Uae Exchange Centre Limited vs Union Of India And Another
2009 Latest Caselaw 520 Del

                 HIGH COURT OF DELHI : NEW DELHI

+                                Judgment delivered on: 13.02.2009

%
                         WP(C) No. 14869/2004

U.A.E.EXCHANGE CENTRE LTD.         ..... Petitioner
                    Through : Mr.H.P.Ranina and Mr.Vivek
                              B.Saharya, Advocates

                           versus

U.O.I. & ANR.                                    ..... Respondents
                                 Through : Mr.R.D.Jolly, Advocate

CORAM :

HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
   be allowed to see the judgment ?          Yes
2. To be referred to Reporters or not ?      Yes
3. Whether the judgment should be reported
    in the Digest ?                          Yes

RAJIV SHAKDHER, J.

1. By this writ petition, the petitioner seeks to challenge the advance

ruling of the Authority For Advance Rulings (Income Tax), New Delhi

(hereinafter referred to as "the Authority") dated 26.05.2004 passed in

A.A.R.No.608/2003 pursuant to an application made by the petitioner under

Section 245Q(1) of the Income Tax Act, 1961 (hereinafter referred to as "the

Act").

2. In the application filed under Section 245Q(1) of the Act by the

petitioner before the Authority, it had sought an advance ruling by the

Authority with respect to the following question :

"Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India?"

2.1 The aforesaid question was posed by the writ petitioner in the

background of the following facts as stated in its application to the Authority.

2.2 The petitioner is a limited liability company incorporated in the United

Arab Emirates („UAE‟), with its head office at Abu Dhabi. The petitioner is

engaged, among others, in offering remittance services for transferring of

monies from UAE to various places in India. In order to facilitate the said

purpose, the petitioner had opened liaison offices in India on 01.01.1997

under a licence granted by the Reserve Bank of India („RBI‟) vide its

communication dated 24.09.1996. As per the RBI communication dated

24.09.1996, the petitioner‟s liaison offices, in India, are permitted to

undertake only the following activities:-

(i) responding to enquiries from correspondent banks with

respect to drafts issued;

(ii) undertaking reconciliation of bank accounts held in India

with correspondent banks under Drafts Drawing Arrangement;

(iii) acting as a communication centre receiving computer

advices of mail transfer from UAE and transmitting to the Indian

correspondent banks;

(iv) printing drafts and dispatching the same to the addressees

and;

(v) following up with the Indian correspondent banks.

2.3 By the very same communication, the RBI has specifically prohibited

the petitioner‟s liaison offices, in India, from charging any commission or fee

or from receiving or earning any remittances from any activity undertaken by

them. Furthermore, the expenses of the liaison offices in India are required

to be met exclusively out of the funds received from abroad through normal

banking channels.

2.4 Pursuant to the aforesaid permission granted by the RBI, the petitioner

set up its first liaison office in Cochin, in the State of Kerala, in January,

1997. At present, the petitioner has liaison offices in Cochin, Chennai, New

Delhi, Mumbai and Jalandhar in India.

2.5 It is the stand of the petitioner both before the authority below, as well

as, before this court, that, through its six liaison offices, in India, it provides

certain „auxiliary‟ services to Non-Resident Indians („NRI‟) in UAE to remit

funds either on their account or for the benefit of their relatives/dependents.

For the said purpose, a contract between the NRI remitter and the petitioner is

executed in UAE, whereupon the NRI hands over his or her funds for

remittance to the petitioner at any of the centres/outlets/camps of the

petitioner in UAE. Each such transaction is a separate contract between the

NRI remitter and the petitioner; governed by the UAE laws. Upon funds

being collected, the petitioner makes an electronic remittance of the funds on

behalf of its NRI customers‟ in either of the two ways:

(i) funds are remitted by telegraphic transfer through banking

channels; or

(ii) on the request of the NRI remitter, the petitioner sends

instruments/cheques though its liaison offices to the

beneficiaries in India designated by the NRI remitter.

2.6 In the second option, the liaison offices in India download the

particulars of remittances through the electronic media and then print

cheques/drafts drawn on the banks in India, which, in turn, are

couriered/despatched to the beneficiaries in India, in accordance, with the

instructions of the NRI remitter. In order to facilitate downloading of the

information with regard to remittances, the liaison office in India, are

connected with the main server of the petitioner in UAE. This information,

which is contained in the main server is accessed by the liaison offices in

India for the purpose of remittances of funds to the beneficiaries in India by

the NRI remitters.

2.7. However, the point to be noted, is that, in either situation, that is,

whether the option exercised by the NRI remitter for remittance of the funds

is through telegraphic transfer of funds to a bank in India or, through a liaison

office in India; the petitioner collects a fixed charge of Dirhams 15 in UAE.

There is no additional or extra charge payable by the customer to the

petitioner if the customer choses the second option.

