1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 9775 OF 2011

Union of India & Anr. ...Appellant(s)

Versus

U.A.E. Exchange Centre ...Respondent(s)

J U D G M E N T

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: -

“Telegrams RESERVE BANK OF INDIA Post Box No. 1055

“RESERVBANK ” EXCHANGE CONTROL DEPARTMENT Fax No.: 022-2665330

BOMBAY CENTRAL OFFICE 022-2654121

CENTRAL OFFICE BUILDING

Please quote Ref. in Reply BOMBAY – 400 023.

Ref. No. EC Co. FID(I)/137/10-I-05-02/3975 (Activity)/96-97

BY AIR MAIL/REGISTERED A.D.

2

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 9

th

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

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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.

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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

5

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 electron ic

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 the

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particulars 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

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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

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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(1)(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(1)(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

9

from such operations, as are carried out in India. After analysing

this aspect and explanation 2 to Section 9(1)(i) inserted by the

Finance Act, 2003, it noted the decision of this Court in

Commissioner of Income Tax, Punjab vs. R.D. Aggarwal &

Company & Anr.

1 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

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AIR 1965 SC 1526

10

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:

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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 ‘per manent

establishment’ within the meaning of the expression in

DTAA.”

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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.

4. Following the impugned ruling of the Authority, dated

26.5.2004, the Department issued four notices of even date i.e.

19.7.2004 under Section 148 of the 1961 Act addressed to the

respondent pertaining to assessment years 2000 -2001, 2001-

2002, 2002-2003 and 2003-2004 respectively. The respondent,

therefore, carried the matter before the High Court of Delhi at New

Delhi (for short, “the High Court”) by way of Writ Petition No.

14869/2004, inter alia, for quashing of the ruling of the Authority

dated 26.5.2004, quashing of stated notices and for a direction to

the appellants not to tax the respondent in India because no

income had accrued to it or is deemed to have accrued to it in India

from its activities of liaison offices in India. The High Court, after

adverting to indisputable facts, noted that the Authority

committed manifest error in appreciating the relevant facts and

materials on record and more particularly, misread the purport of

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Section 90 of the 1961 Act and the settled legal position that the

DTAA ought to override the provisions of the Act (the 1961 Act). In

other words, the tax liability of the respondent was required to be

assessed on the basis of the provisions in the stated treaty,

namely, DTAA. The High Court adverted to the exposition in Union

of India & Anr. vs. Azadi Bachao Andolan & Anr.

2 in

paragraphs 28 and 29 and then observed as follows: -

“11.2 In the present case, the liability to tax under the

DTAA is governed by Article 7. Sub-section (1) of Article 7

of the DTAA categorically provides that profits of an

enterprise of a contracting State shall be taxable only in

that State, unless the enterprise carries on business, in

the other State, through a permanent establishment

situated thereof. If the enterprise carries on business as

aforesaid, the profits of the enterprise may be taxed in the

other State, but only so much of that, as is attributable to

the permanent establishment. Therefore, the liability on

account of tax, of an enterprise of either of the contracting

State, in India, would arise if the enterprise in issue, i.e.,

the petitioner, had a permanent establishment in India.

The provisions of Section 5(2) (b) and Section 9(1)(1) of the

Act would have, in our view, no applicability. Discussion

with respect to the ‘business connection’ in the impugned

ruling was, in our view, unnecessary. The Authority had to

determine only whether the petitioner carried on business

in India through a permanent establishment. For this

purpose it was required to examine the definition of

permanent establishment as contained in Article 5 of

DTAA read with Article 5(3)(e). There is no dispute raised

by the petitioner that it maintains liaison offices in India

and hence, would fall within the definition of permanent

establishment in accordance with the provisions of Article

5(2)(c). The petitioner, however, has contended both before

the Authority and before us tha t it falls within the

exclusionary clause contained in Article 5(3)(e) in as much

as the activity carried on by the liaison offices in India, has

an ‘auxiliary’ character. On this aspect of the matter the

discussion and reasoning by the Authority is contained in

2

(2004) 10 SCC 1

14

paragraphs 12 to 15 of the impugned ruling. The Authority

came to the conclusion that the activity carried on by the

liaison offices in India did not have an ‘auxiliary’ character

in terms of Article 5(3)(e) of the Act as the option of

remitting of funds through the liaison offices in India was

exercised by the NRI remitter which was “nothing short

of, as in the words of the parties, performing contract

of remitting the amounts”. The Authority, thus, held

that while, in respect of all remittances of funds by

telegraphic transfer through banking channels, the role of

the liaison offices in India of an ‘auxiliary’ character, the

same was not true in respect of remittance of funds

through liaison offices in India. This was based on the

reasoning that without remittances of funds to the

beneficiaries in India performance under the contract

would not have been complete and thus, the downloading

of data, preparation of cheques for remitting the amount,

dispatching the same through courier by the liaison

offices, constituted an important part of the main work,

which was, remitting the amount to the beneficiaries as

desired by the NRIs. Based on this reasoning, the

Authority came to the conclusion that the work of the

liaison offices in India, being a significant part of the main

work of UAE establishment, the liaison office of the

petitioner, in India, would constitute a ‘permanent

establishment’ within the provisions of the DTAA.”

