The Delhi High Court recently observed that a Liaison Office (LO) of Western Union does not satisfy the established requirements for considering the same to be a fixed place “permanent establishment” (PE).
A number of Income Tax Appeals were filed by the Revenue against prominent American financial service provider Western Union Financial Services (Western Union), against the judgments of the Income Tax Appellate Tribunal (ITAT) indicating the tax liability of the Respondent owing to their lack of a Permanent Establishment in India during 10 Assessment Years (A.Y.) between 2001 and 2016.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and the United States of America provides for the businesses to establish a fixed place of business by means of a Permanent Establishment in either member country.
Western Union provides cross-border Money Transfer Services wherein any person residing in the USA may transfer money to an individual or entity in India by remitting the requisite amount in USD along with prescribed charges and is then issued a Money Transfer Control Number (MTCN). The MTCN may be verified by the Indian representative/agent of Western Union, facilitating the transfer of funds.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
Obtaining assent from the Reserve Bank of India (RBI), Western Union established a ‘Liaison Office’ in India to facilitate process, while appointing staff members for the same. The RBI assent was provided under the strict guidelines that the LO would not engage in any other commercial or profit-earning activities, besides simple auxiliary functions.
During A.Y. 2001-02, the Assessee was said to have paid a total commission of INR 12,16,94,036/- to its Indian agents, drawing the attention of the Income Tax Department, resulting in a tax demand notice.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
The Revenue contended that Western Union employed management software (Voyager) for and trained Indian agents to aid their business, amounting to a fixed PE or Dependent Agent PE (DAPE), creating a profit-earning process, thus being subject to the Indian laws of Taxation.
Ajay Vohra, Gaurav Jain, Shubham Gupta and Shalini appearing for Western Union submitted that the LO indulged in preparatory and auxiliary functions only, and that the contracts for remittance of the amounts were executed entirely outside India.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
Standing Counsel Aseem Chawla and Pratishtha, appearing for the Revenue contended that the Indian agents were DAPE of Western Union, including establishing a “business connection” under Indian tax laws, calling for the levy of income tax on their operations.
Furthermore, the counsel argued the DTAA provisions excluded preparatory or auxiliary activities from being considered in the test for “permanent establishment” determination.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
A Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja observed that the settled activities such as market research, promotional activities, training or deployment of software fail well within the bounds of “preparatory” or “auxiliary” functions as per Article 5 of the DTAA.
Regarding the use of Software, the High Court deemed the same to be a mere tool for facilitating agent operations, not leading to establishment of a fixed place of business under the DTAA. Referring to a similar decision by the Delhi High Court in UAE Exchange Centre Ltd. v. Union of India and Another (2009), the Division Bench observed that an entity aiding the principal function of the principal overseas entity would not constitute a PE.
In light of the observations made, the Delhi High Court upheld the impugned decisions of the ITAT in holding that there was no DAPE established by Western Union and that the usage of software does not constitute the creation of a PE, dismissing the Revenue’s plea of taxability.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
