Liaison Offices of a Company do not constitute a Permanent Establishment in India

Assessee is a UAE based company engaged in the business of remittance services and transfers funds from UAE to various places in India. Assessee had opened Liaison Offices (LOs) in India for supporting the remittance activities as per the terms and conditions of RBI.
The remittances to the beneficiaries were to be made by way of cheque or drafts, the LOs would download the particulars of such remittances through electronic media, undertake printing of cheques or drafts, and courier the same to the beneficiaries in India.
Assessee filed an application before the Authority of Advance Rulings (‘AAR’) with a question whether any income accrued or deemed to be accrued for the assessee in India on account of the activities carried by its LOs in India.

AAR held that the activities of the assessee constituted a Permanent Establishment (PE) in India and therefore, profits to the extent attributable to such activities of the LOs were taxable in India.

Assessee challenged the ruling of the AAR by way of a writ before the jurisdictional High Court.

It was held that assessee was not liable to tax in India because no income had accrued or deemed to have been accrued from the activities of LOs in India since the activities carried on by the LOs were preparatory and auxiliary in nature.
The activities carried on by LOs did not in any manner contribute directly or indirectly to the earning of profits or gains by the assessee in UAE.
Every aspect of the transaction was concluded in UAE, whereas, the activities performed by LOs in India were only supportive of the transactions carried out in UAE. Therefore, LO cannot be treated as taxpayer’s PE in India under the tax treaty.

Tax department aggrieved by the order filed a Special Leave Petition (SLP) before the Supreme Court.

It was observed that for determining whether an activity is preparatory and auxiliary in nature, a functional test of the activity would need to be undertaken. The terms ‘preparatory’ and ‘auxiliary’ were neither defined in the Income Tax Act, 1961 nor the Tax Treaty, accordingly, the Supreme Court referred to the Black’s Law Dictionary and Oxford Dictionary which define the term auxiliary to mean ‘aiding or supporting’.
RBI had permitted the LOs to carry on only limited activities in India such as responding to queries of banks in India, undertaking bank reconciliation, acting as a communication channel between the branches of the assessee and Indian banks, printing and dispatching cheques or drafts to beneficiaries.
RBI also prohibited LOs not to undertake any other activity of trading, commercial or industrial and not to enter into any business contracts in its own name without prior permission of the RBI. The restrictions imposed by the RBI meant that no business connection was established by the taxpayer in India.
It was held that since such activities of the LOs in India were of preparatory or auxiliary character, the same would fall under an exception of Article 5(3)(e) of the tax treaty between India and UAE. Resultantly, it would not constitute a PE in India and order passed by the High Court was upheld.

LOs of a Company do not constitute a PE in India if the activities undertaken by LO are covered under Article 5(3)(e) of the Treaty with UAE and the facts on the case determine such activities should qualify as preparatory and auxiliary in nature.

Source: Civil Appeal No. 9775 of 2011 – Union of India & Anr. v. U.A.E. Exchange Centre

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