DIRECTOR OF INCOME TAX-II vs WESTERN UNION FINANCIAL SERVICES INC.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 19 September 2024
Judgment pronounced on: 18 December 2024
+ ITA 1288/2006
DIRECTOR OF INCOME TAX INTN’L …..Appellant
Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC.
versus
WESTERN UNION FINANCIAL SERVICES
INC. …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 724/2016
PR.COMMISSIONER OF INCOME TAX …..Appellant
Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC.
versus
WESTERN UNION FINANCIAL SERVICES …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 192/2019
COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)- 3 …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC. …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 126/2016
DIRECTOR OF INCOME TAX-II …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC. …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 141/2016
DIRECTOR OF INCOME TAX II …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 235/2019
THE COMMISSIONER OF INCOME TAX-INTERNATIONAL TAXATION 3 …..Appellant
Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC.
versus
WESTERN UNION FINANCIAL
SERVICES INC. …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 237/2019
THE COMMISSIONER OF INCOME TAX-INTERNATIONAL TAXATION 3 …..Appellant
Through: Mr. Aseem Chawla, SSC with Ms. Pratishtha, JSC.
versus
WESTERN UNION FINANCIAL
SERVICES INC. …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 110/2024
THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 111/2024
THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
+ ITA 597/2019
THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 …..Appellant
Through: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, Adv.
versus
WESTERN UNION FINANCIAL
SERVICES INC …..Respondent
Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Gaurav Jain and Mr. Shubham Gupta, Ms. Shalini, Advocates.
CORAM:
HON’BLE MR. JUSTICE YASHWANT VARMA
HON’BLE MR. JUSTICE RAVINDER DUDEJA
J U D G M E N T
YASHWANT VARMA, J.
1. These batch of appeals emanate from judgments handed down by the Income Tax Appellate Tribunal1 negating the stand of the appellant and principally holding that the respondent-assessee did not have a Permanent Establishment2 in India in the relevant Assessment Years3 as contemplated under Article 5 of the Double Taxation Avoidance Agreement4 between India and the United States of America5. The appeals themselves pertain to AYs 2001-02 [ITA 1288/2006], 2002-03 [ITA 126/2016], 2003-04 [ITA 141/2016] 2004-05 [ITA 724/2016], 2006-07 [ITA 597/2019], 2007-08 [ITA 237/2019], 2008-09 [ITA 235/2019], 2011-12 [ITA 192/2019], 2013-14 [ITA 111/2024] and 2015-16 [ITA 110/2024].
2. The Tribunal had rendered its principal decision on 10 March 2006 while dealing with the appeal pertaining to AY 2001-02 and which decision has been followed in the subsequent years. We had in terms of our order dated 20 July 2009 admitted ITA 1288/2006 on the following question of law:-
Whether on facts, income earned from customers outside India is liable to tax in India under AADT with USA
The remainder of the appeals subsequently came to be tagged with ITA 1288/2006 and were admitted on similar questions of law.
3. From the material placed before us as well as the submissions addressed by learned counsels appearing for respective sides, the following would appear to be the uncontested facts and which we for the sake of convenience glean from the material placed on the record by way of ITA 1288/2006.
4. The respondent-assessee is stated to be a non-resident company registered in USA and has been engaged in the business of rendering Money Transfer Services6 since 1890. The essential business model adopted by it has been recorded by the Tribunal to be as follows. A person residing in USA desirous of transferring money to an individual or an entity in India, approaches a branch or an outlet of the assessee and transfers the money in USDs, together with the charges prescribed by the respondent-assessee. Upon receipt of that money, the respondent-assessee generates a unique number which is referred to as the Money Transfer Control Number7. It is this MTCN which is communicated by the remitter to the person or entity situate in India.
5. The beneficiary of that remittance residing in India then approaches the representative/agent of the respondent-assessee along with the MTCN details. Upon verification of the MTCN with the aid of a software owned by the respondent-assessee, the MTCN, once matched, leads to the transaction being honoured. This is, of course, subject to the Indian agent of the respondent-assessee satisfying itself with respect to the identity of the recipient.