And again, whilst analysing the scope of Articles 5 and 7 of the

DTAA in paragraph 12 of the impugned judgment, the High Court

noted thus: -

“12.…...In the case of DTAA under consideration in the

present case under Article 5 read with Article 7, profits of

an enterprise are liable to tax in India if an enterprise were

to carry on business through permanent establishment,

meaning thereby fixed place of business through which

business of an enterprise is wholly or partly carried on.

Under Article 5(2)(c), amongst others, permanent

establishment includes an office. However, Article 5(3)

which opens with a non-obstante clause, is illustrative of

instances where-under the DTAA various activities have

been deemed as ones which would not fall within the ambit

of the expression ‘permanent establishment’. One such

exclusionary clause is found in Article 5(3)(e) which is:

maintenance of fixed place of business solely for the

purpose of carrying on, for the enterprise, any other

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activity of a preparatory or auxiliary character. The plain

meaning of the word ‘auxiliary’ is found in Black’s Law

Dictionary 7th Edition at page 130 which reads as “aiding

or supporting, subsidiary”. The only activity of the liaison

offices in India is simply to download information which is

contained in the main servers located in UAE based on

which cheques are drawn on banks in India whereupon

the said cheques are couriered or dispatched to the

beneficiaries in India, keeping in mind the instructions of

the NRI remitter. Can such an activity be anything but

auxiliary in character. Plainly to our minds, the instant

activity is in ‘aid’ or ‘support’ of the main activity. The error

into which, according to us, the Authority has fallen is in

reading Article 5(3)(e) as a clause which permits making a

value judgment as to whether the transaction would or

would not have been complete till the role played by liaison

offices in India was fulfilled as represented by the

petitioner to their NRI remitter. According to us, what has

been lost sight of, is that, by invoking the clause with

regard to permanent establishment, we would, by a

deeming fiction tax an income which otherwise neither

arose nor accrued in India – when looked at from this point

of view, the exclusionary clause contained in Article 5(3)

and in this case in particular, sub-clause (e) have to be

given a wider and liberal play. Once an activity i s

construed as being subsidiary or in aid or support of the

main activity it would, according to us, fall within the

exclusionary clause. To say that a particular activity was

necessary for completion of the contract is, in a sense

saying the obvious as every other activity which an

enterprise undertakes in earning profits is with the

ultimate view of giving effect to the obligations undertaken

by an enterprise vis-a-vis its customer. If looked at from

that point of view, then, no activity could be construed as

preparatory or of an ‘auxiliary’ character. On this aspect of

the matter, the Supreme Court in the case of DIT

(International Taxation) vs. Morgan Stanley & Co; 2007(7)

SCC 1 amongst other issues was called upon to decide as

to whether back office operations carried on by Morgan

Stanley Company for one of its Morgan Stanley Advantages

Services Pvt. Ltd would qualify as having a permanent

establishment in India. The Supreme Court, while holding

that back office operations fall within the exclusionary

clause Article 5(3)(e) of Indo-US Double Taxation DTAA,

which is, identical to DTAA under consideration in the

present case, came to the conclusion that back office

operations came within the purview of Article 5(3)(e). It is

laid down by the Supreme Court in the case of Mor gan

Stanley (supra) that in ascertaining what would constitute

16

a ‘permanent establishment’ within the meaning of Article

5(1) of the Indo-US DTAA, one had to undertake what is

called a functional and factual analysis of each of the

activities undertaken by an establishment. In that case the

Supreme Court came to the conclusion that the entity

located in India which was engaged in only supporting the

front office functions of Morgan Stanley & Co., a non-

resident, in fixed income and equity research and

information technology enabled services such as data

processing support centre, technical services and

reconciliation of accounts being back office operators

would not fall with Article 5(1) of the Indo-US DTAA.”

Accordingly, the High Court 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. Further, 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. The High Court

distinguished the decisions relied upon by the Authority in Anglo-

French Textile Co. Ltd., by Agents, M/s. Best & Company Ltd.,

Madras vs. Commissioner of Income Tax, Madras

3 and R.D.

