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Union of India & Anr. v. U.A.E. Exchange Centre

Civil Appeal · 2020 INSC 354Decided 24 Apr 2020
Civil Appeal No. 9775 of 2011
Justice A.M. Khanwilkar · Justice Ajay Rastogi

Background

A UAE-based money remittance company ran RBI-approved liaison offices in India that helped execute transfers requested by NRI customers in the UAE, mainly by downloading remittance data and printing cheques/drafts to be couriered to Indian beneficiaries. The Authority for Advance Rulings held that this created a taxable "business connection" and "permanent establishment" in India, a view the Delhi High Court reversed, holding the liaison office's activities were merely of a "preparatory or auxiliary" nature under the India-UAE DTAA, so no tax was due on commissions earned entirely in the UAE. The Income Tax Department appealed.

Decision Breakdown

The Supreme Court upheld the High Court, holding that the India-UAE DTAA's definition of "permanent establishment" expressly excludes a fixed place of business used solely for activities of a "preparatory or auxiliary character," and that the liaison offices here, restricted by RBI's own conditions from earning any fee, entering contracts, or doing any independent business in India, fell squarely within that exclusion. Since the contracts with NRI remitters were concluded and the remittance fees earned entirely in the UAE, the Indian liaison offices could not be treated as a permanent establishment, and therefore no profits could be taxed in India under the DTAA, regardless of what the general provisions of the Income Tax Act might otherwise suggest.

Lesson Learnt

Where India has signed a tax treaty with another country, the treaty's terms override the general domestic tax law; a foreign company's India office that performs only support or auxiliary functions, not the substantive foreign business itself, generally cannot be taxed in India as a "permanent establishment."

Official source (sci.gov.in)View Judgment (PDF)

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