2.8 On the aforesaid basis, as averred in the writ petition, the petitioner, in

compliance of provisions of Section 139 of the Act, has been filing its return

of income since, the assessment year 1998-99 right through till assessment

year 2003-04. In all these years, returns have been filed showing „Nil"

income as according to the petitioner, no income accrued or deemed to have

accrued in India both under the Act, as well as, the agreement entered into

between the Government of Republic of India and the Government of UAE

which is ubiquitously known as the Double Taxation Avoidance Agreement

(in short „DTAA‟). The point to be noted at this stage is that the Government

of India entered into a DTAA with the government of UAE in pursuance of

its powers under Section 90 of the Act, for the purposes of avoidance of

„Double Taxation and Prevention of Fiscal Evasion‟, with respect to, taxes

and income on capital; which stood notified vide Notification

No.G.S.R.No.710(E) dated 18.11.1993.

2.9 The 2nd respondent had accepted the returns for the aforesaid

assessment years without demur. However, pursuant to impugned ruling of

the Authority dated 26.05.2004, the 2nd respondent issued four notices of

even date i.e., 19.07.2004 under Section 148 of the Act for assessment years

2000-01, 2001-02, 2002-03, 2003-04 respectively. The petitioner, being

aggrieved by the action of the respondent in initiating proceedings under

Section 148 of the Act on the purported ground that the respondent had

reasons to believe that income for the assessment years mentioned in the

aforesaid notices had escaped being taxed, preferred a writ petition before

this court under Articles 226 and 227 of the Constitution of India. In the writ

petition filed before us, the following reliefs have been claimed:-

(i) Issue a Writ of Certiorari or any other Writ or Order quashing the Ruling of the AAR dated 26th May, 2004 passed at New Delhi;

(ii) Issue a Writ of Certiorari or any other Writ or Order quashing the notice and assessment proceedings under Section 148 of the Income Tax Act, 1961, dated 19th July, 2004 for Assessment years 2000-01, 2001-02, 2002-03, 2003-04 and declare that the petitioner is not liable to tax in India;

(iii) Issue a Writ, Order or Direction including Writ of Mandamus directing the respondents not to tax the petitioner in India because no income accrues or is deemed to accrue in India from its activities of liaison offices in India;

(iv) Pending the disposal of this Writ petition, pass such ad- interim order as may be thought fit and proper directing Respondent No.2 not to initiate any assessment proceedings

pursuant to the notices issued under Section 148 of the Income Tax, 1961 for the assessment years 2000-01 to 2003-04;

(v) pass such other order as this Hon‟ble Court may deem fit in the facts and circumstances of the case.

Submissions of petitioner‟s counsel

3 Learned counsel for the petitioner, Mr.H.P.Ranina has broadly made

the following submissions:-

(i) the petitioner does not carry on any business/trade in India. Its

business is carried out in UAE. This was sought to be demonstrated by

alluding to the following facts:-

(a) after the contract for remittance of funds is executed in

UAE, funds are handed over by the NRI remitter to the

petitioner‟s collection centre/camp etc. located in UAE;

(b) the commission, which is equivalent to Dirhams 15 is

received in UAE;

(c) the funds thereafter are remitted in accordance with the

instructions of the customers either telegraphically through

banking channels via banks nominated by the NRI remitter,

or through cheques/drafts drawn on banks in India based on

information downloaded by the petitioner‟s liaison offices

in India by despatching the same through courier to the NRI

remitter‟s beneficiaries in India.

(ii) if the NRI remitter in UAE exercises the option of having funds

transferred through the liaison office in India, no extra commission or

fee is charged;

(iii) the liaison office in India does not carry out any trading,

commercial or industrial activity, in India. As a matter of fact, the RBI

has specifically imposed a prohibition, while granting approval on

opening liaison offices in India.

(iv) based on the aforesaid facts, he submits, that the activity carried

out in India cannot be construed as „business connection‟ within the

meaning of Section 5(2)(b) or Section 9(1)(i) - so as to hold that

income is deemed to accrue or arise in India

3.1 As a necessary adjunct to his submissions above, the learned counsel

for the petitioner further contended that, even if it is assumed, that the income

is deemed to arise or accrue to the petitioner under the provisions of Sections

5(2) and 9(1)(i) of the Act, the business profits of the petitioner would be

liable to tax, only if, it has permanent establishment within the meaning of

Article 7(3) read with Articles 5(1) and (3) of DTAA .

3.2 It is the submission of the learned counsel for the petitioner, that the

Authority in holding that, the income earned in UAE by the petitioner by

virtue of business activity carried out in U.A.E. has a real and intimate

relationship with the business activity carried out in India, has misconstrued

the ratio of the judgments of the Supreme Court in the case of CIT, Punjab

vs. R.D.Aggarwal & Co;(1965) 56 ITR 20 and Anglo French Textile Co Ltd

vs. CIT;(1953) 23 ITR 101.