Aggarwal & Company (supra). Inasmuch as, the ratio in these

decisions, according to the High Court, was that the non-resident

entity could be taxed only if there was business connection

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AIR 1953 SC 105

17

between the business carried on by a non-resident which yields

profits or gains and some activity in the taxable territory which

contributes directly or indirectly to the earning of those profits or

gains. The High Court then 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 High Court also took note of

explanation 2 to Section 9(1)(i) and observed that the same

reinforces the fact that in order to have a business connection, in

respect of a business activity carried on by non-resident through

a person situated in India, it should involve more than what is

supportive or subsidiary to the main function referred to in clauses

(a) to (c). The High Court eventually quashed the impugned ruling

of the Authority and also the notices issued by the Department

under Section 148 of the 1961 Act, since the notices were based

on the ruling which was being set aside. The High Court, however,

gave liberty to the appellants to proceed against the respondent on

any other ground, as may be permissible in law.

18

5. Feeling aggrieved, the Department has assailed the decision

of the High Court by way of the present appeal arising from SLP(C)

No. 31276/2011.

6. We have heard Mr. Arijit Prasad, learned senior counsel for

the appellants and Mr. H.P. Ranina, learned counsel for the

respondent.

7. Both sides have more or less reiterated the stand taken before

the Authority and the High Court. After cogitating over the rival

submissions and the opinion recorded by the Authority and the

High Court, the core issue that needs to be answered in this appeal

is: whether the stated activities of the respondent-assessee would

qualify the expression “of preparatory or auxiliary character”?

Having regard to the nature of activities carried on by the

respondent-assessee, as held by the Authority, it would appear

that the respondent was engaged in “business” and had “business

connections”, for which, by virtue of deeming provision and the

sweep of Sections 2(24), 4 and 5 read with Section 9 of the 1961

Act including the exposition in Anglo-French Textile Co. Ltd.

(supra) and R.D. Aggarwal & Company (supra), it would be a

case of income deemed to accrue or arise in India to the

respondent.

19

8. However, in the present case, the matter in issue will have to

be answered on the basis of the stipulations in DTAA notified in

exercise of powers conferred under Section 90 of the 1961 Act.

This position is no more res integra in view of the dictum in Azadi

Bachao Andolan (supra). The efficacy of Section 90 of the 1961

Act has been delineated by this Court after adverting to the

decisions in Commissioner of Income Tax , AP-I vs.

Vishakhapatnam Port Trust

4, Commissioner of Income Tax

vs. Davy Ashmore India Ltd.

5, Leonhardt Andra Und Par tner,

GmbH vs. Commissioner of Income Tax

6, Commissioner of

Income Tax vs. R.M. Muthaiah

7 and Arabian Express Line Ltd.

of United Kingdom & Ors. vs. Union of India

8, whereafter the

Court went on to observe in paragraph 28, as follows: -

“28. A survey of the aforesaid cases makes it clear that

the judicial consensus in India has been that Section 90 is

specifically intended to enable and empower the Central

Government to issue a notification for implementation of

the terms of a Double Taxation Avoidance Agreement.

When that happens, the provisions of such an

agreement, with respect to cases to which they apply,

would operate even if inconsistent with the provisions

of the Income Tax Act. We approve of the reasoning in

the decisions which we have noticed. If it was not the

intention of the legislature to make a departure from the

general principle of chargeability to tax under Section 4

and the general principle of ascertainment of total income

4

(1983) 144 ITR 146 (AP)

5

(1991) 190 ITR 626 (Cal)

6

(2001) 249 ITR 418 (Cal)

7

(1993) 202 ITR 508 (Kant)

8

(1995) 212 ITR 31 (Guj)

20

under Section 5 of the Act, then there was no purpose of

making those sections “subject to the provisions of the

Act”. The very object of grafting the said two sections with

the said clause is to enable the Central Government to

issue a notification under Section 90 towards

implementation of the terms of DTACs which would

automatically override the provisions of the Income Tax

Act in the matter of ascertainment of chargeability to

income tax and ascertainment of total income, to the

extent of inconsistency with the terms of DTAC.”

(emphasis supplied)

In view of this exposition, which squarely applies to the fact

situation of the present case, we must answer the question under

consideration in light of the purport of provisions in DTAA, which

has been executed by the Government of India and the

Government of UAE, and has come into force consequent to

publication vide notification dated 18.11.1993. The recitals of the

said notification read thus: -

“Income-tax Act, 1961:Notification under section 90:

Agreement Between the Government of the Republic

of India and the Government of the United Arab

Emirates for the avoidance of double taxation and

the prevention of fiscal evasion with respect to taxes

on income and on capital

Notification G.S.R. No. 710(E), dated 18

th

November,

1993

Whereas the annexed agreement between the

Government of the United Arab Emirates and the

Government of the Republic of India for the avoidance of

double taxation and prevention of fiscal evasion with

respect to taxes on income and on capital has entered

into force on the 22

nd

September, 1993, after the

notification by both the Contracting States to each other

of the completion of the proceedings required by laws for

bringing into force of the said agreement in accordance

with paragraph 1 of Article 30 of the said Agreement:

21

Now, therefore, in exercise of the powers conferred by

section 90 of the Income-tax Act, 1961 (43 of 1961),

section 24A of the Companies (Profits) Surtax Act, 1964

(7 of 1964), and section 44A of the Wealth-tax Act, 1957

(27 of 1957), the Central Government hereby directs that

all the provisions of the said agreement shall be given

effect to in the Union of India.

