My UAE client's Indian liaison office only downloads remittance instructions from the head office server and prints cheques on Indian banks. The Assessing Officer says that is a permanent establishment and wants to tax the whole remittance commission. Is he right?
No, on these facts. The Supreme Court held that a liaison office whose only activity is downloading information from the head office server and printing and despatching cheques is carrying on an activity of a preparatory or auxiliary character, which Article 5(3)(e) of the India-United Arab Emirates DTAA expressly takes out of the expression 'permanent establishment'. Once the office is deemed by that legal fiction not to be a PE, Article 7 gives India no right to tax the enterprise's profits, and the deeming provisions in ss.5 and 9 of the Act 'can have no bearing whatsoever'.
Decided by the Supreme Court (A.M. Khanwilkar J and Ajay Rastogi J (judgment delivered by A.M. Khanwilkar J)) on 2020-04-24, reported as Civil Appeal No. 9775 of 2011 (Supreme Court of India), affirming U.A.E. Exchange Centre Ltd. v. Union of India and Another, W.P.(C) No. 14869/2004 (High Court of Delhi, 13 February 2009). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED ARAB EMIRATES — Article 5(1), Article 5(2)(c), Article 5(3)(e) and Article 7.. It bears on section Article 5, section Article 5(3)(e), section Article 7, section 9(1)(i), section 5(2), section 2(24), section 90, section 148 of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
This is the leading Supreme Court authority on the preparatory-or-auxiliary exclusion for a liaison office, and it settles two things a practitioner will be arguing about. First, the order of analysis: the Authority for Advance Rulings had begun with s.5(2)(b) and s.9(1)(i) and only then looked at the treaty; the Delhi High Court held that was the wrong way round where the taxpayer invokes the DTAA, and the Supreme Court upheld it. Second, the width of the exclusion: the Delhi High Court held that Article 5(3) must be given 'a wider and liberal play', and that the fallacy in the Revenue's approach is to ask whether the transaction could have been completed without the Indian activity — on that test nothing would ever be preparatory or auxiliary, because every activity an enterprise undertakes is directed at performing its contract. The limit of the case is equally important: the liaison offices operated under RBI permission which forbade them from engaging in any primary business activity, and the Supreme Court's paragraph 11 turns on exactly that. A liaison office that solicits orders, concludes contracts, negotiates prices or holds stock is outside the exclusion, and Explanation 2 to s.9(1)(i) then supplies the business connection. Note also that the case was fought over s.148 reassessment notices founded on the AAR ruling; once the ruling fell, the Delhi High Court said the department should consider withdrawing the notices unless it had other sustainable grounds.
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The respondent was a company resident in the United Arab Emirates carrying on the business of offering remittance services to non-resident Indians in the UAE. It maintained its main servers in the UAE. With the Reserve Bank of India's permission it set up liaison offices in India. The only thing those offices did was to download from the UAE server the information contained in the instructions given by the NRI remitters, and on the basis of that information draw cheques on banks in India which were then couriered or despatched to the beneficiaries in India. Every element of the transaction with the remitter, including the collection of the fee or commission, was completed in the UAE; nothing was collected by the Indian offices. The Authority for Advance Rulings, by a ruling dated 26 May 2004, held that the liaison offices gave rise to a business connection within s.9(1)(i) read with s.5(2)(b) and constituted a permanent establishment, and reassessment notices under s.148 followed. The Delhi High Court (Badar Durrez Ahmed and Rajiv Shakdher JJ) quashed the ruling on 13 February 2009, holding that the Authority had approached the matter through the Act rather than the INDIA-UAE DTAA and had misread the exclusion in Article 5(3)(e). The Revenue appealed to the Supreme Court.
The Revenue's appeal was dismissed with no order as to costs and the conclusions of the High Court were upheld (paras 14 and 15). The activities of the liaison offices in India were of a preparatory or auxiliary character falling within Article 5(3)(e) of the INDIA-UAE DTAA, so that the fixed place of business in India, though otherwise answering the description of a permanent establishment, is by legal fiction expressly excluded from being one; and being deemed not to be a PE it is not amenable to tax liability in terms of Article 7 of the DTAA (paras 12 and 13). No income within s.2(24) was earned by the liaison office in India, and the deeming provisions in ss.5 and 9 can have no bearing (para 11).