6. It has further come to be noted by the Tribunal that for the purposes of the aforesaid business, the respondent-assessee had entered into agreements appointing agents in India and which included the Department of Posts, Commercial Banks, Non-Banking Financial Companies8 and Tour Operators. In terms of the agency agreements which came to be executed between the respondent-assessee and the Indian agents, the agreement was initially to run for a period of five years and was extendable thereafter. In the shape of remuneration, the Department of Posts was entitled to charge 30% of the remittance made and in the case of all others, the remuneration was fixed at 25%. The aforesaid payment, which was in the nature of a commission, was described as the base compensation in the agency agreements.
7. For the purposes of facilitating its business and undertaking promotional activities, the respondent-assessee is also stated to have applied to the Reserve Bank of India9 for grant of requisite permissions as contemplated under Section 29(1)(a) of the Foreign Exchange Regulation Act, 197310. Basis the permission granted, it also established an office in India and posted a representative therein. This office was described to be the Liaison Office11, manned by one manager and supporting staff.
8. As per the disclosures made, the respondent-assessee had made a declaration before the RBI that the said LO would not represent any party other than Western Union Financial Services. The annexure to that application enumerated the following activities/services which would be undertaken by the LO:-
The Liaison office shall undertake the following liaison activities/services:
(a) Distribute brochures and literature describing the activities of Western Union Financial Services, Inc. (“Western Union”).
(b) Maintain liaison contact with government authorities and officials of the government, its agencies and other organizations and associations.
(c) Maintain and develop the relationship of mutual understanding and co-operation between Western Union and India.
(d) Address seminars on Western Unions activities.
(e) Put interested parties in direct contact with Wester Unions principal offices.
(f) Explore legal, commercial and regulatory feasibility of setting up subsidiaries, affiliates, partnerships, joint ventures, licensing arrangements, etc.
(g) Keep in touch with the economic developments.
(h) Gather commercial and marketing data and information, including its assessment of the requirements of the private sector and of the government.
(i) Gather, receive and transmit message/information from customers and other interested parties to Western Unions offices.
(j) Assist personnel from Western Union during their visits to India, making travel arrangements and arranging appointments with customers and other concerned parties, agencies, government officials, etc.
(k) Investigate business opportunities in the Western Union range of activities and develop business contacts.
The Liaison Office will not:
(a) Undertake any commercial, trading or industrial activity in India.
(b) Sign any commercial agreement (except those directly incidental to the conduct of operations of the liaison office such as office leases, employment of local personnel, car rental, etc.)
(c) Have any power of attorney to participate in any commercial, trading or industrial activity and/or negotiate any related contracts;
(d) Have any authority to bind Western Union companies in any manner in connection with commercial, trading or industrial matters;
Be allowed or entitled to receive any monies on account of commissions, fee or remuneration or otherwise in regard to any commercial, trading or industrial activity
9. The aforesaid application came to be approved by the RBI with it being noted that the said permission would be for a period of three years for the purpose of undertaking liaison activities viz., to act as a communication channel between Head Office and parties in India. Apart from the aforesaid and as the Tribunal records in para 5 of its judgment, the following additional conditions came to be imposed by the RBI:-
(i) Except the liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission.
(ii) No commission/fees will be charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.
(iii) The entire expenses of the office in India will be met exclusively out the funds received from abroad through normal banking channels.
(iv) The office in India shall not borrow or lend any money from/to any person in India without our prior permission.
(v) The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose off any immovable property in India without obtaining prior permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973.
(vi) The office in India will furnish to our Mumbai Regional office (on a yearly basis):
(a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India;
(b) details of remittances received from abroad duly supported by Foreign Inward Remittance Certificate;
(c) certified copy of the audited final accounts of the office in India; and
(d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during the period m respect of which the office had rendered liaison services.
(e) The number of staff engaged/appointed and duties assigned to each staff.
(vii) The liaison office will not render any consultancy or any other services directly/indirectly with or without any consideration.
(viii) The liaison office will not have signing/commitment powers except than those which are required for normal functioning of liaisoning office on behalf of the Head Office.
10. It has further come on record that the respondent-assessee in terms of the conditions imposed by the RBI had also submitted activity reports pertaining to its LO periodically. One such report which has been noticed in para 6 of the order of the Tribunal is extracted hereinbelow:-
Activity Report of the Liaison Office
Report for the period: 1 January 2000 to December 2000
The liaison office acted as a communication link between the agents and the Head Office of Western Union International.
The Liaison office trained and installed one new Agent – Bank of Madura Ltd. After they received final approval from the Reserve Bank of India.