ANNEXURE

AN AGREEMENT BETWEEN THE GOVERN MENT OF

THE REPUBLIC OF INDIA AND THE GOVERNMENT OF

THE UNITED ARAB EMIRATES FOR THE AVOIDANCE

OF DOUBLE TAXATION AND THE PREVENTION OF

FISCAL EVASION WITH RESPECT TO TAXES ON

INCOME AND ON CAPITAL.

The Government of the Republic of India and the

Government of the United Arab Emirates

Desiring to promote mutual economic relations by

concluding an Agreement for the avoidance of double

taxation and the prevention of fiscal evasion with respect

to taxes on income and on capital.

Have agreed as follows:”

Article 1 of the DTAA bears title “Personal Scope” predicating that

the agreement shall apply to persons who are residents of one or

both of the contracting States. Article 2 deals with “Taxes

Covered”, to which the agreement would apply. Article 2 reads

thus: -

“Article 2

TAXES COVERED

1. There shall be regarded as taxes on income and on

capital all taxes imposed on total income, on total capital,

or on elements of income of capital including taxes on

gains from alienation of movable or immovable property

as well as on capital appreciation.

2. The existing taxes to which the Agreement shall

apply are:

(a) In United Arab Emirates:

22

(i) Income-tax;

(ii) Corporation tax;

(iii) Wealth-tax

(hereinafter referred to as “U.A.E. tax”);

(b) In India:

(i) the income-tax including any surcharge

thereon;

(ii) the surtax; and

(iii) the wealth-tax

(hereinafter referred to as “Indian tax”).

3. This Agreement shall also apply to any identical or

substantially similar taxes on income or capital which are

imposed at Federal or State level by either Contracting

State in addition to, or in place of, the taxes referred to in

paragraph 2 of this Article. The competent authorities of

the Contracting States shall notify each other of any

substantial changes which are made in their respective

taxation laws.”

Article 3 refers to General Definitions and the meaning of the

concerned expression contained in the agreement, unless the

context otherwise requires. Article 4 pertains to “Resident of the

Contracting State”. The other Articles which may have bearing on

the question posed before us are Articles 5 and 7, dealing with

“Permanent Establishment (PE)” and “Business Profits”

respectively, which read thus: -

“Article 5

PERMANENT ESTABLISHMENT

1. For the purposes of this Agreement, the term

"permanent establishment" means a fixed place of

business through which the business of an enterprise is

wholly or partly carried on.

2. The term "permanent establishment" includes

especially:

a. a place of management;

23

b. a branch;

c. an office;

d. a factory;

e. a workshop;

f. a mine, an oil or gas well, a quarry or any other

place of extraction of natural resources;

g. a farm or plantation;

h. a building site or construction or assembly project

or supervisory activities in connection therewith, but

only where such site, project or activity continues for

a period of more than 9 months;

i. the furnishing of services including consultancy

services by an enterprise of a Contracting State

through employees or other personnel in the other

Contracting State, provided that such activities

continue for the same project or connected project for

a period or periods aggregating to more than 9 months

within any twelve-month period.

3. Notwithstanding the preceding provisions of this

Article, the term “permanent establishment" shall be

deemed not to include:

a. the use of facilities solely for the purpose of storage,

display or delivery of goods or merchandise belonging

to the enterprise;

b. the maintenance of a stock of goods or

merchandise belonging to the enterprise solely for the

purpose of storage, display or delivery;

c. the maintenance of a stock of goods or

merchandise belonging to the enterprise solely for the

purpose of processing by another enterprise;

d. the maintenance of a fixed place of business solely

for the purpose of purchasing goods or merchandise,

or of collecting information, for the enterprise;

e. the maintenance of a fixed place of business solely

for the purpose of carrying on, for the enterprise, any

other activity of a preparatory or auxiliary character.

4. Notwithstanding the provisions of paragraphs 1 and 2,

where a person - other than an agent of independent

status to whom paragraph 5 applies - is acting on behalf

of an enterprise and has, and habitually exercises in a

Contracting State an authority to conclude contracts on

24

behalf of the enterprise, that enterprise shall be deemed

to have a permanent establishment in that State in

respect of any activities which that person undertakes for

the enterprise, unless the activities of such persons are

limited to the purchase of goods or merchandise for the

enterprise.

