JUDGEMENT

A.M.KHANWILKAR,J. - (1.)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 (for short, "the 1973 Act"), pursuant to which approval was granted by the Reserve Bank of India (for short, "the RBI") vide letter dated 24.9.1996. The same reads thus:-
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Ref. No. EC Co. FID(I)/137/10-I-05-02/3975 (Activity)/96-97

BY AIR MAIL/REGISTERED A.D.

U.A.E. Exchange Centre L.L.C., 24 Sep 1996

Post Box 170,

Abu Dhabi, UAE.

Dear Sirs,

Permission under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 for opening a liaison office in India

Please refer to your application dated Nil and the correspondence resting with your letter Ref. UAEEC/HO/479/96 dated 9th August, 1996 on the captioned subject.

2. We advise that we are agreeable to your establishing a liaison office at Cochin initially for a period of three years to enable you to i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts, ii) to undertake reconciliation of bank accounts held in India, iii) to act as a communication centre receiving computer (via Modem) advices of mail transfer T.T. stop payments messages, payments details etc., originating from your several branches in UAE and transmitting to your Indian correspondent banks, iv) Printing Indian Rupee drafts with facsimile signature from the Head Office and counter signature by the authorised signatory of the Office at Cochin, v) following up with the Indian correspondent banks.

3. Please note that this permission has been granted subject to the following conditions:

i) Except the above mentioned work, the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission.

ii) No commission/fees will be charged or any other remuneration received/income earned by the office in India for any activity undertaken by it as listed in para 2 of this letter or otherwise in India.

iii) The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels

iv) The Liaison office in India shall not borrow or lend any money from/ to any person in India without our prior permission.

v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973.

vi) The Liaison office in India will furnish to our Cochin Regional Office (on a yearly basis):

a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India;

b) details of remittances received from abroad duly supported by Inward Remittance Certificates;

c) certified copy of the audited final accounts of the office in India; and

d) annual report of the work done by the office in India, stating therein the details of actual remittances received from NRI through your office during period in respect of which the office had rendered liaison services.

e) The number of staff engaged/appointed and duties assigned to each staff.

vii) The incharge of the liaison office in India will not have signing/commitment powers except than those which are required for normal functioning of liaison office on behalf of the Head Office.

viii) The liaison office will not render any consultancy or any other services directly/indirectly, with or without any consideration.

4. In case you desire to open a head office account in the books of your liaison office in India, we hereby grant you our approval to maintain such an account subject to the conditions that the credits to the account should represent the funds received from head office through normal banking channels for meeting the expenses of the office and no other amount should be credited without prior permission of the Reserve Bank. Similarly debits to this account could be raised only for meeting the local expenses of the office. Audited transcript of the head office account may be forwarded to our Cochin Regional Office alongwith the annual accounts mentioned above.

5. It is further clarified that the permission granted hereby is limited to and for the purpose of the provisions of Section 29 ibid only and shall not be construed in any way as regularising, condoning or in any manner validating any irregularities, contraventions or other lapses if any under the provisions of any other law for the time being in force.

6. Please note to furnish to us the postal address of your liaison office in due course for our record. You may also note to address the correspondence in future to our Cochin Regional Office.

7. Please acknowledge receipt.

Yours faithfully, Sd/- (Prashant Saran)

Deputy General Manager"

(2.)The respondent set up its first liaison office in Cochin, Kerala (India) in January, 1997 and thereafter, in Chennai, New Delhi, Mumbai and Jalandhar in India. The activities carried on by the respondent from the said liaison offices are stated to be in conformity with the terms and conditions prescribed by the RBI in its letter dated 24.9.1996. The entire expenses of the liaison offices in India are met exclusively out of funds received from UAE through normal banking channels. Indisputably, it is asserted by the respondent that its liaison offices undertake no activity of trading, commercial or industrial, as the case may be. The respondent has no immovable property in India otherwise than by way of lease for operating the liaison offices. No fee/commission is charged or received in India by any of the liaison offices for services rendered in India. 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 (for short, "the 1961 Act"). According to the respondent, the remittance services are offered by the respondent to Non-Resident Indians (for short, "NRIs") 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 in two ways:-
(i) by telegraphic transfer through bank channels; or

(ii) On the request of the NRI remitter, the respondent sends instruments/cheques through its liaison offices to the beneficiaries in India, designated by the NRI remitter.