The Court began from the character of what the liaison office actually did. The respondent was not carrying on any business activity in India as such, but was 'only dispensing with the remittances' by downloading information from the UAE server and printing cheques or drafts on Indian banks; the transactions had completed with the remitters in the UAE and no charges towards fee or commission could be collected by the Indian office (para 11). The activities permitted by the RBI themselves demonstrated that the office had to steer away from any primary business activity and could carry on activities of a preparatory or auxiliary nature only (para 11). The Court then adopted the High Court's reliance on DIT v. Morgan Stanley & Co. Inc., which requires a functional and factual analysis of each activity of an establishment and which had held back office operations to fall within the corresponding Article 5(3)(e) of the India-US treaty (para 10), and on ADIT v. E-Funds IT Solution Inc., where outsourcing of work to India that only facilitated services rendered to customers outside India was held not to give rise to a fixed place PE or a service PE (para 12). Finally the Court dealt with the statutory route: even if the liaison office's activity were regarded as a business activity within the widened meaning given by Explanation 2 to s.9(1)(i) inserted by the Finance Act 2003, the office being of a preparatory or auxiliary character is by Article 5(3)(e) deemed not to be a PE, and therefore falls outside Article 7 (para 13). The High Court's own reasoning, upheld by this judgment, was that the exclusionary clause must be given 'a wider and liberal play', because the alternative — asking whether the transaction could have been completed without the Indian activity — would mean that no activity could ever be preparatory or auxiliary.
And 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.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Supreme Court held that a liaison office whose only activity is downloading information from the head office server and printing and despatching cheques is carrying on an activity of a preparatory or auxiliary character, which Article 5(3)(e) of the India-United Arab Emirates DTAA expressly takes out of the expression 'permanent establishment'. Once the office is deemed by that legal fiction not to be a PE, Article 7 gives India no right to tax the enterprise's profits, and the deeming provisions in ss.5 and 9 of the Act 'can have no bearing whatsoever'. This was decided by the Supreme Court (A.M. Khanwilkar J and Ajay Rastogi J (judgment delivered by A.M. Khanwilkar J)) and bears on section Article 5, section Article 5(3)(e), section Article 7, section 9(1)(i), section 5(2), section 2(24), section 90, section 148 of the Income Tax Act 1961. It is reported as Civil Appeal No. 9775 of 2011 (Supreme Court of India), affirming U.A.E. Exchange Centre Ltd. v. Union of India and Another, W.P.(C) No. 14869/2004 (High Court of Delhi, 13 February 2009). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED ARAB EMIRATES — Article 5(1), Article 5(2)(c), Article 5(3)(e) and Article 7.. This is the leading Supreme Court authority on the preparatory-or-auxiliary exclusion for a liaison office, and it settles two things a practitioner will be arguing about. First, the order of analysis: the Authority for Advance Rulings had begun with s.5(2)(b) and s.9(1)(i) and only then looked at the treaty; the Delhi High Court held that was the wrong way round where the taxpayer invokes the DTAA, and the Supreme Court upheld it. Second, the width of the exclusion: the Delhi High Court held that Article 5(3) must be given 'a wider and liberal play', and that the fallacy in the Revenue's approach is to ask whether the transaction could have been completed without the Indian activity — on that test nothing would ever be preparatory or auxiliary, because every activity an enterprise undertakes is directed at performing its contract. The limit of the case is equally important: the liaison offices operated under RBI permission which forbade them from engaging in any primary business activity, and the Supreme Court's paragraph 11 turns on exactly that. A liaison office that solicits orders, concludes contracts, negotiates prices or holds stock is outside the exclusion, and Explanation 2 to s.9(1)(i) then supplies the business connection. Note also that the case was fought over s.148 reassessment notices founded on the AAR ruling; once the ruling fell, the Delhi High Court said the department should consider withdrawing the notices unless it had other sustainable grounds. If it applies to you, the first step is this: Put the treaty first in the reply to the notice: identify the Article 5(3) sub-clause you rely on before you argue s.5(2) or s.9(1)(i), because the Supreme Court has upheld that sequence.