5. An enterprise of a Contracting State shall not be

deemed to have a permanent establishment in the other

Contracting State merely because it carries on business in

that other State through a broker, general commission

agent or any other agent of an independent status,

provided that such persons are acting in the ordinary

course of their business. However, when the activities of

such an agent are devoted wholly or almost wholly on

behalf of that enterprise, he will not be considered an

agent of an independent status within the meaning of this

paragraph.

Article 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State

shall be taxable only in that State unless the enterprise

carries on business in the other Contracting State through

a permanent establishment situated therein. If the

enterprise carries on business as aforesaid, the profits of

the enterprise may be taxed in the other State but only so

much of them as is attributable to that permanent

establishment.

2. Subject to the provisions of paragraph 3, where an

enterprise of a Contracting State carries on business in

the other Contracting State through a permanent

establishment situated therein, there shall in each

Contracting State be attributed to that permanent

establishment the profits which it might be expected to

make if it were a distinct and separate enterprise engaged

in the same or similar activities under the same or similar

conditions and dealing wholly independently with the

enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent

establishment, there shall be allowed as de ductions

expenses which are incurred for the purposes of the

business of the permanent establishment, including

executive and general administrative expenses so

incurred, whether in the State in which the permanent

establishment is situated or elsewhere.

25

4. In so far as it has been customary in a Contracting

State to determine the profits to be attributed to a

permanent establishment on the basis of an

apportionment of the total profits of the enterprise to its

various parts, nothing in paragraph 2 shall preclude that

Contracting State from determining the profits to be taxed

by such an apportionment as may be customary; the

methods of apportionment adopted shall, however, be

such that, the result shall be in accordance with the

principles contained in this Article.

5. No profits shall be attributed to a permanent

establishment by reason of the mere purchase by the

permanent establishment of goods or merchandise for the

enterprise.

6. For the purposes of the preceding paragraphs, the

profits to be attributed to the permanent establishment

shall be determined by the same method year by year

unless there is good and sufficient reason to the contrary.

7. Where profits include items of income which are

dealt with separately in other Articles of this Agreement,

then the provisions of those Articles shall not be affected

by the provisions of this Article.”

Keeping in view the finding recorded by the High Court, we may

proceed on the basis that the respondent-assessee had a fixed

place of business through which the business of the respondent

was being wholly or partly carried on. That, however, would not

be conclusive until a further finding is recorded that the

respondent had a PE situated in India, so as to attract Article 7

dealing with business profits to become taxable in India, to the

extent attributable to the PE of the respondent in India. For that,

we may have to revert back to Article 5, which deals with and

defines the “Permanent Establishment (PE)”. A fixed place of

26

business through which the business of an enterprise is wholly or

partly carried on is regarded as a PE. The term “Permanent

Establishment (PE)” would include the specified places referred to

in clause 2 of Article 5. It is not in dispute that the place from

where the activities are carried on by the respondent in India is a

liaison office and would, therefore, be covered by the term PE in

Article 5(2). However, Article 5(3) of the DTAA 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 PE, if any of the clauses in Article 5(3) are

applicable. For that, the functional test regarding the activity in

question would be essential. The High Court has opined that the

respondent was carrying on stated activities in the fixed place of

business in India of a preparatory or auxiliary character. Indeed,

the expression “business” has been defined in the 1961 Act, as

follows: -

“2. Definitions.- In this Act, unless the context

otherwise requires,-

xxx xxx xxx

(13) “business” includes any trade, commerce or

manufacture or any adventure or concern in the nature of

trade, commerce or manufacture;”

27

The expression “business connection” can be discerned from

Section 9(1), as also, the meaning of expression “business activity”.

We will advert to those provisions a little later and for the time

being, assume that the stated activities of the respondent are

business activities. However, since the stated activities of the

liaison offices of the respondent in India are of preparatory or

auxiliary character, the same would fall within the excepted

category under Article 5(3)(e) of the DTAA. Resultantly, it cannot

be regarded as a PE within the sweep of Article 7 of DTAA. The

expression “preparatory” is not defined in the 1961 Act or the

DTAA. The dictionary meaning of that expression can be traced to

term “preparatory work” and “travaux préparatoires”, which in the

Black’s Law Dictionary (Eleventh Edition), read thus:-

“preparatory work. See TRAVAUX PRÉPARATOIRES.

travaux préparatoires. Materials used in preparing the

ultimate form of an agreement or statute, and esp. of an

international treaty; the draft or legislative history of a

treaty.”

The expression “auxiliary” is also not defined in the 1961 Act or

the DTAA. In common parlance, the meaning of that expression is

predicated in Concise Oxford English Dictionary (Twelfth Edition),

which reads thus: -

“Auxiliary- adj. providing additional help or support. n.

an auxiliary person or thing. N. Amer. A group of

28

volunteers who assist a church, hospital, etc. with

charitable activities.”