The Liaison office visited the Head Office locations of the Agents and offered training and refresher courses in the areas of Western Union Operations, Customer Service Standard, Security Standard, accounting and reconciliation procedures, telecommunications and systems configuration, merchandising standards and Reserve Bank of India guideline.
The Liaison office communicated procedures to all Agents to ensure a smooth roll over Y2K.
The Liaison office organized local production of posters and merchandising material for the Agents to display at their locations.
The Liaison office facilitated the visit of the Director Operations of Western Union International to visit with Agents and review their quality operational standards.
The Liaison Office provided the latest Western Union Agent Management Software – VOYAGER to the Agents and trained the staff on the usage and versatility.
List of Employees:
Harsh Lambah
Business Development Manager
Shekhar Nair
Regional operations Manager
11. For AY 2001-02, the respondent-assessee is stated to have paid a total commission of INR 12,16,94,036/- to its agents situate in India being equivalent to USD 2,663,472/-. On 13 January 2003, the Income Tax Department is stated to have issued a notice to the respondent-assessee calling upon it to file its Income Tax Returns. The respondent-assessee initially questioned the assumption of jurisdiction, as would be evident from its letter of 03 October 2003. However, notwithstanding that objection being raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as nil.
12. The Assessing Officer12, however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143(2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the respondent-assessee had accrued and arisen in India and would consequently be exigible to tax. It further held that the respondent-assessee would be liable to tax under the provisions of the DTAA.
13. Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a Fixed Place Permanent Establishment13, the activities undertaken by the LO were sufficient to treat it as a Dependent Agent being present in India and thus the test of existence of a Dependent Agent Permanent Establishment14 were also met.
14. Apart from what was construed by the AO and is noticed above, it was further observed and held that the software installed in the office of the Indian agents and the facility of connectivity so provided would also lend credence to the premises of those agents being viewed as a PE. The AO further observed that the test of business connection in India also stood satisfied. This, according to the AO, was in light of the Indian agents carrying out activities which constituted an integral part of the business of the assessee and the revenue so generated.
15. Aggrieved by the aforesaid, the respondent-assessee is stated to have moved the Commissioner of Income Tax (Appeal)15. The CIT(A), while taking note of the activities undertaken by the LO, held that the training activity undertaken by that establishment of employees of the agents such as regulation of service and security standards, accounting and reconciliation procedures as well as the providing of the software Voyager, would be indicative of the LO not being a mere passive communication channel but one which had been actively involved in the business activity of the appellant. The CIT(A) further held that the said establishment would thus satisfy the tests of place of management as well as the existence of a substantial element of an enduring or permanent nature of the foreign enterprise in India. Basis the above, it came to affirm the view which had been taken by AO insofar as Fixed Place PE was concerned. The CIT(A) also concurred with the AO of the installation of the software Voyager in the fixed premises of the agents as being one more element which would be liable to be viewed as being of significance for the purposes of acknowledging the existence of a Fixed Place PE.
16. Before proceeding further, it would be relevant to note that undisputedly the LO which had been established in India operated only up to 31 July 2005 whereafter it was closed and the subsidiary, Western Union Services India Private Limited, came to be incorporated.
17. When the matter travelled to the Tribunal, it firstly held that the business connection test, as enumerated in Explanation 2 to Section 9(1) stood satisfied. However, it held against the appellants insofar as the question of Fixed Place PE was concerned. It further proceeded to hold that the LO would not satisfy the tests enumerated in Article 5 of the DTAA and the activities undertaken by it would be liable to be viewed as being merely preparatory or auxiliary in character.
18. From the record we find that a decision of the Authority for Advance Rulings16 in UAE Exchange Centre LLC, In re.17 was also cited. The applicant in that case also was engaged in money transfer business and had adopted a similar model of remitting money to India through its LOs. The LOs were stated to have engaged in downloading of data pertaining to the beneficiaries in India, printing of cheques and dispatching the same to the beneficiaries. It was on the basis of these facts that the AAR had proceeded to hold that the LOs constituted a PE in India.
19. However and was noticed by the Tribunal, the AAR had observed that the role of the LO must involve performing the contract of remittance of amounts at least in part before it could be said to be a PE of the foreign enterprise. The Tribunal while contrasting the facts of the AAR ruling to the present case, noted that the LO performed no part of the contract of remittance of monies to India because of which it could not be considered to be a PE of the respondent-assessee in India.
