BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

PRESENT :

Hon'ble Mr. Justice Syed Shah Mohammed Quadri (Chairman)
Mr. K.D.Singh (member)
Mr.K.D.Gupta(member)
A.A.R. NO. 608 OF 2003

Name & Address of the Applicant : UAE Exchange Centre LLC, Head Office P B No 170, Abu Dhabi
Commissioner Concerned : Commissioner of Income Tax, Cochin
Present for the Department : Mr V Sree Kumar, JCIT (Sr AR), Cochin
Present for the Apllicant : Mr H P Ranina, Advocate, Mr V Sathyanarayanan, CA, Mr George Anthony, UAE Exchange LLC
Dated : May 26, 2004

RULING
By Mr. Justice Syed Shah Mohammed Quadri :

In this application under section 245Q(1) of the Income-tax Act, 1961 (for short"the Act"), UAE Exchange Centre, LLC,having its registered office in Abu Dhabi, UAE, through its liaison office in Kochi (Kerala), seeks advance ruling of this 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?"

2. The applicant is a limited liability company incorporated in United Arab Emirates (UAE). It is engaged in offering, among others remittance services for transferring amounts from UAE to various places in India. It was granted licence by the Reserve Bank of India (RBI) for the purpose of setting up liaison offices in India for undertaking only the following approved activities.

i. Undertaking reconciliation of bank accounts held in India with correspondent banks under Draft Drawing Arrangement;
ii. Acting as a communication centre receiving computer advices of mail transfer from UAE and transmitting to Indian correspondent banks;
iii. printing drafts and dispatching the same to the addresses.
iv. Following up with the Indian correspondent banks.

The applicant set up its first liaison office in Kochi, Kerala (India) in January, 1997. At present, the applicant has liaison offices in Chennai, New Delhi, Mumbai and Jalandur in India.

They are carrying on the activities strictly in terms of the conditions specified by the RBI. The entire expenses of the liaison offices in India are met exclusively out of funds received from UAE through normal banking channel. The liaison offices undertake no activity of a trading, commercial or industrial nature. No immovable property is acquired, transferred or disposed of in India (otherwise than by way of lease) by the applicant/liaison offices. No fee/commission 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 accrues or arises directly or indirectly through of from any source in India to the liaison offices within the meaning of sections 5 or 9 of the Act.

The Government of India and the Government of United Arab Emirates entered into an agreement of avoidance of Double Taxation and Prevention of Fiscal Evasion (for short "DTAA") with reference to taxes on income. The applicant relies on para 3 of Article 5 of the DTAA in support of the plea that no income arises or accrues/deemed to arise or accrue in India. In the rejoinder it is added that as per the DTAA profits of an enterprise of a contracting state shall be taxable only in that State unless the enterprise caries on business in the other contracting state through a 'permanent establishment' (PE) situated therein. No question of taxing the income of the applicant would arise as it has no PE in India and under the said agreement maintaining a fixed place of business solely for the purpose of carrying on for the enterprise any other activity of a preparatory or auxiliary character would not amount to maintaining PE in India. The activities carried out by thes! e offices are incidental to the main business of the company and they neither earn any income from their activities in India, nor will it be possible to earn any income in India and further no income can be deemed to have accrued or arisen in India.

3. The commissioner of Income tax, Kochi, the jurisdictional Commissioner, in his comments to the application submits that the control, administration and the management of the affairs of the applicant are wholly outside India, from Abu Dhabi, and is subject to the supervision by the UAE Central Bank. However the control of the activities of the liaison offices in India is from its Kochi office. The entire operation expenses of all offices in India are borne by UAE office. Though the applicant is engaged in buying and selling foreign currency and traveller cheques and handling of remittance business and other exchange services, yet while carrying out those operations the liaison offices in India, apart from working as communication center, are engaged in other activities. It is, nonetheless, admitted that those activities are other than trading, commercial or industrial in nature. The work carried on in liaison offices, inter alia, relates to down-loading particulars of remittances through electronic media, printing cheques/drafts drawn of the respective branches of banks in India, and sending them to the addresses of the beneficiaries in India in accordancewith the instructions of the NRIs. It is pointed out that the establishment of liaison offices helps the applicant to extend its volume of business and such part of income as is attributable to and derive from the services rendered in India, shall be deemed to have accrued/arisen in India; the activities carried out by the liaison offices are connected to the main business of the company and there is a territorial nexus between the applicant and its liaison offices in India.

4. Mr. H.P. Ranina, the learned Advocate for the applicant, submits that : no business or trade is carried on by the applicant in India; all its business is only in the UAE, the contracts with NRIs are executed in UAE where NRIs hand over moneys for remittances in India as also the commission; the applicant remits amounts telegraphically through banking channel to banks nominated by NRIs or when they so desire through cheques/drafts which are sent through courier to beneficiaries in India by the liaison offices after down loading the particulars of amounts, name and addresses of the beneficiaries in India from the computer and printing cheques/drafts. It is argued that under para 3 of Article 7 of DTAA the business profits of the applicant would be liable to tax in India only if the applicant has a 'PE' in India and even though maintaining a fixed place of business in India amounts to keeping a 'PE', yet in view of specific provisions of sub clause (e) of Arti! cle 5.3, a fixed place of business for the purpose of carrying on any activity of a preparatory or an auxiliary character is excluded from the definition of 'PE'. Inasmuch the activities of the liaison offices are only supportive and auxiliary in nature to the main work undertaken by the applicant in UAE, profits, if any, attributable to the activities in India are not taxable in India. Such functions as printing of the instruments/cheques for remitting amounts and dispatching through post or courier are auxiliary in nature because they merely support and aid the business of the applicant which is undertaken in the UAE. It is further contended that no income arises/or accrues to the applicant under sections 5(2) and 9(1)(i) of the Act and in any event having regard to the provision of the DTAA, no income can be deemed to accrue or arise in India to be taxed in the hands of the applicant.