The dispute arises in respect of the second mode of remittance through the liaison offices in India. That is on account of the activity undertaken in the liaison office in India of downloading theparticulars 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.

(3.)It is stated that, in compliance with Section 139 of the 1961 Act, the respondent had been filing its returns of income, since the assessment year 1998-1999 until 2003-2004, showing NIL income, as according to the respondent, no income had accrued or deemed to have accrued to it in India, both under the 1961 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 (for short, "DTAA"). This agreement (DTAA) has been entered into between the two sovereign countries in exercise of powers under Section 90 of the 1961 Act, for the purpose of avoidance of double taxation and prevention of fiscal evasion, with respect to taxes and income on capital. The DTAA has been notified vide notification No. GSR No. 710(E) dated 18.11.1993. As noted earlier, 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 under Section 245Q(1) of the 1961 Act before the Authority for Advance Rulings (Income Tax), New Delhi (for short, "the Authority"), which was numbered as AAR No. 608/2003 and sought ruling of the Authority on the following question: -
"Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India?"

The Authority, vide its ruling dated 26.5.2004 answered the question in the affirmative, namely, "Income shall be deemed to accrue in India from the activity carried out by the liaison offices of the applicant in India." For so holding, the Authority opined that in view of the deeming provision in Sections 2(24), 4 and 5 read with Section 9 of the 1961 Act, the respondent-assessee would be liable to pay tax under the 1961 Act, as it had carried on business in India through a "permanent establishment" (for short, "PE") situated in India and the profits of the enterprise needed to be taxed in India, but only so much of that, as is attributable to the liaison offices in India (PE). The Authority, amongst others, first examined the facts of the case to ascertain as to whether any income accrues/arises or is deemed to accrue /arise to the respondent in India under Sections 2(24), 5(2) and 9(l)(i) of the 1961 Act. It noted that the business of the respondent was being carried on in UAE; a contract for remitting the amounts is entered into with NRIs and is executed outside India; and even the commission for remitting the amounts is also earned by the respondent outside India, therefore, ostensibly no income accrues/arises, or is deemed to accrue or arise in India. It then adverted to explanation to Section 9(l)(i) and observed that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or from any property in India, or through any assets or source of income in India or through transfer of capital assets situate in India, shall be deemed to accrue in India. It went on to observe that in the present case, it was evident that all the operations of the business of the respondent were not carried out in India. In such a situation, to attract the provisions referred to above, it must be shown that - (i) the applicant has 'business connections' in India; and (ii) the income of the business can be deemed to accrue or arise in India from such operations, as are carried out in India. After analysing this aspect and explanation 2 to Section 9(l)(i) inserted by the Finance Act, 2003, it noted the decision of this Court in Commissioner of Income Tax, Punjab vs. R.D. Aggarwal and Company and Anr., AIR 1965 SC 1526 and culled out the essential features of expression "business connection" as follows:-

"10. In the light of above discussion, the essential features of "business connection" may be summed up as follows:-

(a) a real and intimate relation must exist between the trading activities by a non-resident carried on outside India and the activities within India:

(b) the relation contributes directly or indirectly to the earning of income by the non-resident in his business;

(c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection."

