TMI Blog2005 (9) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtue of a consolidated agreement entered with the GVB. 2. The scope of assignment of the applicant is to promote products of the principal company/GVB , and to provide support to GVB for obtaining data related to the credit risk and credit rating of the customers or potential customers, as also to provide assistance for timely collection of outstanding dues from the customers. The agreement specifically states that the applicant is prohibited from concluding the contracts on behalf of GVB or collect payments on behalf of the principal company . The applicant by itself cannot procure orders from the customers/potential customers, and does not have the authority to conclude negotiations in this regard. The essence of the above-referred agreement is that all the business dealings are to be carried out by the customer/potential customers directly with the principal company/GVB and the assignment of the applicant Gutal Trading Est. (for short GTE ), is merely to disseminate the information about the products of the principal company and to provide direct support to GVB for obtaining data related to the credit risk and credit rating of the customers/ potential customers and also to provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion within the meaning of section 9 of the Act in India by virtue of its setting up a liaison office (a terminology used by the Reserve Bank of India, while granting the requisite permission), so as to attract tax liability under the Indian tax laws ? (iv) Whether in view of the saving clause as contained in article 5 of the Double Taxation Avoidance Agreement (DTAA) of 1993, the activity of the liaison office(s) proposed to be set up by the applicant in India are liable to be treated as outside the purview of permanent establishment and accordingly no income can be deemed to accrue or arise in India to which the charging provisions as contained in section 5 of the Income-tax Act, 1961, can be held to be applicable ? Comments of the jurisdictional Commissioner : 4. (a) In respect of question No. 1, the jurisdictional Commissioner has stated that the ultimate objective of the applicant is to earn commission income from GVB against the promotion of the products manufactured/ traded by the latter. The more customers it brings for GVB, the more will be its income. In order to augment the commission income, the assessee has been trying to open liaison offices at different places so tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finitely there because the liaison office in India will be attracting the potential customers, which will ultimately yield business to the applicant. No doubt, the liaison office, as per the information submitted by the applicant, has not got powers to negotiate the deals, yet in the absence of such liaison office, Indian customers would not be hitched to the cart of the applicant. That the duty of the liaison office is to transmit information as received from the Dubai office and/or GVB to the customers/consumers, trade and other organisations in India , has been stated in a vague and ambiguous manner and in future its scope may be enlarged by including any other activity that suits the business purpose of the assessee and this aspect has to be duly considered by the hon ble Authority. (d) Regarding question No. 4, it has been stated that whether the proposed liaison office is to be treated as applicant s permanent establishment or not has to be viewed in the light of the DTAA between UAE and India. That since the applicant is not a taxable entity under the tax laws of UAE ; the provisions of the DTAA between India and UAE are not applicable in this case. 5. In respect of question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as complaints, etc., about the product and pass on the same to its Dubai office and/or directly to their principal ; and (e) under no circumstance the liaison offices at Mumbai and such other metropolis shall be allowed to carry on negotiations by themselves, in import or purchase goods by the Indian customers in any manner. 7. That even otherwise the permitted activities of a liaison office, under section 6(6) of the FEMA are as under : For liaison office : (i) Representing the parent company/group companies in India. (ii) Promoting export/import from/to India. (iii) Promoting technical/financial collaboration between parent/ group companies and Indian companies. (iv) Acting as communication channel between parent and India companies. 8. Thus even as per the statutory provisions, the activities of a liaison office are restricted and it cannot venture into securing orders from the customers, in any manner, either directly or indirectly. 9. That in the present case the liaison office will merely be the cost centre having no income as such or surplus whatsoever and it shall be reimbursed by the applicant periodically, that it is not covered by the definition of the person as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India ; Explanation 1.-For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export . . . 14. A perusal of the provisions extracted above shows that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or from any property in India, or through any assets or source of income in India, or through the transfer of capital assets situate in India, shall be deemed to accrue in India. The mandate contained in Explanation 1 is that for the purpose of the aforementioned clause wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities in the aforementioned clauses is carried out in India. The newly added Explanation 2 is, therefore, of no assistance in comprehending the meaning of the expression business connection as no precise definition has been attempted. 17. The hon ble Supreme Court in various decisions has interpreted the expression. In the cases of UAE Exchange Centre, LLC, In re [2004] 268 ITR 9 (AAR) and Sutron Corporation, In re [2004] 268 ITR 156 (AAR), this Authority having considered the decisions of the apex court summed up the salient features of business connection as follows : (a) a real and intimate relation must exist between the trading activities by a non-resident carried on outside India and the activities within India ; (b) the relation contributes directly or indirectly to the earning of income by the non-resident in his business ; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection. 18. The activities of the LO which the applicant proposes to open in India have been enumerated in annexure II to the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, unless he has got a permanent establishment in India. In this regard, it is common ground that the issue is covered by the recent ruling of the Authority in the case of AAR Nos. 637, 638 and 640 of 2004 (Abdul Razak A. Meman, In re [2005] 276 ITR 306 ). In the above 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 (see [1994] 205 ITR (St.) 49 ). As such the applicant is not entitled to claim the benefit of the DTAA. In the light of the above discussion we rule on : Question No. (i) : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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