TMI Blog2004 (5) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... office in Abu Dhabi, UAE, through its liaison office in Kochi (Kerala), seeks advance ruling of this Authority on the following question. "Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India?" 2. The applicant is a limited liability company incorporated in United Arab Emirates (UAE). It is engaged in offering, among others, remittance services for transferring amounts from UAE to various places in India. It was granted licence by the Reserve Bank of India (RBI) for the purpose of setting up liaison offices in India for undertaking only the following approved activities. * Undertaking reconciliation of bank accounts held in India with correspondent banks under Draft Drawing Arrangement; * Acting as a communication centre receiving computer advices of mail transfer from UAE and transmitting to Indian correspondent banks; * Printing drafts and dispatching the same to the addresses. * Following up with the Indian correspondent banks. The applicant set up its first liaison office in Kochi, Kerala (India) in January, 1997. At present, the applicant has liaison offices in Chennai, New Delhi, Mumbai and Jalandu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from its Kochi office. The entire operation expenses of all offices in India are borne by UAE office. Though the applicant is engaged in buying and selling foreign currency and traveller cheques and handling of remittance business and other exchange services, yet while carrying out those operations the liaison offices in India, apart from working as communication center, are engaged in other activities. It is, nonetheless, admitted that those activities are other than trading, commercial or industrial in nature. The work carried on in liaison offices, inter alia, relates to down-loading particulars of remittances through electronic media, printing cheques/drafts drawn on the respective branches of banks in India, and sending them to the addresses of the beneficiaries in India in accordance with the instructions of the NRIs. It is pointed out that the establishment of liaison offices helps the applicant to extend its volume of business and such part of income as is attributable to and derived from the services rendered in India, shall be deemed to have accrued/arisen in India; the activities carried out by the liaison offices are connected to the main business of the company and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider the treatment of such income under the provisions of the DTAA. 6. Section 5 of the Act deals with the scope of total income. Sub-section (1) thereof relates to total income of a resident. The applicant is a non-resident in India so Sub-section (2) will be attracted. It says that the total income of a non-resident shall include all income from whatever source derived, which is received or deemed to have been received in India in any previous year by or on behalf of such person. Clause (b) of sub-section (2) which is material here, provides that the total income of a non-resident includes all income, from whatsoever source which accrues or arises or is deemed to accrue or arise in India during such year. The business of the applicant is being carried on in UAE; a contract for remitting the amounts is entered into with NRIs and is executed outside India; the commission for remitting the amounts is also earned by the applicant outside India, therefore, no income accrues/arises, or is deemed to accrue or arise in India in view of the principle that income accrues in the country in which the contract is executed. 7. The provisions of clause (i) of sub-section (1) of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income as is reasonably attributable to the operations carried out in India. Here, we need to examine only whether any income accrues or arises to the applicant (whether directly or indirectly) through or from any 'business connection' in India. From the facts of the case it is evident that all the operations of the business of the applicant are not carried out in India. In such a situation to attract the provisions referred to above, it must be shown that (i) the applicant has 'business connection' in India; and (ii) the income of the business can be deemed to accrue or arise in India from such operations as are carried out in India. In such a situation the Explanation (now Explanation 1) limits the quantum of taxable income so deemed to accrue or arise only to such part of the income as is reasonably attributable to the operations carried out in India. 8. The first important aspect we have to consider is whether the applicant has "business connection" in India. The expression "business connection" was not defined for the purpose of the aforementioned provision, before March 31, 2003. By Finance Act, 2003 two Explanations were inserted after the then existing Explanation which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection." The requirement of continuity of transactions to form 'business connection' between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Company Limited (23 ITR 101), Hon'ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, "an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection". 10. In the light of above discussion, the es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now we shall advert to the contention of the application based on DTAA. In this regard reference to the relevant provisions of Article 7 of DTAA which deal with the business profits would be necessary. Article 7:Business profits "1. The profits of an enterprise of a Contracting States shall be taxable only in that State unless the enterprises carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." A perusal of para (I) alongwith the definition clauses in Article 3, would show that the profits of an enterprise of UAE are taxable in that country provided that enterprise does not carry on business through a permanent establishment (PE) in India. If the enterprise carries on business, through a 'PE' in India its profits may be taxed here but only so much of them as are attributable to that PE. This provision is in line with sub-clause (a) of Explanation (I) to clause (i) of Section (1) of Section 9 of the Act. 13. The expression 'permane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded from the meaning of the expression 'permanent establishment'. Clause (e) of para 3 says that the expression 'permanent establishment' shall be deemed not to include the maintaining of a fixed place of business solely for the purpose of carrying on for an enterprise any other activity of a preparatory or auxiliary character . Mr. Ranina placed before us extracts from various dictionaries to show the meaning of the word 'auxiliary'. It is unnecessary to refer to them here. Suffice it to say that the word 'auxiliary' in common English usage means helping, assisting or supporting the main activity. We have, therefore, to ascertain whether the activities carried on in the liaison offices in India , are only supportive of the main business or form one of the main functions of the business. The applicant enters into a contract with a NRI to remit to the nominated banks or the nominated beneficiaries in India the amount which is the Indian rupee equivalent of foreign currency handed over to it. It is true that the contract is entered into in UAE and the amount to be remitted as well as the commission is also received in UAE. The contract is, therefore, executed in UAE. To fulfill it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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