In Black’s Law Dictionary (Eleventh Edition), the term “auxiliary”

is defined as follows: -

“Auxiliary adj. 1. Aiding or supporting. 2. Subsidiary.

3. Supplementary.”

The crucial activities in the present case are of downloading

particulars of remittances through electronic media and then

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

so, the liaison office of the respondent in India remains connected

with its main server in UAE and the information residing thereat

is accessed by the liaison office in India for the purpose of

remittance of funds to the beneficiaries in India by the NRI

remitters. These are combination of virtual and physical activities

unlike the virtual activity of funds being remitted by telegraphic

transfer through banking channels. As regards the latter, it is not

the case of the Department that the same would be covered and

amenable to tax liability by virtue of deeming provision in the 1961

Act.

9. While answering the question as to whether the activity in

question can be termed as other than that “of preparatory or

29

auxiliary character”, we need to keep in mind the limited

permission given by the RBI to the respondent under Section

29(1)(a) of the 1973 Act, on 24.9.1996. From paragraph 2 of the

stated permission, it is evident that the RBI had agreed for

establishing a liaison office of the respondent at Cochin, initially

for a period of three years to enable the respondent to (i) respond

quickly and economically to enquiries 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 are the limited activities which the respondent has been

permitted to carry on within India. This permission does not allow

the respondent-assessee to enter into a contract with anyone in

India, but only to provide service of delivery of cheques/drafts

drawn on the banks in India. Notably, the permitted activities are

30

required to be carried out by the respondent subject to conditions

specified in clause 3 of the permission, which includes not to

render any consultancy or any other service, directly or indirectly,

with or without any consideration and further that the liaison

office in India shall not borrow or lend any money from or to any

person in India without prior permission of RBI. The conditions

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. 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. From the onerous stipulations specified by the RBI,

it could be safely concluded, as 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. That

finding reached by the High Court is unexceptionable.

10. The High Court had justly adverted to the exposition of this

Court in DIT (International Taxation), Mumbai vs. Morgan

31

Stanley & Co. Inc.

9, which dealt with the case of an assessee

having set up office in India to support the main office functions

in fixed income and equity research and in providing IT enabled

services such as back office operations, data processing and

support centres to the entity in United States. This Court, in

paragraphs 10 to 14, observed thus: -

“10. In our view, the second requirement of Article 5(1)

of DTAA is not satisfied as regards back office functions.

We have examined the terms of the Agreement along with

the advance ruling application made by MSCo inviting AAR

to give its ruling. It is clear from reading of the above

Agreement/application that MSAS in India would be

engaged in supporting the front office functions of MSCo in

fixed income and equity research and in providing IT

enabled services such as data processing support centre

and technical services as also reconciliation of accounts.

In order to decide whether a PE stood constituted one

has to undertake what is called as a functional and

factual analysis of each of the activities to be

undertaken by an establishment. It is from that point of

view, we are in agreement with the ruling of AAR that in

the present case Article 5(1) is not applicable as the said

MSAS would be performing in India only back office

operations. Therefore to the extent of the above back office

functions the second part of Article 5(1) is not attracted.

11. Lastly, as rightly held by AAR there is no agency

PE as the PE in India had no authority to enter into or

conclude the contracts. The contracts would be

entered into in the United States. They would be

concluded in US. The implementation of those

contracts only to the extent of back office functions

would be carried out in India, and therefore, MSAS

would not constitute an agency PE as contended on

behalf of the Department.

12. In DTAA, the term PE means a fixed place of

business through which the business of an MNE is wholly

or partly carried out. The definition of the word PE in

Section 92-F(iii) is inclusive, however, it is not under Article

9

(2007) 7 SCC 1

32

5(1) of the Treaty. It is for this reason that Article 5(2) of

DTAA herein refers to places included as PE of the MNE.

One such place is mentioned in Article 5(2)(l) which deals

with furnishing of services.

13. The concept of PE was introduced in the 1961 Act

as part of the statutory provisions of transfer pricing by the

Finance Act of 2001. In Section 92 -F(iii) the word

“enterprise” is defined to mean

“a person (including a permanent establishment of

such person) who is, or has been, or is proposed to

be, engaged in any activity, relating to the

production, …”

Under CBDT Circular No. 14 of 2001 it has been clarified

that the term PE has not been defined in the Act but its

meaning may be understood with reference to DTAA

entered into by India. Thus the intention was to rely on the

concept and definition of PE in DTAA. However, vide the

Finance Act, 2002 the definition of PE was inserted in the

Income Tax Act, 1961 (for short “the IT Act”) vide Section

92-F(iii-a) which states that the PE shall include a fixed

place of business through which the business of MNE is

wholly or partly carried on. This is where the difference

lies between the definition of the word PE in the

inclusive sense under the IT Act as against the

definition of the word PE in the exhaustive sense under

DTAA. This analysis is important because it indicates

the intention of Parliament in adopting an inclusive

definition of PE so as to cover service PE, agency PE,

software PE, construction PE, etc.