20. It is pertinent to note that the decision of the AAR thereafter came to be overturned by the Delhi High Court in UAE Exchange Centre Ltd. v. Union of India and Another18 and which decision was affirmed by the Supreme Court in Union of India and Another v. U.A.E. Exchange Centre19.
21. Insofar as the issue of software constituting a PE is concerned, the Tribunal held that it merely accorded access to the agents to communicate with the mainframe computers and servers situate outside India. According to the Tribunal, the software was the property of the respondent-assessee and mere use thereof would not lead to a PE coming into existence. It also negated the conclusions which were rendered by the AO as well as the CIT(A) insofar as the question of DAPE was concerned. It is aggrieved by the aforesaid decision of the Tribunal that these appeals have come to be preferred before this Court
22. Leading submissions on behalf of the appellants, Mr. Chawla, learned counsel submitted that bearing in mind the nature of activities which the LO had undertaken and which extended to training of agents in India as well as interacting with local agents, conducting refresher courses in accounting, reconciliation, aiding them in successfully transitioning Y2K and the provision of the Voyager software, when cumulatively considered, would lead one to the irresistible conclusion that a Fixed Place PE came into existence.
23. It was Mr. Chawlas submission that it would be wholly incorrect to view the activities undertaken and functions discharged by the LO as being preparatory or auxiliary. It was submitted by learned counsel that the LO was engaged in the core activities of the respondent and would thus be liable to be viewed as a projection of the foreign enterprise itself.
24. Mr. Chawla further argued that the installation of software in the premises of the Indian agents would satisfy the provisions made in Article 5(2) of the India-USA DTAA and which speaks of letting or leasing of intangible property. Mr. Chawla argued that the software plays a central role in the completion of transactions and thus the placement of that dedicated software would result in the establishments of the Indian agents being liable to be viewed as a Fixed Placed PE. It was then argued that the Indian agents were in turn entitled to appoint sub-agents to carry on the business of the respondent and this too would be a factor which would render the conclusions of the Tribunal unsustainable.
25. Refuting those submissions, Mr. Vohra, learned senior counsel appearing for the respondents, firstly urged us to dismiss the appeals outrightly since according to learned senior counsel, the determination of whether a PE exists or not is essentially a question of fact. According to Mr. Vohra, the Tribunal being the final fact finding authority having come to the conclusion that no PE existed, the same would clearly not give rise to any substantial question of law.
26. Mr. Vohra then cited for our consideration the decision of the Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi and Another20 and which, according to learned senior counsel, had identified the principal elements for a Fixed Place PE being assumed to have come into existence to be: (a) an identified fixed place, (b) that fixed place being made available and placed at the disposal of the foreign enterprise and (c) business of that foreign enterprise being carried on through such fixed place. Mr. Vohra in order to buttress his submissions adverted to the following paragraphs from the Formula One decision of the Supreme Court:-
33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be at the disposal of the enterprise. For this purpose, it is not necessary that the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon.
xxxx xxxx xxxx
39. OECD commentary on Model Tax Convention mentions that a general definition of the term PE brings out its essential characteristics i.e. a distinct situs, a fixed place of business. This definition, therefore, contains the following conditions:
(i) the existence of a place of business i.e. a facility such as premises or, in certain instances, machinery or equipment.
(ii) this place of business must be fixed i.e. it must be established at a distinct place with a certain degree of permanence;
(iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.
xxxx xxxx xxxx
74. As per Article 5 of the DTAA, the PE has to be a fixed place of business through which businesses of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE i.e. What is mentioned in clauses (a) to (f) as the negative list. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that not only certain forms of establishment are excluded as mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the word include which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specially mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out.
27. Learned senior counsel then took us through the decision rendered by this Court in Director of Income Tax v. E-Funds IT Solution21 and which had underscored the requirement of the core business of the foreign enterprise being carried out through an identified fixed place in order to constitute a Fixed Place PE. Our attention was drawn to the following paragraphs of that decision:-
53. Reference to core of auxiliary or preliminary activity is relevant when we apply para 3 of Article 5 or when sub-clause (a) to para 4 to Article 5 is under consideration. The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place PE. Paragraph 3 of Article 5 lists negative activities which when performed from a fixed placed in the other contracting State would not create a PE. The activities specified in Article 5, para 3 would not create a PE, even when the conditions specified in paras (1) and (2) of Article 5 are satisfied. Paragraph 3 is not a positive provision but a negative list. The said paragraph does not create a PE but has a negative connotation and activities specified when carried on do not create a PE.