The respondent was a company resident in the United Arab Emirates carrying on the business of offering remittance services to non-resident Indians in the UAE. It maintained its main servers in the UAE. With the Reserve Bank of India's permission it set up liaison offices in India. The only thing those offices did was to download from the UAE server the information contained in the instructions given by the NRI remitters, and on the basis of that information draw cheques on banks in India which were then couriered or despatched to the beneficiaries in India. Every element of the transaction with the remitter, including the collection of the fee or commission, was completed in the UAE; nothing was collected by the Indian offices. The Authority for Advance Rulings, by a ruling dated 26 May 2004, held that the liaison offices gave rise to a business connection within s.9(1)(i) read with s.5(2)(b) and constituted a permanent establishment, and reassessment notices under s.148 followed. The Delhi High Court (Badar Durrez Ahmed and Rajiv Shakdher JJ) quashed the ruling on 13 February 2009, holding that the Authority had approached the matter through the Act rather than the INDIA-UAE DTAA and had misread the exclusion in Article 5(3)(e). The Revenue appealed to the Supreme Court. The matter was decided on 2020-04-24 by the Supreme Court (A.M. Khanwilkar J and Ajay Rastogi J (judgment delivered by A.M. Khanwilkar J)). On those facts the Supreme Court held as follows. The Revenue's appeal was dismissed with no order as to costs and the conclusions of the High Court were upheld (paras 14 and 15). The activities of the liaison offices in India were of a preparatory or auxiliary character falling within Article 5(3)(e) of the INDIA-UAE DTAA, so that the fixed place of business in India, though otherwise answering the description of a permanent establishment, is by legal fiction expressly excluded from being one; and being deemed not to be a PE it is not amenable to tax liability in terms of Article 7 of the DTAA (paras 12 and 13). No income within s.2(24) was earned by the liaison office in India, and the deeming provisions in ss.5 and 9 can have no bearing (para 11).
The Court began from the character of what the liaison office actually did. The respondent was not carrying on any business activity in India as such, but was 'only dispensing with the remittances' by downloading information from the UAE server and printing cheques or drafts on Indian banks; the transactions had completed with the remitters in the UAE and no charges towards fee or commission could be collected by the Indian office (para 11). The activities permitted by the RBI themselves demonstrated that the office had to steer away from any primary business activity and could carry on activities of a preparatory or auxiliary nature only (para 11). The Court then adopted the High Court's reliance on DIT v. Morgan Stanley & Co. Inc., which requires a functional and factual analysis of each activity of an establishment and which had held back office operations to fall within the corresponding Article 5(3)(e) of the India-US treaty (para 10), and on ADIT v. E-Funds IT Solution Inc., where outsourcing of work to India that only facilitated services rendered to customers outside India was held not to give rise to a fixed place PE or a service PE (para 12). Finally the Court dealt with the statutory route: even if the liaison office's activity were regarded as a business activity within the widened meaning given by Explanation 2 to s.9(1)(i) inserted by the Finance Act 2003, the office being of a preparatory or auxiliary character is by Article 5(3)(e) deemed not to be a PE, and therefore falls outside Article 7 (para 13). The High Court's own reasoning, upheld by this judgment, was that the exclusionary clause must be given 'a wider and liberal play', because the alternative — asking whether the transaction could have been completed without the Indian activity — would mean that no activity could ever be preparatory or auxiliary. In the words reproduced by the source cited on this page: "And 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." The decision followed or applied DIT (International Taxation), Mumbai v. Morgan Stanley & Co. Inc., 2007 (7) SCC 1 — applied; quoted at para 10; ADIT v. E-Funds IT Solution Inc. — applied; quoted at para 12; U.A.E. Exchange Centre Ltd. v. Union of India, W.P.(C) 14869/2004 (Delhi High Court, 13 February 2009) — affirmed.