3.3 It is also the contention of the petitioner that the Authority having

recorded findings of fact in paragraph 6 of the impugned ruling, to the effect:

that the business of the Petitioner is 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

Petitioner outside India, therefore no income accrues/arises or is deemed to

accrue or arise in India in view of the principle that the income accrues in the

country, in which, the contract is executed- it could not have, in paragraphs 7

to 11, more particularly, in paragraph 11, of the impugned ruling held that the

income shall be deemed to, accrue/arise in UAE from a business connection

in India.

3.4 It may be noted here that, apart from the above submission in the writ

petition, one of the grounds which has been taken to challenge the ruling of

the Authority, is that, the Authority has rendered its ruling beyond the period

of six months as prescribed under Section 245R(6) of the Act. It is averred

that the petitioner had filed the application with the Authority on 10.01.2003;

while the ruling was rendered by the Authority on 26.05.2004 well beyond

the period prescribed under the said provision. It may, however, be noted

that at the stage of arguments, this ground was not pressed before us. We

have taken note that the petitioner has given up the said ground of challenge.

Submission of the Respondent

4. As against this, the learned counsel for the respondent, Mr.R.D.Jolly,

has raised a preliminary objection, which is that, in view of Section 245S,

which provides, that the advance ruling pronounced by the Authority under

the provisions of Section 245R shall be binding on the petitioner/applicant,

the Commissioner and the Income Tax authorities subordinate to him in

respect of the application and the transactions on which ruling has been

sought - this Court ought not to exercise its extra ordinary jurisdiction under

Article 226 of the Constitution of India as, there is no case made out by the

petitioner that the Authority has acted either without jurisdiction or in breach

of the principles of natural justice.

4.1 As regards merits, the learned counsel for the Revenue, has largely

placed reliance on the ruling of the Authority, by reiterating, that the activity

undertaken by the liaison offices had a „real and intimate‟ connection with

business activity of the petitioner in UAE and hence, the business connection

was established in terms of Section 9(1)(i) read with Section 5(2)(b) of the

Act. He further contended that the liaison offices of the petitioner, in India,

also represented the permanent establishment of the petitioner in India in

terms of Articles 5(1) and 7 of the DTAA, and that, in respect of the second

mode of remittance, whereby the liaison offices in India performed the

function of downloading information in India, which was, stored in the main

server in UAE for the purposes of printing cheques which were then,

despatched/couriered to the NRI remitter‟s beneficiaries, in India, has a

crucial link, which enabled fulfillment of obligation undertaken by the

petitioner under the contract with the NRI remitter in UAE and hence, could

not be termed as an activity of an „auxiliary‟ character, so as to, fall within

the ambit of an exclusionary clause contained in Article 5(3) (e) of DTAA

Our reasoning with respect to preliminary objection of the respondent

5. The provisions for advance ruling are contained in chapter XIX-B of

the Act, which was introduced in the Act, by virtue of the Finance Act, 1993

with effect from 01.01.1993. The said chapter consists of Sections

commencing from Section 245N to Section 245V. Section 245N deals with

definitions of various terms used in the chapter which, in sum and substance,

define as to who can approach the Authority and, the kind of transactions on

which the Authority can render its advance ruling. Section 245-O deals with

the constitution of the Authority. The said Section provides for a three

member authority, with the Chairman being a retired Judge of the Supreme

Court and the other two members from Indian Revenue Service and Indian

Legal Service respectively. Section 245P provides that no proceedings

before, or pronouncement of advance ruling by the authority shall be

questioned or become invalid on the ground of any vacancy or defect in the

constitution of the authority. Section 245Q provides for the procedure for

filing of an application before the authority, in the manner prescribed, stating

the question, on which the advance ruling is sought by the applicant. Section

245R, significantly, provides for the procedure which the authority is

required to adopt in deciding the question posed before it by the applicant.

Under sub-section (1) of Section 245R, on receipt of an application, the

Authority is required to forward a copy of the same to the Commissioner and,

if necessary, call upon him to furnish the relevant records. After examining

the application and the records, the Authority is empowered to allow or reject

the application. Under the first proviso, the authority‟s jurisdiction to allow

the application is excluded, with respect to issues which are also pending

before Income Tax Authority or the Appellate Tribunal or involves

determination of fair market value of any property or relates to a transaction

or an issue, which is designed prima facie to avoid income-tax except in the

case of a resident applicant falling in sub-clause (iii) of clause (b) of Section

