(2020) 425 ITR 30 (SC)
Income deemed to accrue or arise in India; double taxation relief
No. The activity was preparatory or auxiliary in character and fell within the exclusion in the treaty. No part of the business profits was therefore taxable in India.
Does a liaison office that merely downloads remittance particulars and forwards instruments to beneficiaries in India constitute a permanent establishment?
The taxpayer was a UAE company carrying on the business of remitting money from non-resident Indians in the Gulf to beneficiaries in India. Contracts with remitters were concluded in the UAE and the consideration was received there. The company had obtained Reserve Bank of India approval to open liaison offices in India, subject to conditions expressly prohibiting any trading, commercial or industrial activity and requiring the offices to be maintained out of inward remittances. The Indian offices downloaded particulars of remittances from the UAE servers, printed cheques or drafts, and dispatched them to the beneficiaries named by the remitters. No fee was charged in India and no contracts were concluded there.
The Authority for Advance Rulings held against the taxpayer. The Delhi High Court reversed, holding the activity preparatory or auxiliary. The Revenue appealed to the Supreme Court.
For the assessee
The entire substantive business — soliciting customers, contracting, and receiving consideration — took place in the UAE. The Indian offices performed a mechanical follow-through step in aid of that business, generating no income of their own and charging nothing. That is precisely what the preparatory or auxiliary exclusion in the treaty is directed at.
For the Revenue
Delivering the remitted funds to the beneficiary is the completion of the service the customer paid for, and is therefore a core activity rather than a subsidiary one. The liaison offices were the means by which the taxpayer performed its contractual obligation in India.
The Court accepted that the liaison offices constituted a fixed place, but held that the decisive question was whether the activity carried on there fell within the treaty exclusion for activities of a preparatory or auxiliary character. It examined the sequence of the business and found that the contract, the consideration and the substantive service all occurred outside India; what happened in India was the downloading of information and the physical dispatch of instruments to give effect to instructions already received and paid for abroad. That, the Court held, was a subsidiary step in aid of the main business rather than the business itself. It laid weight on the Reserve Bank's conditions prohibiting any commercial activity, observing that while regulatory permission is not by itself decisive of the tax question, the offices had in fact operated within those limits and had earned nothing in India. Because the activity fell within the exclusion, no permanent establishment arose and no part of the business profits was taxable in India.
The reference point for liaison and representative offices under Section 9 and Section 159. The decision confirms that operating strictly within Reserve Bank conditions, while not decisive on its own, strongly supports a preparatory-or-auxiliary characterisation — which makes adherence to those conditions a tax matter as well as a regulatory one.