The Delhi High Court has held that the liaison office of Western Union in India does not constitute Permanent Establishment (PE) as per India-US Double Taxation Avoidance Agreement (DTAA).
The bench of Justice Yashwant Varma and Justice Ravinder Dudeja while putting an end to 18 years old battle has observed that the software utilised for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE. The argument of the premises of the Indian agents constituting a PE is clearly misconceived since these were independent third parties having their own business portfolio. Their premises, in any case, would not satisfy the test of virtual projection.
The respondent-assessee, Western Union is stated to be a non-resident company registered in USA and has been engaged in the business of rendering Money Transfer Services since 1890. The essential business model adopted by it has been recorded by the Tribunal to be as follows.
A person residing in USA desirous of transferring money to an individual or an entity in India, approaches a branch or an outlet of the assessee and transfers the money in USDs, together with the charges prescribed by the respondent-assessee.
Upon receipt of that money, the Western Union generates a unique number which is referred to as the Money Transfer Control Number. It is this MTCN which is communicated by the remitter to the person or entity situate in India.
It has further come to be noted by the Tribunal that for the purposes of the aforesaid business, the Western Union had entered into agreements appointing agents in India and which included the Department of Posts, Commercial Banks, Non-Banking Financial Companies and Tour Operators.
In terms of the agency agreements which came to be executed between the Western Union and the Indian agents, the agreement was initially to run for a period of five years and was extendable thereafter. In the shape of remuneration, the Department of Posts was entitled to charge 30% of the remittance made and in the case of all others, the remuneration was fixed at 25%. The payment, which was in the nature of a commission, was described as the ‘base compensation’ in the agency agreements.
For the purposes of facilitating its business and undertaking promotional activities, theWestern Union is also stated to have applied to the Reserve Bank of India for grant of requisite permissions as contemplated under Section 29(1)(a) of the Foreign Exchange Regulation Act, 1973. Basis the permission granted, it also established an office in India and posted a representative therein. This office was described to be the Liaison Office (LO), manned by one manager and supporting staff.
For AY 2001-02, the Western Union is stated to have paid a total commission of INR 12,16,94,036/- to its agents situate in India being equivalent to USD 2,663,472/-. On 13 January 2003, the Income Tax Department is stated to have issued a notice to the Western Union calling upon it to file its Income Tax Returns.
The Western Union initially questioned the assumption of jurisdiction, as would be evident from its letter of 03 October 2003. However, notwithstanding that objection being raised, it ultimately furnished a return of income on 08 December 2003 declaring its income as ‘nil’.
The Assessing Officer, however, assessed the total income to be INR 4,90,22,316/-, as a consequence of which notices under Section 143(2) came to be issued on 04 March 2004. The AO, while framing the order of assessment essentially came to hold as under. It firstly opined that the income of the Western Union had accrued and arisen in India and would consequently be exigible to tax. The Western Union would be liable to tax under the provisions of the DTAA.
Tested on the anvil of the activities that occurred in India, the AO came to conclude that not only did the respondent have a fixed place of business and which constituted a ‘Fixed Place’ Permanent Establishment, the activities undertaken by the LO were sufficient to treat it as a Dependent Agent being present in India and thus the test of existence of a Dependent Agent Permanent Establishment were also met.
The respondent-assessee is stated to have moved the Commissioner of Income Tax (Appeal). The CIT(A) also concurred with the AO of the installation of the software ‘Voyager’ in the fixed premises of the agents as being one more element which would be liable to be viewed as being of significance for the purposes of acknowledging the existence of a Fixed Place PE.
When the matter travelled to the Tribunal, it held that the business connection test, as enumerated in Explanation 2 to Section 9(1) stood satisfied. However, it held against the appellants insofar as the question of Fixed Place PE was concerned. It further proceeded to hold that the LO would not satisfy the tests enumerated in Article 5 of the DTAA and the activities undertaken by it would be liable to be viewed as being merely ‘preparatory’ or ‘auxiliary’ in character.
The department challenged the decision of the tribunal and held that bearing in mind the nature of activities which the LO had undertaken and which extended to training of agents in India as well as interacting with local agents, conducting refresher courses in accounting, reconciliation, aiding them in successfully transitioning Y2K and the provision of the ‘Voyager’ software, when cumulatively considered, would lead one to the irresistible conclusion that a Fixed Place PE came into existence.
The department contended that it would be wholly incorrect to view the activities undertaken and functions discharged by the LO as being preparatory or auxiliary. It was submitted by learned counsel that the LO was engaged in the core activities of the respondent and would thus be liable to be viewed as a projection of the foreign enterprise itself.
The court noted that the LO was discharging functions and duties indelibly connected with the principal business of Columbia Sportswear.
The court held that the LO did not meet the criteria established in sub-paras 1 and 2 of Article 5, so as to constitute a ‘fixed place’ of business or meet the tests of virtual projection, a takeover of the premises as well as the precepts of control and disposal in order to be a Fixed Place PE. The activities undertaken by the LO even otherwise were clearly auxiliary in character and would thus clearly fall within Article 5(3)(e) of the DTAA. The LO also did not meet the requirements of a DAPE as per of clauses (a), (b) and (c) of para 4 of Article 5.
The court upheld the order of the Tribunal by which it was held that the LO of the respondent-assessee did not constitute a PE in India, there was no DAPE and that the software did not result in the creation of a permanent establishment.
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Case Details
Case Title: Director Of Income Tax Intn’l Versus Western Union Financial Services
Case No.: ITA 1288/2006
Date: 18 December 2024
Counsel For Petitioner: Aseem Chawla
Counsel For Respondent: Ajay Vohra
