2020 Supreme(SC) 331

SUPREME COURT OF INDIA
A.M. KHANWILKAR, AJAY RASTOGI, JJ.
Union of India & Anr – Appellant
Versus
U.A.E. Exchange Centre – Respondent
Civil Appeal No. 9775 of 2011
Decided On : 24-04-2020

IMPORTANT POINTS
Provisions of DTAA, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act.
Activities of liaison offices of respondent in India being of preparatory or auxiliary character and circumscribed by the permission given by RBI, are not PEs.
No income being earned by the liaison office in India, no tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE.

Headnote:

(a) Income Tax Act, 1951 - Section 5(2)(b) and Section 9(1)(i) r/w Articles 5 and 7, DTAA u/s 90 - Provisions of DTAA, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. (Para 8)

(b) Income Tax Act, 1951 - Section 5(2)(b) and Section 9(1)(i) r/w Articles 5 and 7, DTAA u/s 90 - Activities of liaison offices of respondent in India are of preparatory or auxiliary character - Circumscribed by the permission given by RBI - Liaison offices not PEs. (Para 9, 10)

(c) Income Tax Act, 1951 - Section 2(24) r/w Articles 5 and 7, DTAA u/s 90 - Liaison office of respondent not a PE - Not carrying on any business activity in India as such - Transaction(s) had completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India - Thus, no income is earned by the liaison office in India - No tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE. (Para 11, 13)

Facts of the case:

The respondent is a limited company incorporated in the United Arab Emirates (UAE). It is engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India. It had applied for a permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973, pursuant to which approval was granted by the Reserve Bank of India vide letter dated 24.9.1996.

The respondent set up its first liaison office in Cochin, Kerala in January, 1997 and thereafter, in Chennai, New Delhi, Mumbai and Jalandhar. The entire expenses of the liaison offices in India are met exclusively out of funds received from UAE through normal banking channels. It is claimed that no income accrues or arises or deemed to accrue or arise, directly or indirectly, through or from any source in India from liaison offices within the meaning of Section 5 or Section 9 of the Income Tax Act, 1961. According to the respondent, the remittance services are offered by the respondent to Non-Resident Indians in UAE. The contract pursuant to which the funds are handed over by the NRI to the respondent in UAE, is entered between the respondent and the NRI remitter in UAE. The funds are collected from the NRI remitter by the respondent in UAE by charging one-time fee of Dirhams 15. After collecting the funds from the NRI remitter, the respondent makes an electronic remittance of the funds on behalf of its NRI customer.

The dispute arises in respect of the remittance through the liaison offices in India. That is on account of the activity undertaken in the liaison office in India of downloading the particulars of remittances through electronic media and printing cheques/drafts drawn on the banks in India, which, in turn, are couriered or dispatched to the beneficiaries in India, in accordance with the instructions of the NRI remitter. While doing this, the liaison office of the respondent remains connected with its main server in UAE, as the information is contained in the main server thereat, which could be accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India by the NRI remitters.

Returns were filed on regular basis by the respondent, which were accepted by the Department without any demur. However, as some doubt was entertained, the respondent filed an application u/s 245Q(1) of the 1961 Act before the Authority for Advance Rulings.

The Authority accordingly concluded that so much of the profits as shall be deemed to accrue or arise to the respondent in India, which were attributable to the PE, namely, the liaison offices in India, would be taxable in India even under the DTAA, and answered the question affirmatively against the respondent-assessee.

Thereafter the Department issued four notices of even date i.e. 19.7.2004 under Section 148 of the 1961 Act addressed to the respondent pertaining to assessment years 2000-2001, 2001-2002, 2002-2003 and 2003-2004 respectively. The respondent, therefore, carried the matter before the High Court which eventually quashed the impugned ruling of the Authority and also the notices issued by the Department under Section 148 of the 1961 Act.

Finding of the Court:

Liaison offices of respondent are not PEs and do not carry out any business activities. Not amenable to tax.

Result: Appeal dismissed.