In the recent case of the UAE Exchange Centre, India’s Supreme Court (SC) highlighted the principles surrounding the taxability of foreign entities having a liaison office or a place of business in India.
It should not be presumed that a liaison office will not constitute a permanent establishment in India merely because the Reserve Bank of India (RBI) permission has been obtained prior to it being established.
To determine the Indian tax implications, it is critical to examine whether the liaison office is carrying out an important part of the business activity of the foreign company (i.e., a commercial activity which is core income-generating) or whether it is merely aiding or supporting activities of the main business.
On facts, the SC found that neither were the activities of the UAE Exchange Centre’s liaison office (LO) commercial in nature nor were they core income-generating. They were mere of a preparatory or auxiliary character, which specifically exempted the LO from tax in India under the provisions of the India-UAE double taxation avoidance agreement (UAE DTAA).
Background
The UAE Exchange Centre (UAEEC) is engaged in the business of, inter alia, providing money remittance services to different clients in the UAE for transferring monies from the UAE to India. In this regard, the UAEEC set up LOs in India at Kochi, Chennai, New Delhi, Mumbai and Jalandhar, respectively, after obtaining the RBI’s approval. The RBI permitted the LOs:
- to act as a communication centre for receiving computer advices of mail transfers from the UAE;
- to receive telegraphic transfer stop payment messages from the UAE;
- to receive payment details originating from the UAE and allow its transmission to Indian correspondent banks; and
- to print Indian Rupee drafts with facsimile signatures received from the head office in the UAE.
A contract was entered into between the UAEEC and certain non-resident Indian (NRI) remitters based in the UAE. The funds were collected from the NRI remitters by the UAEEC in the UAE by charging a one-time fee. After collecting the funds, the UAEEC made electronic remittances on behalf of the NRI customers in the following two (2) ways:
- by telegraphic transfer through normal banking channels; or
- at the request of the NRI remitters, instruments/cheques were sent through the LOs to the beneficiaries in India.
The Indian tax authorities disputed the second mode of remittance and argued that the following amounted to commercial activity by the LO on behalf of the UAEEC in India:
- the activity of downloading the particulars of remittances through electronic media;
- the printing of cheques/drafts drawn on Indian banks;
- sending documents by courier to the beneficiaries in India in accordance with the instructions of the NRI remitters; and
- accessing of the main server of the UAEEC in the UAE by the LO to remit funds to the beneficiaries in India.
Therefore, the LO had a PE in India, and a portion of its profits should be attributed to the PE and taxed in India.
The Supreme Court Ruling
The SC held that:
- It is not in dispute that the LOs are covered within the PE definition under the UAE DTAA; however, the LOs cannot be reckoned as PEs if their activities are preparatory or auxiliary in character.
- The terms “preparatory” or “auxiliary” are not defined under Indian tax law or the UAE DTAA. However, the activities of downloading particulars of remittances through electronic media; printing cheques or drafts drawn on Indian banks; or sending documents by courier to the Indian beneficiaries (which are a combination of virtual and physical activity) cannot be regarded as anything more than “aiding or supporting” the main activity of the UAEEC in line with the RBI’s approval.
- The UAEEC is not charging a commission or fee, or receiving any remuneration or income, in respect of the activities undertaken by its LOs in India. Additionally, the LO activities do not in any manner contribute, directly or indirectly, to the earning of profits or gains by the UAEEC, and as such, no income accrues or arises in India.
Our comments
This is a welcome decision, as the issue of whether a liaison office constitutes a PE in India has been the subject matter of much debate before Indian courts and tax tribunals.
In our view, one should not presume that a liaison office or place of business will not constitute a PE merely because the RBI or a government body has given permission for its establishment in India. To determine the Indian tax implications, it is critical to examine whether the liaison office is carrying out an important part of the business activity of the foreign company (i.e., a commercial activity which is core income-generating) or whether it is merely aiding or supporting activities of the main business.
Moreover, a number of foreign technology and service sector companies use Indian PEO providers to hire Indian employees. In our view, these entities should assess whether the activities of their Indian personnel can trigger a PE exposure or tax risks in India.
Image courtesy – Khaleej Times