245N. The second proviso to Section 245R clearly mandates that the

Authority shall not reject any application unless the applicant has been given

an opportunity of being heard. Under the third proviso, the said section,

specifically, provides that where the application is rejected, reasons for

rejection shall be given in the order. Under sub-sections (4) and (5) of the

said Section, the Authority is required to give its advance ruling after

examining the material placed before it by the applicant or that obtained by

the Authority and after providing an opportunity to the applicant of being

heard in person or his duly authorised representative. Section 245S specifies

that the advance ruling pronounced by the Authority under Section 245R

shall be binding both, on the applicant, as well as the Commissioner and the

Authority below, in respect of, the applicant and the transaction with regard

to which a ruling has been sought. Section 245T provides that the authority

may declare its ruling as void ab initio based on the representation by the

Commissioner or otherwise that the same has been obtained by fraud or

misrepresentation of facts. Significantly, under Section 245U, the authority

has been conferred with all the powers of the Civil Court under the Civil

Procedure Code, 1908 (CPC) as referred to in Section 131 of the Act, while

exercising its power under this chapter. Sub-section 245U(2) provides that

the Authority is deemed a Civil Court for the purposes of Section 195 of the

Criminal Procedure Code, 1973 (Cr. P.C.) and every proceeding before the

Authority shall be deemed to be a judicial proceedings within the meaning of

Sections 193 and 228 and also, for the purpose of Section 196 of the Indian

Penal Code (IPC). The last Section in the Chapter being Section 245V.

Under this Section, the Authority has been conferred with the power to

regulate its own procedure in all matters arising out of the exercise of its

power under this Act.

6. At this point, it would be important to note that the powers given under

Section 131 of the Act are the same powers which are vested in a Court under

the CPC when trying a suit in respect of discovery, production of evidence,

enforcing attendance of persons, issue of commission etc. A perusal of

Section 245S of the Act shows that, while it is binding on the applicant, the

transaction in relation to which the ruling is sought, the Commissioner and

the Income Tax authorities subordinate to him, in respect of, the applicant

and the transaction, it does not exclude the jurisdiction of the Courts either

expressly or by implication. There is no provision which gives finality to the

decision of the Authority. In our view, even though the provisions of Section

245S provide that the orders of the Authority would be binding, this, by

itself, cannot exclude the jurisdiction of the Courts by implication or

otherwise, as it does not provide for any adequate remedy to mitigate or deal

with the grievance of the aggrieved party. Therefore, in our view the Courts

would have jurisdiction to entertain actions under Article 226 of the

Constitution impugning the ruling given by the Authority under Section 245R

of the Act. [See : Dhulabhai vs. State of MP; AIR 1969 SC 78 at page 89

(para 32) and Gurbax Singh vs. Financial Commissioner and Anr; 1991

Supp (1) SCC 167 at pages 174-175 (para 19)]. The principles enunciated in

the aforementioned judgments clearly point to the fact that Section 245S in

Chapter XIX-B of the Act cannot be construed as an ouster clause, ousting

the jurisdiction of the Courts.

7. This brings us to a question as to whether the Authority is a Tribunal

within the meaning of Article 227 of the Constitution. The broad test which

has been laid down by the Courts are that an Authority shall be construed to

be a Tribunal within the meaning of Article 227 of the Constitution of India if

it is invested with the judicial power of the State, which is, that it should act

judicially after ascertaining the facts placed before it and upon application of

the relevant law applicable to the facts obtaining in a case. Broadly, the

expression used in various judgments rendered by various Courts is that an

Authority would be a Tribunal if it has the „trappings of a Court‟. What are

the indices of the expression „trappings of a court‟ are best illustrated in the

judgment of the Supreme Court in the case of Jaswant Sugar Mills Ltd,

Meerut vs. Lakshmi Chand & Ors; AIR 1963 SC 677, Justice Shah (as he

then was) at page 685 (paras 19 & 20) observed as follows:-

"Their primary function is administrative and not judicial. In deciding whether an authority required to act judicially when dealing with matters affecting rights of citizens may be regarded as a tribunal, though not a court, the principle incident is the investiture of the "trappings of a court" - such as authority to determine matters in cases initiated by parties, sitting in public, power to compel attendance of witnesses and to examine them on oath, duty to follow fundamental rules of evidence (though not the strict rules of the Evidence Act), provision for imposing sanctions by way of imprisonment, fine, damages or mandatory or prohibitory orders to enforce obedience to their commands. The list is illustrative; some, though not necessarily all such trappings will ordinarily, make the authority which is under a duty to act judicially, a 'tribunal'.

20. Mahajan, J., in Bharat Bank Ltd. v. Employees of Bharat Bank Ltd. [(1950) S.C.R. 459] observed at p. 476 :

"As pointed out in picturesque language by Lord Sankey L.C. in Shell Co. of Australia v. Federal Commissioner of Taxation [[1931] A.C. 275], there are tribunals with many of the "trappings of a Court" which, nevertheless, are not Courts in the strict sense of exercising judicial power. It seems to me that such

tribunals though they are not full-fledged Courts, yet exercise quasi-judicial functions and are within the ambit of the word 'tribunal' in article 136 of the Constitution. It was pointed out in the above case that a tribunal is not necessarily a Court in this strict sense because it gives a final decision, nor because it hears witnesses on oath, nor because two or more contending parties appear before it between whom it has to decide, nor because it gives decisions which affect the rights of subjects, nor because there is an appeal to a Court, nor because it is a body to which a matter is referred by another body. The intention of the Constitution by the use of the word 'tribunal' in the article seems to have been to include within the scope of article 136 tribunals adorned with similar trappings as Court but strictly not coming within that definition."

