2005 (9) TMI 639 - AAR - Income Tax

Seeking advance ruling from the authority - non-resident - liaison office is to be treated as permanent establishment or not - income accrues/arises or is deemed to accrue/arise in India u/s 9(1)(i) of the Act - Principal company/GVB/GTE - Nature of activities to be carried on by the liaison office (LO) covered under business connection ? - Benefit of the DTAA between India and UAE - HELD THAT - The activities of the LO which the applicant proposes to open in India have been enumerated in annexure II to the application. As per clauses (a) to (d) these broadly consist of holding of seminars conferences and shows to cover information about the technology being used by the GVB in manufacture of reflective glasses of different kinds. To receive trade queries from the customers and to pass it on the GTE/GVB and to transmit information as received from the Dubai office/GVB. To collect feed back from customers/consumers trade organisations architects and builders etc. about the products and pass on the same to the Dubai office/GVB. From the above narration it is clear that LO will be only acting as a channel of communication between the principal company/GVB/GTE on one side and Indian companies traders customers/consumers on the other side. So long as the liaison office does not enter into negotiations with the customers in India for import or purchase of goods by the Indian customers from the principal company/GVB it cannot be said that an intimate relationship exists between the trading activity of the principal company/ GVB/GTE outside India and the activities of the liaison office within India. Therefore the activities of the liaison office in India would not constitute a course of dealing or continuity of relationship and cannot be said to contribute directly or indirectly to the earning of income by the non-resident i.e. GTE in its business outside India. Therefore it follows that the activities of the liaison office as given above would not tantamount to having a business connection in India. However in case the scope of the activities of the liaison office is enlarged and it enters into negotiations for import/purchase of goods by the Indian customers in any manner it would come within the expression business connection as used in section 9(1)(i) of the Act. It is common ground that the issue is covered by the recent ruling of the Authority in the case of AAR in Abdul Razak A. Meman 2005 (5) TMI 12 - AUTHORITY FOR ADVANCE RULINGS . In this decision it has been held that since there is no tax regime for individuals in UAE they are not covered by the expression resident of a Contracting State as contained in article 4(1) of the DTAA between India and UAE as per Notification GSR No. 710(E) dated November 18 1983. As such the applicant is not entitled to claim the benefit of the DTAA. Thus we rule on Looking to the nature of activities as proposed to be carried out by the liaison office (to be set up in India) the applicant would not be earning any income through LO in India. Question No. (ii) In view of the ruling in question No. 1 no ruling need be given on this question. Question No. (iii) Gutal Trading Est. (having its principal place of activities at Dubai UAE) cannot be said to be having any business connection within the meaning of section 9 of the Act in India by virtue of setting up of a liaison office as specified by the applicant and no tax liability would be attracted under the Indian tax laws. Question No. (iv) The applicant an individual residing in UAE is not entitled to claim the benefit of the provisions of the treaty entered into between India and UAE.

Summary

Issues Involved:
1. Whether the applicant can be held to have earned any income through the proposed liaison office in India.
2. Whether such income can be said to have accrued or be deemed to have accrued and arisen in India, making it taxable under the Income-tax Act, 1961.
3. Whether the applicant can be said to be having any "business connection" in India by virtue of setting up a liaison office, attracting tax liability under Indian tax laws.
4. Whether the activity of the liaison office is outside the purview of "permanent establishment" under the Double Taxation Avoidance Agreement (DTAA) between India and UAE.

Issue-wise Detailed Analysis:

Issue 1: Income Earned Through Liaison Office
The applicant, based in Dubai, UAE, sought to establish a liaison office (LO) in India to promote products of its principal company, Glaverbel S.A., and provide support in obtaining data related to credit risk, credit rating, and collection of dues. The liaison office's activities would include holding seminars, receiving trade inquiries, and transmitting information. The jurisdictional Commissioner argued that the LO's activities would indirectly lead to income generation for the applicant by promoting the products and securing customers in India. However, the applicant contended that the LO would not engage in concluding contracts or collecting payments, and its role would be limited to disseminating information and acting as a communication channel. The Authority ruled that the applicant would not be earning any income through the LO in India, as its activities would not constitute a direct business operation or income generation.

Issue 2: Accrual of Income in India
Given the ruling on Issue 1, the question of whether such income can be said to have accrued or be deemed to have accrued and arisen in India was deemed unnecessary to address.

Issue 3: Business Connection in India
The jurisdictional Commissioner argued that the LO would create a business connection in India by promoting products and securing customers, thereby contributing to the applicant's income. However, the applicant emphasized that the LO would not engage in negotiations or procurement of orders and would merely act as a communication channel. The Authority examined the definition of "business connection" under section 9(1)(i) of the Income-tax Act and concluded that the LO's activities, as specified, would not constitute a business connection in India. The LO would not engage in negotiations or direct business dealings, and its role would be limited to communication and information dissemination, which does not contribute directly or indirectly to the applicant's income. Therefore, the applicant would not have a business connection in India, and no tax liability would be attracted under Indian tax laws.

Issue 4: Permanent Establishment under DTAA
The applicant sought to claim benefits under the DTAA between India and UAE, arguing that the LO's activities would not constitute a permanent establishment. However, the Authority referred to a recent ruling (Abdul Razak A. Meman, In re [2005] 276 ITR 306) which held that individuals in UAE are not covered by the DTAA due to the absence of a tax regime for individuals in UAE. Consequently, the applicant, being an individual residing in UAE, is not entitled to claim the benefits of the DTAA. The LO's activities would not fall within the scope of a permanent establishment under the DTAA, but the applicant cannot claim treaty benefits due to the lack of a tax regime for individuals in UAE.

Conclusion:
1. The applicant would not earn any income through the proposed LO in India.
2. No ruling was needed on the accrual of income in India due to the conclusion on Issue 1.
3. The applicant would not have a business connection in India by virtue of setting up the LO, and no tax liability would be attracted.
4. The applicant is not entitled to claim the benefits of the DTAA between India and UAE.