Case Note & Summary
The respondent, U.A.E. Exchange Centre, a company incorporated in the United Arab Emirates, provided remittance services for transferring amounts from UAE to India. It obtained permission from the Reserve Bank of India under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973 to establish liaison offices in India, initially at Cochin, and later at Chennai, New Delhi, Mumbai, and Jalandhar. The liaison offices were permitted to undertake specific activities, including printing Indian Rupee drafts and dispatching them to beneficiaries in India. The respondent filed income tax returns showing nil income, claiming no income accrued in India. However, the Authority for Advance Rulings ruled that income was deemed to accrue in India from the activities of the liaison offices, which constituted a permanent establishment. The Supreme Court upheld this ruling, holding that the activities of printing and dispatching cheques in India created a business connection and a permanent establishment, and profits attributable to such activities were taxable in India under the Income Tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and UAE.
Headnote
A) Income Tax - Business Connection - Deemed Accrual - Sections 2(24), 4, 5, 9(1)(i) of the Income Tax Act, 1961 - The respondent, a UAE-based company, operated liaison offices in India that printed and dispatched cheques/drafts to beneficiaries in India based on remittance instructions from NRIs in UAE. The court held that these activities constituted a 'business connection' in India, and income attributable to such operations was deemed to accrue in India under Section 9(1)(i) read with Explanation 2. (Paras 1-10) B) Income Tax - Permanent Establishment - Attribution of Profits - Article 5 of the Double Taxation Avoidance Agreement between India and UAE - The liaison offices were held to be a 'permanent establishment' (PE) of the respondent in India. The court ruled that profits attributable to the PE, specifically from the activity of printing and dispatching cheques, were taxable in India under Article 7 of the DTAA. (Paras 11-15) C) Income Tax - Double Taxation Avoidance Agreement - Applicability - Section 90 of the Income Tax Act, 1961 - The DTAA between India and UAE was considered, and the court held that the provisions of the DTAA do not override the deeming provisions of the Income Tax Act where a PE exists. The income attributable to the PE was taxable in India in accordance with the DTAA. (Paras 16-20)
Issue of Consideration
Whether any income accrues or is deemed to accrue in India from the activities carried out by the liaison offices of the respondent in India, and whether such income is taxable under the Income Tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and UAE.
Final Decision
The Supreme Court upheld the ruling of the Authority for Advance Rulings, holding that income from the activities of the liaison offices in India is taxable in India. The appeal by the Union of India was allowed.
Law Points
- Business connection
- Permanent establishment
- Attribution of profits
- Deemed accrual of income
- Double Taxation Avoidance Agreement
