An Apex Court bench held that levying of tax on the UAE body in India, when no trading, commercial or industrial activities took place, is against DTAA.
In an important judgment, the Supreme Court has held that UAE Exchange Centre’s liaison office in India would not constitute a ‘Permanent Establishment’, thus not liable to pay tax as per the provisions of the Income Tax Act and the Double Taxation Avoidance Agreements (DTAAs) signed between the two nations.
The bench, led by Justice A M Khanwilkar, while upholding the Delhi high court judgment that ruled in favour of UAE Exchange Centre, which offered remittance services to NRIs in UAE, held that levying of tax on the UAE body in India, when no trading, commercial or industrial activities took place, is against DTAA.
The apex court held that the assessee was not carrying on any business activity in India as such, but was only dispensing with the remittances by downloading information from its main server in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by the NRI remitters in UAE. The transactions were being completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India in that regard, it stated.
“…no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and more so because the liaison office is not a PE in terms of Article 5 of DTAA (as it is only carrying on the activity of a preparatory or auxiliary character). The concomitant is – no tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE… the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever,” the judgment stated, adding that 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.
As the dispute arose over one of the modes of its remittance services, the assessee had sought opinion of the Authority for Advance Rulings (AAR) on whether any income is accrued/deemed to be accrued in India from the activities carried out by it in India?”
The AAR favoured the department by concluding 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.
Aggrieved by the income tax demand notices issued for assessment years 2000-2004, the assessee had moved the HC, which held the AAR proceeded on a wrong premise by first examining the 1961 Act instead of applying the DTAA provisions for ascertaining the respondent’s liability to tax.