Liaison office cannot be considered as PE of foreign company in India – Supreme court

In Union of India V. UAE exchange center (116 taxmann.com 379) it was held by Supreme court that Services provided by liaison office in India would not result into a PE in India.

The respondent i.e. UAE exchange center is a company incorporated in United Arab Emirates. As far as services to India is concerned it was mainly engaged in transferring remittance to various places in India from UAE.

It had set up a liaison office in India to provide auxiliary and supporting services to HO. The entire expense of the liaison office was borne by the head office in UAE.

The funds are collected from the NRI remitter by the respondent in UAE by charging a one-time fee. After collecting the funds from the NRI remitter, the respondent makes an electronic remittance of the funds on behalf of its NRI customer in two ways: —

(i) by telegraphic transfer through bank channels; or

(ii) On the request of the NRI remitter, the respondent sends instruments/cheques through its liaison offices to the beneficiaries in India, designated by the NRI remitter.

The dispute arose in second method wherein the instrument/ cheques were sent to the beneficiary through liaison office.

Assessee was of the opinion that the liaison office is just providing auxiliary and supporting service and also not charging any fees, further it has been registered as such with RBI. Hence, same would not be considered as PE for taxation purpose.

AO contended that the services provided by liaison office were not only supporting or auxiliary but an important part of main service and hence it needs to be treated as PE of foreign company in India and income related to that PE needs to be taxed in India.

Hon’ble Court also relied on the judgement of The Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley & Co; wherein it was decided that back office operations came within the purview of Article 5(3)(e). Therefore, the entity located in India which was engaged in only supporting the front office functions of Morgan Stanley & Co., a non-resident, in fixed income and equity research and information technology enabled services such as data processing support centre, technical services and reconciliation of accounts being back office operators would not fall with Article 5(1) of the Indo-US DTAA.

It is evident that the activities are required to be carried out by the respondent subject to conditions specified in clause 3 of the permission by RBI, which includes not to render any consultancy or any other service, directly or indirectly, with or without any consideration without prior permission of RBI. The conditions make it amply clear that the office in India will not undertake any other activity of trading, commercial or industrial, nor shall it enter into any business contracts in its own name without prior permission of the RBI. The liaison office in India cannot even charge fee/ commission or remuneration for services provided in India.

Hence, liaison office won’t be considered as PE in India and income won’t be chargeable to tax in India.

The order was made on 24.04.2020. To download full judgement CLICK HERE.