xxxx xxxx xxxx
59. 10K report referred to in the orders was filed by the assessee with the S.E.C. USA. The details submitted in this document not only pertain to the two assessee incorporated and paying tax in USA but the entire group companies including e-Fund India. The assets, revenues, income earned, employees of e-Fund India, etc. have to be disclosed and elucidated in the said report. The report, no doubt, is relevant and material but has to be examined with due care and caution to determine and decide whether the two assessees have PE in India. The fact that business has been transferred or sub-contracted or assigned to e-Fund India is not relevant and material, unless we are determining applicability of para 3 to para 5 and the question is whether the Indian company is performing core or auxiliary and preliminary activities. The fact, the report refers to and give details of or number of employees of e-Fund India which are part of the e-Fund group is not relevant. Neither income earned by e-Fund India nor activities in India by the Indian subsidiary by itself, relevant in determining whether or not PE exists under paras 1, 2, 4 and 5 of Article 5. Thus and therefore, the fact that 40% of the employees of the entire group were in India i.e. were employees of e-Fund India, will not make the said company agency subsidiary PE or fixed place PE of the assessee. Neither provision of any software, intangible data etc. whether free of cost or otherwise, make e-Fund India an agency or fixed place PE of the two foreign assessees. Whether or not and on what basis e-Fund India was reimbursed expenses of xerox, courier charges etc. will not make e-Fund India as PE of the assessee under Articles 5(1), 5(4) or 5(5). Conditions and stipulates under Articles 5(1), 5(4) or 5(5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5 (4) and 5(5) of DTAA.
28. Mr. Vohra also laid emphasis on the fact that the legal position as enunciated by this Court ultimately came to be affirmed by the Supreme Court in Assistant Director of Income Tax-I, New Delhi v. E-Funds IT Solution Inc.22 and where the law was explained in the following terms:-
16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5.
17. Since the Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a fixed place of business is no longer res integra. In Formula One, this Court, after setting out Article 5 of the DTAA, held as follows: (SCC pp. 625-29, paras 33-39)
33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be at the disposal of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as at the disposal of the enterprise when the enterprise has the right to use the said place and has control thereupon.
* * *
35. According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises.
36. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term business is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term place. Importance of the term place is explained by him in the following manner:
In conjunction with the attribute fixed, the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC).
37. We would also like to extract below the definition to the expression place by Vogel, which is as under:
A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term establishment. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term fixed rather than the term place, given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term establishment makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term installation instead of place.
The term place is used to define the term establishment. Therefore, place includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative. It is rather the context (including, above all, the terms fixed/fixe*), as well as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term place needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of place and, therefore, we assume a PE once such property has been fixed to the soil.
For example, a workbench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformer or generator on board a former railway wagon qualify as places (and may also be fixed).
In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks, etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of PE constituted otherwise. Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE.
Neither does the mere incorporation of a company in a contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its bye-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only [Article 4(3) OECD and UN MC]. In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxed only in State B under the 1st sentence of Article 7(1) OECD and UN MC.
There is no minimum size of the place of work. If the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals will be sufficient if it were available. Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous! This can be illustrated by the example of a salesman who regularly visits a major customer to take orders and conduct negotiations in the purchasing Director’s office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.’
38. Taking cue from the word through in the Article, Vogel has also emphasised that the place of business qualifies only if the place is at the disposal of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, disposal is the power (or a certain fraction thereof) to use the place of business directly. Some of the instances given by Vogel in this behalf, of relative standards of control, are as under:
‘The degree of control depends on the type of business activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using the POB.
The painter example in the OECD MC Comm. (No. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what is required for the specific type of activity which is determined by the concrete business.
By contrast, in the case of a self-employed engineer who had free access to his customer’s premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer’s regular office hours and was not entitled to carry on businesses of his own on the premises.
Similarly, a Special Bench of Delhi’s Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson’s employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson’s) had exercised other businesses of their employer.
The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold.
The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries [cf. Article 24(3) OECD and UN MC], and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing.
Along these lines, a POB will usually exist only where the taxpayer is free to use the POB:
at any time of his own choice;
for work relating to more than one customer; and
for his internal administrative and bureaucratic work.
In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop [cf. Article 5(2)(e) OECD and UN MC] of 10 or 12 sq m can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine.’
