DIT (International Taxation) v. Western Union Financial Services Inc.

Case snapshot

Sections / provisions: India-USA DTAA Article 5; Permanent Establishment

Questions before the Court / Tribunal

• Liaison office, DAPE and software as permanent establishment: The reported Delhi High Court judgment holds that the liaison office did not satisfy the fixed-place PE tests, the Indian agents did not create a dependent-agent PE, and connecting software did not itself create a PE. Primary text should be used for the treaty analysis and factual functions of the liaison office.

Material facts and background

―23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5(4), there is no PE in India. It is to be noted that Article 5(4) has three clauses, namely, a, b & c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub-Article (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL. This fact is evident from the letter of Mr. L.M. Morgan to Mr. Prateek Dabral and Ms. Usha. In the said letter, it is made clear that even request for quotation/extension could not be communicated directly to the appellant but are to be routed through the office of RRIL. This is...

Digitally Signed By:KAMLESH KUMAR Signing Date:18.12.2024 17:35:40

(e) RRIL and its employees are soliciting and receiving orders wholly and exclusively on behalf of the Rolls Royce Group. (f) Employees of Rolls Royce Group are also present in various locations in India and they report to the Director of RRIL in India. (g) The personnel functioning from the premises of RRIL are in fact employees of Rolls Royce Pic. This has been admitted by the MD Mr. Tim Jones, GM, and can be discerned from statement of Mr. Ajit Thosar and documents like terms of employment of GMS. Thus, the appellant can be said to have a PE in India within the meaning of Article 5(1), 5(2) and 5(4) of the Indo UK DTAA. Since we have found that the appellant has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India.‖ 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were...

Jebon Corporation v. Commissioner of Income-tax and

another29, a judgment rendered by the Karnataka High Court was again concerned with a LO of a South Korean enterprise which had come to be established at Bangalore. On facts, that High Court in Jebon Corporation had found as follows:―19. It is on the basis of the aforesaid material, the Tribunal held that the activities carried on by the liaison office are not confined only to the liaison work. They are actually carrying on the commercial activities of procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price, thereafter, requesting them to place a purchase order and then the said purchase order is forwarded to the head office and then the material is dispatched to the customers and they follow up regarding the payments from the customers and also offer after-sales support. Therefore, it is clear that merely because the buyers place orders directly with the head office and make payment directly to the head 29

Appellant / assessee submissions

two asterisks has been emphasised in original.] include [Ed.: The matter between two asterisks has been emphasised in original.] a fixed place of business through which the business of MNE is wholly or partly carried on. This is where the difference lies between the definition of the word PE in the inclusive sense under the IT Act as against the definition of the word PE in the exhaustive sense under DTAA. This analysis is important because it indicates the intention of Parliament in adopting an inclusive definition of PE so as to cover service PE, agency PE, software PE, construction PE, etc. 14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5(3). Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under Article 5(2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present...

Revenue / respondent submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Court / Tribunal analysis and reasoning

foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents are brought within any of the sub-clauses of Article 5. 17. Since the Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a ―fixed place of business‖ is no longer res integra. In Formula One, this Court, after setting out Article 5 of the DTAA, held as follows: (SCC pp. 625-29, paras 3339) ―33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be “at the disposal” of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated...

37. We would also like to extract below the definition to the expression “place” by Vogel, which is as under: ‗A place is a certain amount of space within the soil or on the soil. This understanding of place as a threedimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term ―establishment‖. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term ―fixed‖ rather than the term ―place‖, given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term ―establishment‖ makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term ―installation‖ instead of ―place‖.‘ The term “place” is used to define the term “establishment”. Therefore, “place” includes all tangible assets used for carrying on the business, but one such...

website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE. Neither does the mere incorporation of a company in a contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its bye-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only [Article 4(3) OECD and UN MC]. In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxed only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the place of work. If the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals will be sufficient if it were available. Article 5(5) OECD MC and Article 5(5)(a) UN MC...

therefore not necessary that the taxpayer is able to exclude others from entering or using the POB. The painter example in the OECD MC Comm. (No. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what is required for the specific type of activity which is determined by the concrete business. By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer's regular office hours and was not entitled to carry on businesses of his own on the premises. Similarly, a Special Bench of Delhi's Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson's employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did...

Operative decision and relief

unable to sustain the arguments of the appellants and who had commended us to upset the conclusions rendered by the Tribunal. In our considered opinion, the Tribunal rightly came to the conclusion 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. 71.

against the Revenue. The instant batch of appeals shall consequently stand dismissed. YASHWANT VARMA, J.

Authorities and precedents appearing in the judgment

• JSC. versus WESTERN UNION FINANCIAL SERVICES
• JSC. versus WESTERN UNION FINANCIAL SERVICES .....Respondent
• Adv. versus WESTERN UNION FINANCIAL
• Page 2 of 72 versus WESTERN UNION FINANCIAL
• JSC. versus WESTERN UNION FINANCIAL
• Centre Ltd. v. Union of India and Another18 and which decision was
• Supreme Court in Union of India and Another v. U.A.E. Exchange Centre19
• Supreme Court in Formula One World Championship Limited v. Commissioner of Income Tax
• Court in Director of Income Tax v. E-Funds IT
• New Delhi v. E-Funds IT Solution Inc.22 and where the law was explained in the
• Taxation) v. Morgan Stanley and Co. Inc
• Court in CIT v. Morgan Stanley & Co. Inc

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Liaison office, DAPE and software as permanent establishment. The operative result is classified as Operative order controls. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Liaison office, DAPE and software as permanent establishment. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Map domestic-law provisions against the applicable treaty article separately; PE, FTS/royalty and withholding conclusions depend on functions, control, contract terms and treaty language.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

Read / download the authenticated official judgment PDF

Related Finin2min guidance