It then observed in paragraph 11 of the ruling, as follows: -

"11. Admittedly, the applicant is having liaison offices in India. They attend to the complaints of the clients in cases where remittances are sent directly to banks in India UAE. In addition, in cases where the applicant has to remit the amounts to the beneficiaries in India, as per the directions of the NRIs, the liaison offices down load the information from the internet, print cheques/drafts in the name of the beneficiaries in India send them through couriers to various places in India. Without the latter activity, the transaction of remittance of the amounts in terms of the contract with the NRIs would not be complete. The commission which the applicant receives for remitting the amount covers not only the business activities carried on in UAE but also the activity of remittance of the amount to the beneficiary in India by cheques/drafts through courier which is being attend to by the liaison offices. There is, therefore, a real relation between the business carried on by the applicant for which it receives commission in UAE and the activities of, the liaison offices, downloading of information, printing and preparation of cheques/drafts and sending the same to the beneficiaries in India, which contributes directly or indirectly to the earning of the income by the applicant by way of commission. There is also continuity between the business of the applicant in UAE and the activities carried on by the liaison offices. Therefore, it follows that income shall be deemed to accrue/arise to the applicant in UAE from 'business connection' in India. However, the deemed accrual of income to the applicant from the business connection in India in view the Explanation (I) would be only such part of the income as is reasonably attributable to the operations which are carried out in India......."

The Authority also took note of Articles 5 and 7 of DTAA and then noted in paragraph 14 as follows: -

"......The moot question is whether the exclusionary clause (e) of para 3 is attracted; if so, whether the liaison offices would stand excluded from the meaning of the expression 'permanent establishment'. Clause (e) of para 3 says that the expression 'permanent establishment' shall be deemed not to include the maintaining of a fixed place of business solely for the purpose of carrying on for an enterprise any other activity of a preparatory or auxiliary character, Mr. Ranina placed before us extracts from various dictionaries to show the meaning of the word 'auxiliary'. It is unnecessary to refer to them here. Suffice it to say that the word 'auxiliary' in common English usage means helping, assisting or supporting the main activity. We have, therefore, to ascertain whether the activities carried on in the liaison offices in India, are only supportive of the main business or form one of the main functions of the business. The applicant enters into a contract with a NRI to remit to the nominated banks or the nominated beneficiaries in India the amount which is the Indian rupee equivalent of foreign currency handed over to it. It is true that the contract is entered into in UAE and the amount to be remitted as well as the commission is also received in UAE. The contract is, therefore executed in UAE. To fulfill its obligation under the contract the applicant remits the amount in either of the following two modes:

By establishment in UAE -

(i) by telegraphic instructions from Abu Dhabi through banking channels or by liaison offices in India-

(ii) by dispatching through courier the instruments of cheques/drafts prepared by liaison offices to the beneficiaries at various places in India.

In so far as the first mode is concerned, the amount is remitted telegraphically by transferring directly from UAE through bank channel to various places in India and in such remittances the liaison offices have no role to play except attending to the complaints, if any, in India regarding the remittances in cases of fraud etc. This is undoubtedly a work of auxiliary character. However, where is undoubtedly a work of auxiliary character. However, where the applicant adopts the second mode for remitting the amounts in India -an activity approved by the RBI -the liaison offices of the applicant play an important role. They down load the data from internet with regard to the amount to be remitted, the names and addresses of the beneficiaries and then print cheques/drafts and dispatch them to the addresses of the beneficiaries in India through courier. The role of liaison offices in remitting the amounts by adopting the second mode, is nothing short of performing the contract of remitting the amounts at least in part. This case presents a good example of an auxiliary activity to the main activities and an essential activity in performance of contractual obligation. Whereas in the first mode, the activity undertaken by the liaison offices in India may be said to be auxiliary in character, the same cannot be said of the second mode. Down loading the data, preparing cheques for remitting the amount, dispatching the same through courier by the liaison offices is an important part of the main work itself because without remitting the amount to the beneficiaries as desired by the NRIs, performance of the contract will not be complete. So the activities of the liaison offices in the second mode remittance, cannot be said to be work of auxiliary character. It is indeed a significant part of the main work of UAE establishment. It follows that the liaison offices of the applicant in India for the purposes of the second mode of remittance of amount would be a 'permanent establishment' within the meaning of the expression in DTAA."

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.

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