8. Seen in the light of the principles enunciated above, it is clear that the

Authority constituted under Chapter XIX-B of the Act is a Tribunal as it is

invested with powers of a civil court by virtue of provisions of Section 131 of

the Act; which includes all such powers a court is vested with under the CPC

when trying a suit in respect of matters relating to discovery, inspection,

enforcing attendance of persons including officials of banking company and

examining such persons on oath, compelling production of books of

accounts, summons of accounts etc. Under the provisions of 245R, there is a

requirement to give an opportunity of hearing to the applicant and to give

reasons for rejecting an application. The cumulative effect of the powers

invested and the attributes of the Authority, when gleaned from the

provisions of Chapter XIX-B, leave no doubt in our minds that it has the

„trappings of a court‟ and hence, would undoubtedly qualify as a Tribunal

within the meaning of Article 227 of the Constitution of India. Thus, the

Authority would be amenable to the jurisdiction of this court under Article

227, and more so, under Article 226 of the Constitution of India which,

without doubt, has a wider reach being conferred with jurisdiction to issue

appropriate writ order or direction to any "person or Authority" for

enforcement of fundamental rights under Part-III of the Constitution as also

for any other purpose. [See: Kihoto Hollohan vs. Zachillhu and Ors; 1992

Supp (2) Supp 651 at 706 to 712 (paras 98 to 111)]

9. This brings us to the next limb of the preliminary objection as to

whether in the facts and circumstances of the present case, we should

exercise our writ jurisdiction. This would require us to look at the merits of

the case. Before we do that, we would like to touch upon the well engrafted

principles, with respect to, the exercise of writ jurisdiction by Courts, in such

like, matters. Essentially, when superior courts exercise the power of judicial

review in respect of orders, decisions or, as in the instant case, a ruling of

administrative quasi-judicial authority or a judicial authority, it looks at the

decision making process and not at the decision itself. A superior court is not

expected to substitute its view with that of the authority whose decision is

impugned before it as long as the view taken by the authority, is a plausible

view which is free from errors of jurisdiction or errors apparent on the face of

the record. The statement of law on this aspect of the matter, in respect of a

quasi judicial authority, has been very aptly enunciated in the judgment of

seven Judges of the Supreme Court in the case of Ujjam Bai vs. State of

U.P.; AIR 1962 SC 1621 at page 1629 (para 15) reads as follows:-

"where a quasi-judicial authority has jurisdiction to decide a matter, it does not lose its jurisdiction by coming to a wrong conclusion, whether it is wrong in law or in fact."

9.1 It is now fairly well settled that superior courts can issue a writ of

certiorari where there is an error of law which is apparent on the face of

record as these are akin to errors of jurisdiction as against mere errors of law.

The statement of law in Halsbury‟s Laws of England [4th Edition Vol. 1(1)

Para 73 Page 127] best captures the accepted position in law.

"Where upon the face of the proceedings themselves it appears that the determination of an inferior tribunal is wrong in law, certiorari to quash will be granted. Thus, it will be granted where a charge laid before magistrates, as stated in the information, does not constitute an offence punishable by the magistrates, or where it does not amount in law to the offence of which the accused is convicted, or where an order is made which is unauthorized by the findings of the magistrates, or is materially defective in form. Most of these cases are to be regarded as usurpations of jurisdiction; but it is settled that certiorari will also be granted to quash a determination for error of law on the face of the record although the error does not go to jurisdiction."

9.2 This again brings us to the question as to what would be an error

apparent on the face of record. The Supreme Court in the case of Hari

Vishnu Kamath vs. Ahmad Ishaque; AIR 1955 SC 233 at page 244 (paras

22 & 23) has laid down a litmus test, that is, it should be one which is

„manifest error apparent on the face of the record‟. This brings us to another

quintessential question as to what constitutes a „record‟. In the case of R. vs.

Northumberland Compensation; (1952) 1 AII.E.R. 122 at page 131 Lord

Justice Denning has opined that the record must contain "at least the

document which initiates the proceedings, the pleadings if any, and the

adjudication, but not the evidence, nor the reasons, unless the Tribunal chose

to incorporate them." We may also note the decisioin in MMB Catholicos vs.

M.P.Athanasius; AIR 1954 SC 526 at page 543 (para 36) wherein the

Supreme Court expanded the scope of what would constitute a „record‟.

9.3 The difficult part is as to how to differentiate between the error of law

as against the error of jurisdiction as in most cases errors of law impinge

upon the jurisdiction of the court. However, this distinction has disappeared

with the judgment of House of Lords in the case of Anisminic vs. Foreign

Compensation Commission; (1969) 2 AC 247 as also in O' Reelly vs.