14. There is one more aspect which needs to be

discussed, namely, exclusion of PE under Article 5(3).

Under Article 5(3)(e) activities which are preparatory or

auxiliary in character which are carried out at a fixed

place of business will not constitute a PE. Article 5(3)

commences with a non obstante clause. It states that

notwithstanding what is stated in Article 5(1) or under

Article 5(2) the term PE shall not include maintenance

of a fixed place of business solely for advertisement,

scientific research or for activities which are

preparatory or auxiliary in character. In the present case

we are of the view that the abovementioned back office

functions proposed to be performed by MSAS in India falls

under Article 5(3)(e) of DTAA. Therefore, in our view in the

present case MSAS would not constitute a fixed place PE

under Article 5(1) of DTAA as regards its back office

operations.”

(emphasis supplied)

33

Learned counsel for the appellant, however, attempted to

distinguish this judgment on the argument that this case dealt

with the issue of service PE. According to him, the Court must

examine the full transactions of the respondent to determine

whether the work done by the respondent-assessee was one of a

backup office work or auxiliary work. Insofar as the nature of

activities carried on by the respondent through the liaison office in

India, as permitted by the RBI, we have upheld the conclusion of

the High Court that the same were 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 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.

11. Having said thus, it must follow 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. The transaction(s) had completed with the

remitters in UAE, and no charges towards fee/commission could

34

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 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). 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 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.

12. Our attention was invited to the dictum in Assistant

Director of Income Tax-1, New Delhi vs. E-Funds IT Solution

Inc.

10. Paragraph 2 of the said decision would clearly indicate the

background in which the issue was answered by this Court. The

same reads thus: -

10

(2018) 13 SCC 294

35

“2. The assessing authority decided that the assessees

had a permanent establishment (hereinafter referred to as

“PE”) as they had a fixed place where they carried on their

own business in Delhi, and that, consequently, Article 5 of

the India US Double Taxation Avoidance Agreement of

1990 (hereinafter referred to as “DTAA”) was attracted.

Consequently, the assessees were liable to pay tax in

respect of what they earned from the aforesaid fixed place

PE in India. The CIT (Appeals) dismissed the appeals of the

assessees holding that Article 5 was attracted, not only

because there was a fixed place where the assessees

carried on their business, but also because they were

“service PEs” and “agency PEs” under Article 5. In an

appeal to the ITAT, the ITAT held that the CIT (Appeals)

was right in holding that a “fixed place PE” and “service

PE” had been made out under Article 5, but said nothing

about the “agency PE” as that was not argued by the

Revenue before the ITAT. However, the ITAT, on a

calculation formula different from that of the CIT (Appeals),

arrived at a nil figure of income for all the relevant

assessment years. The appeal of the assessees to the High

Court proved successful and the High Court, by an

elaborate judgment, has set aside the findings of all the

authorities referred to above, and further dismissed the

cross-appeals of the Revenue. Consequently, the Revenue

is before us in these appeals.”

The Court, after analysing the decisions and the concerned report

produced before it, observed in paragraph 22 as follows: -

“22. This report would show that no part of the main

business and revenue earning activity of the two

American companies is carried on through a fixed

business place in India which has been put at their

disposal. It is clear from the above that the Indian

company only renders support services which enable

the assessees in turn to render services to their clients

abroad. This outsourcing of work to India would not

give rise to a fixed place PE and the High Court

judgment is, therefore, correct on this score.”

(emphasis supplied)

36

We may usefully refer to paragraphs 24 and 26 of the reported

decision, which read thus: -

“24. It has already been seen that none of the

customers of the assessees are located in India or have

received any services in India. This being the case, it

is clear that the very first ingredient contained in

Article 5(2)(l) is not satisfied. However, the learned

Attorney General, relying upon Para 42.31 of the OECD

Commentary, has argued that services have to be

furnished within India, which does not mean that they

have to be furnished to customers in India. Para 42.31 of

the OECD Commentary reads as under:

“42.31. … Whether or not the relevant services are

furnished to a resident of a State does not matter;

what matters is that the services are performed in the

State through an individual present in that State.”

xxx xxx xxx

26. We entirely agree with the approach of the High

Court in this regard. Para 42.31 of the OECD Commentary

does not mean that services need not be rendered by the

foreign assessees in India. If any customer is rendered a

service in India, whether resident in India or outside

India, a “service PE” would be established in India. As

has been noticed by us hereinabove, no customer, resident

or otherwise, receives any service in India from the

assessees. All its customers receive services only in

locations outside India. Only auxiliary operations that

facilitate such services are carried out in India. This being

so, it is not necessary to advert to the other ground,

namely, that “other personnel” would cover personnel

employed by the Indian company as well, and that the US

companies through such personnel are furnishing services

in India. This being the case, it is clear that as the very first

part of Article 5(2)(l) is not attracted, the question of going

to any other part of the said article does not arise. It is

perhaps for this reason that the assessing officer did not

give any finding on this score.”

