SC: Liaison offices of foreign exchange company not taxable in India—activities held preparatory or auxiliary under India–UAE DTAA

Case Name: Union of India & Anr. v. U.A.E. Exchange Centre

Citation: Civil Appeal No. 9775 of 2011

Date of Judgment: 24 April 2020

Bench: Justice A.M. Khanwilkar and Justice Ajay Rastogi

Held: The Supreme Court held that the liaison offices of U.A.E. Exchange Centre operating in India were not liable to income tax since their activities were of a “preparatory or auxiliary character” within the meaning of Article 5(3)(e) of the India–UAE Double Taxation Avoidance Agreement (DTAA). The Court ruled that although the offices constituted a “fixed place of business,” they did not amount to a “permanent establishment” (PE) under the DTAA because they were restricted to liaison functions such as downloading remittance details, printing and dispatching drafts, and reconciling bank accounts all strictly within the Reserve Bank of India’s permission under the Foreign Exchange Regulation Act, 1973. No income accrued or arose in India, and the deeming provisions of the Income Tax Act could not override the DTAA.

Summary: The respondent, incorporated in the UAE, provided remittance services for NRIs sending money to India. It established liaison offices in Cochin and other cities under RBI approval to perform limited functions without engaging in trading or commercial activity. The Authority for Advance Rulings (AAR) had ruled that these offices constituted a PE and that income was taxable in India. The Delhi High Court reversed, holding that the liaison offices’ work was purely auxiliary and not part of income-generating operations. Affirming the High Court, the Supreme Court applied Articles 5 and 7 of the DTAA, noting that the main contract and fee collection occurred entirely in the UAE. The liaison offices’ activities printing drafts and dispatching them to Indian beneficiaries were merely supportive of remittance services already completed abroad. The RBI’s permission terms further prohibited any revenue-earning activity within India.

Decision: Appeal dismissed. The Supreme Court upheld the Delhi High Court’s ruling, confirming that the liaison offices did not constitute a “permanent establishment” in India under Article 5(3)(e) of the DTAA. Accordingly, no income accrued or arose in India, and no tax could be levied on the respondent. No order as to costs.