Mackman; (1983) 2 AC 237 at Page 278. The position which has emerged is

that, in so far as, errors of fact are concerned the Courts will quash a decision

which is based on an erroneous but a decisive fact which goes to the root of

jurisdiction, or is based on no evidence or is wrong, misunderstood or

ignored. Similarly Courts would also quash decisions of the Tribunal which

is a decisive error of law since all errors of law are considered as errors of

jurisdiction (See: Administrative Law 8th Edition by H.W.R.Wade and

C.F.Forsyth at Page 286). What has, however, been accepted, is that, the

Writ Courts in India have power to issue the writ of certiorari, in respect of,

errors apparent on the face of the record committed by a subordinate Court or

a Tribunal.

10 In the light of the aforesaid well entrenched principles of law it would

be appropriate to consider the decision of the Authority in the facts of the

present case.

10.1 The admitted facts in this case are that the petitioner is offering

remittance services to NRIs in UAE. The contracts pursuant to which funds

are handed over by the NRIs to the petitioner in UAE are entered into

between the petitioner and the NRI remitter in UAE. The funds are collected

from the NRI remitter by the petitioner in UAE. A one time fee of Dirhams

15 is levied and collected by the petitioner from the NRI remitter in UAE.

The funds are transmitted to the beneficiaries of the NRI remitter, in India,

either by telegraphic transfer through normal banking channels via banks in

India or are remitted by involving the liaison offices of the petitioner in India,

who in turn, download the information and particulars necessary for

remittance by using computers in India which are connected to the servers in

UAE, by drawing cheques on banks in India in couriering/despatching the

same to the beneficiaries of the NRI remitter in India.

11 The Authority in paragraph 11 of the impugned ruling held that

downloading of information by the liaison offices in India with regard to the

beneficiaries of the NRI remitters in India and thereupon the act of the

cheques or drafts being drawn on banks in India, in the name of beneficiaries

and their despatch through couriers to the beneficiaries constitutes an

activity, which enabled the petitioner to complete the transaction of

remittance, in terms of the contract entered into with the NRIs. From this the

Authority has concluded, that there is, therefore, a real and intimate

relationship between the business carried on by the petitioner, for which, it

receives commission in UAE. Furthermore, the Authority has held that the

activities of the liaison offices of downloading of information, printing and

preparation of cheques and drafts, and sending the same to the beneficiaries

in India, contribute directly or indirectly to the earning of income by the

petitioner by way of commission. It also held that there is continuity between

the business of the petitioner in UAE and the activities carried on by the

liaison offices in India. On this basis, the Authority concluded that the

income shall be deemed to accrue or arise to the petitioner in UAE from

„business connection‟ in India.

11.1 In our view, the Authority has misconstrued the provisions of Section

90 of the Act which empowers the Central Government to enter into an

agreement with the Government outside India for the purposes of granting

relief in respect of aspects referred to in sub-section (1) clauses (a) to (d). It

is well settled that where India has entered into a treaty for avoidance of

double taxation as also in respect of purposes referred to in Section 90 of the

Act, the contracting parties are governed by the provisions of the treaty. The

treaty overrides the provisions of the Act. The answer with respect to the

same is clearly evident from a reading of Sections 4 and 5 of the Act.

Section 4 which relates to the chargeability and Section 5 which encapsulates

what would constitute the total income which would be chargeable under the

Act are provisions, which are, both subject to other provisions of the Act.

Therefore, a treaty entered into by the Government of India, which is,

notified under Section 90 of the Act will govern the liability to tax, in respect

of, those to whom the treaty applies. In this regard, the observations of the

Supreme Court in the case of Union of India vs. Azadi Bachao Andolan;

(2003) 263 ITR 706 at page 724 are apposite:-

"A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of granting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTA's which would automatically override the provisions of the Income-Tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.

The contention of the respondents, which weighted with the High Court, viz, that the impugned Circular No.789 (see [2000] 243 ITR (St.) 57) is inconsistent with the provisions of the Act, is a

total non sequitur. As we have pointed out, Circular No.789 (see [2000] ITR(St.) 57) is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section 2 of the Section 90. In other words, the circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assesses covered by the provisions of the DTAC are concerned."

11.2 In the present case, the liability to tax under the DTAA is governed by

Article 7. Sub-section (1) of Article 7 of the DTAA categorically provides

that profits of an enterprise of a contracting State shall be taxable only in that

State, unless the enterprise carries on business, in the other State, through a

permanent establishment situated thereof. 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 that, as is attributable to the permanent

establishment. Therefore, the liability on account of tax, of an enterprise of

either of the contracting State, in India, would arise if the enterprise in issue,