The Commissioner of Income-tax sought permission to place before us and rely upon the opinion of senior counsel of the Income-tax Department but we declined to receive the same and heard his oral submissions.

5. We shall first examine whether on the facts and in the circumstances of the case any income accrues/arises or is deemed to accrue/arise to the applicant in India under sections 5(2) and 9 (1) (i) of the Act; if it does, then consider the treatment of such income under the provisions of the DTAA.

6. Section 5 of the Act deals with the scope of total income. Sub-section (1) thereof relates to total income of a resident. The applicant is a non-resident in India so Sub-section (2) will be attracted. It says that the total income of a non-resident shall include all income from whatever source derived, which is received or deemed to have been received in India in any previous year by or on behalf of such person. Clause (b) of sub-section (2) which is material here, provides that the total income of a non-resident includes all income, from whatsoever source which accrues or arises or is deemed to accrue or arise in India during such year. The business of the applicant is being carried on in UAE; a contract for remitting the amounts is entered into with NRIs and is executed outside India; the commission for remitting the amounts is also earned by the applicant outside India, therefore, no income accrues/arises, or is deemed to accrue or arise in India in view! of the principle that income accrues in the country in which the contract is executed.

7. The provisions of clause (i) of sub-section (1) of section 9 read with Explanation thereto may be referred to here.

"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 of 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
(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 in India."

A perusal of the provision extracted above shows 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. The mandate contained in the Explanation is that for the purpose of aforementioned clause where the 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. Here, we need to examine only whether any income accrues or arises to the applicant (whether directly or indirectly) through or from any 'business connection' in India. From the facts of the case it is evident that all the operations of the business of the applicant are 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 connection' in India; and (ii) the income of the business can be deemed to accrue or arise in India from such operations as are carried out in India. In such a situation the Explanation (now Explanation 1)limits the quantum of taxable income so deemed to accrue or arise only to such part of the income as is reasonably attributable to the operations carried out in India.

8. The first important aspect we have to consider is whether the applicant has "business connection" in India.

The _expression "business connection" was not defined for the purpose of the aforementioned provision, before March 31, 2003. By Finance Act, 2003 two Explanations were inserted after the then existing Explanation which is numbered as
Explanation 1 of sub-section (1) of section 9 w.e.f. 1.4.2004. Explanation 2 which is relevant for our purpose defines the _expression thus:
"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 contracts 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 or the non-resident; or
(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."

The said Explanation contains an inclusive definition; it brings in the business activities specified in clauses (a) to (c), refereed to above, within the fold of "business connection" which has to be understood in its ordinary meaning. On the facts of this case it may unhesitatedly be concluded that none of the business activities in the aforementioned clauses is carried out in India. The newly added Explanation 2 is , therefore, of no assistance in comprehending the meaning of the _expression "business connection" as no precise definition has been attempted. The _expression has been interpreted by the courts in various decisions. it will be useful to refer to the following judgments.

9. In CIT, Punjab, v. R.D. Aggarwal & Co (56 ITR 20), the import of _expression is brought out in the following observation of the Supreme Court:
"The _expression "business connection" postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity".

The Supreme Court, speaking through Hon'ble Mr.Justice Shah (as he then was) for the purpose of Section 42 of the Income-tax Act, 1922 laid down, "business connection" contemplated by section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection."

The requirement of continuity of transactions to form 'business connection' between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Company Limited (23 ITR 101), Hon'ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, "an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection".

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.

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 from 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 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 b! usiness 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.

12. Now we shall advert to the contention of the application based on DTAA. In this regard reference to the relevant provisions of Article 7 of DTAA which deal with the business profits would be necessary.

Article 7: Business profits

"1. The profits of an enterprise of a Contracting States shall be taxable only in that State unless the enterprises 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."

A perusal of para (I) along with the definition clauses in Article 3, would show that the profits of an enterprise of UAE are taxable in that country provided that enterprise does not carry on business through a permanent establishment (PE) in India. If the enterprise carries on business, through a 'PE' in India its profits may be taxed here but only so much of them as are attributable to that PE. This provision is in line with sub-clause (a) of Explanation (I) to clause (i) of Section (1) of Section 9 of the Act.

13. The _expression 'permanent establishment' is defined in Article 5. We shall advert to Para 1 to 3 thereof, which are relevant for our purpose and are reproduced below:

"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;
(b) branch;
(c) an office;
(d) to (i) x x x x x x x x x
(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 stock of goods or merchandise belonging to he 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."
To summarize the _expression 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on and includes within its ambit places enumerated in clauses (a) to (i) of para 2 but excludes places specified in clauses (a) to (e) of para, 3, referred to above.

14. It is urged for the applicant that maintenance of liaison offices solely for the purpose of carrying on for the enterprise activities of attending to the complaints of the beneficiaries and dispatching cheques/draft through courier, is covered by exclusionary clause (e). It is emphasized that no commission is received in the liaison offices, no business is entertained and no activity in violation of conditions prescribed by RBI is carried on there. It is a common ground that the liaison offices fall within the inclusive definition of the _expression. 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 a! ctivity 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 function 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 t! he following two modes:

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 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 cheque/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 of 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 'permanent establishment' within the meaning of the _expression in DTAA.

15. From the above discussion it can safely be concluded that so much of the profits as shall be deemed to accrue or arise to the applicant in India which are attributable to the 'permanent establishment', namely, the liaison offices in India, would be taxable in India even under the DTAA.
For the aforementioned reasons, we rule on 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."