It was decided by the Supreme Court on 2020-04-24 and is reported as Civil Appeal No. 9775 of 2011 (Supreme Court of India), affirming U.A.E. Exchange Centre Ltd. v. Union of India and Another, W.P.(C) No. 14869/2004 (High Court of Delhi, 13 February 2009). The treaty construed is the Double Taxation Avoidance Agreement between INDIA and the UNITED ARAB EMIRATES — Article 5(1), Article 5(2)(c), Article 5(3)(e) and Article 7.. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section Article 5, section Article 5(3)(e), section Article 7, section 9(1)(i), section 5(2), section 2(24), section 90, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed with no order as to costs and the conclusions of the High Court were upheld (paras 14 and 15). The activities of the liaison offices in India were of a preparatory or auxiliary character falling within Article 5(3)(e) of the INDIA-UAE DTAA, so that the fixed place of business in India, though otherwise answering the description of a permanent establishment, is by legal fiction expressly excluded from being one; and being deemed not to be a PE it is not amenable to tax liability in terms of Article 7 of the DTAA (paras 12 and 13). No income within s.2(24) was earned by the liaison office in India, and the deeming provisions in ss.5 and 9 can have no bearing (para 11). It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section Article 5, section Article 5(3)(e), section Article 7, section 9(1)(i), section 5(2), section 2(24), section 90, section 148 of the Income Tax Act 1961, and was decided by A.M. Khanwilkar J and Ajay Rastogi J (judgment delivered by A.M. Khanwilkar J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put the RBI approval letter for the liaison office on record, together with the conditions attached to it; the whole case turns on the office being forbidden to carry on any primary business activity. Build a factual and functional analysis of what the office actually does, activity by activity, in the Morgan Stanley form — the Court decides PE on that analysis, not on labels. Show where the contract was concluded, where the consideration was earned and where the commission was collected; the Court's finding was that every element was completed in the UAE and no fee or commission could be collected by the Indian office. Test the office against each limb of Explanation 2 to s.9(1)(i) — authority to conclude contracts, a stock of goods for delivery, habitually securing orders — and record that none is satisfied, as the AAR itself had found here. Do not let the Assessing Officer reframe the test as 'could the transaction have been completed without the Indian office'; the Delhi High Court identified that as the error, and the Supreme Court upheld it. Where the treaty is not the India-UAE treaty, read the equivalent sub-clause of your own treaty; the exclusion is not worded identically in every Indian DTAA and the sub-clause lettering differs.
Still good law. A Supreme Court decision on the construction of Article 5(3)(e). I did NOT run a citator check for later treatment, and no search for subsequent doubting was made, so this label rests on the status of the deciding court and not on a completed validity check. Note for the reader that the AAR ruling of 26 May 2004 which this litigation quashed is already in this library recorded as overruled; this entry is the appellate outcome, not that ruling. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two retrieval cautions recorded because they bear on how this entry may be checked. (1) The Supreme Court judgment has fifteen numbered paragraphs. Its paragraph 10 consists almost entirely of a block quotation from DIT v. Morgan Stanley & Co. Inc. reproducing that judgment's paragraphs 10 to 14, and its paragraph 12 reproduces paragraphs 2, 22, 24 and 26 of ADIT v. E-Funds IT Solution Inc. Those inner numbers belong to the quoted decisions, not to this one, and must not be cited as paragraphs of this judgment. The first verbatim request for 'paragraphs 10 to 13' returned only paragraph 10 and its embedded quotation; paragraphs 11, 12 and 13 had to be asked for separately. (2) The date of the AAR ruling that was quashed is 26 May 2004, taken from paragraph 13 of the Delhi High Court judgment. The liaison offices' locations and number were not stated in the passages read and are therefore not given here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed with no order as to costs and the conclusions of the High Court were upheld (paras 14 and 15). The activities of the liaison offices in India were of a preparatory or auxiliary character falling within Article 5(3)(e) of the INDIA-UAE DTAA, so that the fixed place of business in India, though otherwise answering the description of a permanent establishment, is by legal fiction expressly excluded from being one; and being deemed not to be a PE it is not amenable to tax liability in terms of Article 7 of the DTAA (paras 12 and 13). No income within s.2(24) was earned by the liaison office in India, and the deeming provisions in ss.5 and 9 can have no bearing (para 11).
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