39. OECD Commentary on Model Tax Convention mentions that a general definition of the term PE brings out its essential characteristics i.e. a distinct situs, a fixed place of business. This definition, therefore, contains the following conditions:
(i) the existence of a place of business i.e. a facility such as premises or, in certain instances, machinery or equipment;
(ii) this place of business must be “fixed” i.e. it must be established at a distinct place with a certain degree of permanence;
(iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.” (emphasis supplied)
18. Thus, it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. The High Court has dealt with this aspect in some detail in which it held: (E Funds case, SCC OnLine Del para 49)
xxxx xxxx xxxx
22. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score.
29. According to Mr. Vohra, the issues which are sought to be canvassed no longer survive and nor do they merit any exposition by this Court in light of the decision of the Supreme Court in UAE Exchange. Mr. Vohra submitted that the facts as they obtained in UAE Exchange are identical to those which form the subject matter of these appeals and thus following the principles culled out by the Supreme Court, the arguments advanced by the appellants are wholly unmerited.
30. Mr. Vohra then submitted that the assumption of the LO carrying on business activities in India is factually flawed and had come to be rendered by the AO as well as the CIT(A) in ignorance of Article 5(3)(e) of the India-USA DTAA and the fundamental functions and attributes which must be found to vest in an agent before a DAPE could be said to have come into being.
31. Elaborating on that aspect, Mr. Vohra also vehemently assailed the view expressed by the AO as well as the CIT(A) insofar as the question of DAPE was concerned. It was submitted that the Department of Posts, NBFCs were all independent third parties having substantial business and revenue of their own and were thus clearly not dependent upon the revenue that came to be generated while discharging certain functions under the agency agreements. It was submitted that the conclusions to the contrary as drawn by the AO as well as the CIT(A) would in any case not sustain in light of the decision of this Court in E-Funds.
32. Mr. Vohra also highlighted the fact that the Indian agents were remunerated at arms length and were, in that sense, independent. This according to learned senior counsel more so since undisputedly they stood conferred with no authority to conclude contracts on behalf of the principal in India.
33. Mr. Vohra submitted that all contracts for MTS were entered into by the respondent-assessee outside India with the remitters too being situate outside the country. The submissions, which were addressed in the backdrop of the Voyager software, were countered by Mr. Vohra who referred for our consideration the following passage from the Organization for Economic Cooperation and Development23 Model Commentary, 200524.
42.2 Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a place of business as there is no “facility such as premises or, in certain instances, machinery or equipment” (see paragraph 2 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a “fixed place of business” of the enterprise that operates that server.
34. Mr. Vohra argued that the software was merely a tool employed to facilitate the verification of details and its role being confined to enabling the Indian agents to undertake that exercise and communicate with the mainframe computers and servers of the respondents situate outside India. Learned senior counsel thus submitted that it would be wholly incorrect for the installation of that software to be viewed as giving rise to the creation of a Fixed Place PE. It is these rival submissions which arise for consideration
35. Although, the Tribunal has come to hold against the respondent-assessee insofar as the issue of business connection is concerned, we do not find any legal imperative to engage with that question since the same is undisputedly concerned with Section 9 of the Act and thus relating to income which could be said to be deemed to have accrued or arisen in India. We thus propose to confine and focus our discussion in evaluating the correctness of the view expressed by the Tribunal primarily on the anvil of the DTAA.
36. Having chronicled the submissions which were addressed by respective sides before us, we proceed further and firstly take up for consideration Article 5 of the DTAA and which defines the concept of a PE. Article 5 of the India-USA DTAA reads as follows:-
ARTICLE 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, 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) a branch
(c) an office
(d) a factory
(e) a workshop
(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;
(g) a warehouse, in relation to a person providing storage facilities for others;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;
(i) a store or premises used as a sales outlet;
(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period;
(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period;
(l) The furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if:
(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or
(ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)].
3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include any one or more of the following:
(a) the use of facilities solely for the purpose of storage, display, or occasional 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 occasional delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the 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 advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2, where a personother than an agent of an independent status to whom paragraph 5 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if:
(a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;
(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
37. As per Article 5(1), a PE would mean a fixed place through which the enterprise carries on its business wholly or in part. Article 5(2) then proceeds to specify several categories of establishments which would fall within the ambit of the expression Permanent Establishment. This, as our Court correctly explained in E-Funds, is a provision with a positive connotation as opposed to the negative list enumerated in Article 5(3) and which excludes a fixed places of business if it satisfies the conditions prescribed therein. The argument of preparatory and auxiliary proceeds in light of the aforesaid distinction.
