UAE Exchange can’t be Taxed through It’s Liaison Office in India as it does not constitute ‘PE’: Supreme Court [Read Judgment]

UAE Exchange - Income Tax - Taxscan

In a significant ruling, a two-judge bench of the Supreme Court has granted relief to UAE Exchange by holding that its liaison office in India would not constitute a “Permanent Establishment” for the purpose of taxing the former as per the provisions of the Income Tax Act, 1961 and the relevant Double Taxation Avoidance Agreements (DTAAs).

The respondent, one of the biggest names in the remittance space of the United Arab Emirates (UAE),  is engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India. It had applied for 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 (RBI). The entire expenses of the liaison offices in India are met exclusively out of funds received from the UAE through normal banking channels. Currently, operations at UAE Exchange Centre in UAE are frozen as per the directions of the UAE Central Bank.

The bench comprising Justice A.M Khanwilkar and Justice Ajay Rastogi held that levying of tax from a UAE Company in India, when no trading, commercial or industrial activities took place is against Double Taxation Avoidance Agreement (DTAA), signed between India and UAE.

In compliance with Section 139 of the Act, the respondent had been filing its returns of income, showing NIL income, as according to the respondent, no income had accrued or deemed to have accrued to it in India, both under the Income Tax Act, as well as, the agreement entered into between the Government of the Republic of India and the Government of the UAE, which is known as Double Taxation Avoidance Agreement (DTAA).

On an application made by the respondent, the Authority of Advance Ruling (AAR) 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. Consequently, the Department issued four notices under Section 148 of the 1961 Act addressed to the respondent.

Aggrieved by the notices, the respondent appeared in the High court, which was of the opinion that the Authority proceeded on a wrong premise by first examining the efficacy of Section 5(2)(b) and Section 9(1)(i) of the 1961 Act instead of applying the provisions in Articles 5 and 7 of the DTAA for ascertaining the respondent’s liability to tax.

The division bench comprising Justice A.M. Khanwilkar and Justice Ajay Rastogi upheld the decision of the high court and held that levying of tax from UAE’s Company in India, when no trading, commercial or industrial activities took place is against Double Taxation Avoidance Agreement (DTAA), which was signed between India and UAE.

The bench observed that the nature of activities carried on by the respondent through the liaison office in India was in the nature of “preparatory or auxiliary character” and, therefore, covered by Article 5(3)(e).

“As a result, the fixed place used by the respondent as a liaison office in India, would not qualify the definition of PE in terms of Articles 5(1) and 5(2) of the DTAA on account of non-obstante and deeming clause in Article 5(3) of the DTAA,” the bench said.

While concluding the matter in favor of the assessee, the bench held that “the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server of the respondent in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by the NRI remitters in UAE. The transaction(s) had completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India in that regard. To put it differently, no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and more so because the liaison office is not a PE in terms of Article 5 of DTAA (as it is only carrying on the activity of a preparatory or auxiliary character). The concomitant is – 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. The activities carried on by the liaison office of the respondent in India as permitted by the RBI, clearly demonstrate that the respondent must steer away from engaging in any primary business activity and in establishing a business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever.”

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