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Indian liaison office of 'U.A.E Exchange Centre' is not susceptible to pay Income Tax for NRI Remittances from UAE to India, Art. 5(3)(e) DTAA: SC

The SC on April 24, 2020 {Union of India & Anr. v U.A.E. Exchange Centre} 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 respondent in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by the NRI remitters in UAE. It was held that 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, it was held by the SC that no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and moreso because, the liaison office is not a PE in terms of Article 5 of DTAA (as it is only carrying on activity of a preparatory or auxiliary character). It was held that 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. 

It was further held by the SC Bench, comprising of Justice A.M. Khanwilkar & Justice Ajay Rastogi, that the conditions imposed by RBI while granting permission to the respondent make it amply clear that the office in India will not undertake any other activity of trading, commercial or industrial, nor shall it enter into any business contracts in its own name without prior permission of the RBI. It was held that the liaison office of the respondent in India cannot even charge commission/fee or receive any remuneration or income in respect of the activities undertaken by the liaison office in India. It was held by the SC that the onerous stipulations specified by the RBI, it could be safely concluded, as also opined by the High Court, that the activities in question of the liaison office(s) of the respondent in India are circumscribed by the permission given by the RBI and are in the nature of preparatory or auxiliary character. It was, therefore, held by the SC that finding reached by the High Court is unexceptionable. 

In the present 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 (for short, “the 1973 Act”), pursuant to which approval was granted by the Reserve Bank of India (for short, “the RBI”)

The High Court has concluded that the activity carried on by the liaison offices of the respondent in India did not in any manner contribute directly or indirectly to the earning of profits or gains by the respondent in UAE and more so, every aspect of the transaction was concluded in UAE, whereas, the activity performed by the liaison offices in India was only supportive of the transaction carried on in UAE.

The core issue that needs to be answered in this appeal by the SC was: whether the stated activities of the respondent-assessee would qualify the expression “of preparatory or auxiliary character”?

Answering the issue in affirmative, it was held by the SC that the nature of activities carried on by the respondent-assessee in the liaison offices being only of preparatory and auxiliary character, were clearly excluded by virtue of deeming provision i.e. Art. 5(3)(e) of Double Taxation Avoidance Agreement (for short, “DTAA”).

Accordingly, it was held by the SC that taking any view of the matter, it find no substance in this appeal. The SC upheld the conclusions reached by the High Court for the reasons stated hitherto.  Accordingly, the appeal was dismissed by the SC.

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