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Informist, Thursday, Dec. 19, 2024

 

NEW DELHI – Rejecting a batch of petitions by the income tax department, the Delhi High Court has held that American multinational Western Union Financial Services Inc's liaison office did not constitute a permanent establishment in India and, therefore, it couldn't be taxed by the department.

 

"In our considered opinion, the Tribunal (Income Tax Appellate Tribunal) rightly came to the conclusion that the LO (liaison office) of the respondent-assessee did not constitute a PE (permanent establishment) in India, there was no DAPE (Dependent Agent Permanent Establishment) and that the software did not result in the creation of a permanent establishment," the court said. The liaison office did not meet the criteria established in Article 5 of the Double Taxation Avoidance Agreement between India and the US to constitute a fixed place of business, the court said.

 

"...the software utilised (by the liaison office) for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of permanent establishment," the court said. The argument that the premises of the Indian agents of Western Union constitute a permanent establishment was misconceived since these were independent third parties with their own business portfolio, the court added.

 

The high court was hearing appeals by the tax department against Western Union Financial for some assessment years between 2001-02 and 2015-16. Western Union Financial is engaged in the business of rendering money transfer services since 1980. For its business, Western Union Financial had entered into agreements appointing agents in India which included the Department of Posts, commercial banks, non-banking financial companies, and tour operators.

 

Western Union Financial had also established an office in India and posted a representative therein. This office was described to be the liaison office, manned by a manager and supporting staff, for the purpose of undertaking liaison activities such as to act as a communication channel between the head office and parties in India. The liaison office provided the latest Western Union Agent Management Software - VOYAGER – to the agents and trained the staff on the usage and versatility. The VOYAGER software enabled Indian agents to verify details and correlate data relevant to the remittance. 

 

In 2003, the income tax department issued a notice to Western Union Financial, calling upon it to file its income tax returns. The American company furnished a return of income by declaring it as nil. The assessing officer, however, assessed the total income to be INR 49 million, as a consequence of which it issued notices under Section 143(2) of the Income Tax Act, 1961, in 2004. 

 

The assessing officer said that the income of the American company had accrued and arisen in India and would consequently be exigible for tax. The officer further held that the assessee would be liable to tax under the provisions of the Double Taxation Avoidance Agreement. The counsel for the tax department said the installation of the software in the premises of Indian agents should be acknowledged as being sufficient to recognise a fixed place permanent establishment coming into existence. Further, the tax department's counsel said that the liaison office of the American company was a permanent establishment in India, due to its various roles. The case then moved to the Commissioner of Income Tax (Appeal) and Income Tax Appellate Tribunal, in which the latter ruled in favour of the American company. Challenging the appellate tribunal's order, the tax department moved the high court.  End

 

Reported by Surya Tripathi

Edited by Avishek Dutta

 

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