i.e., the petitioner, had a permanent establishment in India. The provisions of

Section 5(2) (b) and Section 9(1)(1) of the Act would have, in our view, no

applicability. Discussion with respect to the „business connection‟ in the

impugned ruling was, in our view, unnecessary. The Authority had to

determine only whether the petitioner carried on business in India through a

permanent establishment. For this purpose it was required to examine the

definition of permanent establishment as contained in Article 5 of DTAA

read with Article 5(3)(e). There is no dispute raised by the petitioner that it

maintains liaison offices in India and hence, would fall within the definition

of permanent establishment in accordance with the provisions of Article

5(2)(c). The petitioner, however, has contended both before the Authority

and before us that it falls within the exclusionary clause contained in Article

5(3)(e) in as much as the activity carried on by the liaison offices in India,

has an „auxiliary‟ character. On this aspect of the matter the discussion and

reasoning by the Authority is contained in paragraphs 12 to 15 of the

impugned ruling. The Authority came to the conclusion that the activity

carried on by the liaison offices in India did not have an „auxiliary‟ character

in terms of Article 5(3)(e) of the Act as the option of remitting of funds

through the liaison offices in India was exercised by the NRI remitter which

was "nothing short of, as in the words of the parties, performing contract of

remitting the amounts". The Authority, thus, held that while, in respect of

all remittances of funds by telegraphic transfer through banking channels, the

role of the liaison offices in India of an „auxiliary‟ character, the same was

not true in respect of remittance of funds through liaison offices in India.

This was based on the reasoning that without remittances of funds to the

beneficiaries in India performance under the contract would not have been

complete and thus, the downloading of data, preparation of cheques for

remitting the amount, despatching the same through courier by the liaison

offices, constituted an important part of the main work, which was, remitting

the amount to the beneficiaries as desired by the NRIs. Based on this

reasoning, the Authority came to the conclusion that the work of the liaison

offices in India, being a significant part of the main work of UAE

establishment, the liaison office of the petitioner, in India, would constitute a

„permanent establishment‟ within the provisions of the DTAA.

12 In our opinion, this view is clearly erroneous. We are living in an era

where the world is described euphemistically as „flat‟ or even a global

village. Organisations and companies operate transnationally. There is an

eagerness to bring to tax by States income, by employing deeming fictions so

that incomes which ordinarily do not accrue or arise within the taxing State

are brought within the States‟ tax net. It is in this context that the expression

„permanent establishment‟ appearing in the DTAA has to be viewed. In the

case of DTAA under consideration in the present case under Article 5 read

with Article 7, profits of an enterprise are liable to tax in India if an enterprise

were to carry on business through permanent establishment, meaning thereby

fixed place of business through which business of an enterprise is wholly or

partly carried on. Under Article 5(2)(c), amongst others, permanent

establishment includes an office. However, Article 5(3) which opens with a

non-obstante clause, is illustrative of instances where-under the DTAA

various activities have been deemed as ones which would not fall within the

ambit of the expression „permanent establishment‟. One such exclusionary

clause is found in Article 5(3)(e) which is: maintenance of fixed place of

business solely for the purpose of carrying on, for the enterprise, any other

activity of a preparatory or auxiliary character. The plain meaning of the

word „auxiliary‟ is found in Black‟s Law Dictionary 7th Edition at page 130

which reads as "aiding or supporting, subsidiary". The only activity of the

liaison offices in India is simply to download information which is contained

in the main servers located in UAE based on which cheques are drawn on

banks in India whereupon the said cheques are couriered or despatched to the

beneficiaries in India, keeping in mind the instructions of the NRI remitter.

Can such an activity be anything but auxiliary in character. Plainly to our

minds, the instant activity is in „aid‟ or „support‟ of the main activity. The

error into which, according to us, the Authority has fallen is in reading

Article 5(3)(e) as a clause which permits making a value judgment as to

whether the transaction would or would not have been complete till the role

played by liaison offices in India was fulfilled as represented by the petitioner

to their NRI remitter. According to us, what has been lost sight of, is that, by

invoking the clause with regard to permanent establishment, we would, by a

deeming fiction tax an income which otherwise neither arose nor accrued in

India - when looked at from this point of view, the exclusionary clause

contained in Article 5(3) and in this case in particular, sub-clause (e) have to

be given a wider and liberal play. Once an activity is construed as being

subsidiary or in aid or support of the main activity it would, according to us,

fall within the exclusionary clause. To say that a particular activity was

necessary for completion of the contract is, in a sense saying the obvious as

every other activity which an enterprise undertakes in earning profits is with

the ultimate view of giving effect to the obligations undertaken by an

enterprise vis-a-vis its customer. If looked at from that point of view, then,

no activity could be construed as preparatory or of an „auxiliary‟ character.

On this aspect of the matter, the Supreme Court in the case of

DIT(International Taxation) vs. Morgan Stanley & Co; 2007(7) SCC 1

amongst other issues was called upon to decide as to whether back office

operations carried on by Morgan Stanley Company for one of its Morgan

Stanley Advantages Services Pvt. Ltd would qualify as having a permanent

establishment in India. The Supreme Court, while holding that back office

operations fall within the exclusionary clause Article 5(3) (e) of Indo-US

Double Taxation DTAA, which is, identical to DTAA under consideration in

the present case, came to the conclusion that back office operations came

within the purview of Article 5(3)(e). It is laid down by the Supreme Court

in the case of Morgan Stanley (supra) that in ascertaining what would

constitute a „permanent establishment‟ within the meaning of Article 5(1) of

the Indo-US DTAA, one had to undertake what is called a functional and

factual analysis of each of the activities undertaken by an establishment. In

that case the Supreme Court came to the conclusion that 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.

