2009 (2) TMI 56 - HC - Income Tax

Challenge to ruling of AAR while the Authority has returned a finding of fact that none of the activities mentioned in Ex. (2) to S. 9(1)(1) is carried on by the petitioner in India Authority then went on to apply the ratio of SC decision in case of R.D.Aggarwal to hold that activity of liaison offices of the petitioner constituted a business connection in India and hence income shall be deemed to accrue/arise in India - AAR has erred in applying the ratio of the decision of Supreme Court

Summary

Issues Involved:
1. Challenge to the advance ruling of the Authority for Advance Rulings (Income Tax).
2. Determination of whether income is accrued/deemed to be accrued in India from activities carried out by the petitioner.
3. Examination of the applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
4. Analysis of whether the petitioner's liaison offices in India constitute a 'permanent establishment' under DTAA.
5. Examination of the legality of notices issued under Section 148 of the Income Tax Act.

Detailed Analysis:

1. Challenge to the Advance Ruling:
The petitioner challenged the advance ruling of the Authority for Advance Rulings (Income Tax), New Delhi, dated 26.05.2004, under Section 245Q(1) of the Income Tax Act, 1961. The petitioner sought a ruling on whether any income is accrued or deemed to be accrued in India from its activities.

2. Determination of Income Accrued/Deemed to be Accrued in India:
The petitioner, a UAE-based company, operates liaison offices in India to facilitate remittance services for NRIs. The RBI permitted these liaison offices to undertake specific activities without charging any commission or fee. The petitioner argued that its business activities, including the collection of commission, were conducted entirely in UAE, and thus, no income accrued or was deemed to accrue in India. The petitioner filed returns showing 'Nil' income, which were accepted by the 2nd respondent for several assessment years.

3. Applicability of the DTAA:
The petitioner contended that under the DTAA between India and UAE, income earned in UAE should not be taxable in India. The DTAA, notified under Section 90 of the Act, aims to avoid double taxation and prevent fiscal evasion. The petitioner argued that the Authority misinterpreted the DTAA and the judgments of the Supreme Court in CIT, Punjab vs. R. D. Aggarwal & Co and Anglo French Textile Co Ltd vs. CIT.

4. 'Permanent Establishment' Under DTAA:
The petitioner argued that its liaison offices in India did not constitute a 'permanent establishment' under Article 5 of the DTAA, as their activities were of an 'auxiliary' character. The Authority, however, concluded that the liaison offices had a real and intimate relationship with the petitioner's business in UAE, thus constituting a 'permanent establishment'. The Court disagreed, stating that the activities of downloading information, printing cheques, and dispatching them to beneficiaries in India were auxiliary and supportive of the main business conducted in UAE.

5. Legality of Notices Issued Under Section 148:
The 2nd respondent issued notices under Section 148 of the Act for several assessment years based on the Authority's ruling. The petitioner sought to quash these notices and the assessment proceedings initiated under them. The Court held that the Authority's ruling was erroneous and quashed it. Consequently, the Court refrained from examining the legality of the notices under Section 148, leaving it to the respondent to consider their withdrawal.

Conclusion:
The Court quashed the impugned ruling of the Authority dated 26.05.2004, holding that the activities of the petitioner's liaison offices in India were auxiliary and did not constitute a 'permanent establishment' under the DTAA. The Court emphasized that the DTAA provisions override the Income Tax Act, and the petitioner's income earned in UAE should not be taxed in India. The writ petition was disposed of accordingly.