It is a settled principle of international tax jurisprudence
that the maintenance of a fixed place of business solely for the
purpose of carrying on any activity of a preparatory or
auxiliary character would not give rise to a permanent
establishment (“PE”). But, can an activity that
is not merely auxiliary and actually forms a core part of the
operations of the non-resident enterprise still fall within the
scope of this exclusion? The recent decision of the High Court
of Delhi seems to answer this question in the affirmative.1
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To briefly state the facts, a UAE-based company (“UAE
Co”) offered remittance services to various
non-resident Indians for transferring money from UAE to specific
individuals in India. The remittance was made electronically by
way of (i) telegraphic transfer through banking channels; or
(ii) on the request of the remitter, dispatch of instruments /
cheques though the Indian liaison office (“LO”)
of UAE Co to the designated beneficiaries. UAE Co approached,
the Authority for Advance Rulings (“AAR”) for a
ruling on whether its activities in India gave rise to a PE in
India.
Since the role of the LO in the first mode of remittance was
confined to addressing customer queries and complaints, the AAR
held that such auxiliary involvement would not give rise to a PE
in India as per the provisions of Article 5(3)(e) of the
India-UAE Tax Treaty. However, in the second mode of remittance,
the LO undertook the enhanced role of downloading online data
regarding the amount to be remitted along with relevant names
and addresses, and printing and dispatching the cheques / drafts
to the designated beneficiaries by way of courier. The AAR
observed that this effectively formed part of the core activity
carried out by UAE Co and could not be viewed as auxiliary or
incidental in nature. Considering that the LO was a fixed place
of business through which UAE Co carried on business in India,
the AAR held that UAE Co had a PE in India.
With a view to challenge the AAR’s decision, UAE Co then invoked
the writ jurisdiction of the Delhi High Court under Article 226
of the Constitution of India. After reviewing the AAR’s
construction of the domestic and treaty provisions, the Delhi
High Court quashed the AAR’s decision on the basis that it
suffered from ‘errors apparent on the face of record’. It may be
noted that a contrasting approach was adopted by the Madras High
Court in another recent case where the Court limited its
judicial review to the legality of the procedure followed by the
AAR and refused to venture into the correctness or legal
validity of the AAR's order.2
The Delhi High Court in the present case, undertook a liberal
construction of the auxiliary activity exclusion in the Treaty
so as to cover the role played by the LO, which in its view was
merely supportive of the main activity of the LO. Accordingly,
it was held that the LO could not be considered a PE of UAE Co
in India.
If it is presumed that the LO and UAE Co essentially carried out
the same activity (i.e. remittance of money), the decision of
the Delhi High Court would clearly contradict the OECD view that
“a fixed place of business whose general purpose is one which is
identical to the general purpose of the whole enterprise, does
not exercise a preparatory or auxiliary activity.”
The High Court even went a step further to hold that under
domestic tax law as well, UAE Co cannot be said to have a
business connection in India so as to render its income taxable
in India. Under the domestic provisions, business profits earned
by a non-resident would be taxable in India only to the extent
that it is attributable to a business connection in India.3
It seems that the Delhi High Court’s decision has the effect of
narrowing down the scope of the business connection threshold.
The Delhi High Court’s liberal interpretation of the auxiliary
activity exclusion and the concept of business connection, and
its admonition of the AAR’s ‘errors apparent on the face of
record’ is likely to give rise to similar litigation in the
future.
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1. UAE Exchange Centre Ltd. v. UOI,
2009-TIOL-84-HC-DEL-IT
2. Anurag Jain v. AAR, [2009] 308 ITR
302 (Mad) relying on the principle laid down by the
Supreme Court in Shreeram Durga Prasad v. Settlement
Commission, [1989] 176 ITR 169
3. The business connection threshold is
wider than the PE threshold under the treaty and covers all
situations where there is some sort of a real and intimate
relationship between the offshore activities of the non-resident
with its activities inside India.