13 In view of the fact that the ruling rendered by the Authority proceeded

on a wrong premise, inasmuch as, it firstly examined the case from the point

of view of Section 5(2)(b) and Section 9(1)(1) of the Act, while it was

required to look at the provisions of DTAA for ascertaining the petitioner‟s

liability to tax and, secondly, it ignored the plain meaning of the terms of

exclusionary clause, i.e., Article 5(3)(e), while examining as to whether by

setting up a liaison office in India would result in setting up a permanent

establishment within the meaning of DTAA, the decision of the Authority in

these circumstances, being contrary to, the well established principles, as

well as, provisions of law, would amount to an error apparent on the face of

the record and hence, amenable to a writ of certiorari. In these

circumstances, we are inclined to quash and set aside the impugned ruling of

the Authority dated 26.05.2004. In this matter, even though, as discussed

above, we are not required to discuss as to whether the activity carried on by

the liaison offices of the petitioner in India resulted in a „business connection‟

so as to bring the income earned by the petitioner within the ambit of Section

9(1)(1) and Section 5(2)(b) of the Act, we are of the opinion that the

Authority has misconstrued the ratio of the judgments of the Supreme Court

in the case of Anglo French Textile Co Ltd vs. CIT; (1953) 23 ITR 101 and

CIT, Punjab vs. R.D.Aggarwal & Co; (1965) 56 ITR 20. The ratio in both

the judgments is that the non-resident entity could be taxed only if there was

business connection between the business carried on by a non-resident which

yields profits or gains and some activity in the taxable territory which

contributes directly or indirectly to the earning of those profits or gains. The

acid test for determination of a business connection as laid down in the

aforementioned judgments is that there must be a real and intimate

relationship between the activity of a non-resident outside the taxable

territory with that of activity in the taxable territory. Therefore, the profit or

gains earned by the non-resident should accrue or arise due to direct or

indirect contribution of the activity carried out in the taxable territory

entailing an element of continuity. A fortiori every such activity would not

come within the purview of the expression „business connection‟. According

to accepted business notions and usages, a particular activity may be a well

defined business operation. Activities which are not well defined or are of

casual or isolated character would not fall within the ambit of this

aforementioned test.

13.1 In our view, the activity carried on by the liaison offices in India did

not, in any manner, whatsoever, contribute directly or indirectly to the

earning of profits or gains by the petitioner in UAE. As indicated above,

every aspect of the transaction was concluded in UAE. The commission for

the services of remittances offered by the petitioner was also earned in UAE.

The activity performed by the liaison offices in India was only supportive of

the transaction carried on in UAE. It did not contribute to the earning of

profits or gains by the petitioner in UAE. The reasoning of the Authority in

paragraph 11 of the impugned order does not commend to us.

13.2 This is made even more clear if a reference is made to explanation 2 to

Section 9(1). The said explanation reads as follows:-

"Explanation 2 - For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non- resident.

(a) has and habitually exercises in India, an authority to conclude contact on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non- resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident."

13.3 The explanation is a pointer to the fact that in order to have a business

connection, in respect of a business activity carried on by non-resident

through a person situated in India it should involve more than what are

supportive or subsidiary to the main function. Illustratively, clauses (a) to (c)

includes activities such as habitually concluded contracts on behalf of non-

resident, maintaining of all stocks and goods and merchandises from which

he regularly delivers goods or habitually secures orders in India mainly or

wholly for the non-resident.

13.4 Curiously, while the Authority has returned a finding of fact that none

of the activities mentioned in explanation (2) to Section 9(1)(1) is carried on

by the petitioner in India, it then went on to apply the ratio of the judgment of

the Supreme Court in the case of R.D.Aggarwal (supra) to hold that the

activity carried on by the liaison offices of the petitioner, in India, constituted

a „business connection‟ in India and hence, income shall be deemed to

accrue/arise in India, to the petitioner, situated in UAE, from business

connection in India. In our opinion, the Authority has clearly erred in

applying the ratio of the judgments of Supreme Court in the case of

R.D.Aggarwal (supra) and Anglo French Textile Co (supra) which was not

applicable in the present case.

14 In the circumstances, we quash the impugned order of the Authority.

In so far as the other prayers are concerned we refrain from examining the

matter, in respect of the same as in either situation it would be incumbent

upon respondent to consider withdrawal of the notices under Section 148 of

the Act if the only ground available for reopening the assessments of earlier

years was the impugned ruling rendered by the Authority. In the event the

respondent has additional grounds which are sustainable in law, it would be

open to the petitioner to resist the re-opening of assessment by taking

recourse to the remedies available under the Act.

15 The writ petition is disposed of in the aforesaid terms.

RAJIV SHAKDHER, J

BADAR DURREZ AHMED, J February 13, 2009 da