38. In these proceedings, the appellants had contended that it was the LO of the respondent-assessee which constituted a PE in India. That submission was addressed in the backdrop of the various functions which were discharged by that LO upto 2005. The Tribunal has taken due note of the nature of permission which was accorded by RBI relating to the functioning of the LO and which enabled it to engage in activities such as distribution of brochures and literature, educating and informing parties with respect to the nature of activities of Western Union Financial Services, liaising with governmental authorities and officials, addressing seminars on its activities, putting interested parties in contact with Western Union Financial Services and exploring legal, commercial and regulatory feasibility of setting up subsidiaries and affiliates.
39. The permission granted by RBI proscribed the LO from undertaking any commercial trading or industrial activity in India, signing any commercial agreements, participating in any commercial trading or industrial activity or for that matter negotiating any related contracts. From the activity report which was submitted by that LO to the RBI, we note that it had asserted that it had merely acted as a communication link between the agents and Western Union Financial Services. It had also made due disclosure of the initiatives undertaken by it and which included training agents, administering training and refresher courses as well as providing the updated versions of the Voyager software to agents and training their staff with respect to its usage. The respondent-assessee had in the aforesaid light argued that the activities undertaken by the LO would clearly fall within the category of activities which could at best be described as preparatory or auxiliary and thus falling within the ambit of Article 5(3) of the DTAA.
40. It is pertinent to note that Article 5(3) sets out the exclusions from the term Permanent Establishment and thus excludes a fixed place of business from where preparatory or auxiliary activities may be undertaken. Although Mr. Chawla had sought to lay stress on the phrase or for other activities as it appears in Article 5(3)(e), we find no merit in that contention since the said expression would have to be read in conjunction with the phrase which have a preparatory or auxiliary character to which it is prefaced. The scope of the words preparatory and auxiliary had directly arisen for the consideration of this Court in UAE Exchange. The said decision was concerned with the assertion of the Income Tax Department of an office of the assessee, UAE Exchange Centre, situate in India constituting a PE. Similar to the fact which obtain in these appeals, UAE Exchange was also concerned with the movement of monies handed over to it by various remitters residing outside India. The funds were deposited with that entity by remitters in the United Arab Emirates25 and thereafter transmitted to beneficiaries in India either through normal banking channels or with the involvement of the LOs. The LOs of UAE Exchange Centre were enabled to download requisite information particulars by using computers installed in India and which were in turn connected to servers in the UAE. It was the LOs which after due verification were drawing cheques on banks in India and transmitting them to the concerned beneficiaries. The AAR had held against the assessee by observing that those LOs would constitute a PE.
41. Our Court in UAE Exchange while examining the challenge had held that the AAR had clearly erred in taking that position and ignoring that the services rendered by LOs clearly fell within the scope of Article 5(3). This becomes apparent from a reading of para 32 of that decision and which is extracted hereinbelow:-
32. In our opinion, this view is clearly erroneous. We are living in an era where the world is described euphemistically as flat or even a global village. Organisations and companies operate transnationally. There is an eagerness to bring to tax by States income, by employing deeming fictions so that incomes which ordinarily do not accrue or arise within the taxing State are brought within the State’s tax net. It is in this context that the expression permanent establishment appearing in the DTAA has to be viewed. In the case of the DTAA under consideration in the present case under article 5 read with article 7, profits of an enterprise are liable to tax in India if an enterprise were to carry on business through a permanent establishment, meaning thereby fixed place of business through which business of an enterprise is wholly or partly carried on. Under article 5(2)(c), amongst others, permanent establishment includes an office. However, article 5(3) which opens with a non obstante clause, is illustrative of instances where under the DTAA various activities have been deemed as ones which would not fall within the ambit of the expression permanent establishment. One such exclusionary clause is found in article 5(3)(e) which is : maintenance of fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. The plain meaning of the word auxiliary is found in the Black’s Law Dictionary 7th Edition at page 130 which reads as aiding or supporting, subsidiary. The only activity of the liaison offices in India is simply to download information which is contained in the main servers located in the UAE based on which cheques are drawn on banks in India whereupon the said cheques are couriered or despatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Can such an activity be anything but auxiliary in character. Plainly to our minds, the instant activity is in aid or support of the main activity. The error into which, according to us, the Authority has fallen is in reading article 5(3)(e) as a clause which permits making a value judgment as to whether the transaction would or would not have been complete till the role played by liaison offices in India was fulfilled as represented by the petitioner to their NRI remitter. According to us, what has been lost sight of is that by invoking the clause with regard to permanent establishment, we would, by a deeming fiction tax an income which otherwise neither arose nor accrued in Indiawhen looked at from this point of view, the exclusionary clause contained in article 5(3) and in this case in particular, sub-clause (e) have to be given a wider and liberal play. Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an auxiliary character. On this aspect of the matter, the Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 ; [2007] 7 SCC 1 amongst other issues was called upon to decide as to whether back office operations carried on by Morgan Stanley Company for one of its Morgan Stanley Advantages Services Pvt. Ltd. would qualify as having a permanent establishment in India. The Supreme Court, while holding that back office operations fall within the exclusionary clause article 5(3)(e) of the Indo-US DTAA, which is, identical to the DTAA under consideration in the present case, came to the conclusion that back office operations came within the purview of article 5(3)(e). It is laid down by the Supreme Court in the case of Morgan Stanley [2007] 292 ITR 416 ; [2007] 7 SCC 1 that in ascertaining what would constitute a permanent establishment within the meaning of article 5(1) of the Indo-US DTAA, one had to undertake what is called a functional and factual analysis of each of the activities undertaken by an establishment. In that case, the Supreme Court came to the conclusion that the entity located in India which was engaged in only supporting the front office functions of Morgan Stanley and Co., a non-resident, in fixed income and equity research and information technology enabled services such as data processing support centre, technical services and reconciliation of accounts being back office operators would not fall within article 5(1) of the Indo-US DTAA.
42. Our Court found that the LOs were merely aiding and supporting the entity, UAE Exchange Centre. Thus, and viewed in that light, the said offices could not possibly be held to constitute a PE. It also bore in consideration that every aspect of the principal transaction had been concluded in the UAE and the remittances as well as the commission was deposited and earned in that territory. It pertinently observed that the functions performed by the LOs were merely supportive of the transaction which had occurred in the UAE. It thus observed that the LOs did not contribute to the earning of profits by the assessee.
43. The aforesaid judgment rendered by this Court came to be appealed by the Union before the Supreme Court and which, while affirming the judgment handed down by this Court had observed as follows:-
31. While answering the question as to whether the activity in question can be termed as other than that of preparatory or auxiliary character, we need to keep in mind the limited permission given by RBI to the respondent under Section 29(1)(a) of the 1973 Act, on 24-9-1996. From Para 2 of the stated permission, it is evident that RBI had agreed for establishing a liaison office of the respondent at Cochin, initially for a period of three years to enable the respondent to:
(i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts;
(ii) undertake reconciliation of bank accounts held in India;
(iii) act as a communication centre receiving computer (via modem) advices of mail transfer T.T. stop payments messages, payment details, etc., originating from the respondent’s several branches in UAE and transmitting to its Indian correspondent banks;
(iv) printing Indian Rupee drafts with facsimile signature from the Head Office and counter-signature by the authorised signatory of the office at Cochin; and
(v) following up with the Indian correspondent banks.
These are the limited activities which the respondent has been permitted to carry on within India. This permission does not allow the respondent assessee to enter into a contract with anyone in India, but only to provide service of delivery of cheques/drafts drawn on the banks in India.
32. Notably, the permitted activities are required to be carried out by the respondent subject to conditions specified in Clause 3 of the permission, which includes not to render any consultancy or any other service, directly or indirectly, with or without any consideration and further that the liaison office in India shall not borrow or lend any money from or to any person in India without prior permission of RBI. The conditions make it amply clear that the office in India will not undertake any other activity of trading, commercial or industrial, nor shall it enter into any business contracts in its own name without prior permission of RBI. The liaison office of the respondent in India cannot even charge commission/fee or receive any remuneration or income in respect of the activities undertaken by the liaison office in India.
33. From the onerous stipulations specified by RBI, it could be safely concluded, as opined by the High Court, that the activities in question of the liaison office(s) of the respondent in India are circumscribed by the permission given by RBI and are in the nature of preparatory or auxiliary character. That finding reached by the High Court is unexceptionable.
34. The High Court had justly adverted t