Factors leading to the formation of Fixed Place Permanent Establishment
- The Assessee was a limited company incorporated in the United Arab Emirates (UAE). It was engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India.
- The Assessee had set up its first liaison office in Cochin, India in January, 1997 and thereafter, in Chennai, New Delhi, Mumbai and Jalandhar in India. The activities carried on by the Assessee from the said liaison offices were stated to be in conformity with the terms and conditions prescribed by the Reserve Bank of India.
- The entire expenses of the liaison offices in India were met exclusively out of funds received from UAE through normal banking channels. The liaison offices undertake no activity of trading, commercial or industrial. The Assessee had no immovable property in India otherwise than by way of lease for operating the liaison offices. No fee/ commission was charged or received in India by any of the liaison offices for services rendered in India. The remittance services were offered by the Assessee to Non-Resident Indians in UAE. The contract pursuant to which the funds were handed over by the Non-Resident Indian to the Assessee in UAE was entered between the Assessee and the Non-Resident Indian remitter in UAE.
- However, the revenue was of the view that income shall be deemed to accrue in India from the activity carried out by the liaison offices of the Assessee in India under Article 5 and Article 7 of the tax treaty.
- Article 5, deals with and defines the “Permanent Establishment” as ‘A fixed place of business through which the business of an enterprise is wholly or partly carried on is regarded as a Permanent Establishment. The term “Permanent Establishment” would include the specified places referred to in clause 2 of Article 5’.
- In the present facts of the case, it was not in dispute that the place from where the activities were carried on by the Assessee in India was a liaison office and would, therefore, be covered by the term Permanent Establishment in Article 5(2).
- However, Article 5(3) of the tax treaty opens with a non- obstante clause and also contains a deeming provision. It predicates that notwithstanding the preceding provisions of the concerned Article, which would mean clauses 1 and 2 of Article 5, it would still not be a Permanent Establishment, if any of the clauses in Article 5(3) are applicable.
- In present facts of the case, the crucial activities were of downloading particulars of remittances through electronic media and then printing cheques/ drafts drawn on the banks in India, which, in turn, were couriered or dispatched to the beneficiaries in India, in accordance with the instructions of the Non-Resident Indian remitter.
- While doing so, the liaison office of the Assessee in India remained connected with its main server in UAE and the information residing thereat was accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India by the Non-Resident Indian remitters. These were combination of virtual and physical activities unlike the virtual activity of funds being remitted by telegraphic transfer through banking channels.
- Further, the Reserve Bank of India had agreed for establishing a liaison office of the respondent at Cochin, initially for a period of three years to enable the Assessee to (i) respond quickly and economically to inquiries from correspondent banks with regard to suspected fraudulent drafts; (ii) undertake reconciliation of bank accounts held in India; (iii) act as a communication centre receiving computer (via modem) advices of mail transfer T.T. stop payments messages, payment details etc., originating from respondent’s several branches in UAE and transmitting to its 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; and (v) following up with the Indian correspondent banks. These were the limited activities which the Assessee was permitted to carry on within India.
- Thus, the office in India was not permitted to undertake any other activity of trading, commercial or industrial, or to enter into any business contracts in its own name without prior permission of the Reserve Bank of India. The liaison office of the Assessee in India could not even charge commission/ fee or receive any remuneration or income in respect of the activities undertaken by the liaison office in India.
- Therefore, from the onerous stipulations specified by the Reserve Bank of India, it could be safely concluded, as opined by the Hon’ble High Court, that the activities of the liaison office(s) of the Assessee in India were in the nature of preparatory or auxiliary character.
- Hence, the same being “of preparatory or auxiliary character” by virtue of Article 5(3)(e) of the tax treaty, the fixed place of business (liaison office) of the Assessee in India otherwise a Permanent Establishment, was deemed to be expressly excluded from being so. And since by a legal fiction it was deemed not to be a Permanent Establishment of the Assessee in India, it was not amenable to tax liability in terms of Article 7 of the tax treaty.