(emphasis supplied)

As aforesaid, we agree with the finding recorded by the High Court

about the nature and character of stated activities carried on by

37

the liaison offices of the respondent and in our view, the High

Court justly reckoned the same as being of preparatory or auxiliary

character, falling under Article 5(3)(e).

13. The High Court has also examined the matter in the context

of explanation to Section 9(1)(i) of the 1961 Act. Prior to enactment

of Finance Act, 2003 (32 of 2003), Section 9(1)(i) read thus: -

“Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or

arise in India: -

(i) all income accruing or arising, whether

directly or indirectly, through or from any business

connection in India, or through or from any property

in India, or through or from any asset or source of

income in India, or through the transfer of a capital

asset situate in India.

Explanation.— For the purposes of this clause—

(a) in the case of a business of which all the

operations are not carried out in India, the

income of the business deemed under this clause

to accrue or arise in India shall be only such part

of the income as is reasonably attributable to the

operations carried out in India;

(b) in the case of a non-resident, no income

shall be deemed to accrue or arise in India to him

through or from operations which are confined to

the purchase of goods in India for the purpose of

export;

(c) in the case of a non-resident, being a

person engaged in the business of running a news

agency or of publishing newspapers, magazines or

journals, no income shall be deemed to accrue or

arise in India to him through or from activities

which are confined to the collection of news and

views in India for transmission out of India;

(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of

India; or

38

(2) a firm which does not have any

partner who is a citizen of India or who is

resident in India; or

(3) a company which does not have any

shareholder who is a citizen of India or

who is resident in India,

no income shall be deemed to accrue or

arise in India to such individual, firm or

company through or from

operations which are confined to the

shooting of any cinematograph film in

India.

………………….. ”

After the enactment of Finance Act, 2003, explanation 2 came to

be inserted after the renumbered explanation 1 to clause (i) of sub-

Section (1) of Section 9 with effect from 1.4.2004. The same reads

thus: -

“Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or

arise in India: -

(i) all income accruing or arising, whether

directly or indirectly, through or from any business

connection in India, or through or from any property

in India, or through or from any asset or source of

income in India, or through the transfer of a capital

asset situate in India.

Explanation 1.- xxx xxx xxx

Explanation 2.– For the removal of doubts, it is

hereby declared that “business connection” shall

include any business activity carried out through a

person who, acting on behalf of the non-resident,-

(a) has and habitually exercises in India, an

authority to conclude contact on behalf of the non-

resident, unless his activities are limited to the

purchase of goods or merchandise for the non -

resident; or

(b) has no such authority, but habitually

maintains in India a stock of goods or merchandise

from which he regularly delivers goods or

merchandise on behalf of the non-resident; or

39

(c) habitually secures orders in India, mainly or

wholly for the non-resident or that non-resident and

other non-residents controlling, controlled by, or

subject to the same common control, as that non-

resident:

Provided that such business connection shall not

include any business activity carried out through a

broker, general commission agent or any other

agent having an independent status, if such broker,

general commission agent or any other agent having

an independent status is acting in the ordinary

course of his business:

Provided further that where such broker, general

commission agent or any other agent works mainly

or wholly on behalf of a non-resident (hereafter in

this proviso referred to as the principal non -

resident) or on behalf of such non-resident and

other non-residents which are controlled by the

principal non-resident or have a controlling interest

in the principle non-resident or are subject to the

same common control as the principal non -

resident, he shall not be deemed to be a broker,

general commission agent or an agent of an

independent status.”

The meaning of expressions “business connection” and “business

activity” has been articulated. However, even if the stated

activity(ies) of the liaison office of the respondent in India is

regarded as business activity, as noted earlier, the same being “of

preparatory or auxiliary character”; by virtue of Article 5(3)(e) of

the DTAA, the fixed place of business (liaison office) of the

respondent in India otherwise a PE, is deemed to be expressly

excluded from being so. And since by a legal fiction it is deemed

not to be a PE of the respondent in India, it is not amenable to tax

liability in terms of Article 7 of the DTAA.

40

14. Taking any view of the matter, therefore, we find no

substance in this appeal. We uphold the conclusions reached by

the High Court for the reasons stated hitherto.

15. Accordingly, the appeal is dismissed with no order as to costs.

Pending interlocutory applications, if any, shall stand disposed of.

..................................J.

(A.M. Khanwilkar)

..................................J.

(Ajay Rastogi)

New Delhi;

April 24, 2020.