Delhi High Court rules Liaison Office of a non-resident does not constitute PE in India

In the case of Western Union Financial Services Inc ^[1] (Taxpayer), the Taxpayer was a US-registered entity engaged in the business of rendering money transfer services. Any person interested in transferring funds to India would deposit the required sum at a branch or outlet of the Taxpayer outside India and the branch in turn would provide an identification number referred to as Money Transfer Control Number (MTCN) which would then be communicated to the recipient in India. The recipient then approaches the agent or representative of the Taxpayer in India and provides the MTCN details and upon successful identity verification, the amount is paid to the recipient in India. 

In order to carry on the money transfer business, the Taxpayer entered into agreements with agents in India, including the Department of Post, commercial banks, non-banking financial companies and tour operators. The Taxpayer also installed a software at the agent’s premises which enabled the agent to verify the MTCN. Further, the Taxpayer also established a Liaison Office (LO) in India to facilitate its business, to act as a communication channel between the Taxpayer and parties in India and to undertake promotional activities in India. 

The tax authority contended that the software at the agents’ premises indicated that the agents’ premises constituted a fixed place permanent establishment (PE). It was further contended that the activities of agent in India constituted a business connection for the Taxpayer in India and that the activities of the LO were not limited to acting merely as a communication channel but one which involved active involvement in the business of the Taxpayer in India, thus constituting a fixed place PE of the Taxpayer in India.

On appeal, the first appellate authority concurred with the view of tax authority that the Taxpayer had a fixed place PE in India. Aggrieved, the Taxpayer appealed before Delhi Bench of Income Tax Appellate Tribunal.

The Delhi Tribunal held that while the Taxpayer had a business connection in India however, the activities of the LO were merely preparatory and auxiliary in nature and hence would not result in creation of a fixed place PE for the Taxpayer in India. The Tribunal further held that LO did not result in a dependent agent PE (DAPE) in India. The Tribunal also held that the software installed at the premises of the agents merely granted the agents an access to the mainframe computer and server of the Taxpayer situated outside India and mere use of such software by agents would not lead to creation of a fixed place PE in India. 

Aggrieved, the tax authority appealed before the Delhi High Court which concluded that the Taxpayer did not have a PE in India by making the following observations:

• The license granted to the LO by Reserve Bank of India (RBI) prohibited LO from entering into any commercial activity or for negotiating any related contract. The business of the Taxpayer pertaining to transfer of funds was consummated outside India and all the essential functions required for completion of such transaction were carried on by the agents and not the LO in India. Thus, the LO failed to meet the tests of “virtual projection” of the Taxpayer in India.
• In fact, the activities of the LO were limited to liaising with governmental authorities, training of personnel and undertaking various other peripheral functions in aid of the business of the Taxpayer in India. Thus, the activities of the LO qualified as preparatory or auxiliary in nature and, hence, the LO did not constitute a fixed place PE for the Taxpayer in India. 
• Further, nothing was brought on record to establish that the LO exercised an authority to conclude contracts or secure orders for the Taxpayer and, hence, the LO did not constitute a DAPE for the Taxpayer in India in terms of Article 5(4) of the India-US Double Taxation Avoidance Agreement (DTAA).
• Articles 5(1) and 5(2) nowhere contemplate an intangible property as constituting a fixed PE. Various commentaries support that while a software may itself not constitute tangible property and consequently it cannot constitute a ‘fixed place of business’, the place where the server is stored may meet the threshold of a fixed place PE provided it satisfies the “disposal test” and the activities carried on therein do not qualify as preparatory and auxiliary in nature.
• The software installed at the agent’s premises only constituted a medium of communication between agents and the Taxpayer. There was no installation of hardware in the premises of those agents, or for that matter, a placement of their premises or a part thereof at the disposal of Taxpayer. Hence, the deployment of the software lacked the physical attributes which is integral to creation of a fixed place PE.
• Furthermore, the Indian agents were independent third parties carrying on their own business and the thus the premises from where the agents carried on their own business would, in no way, constitute a virtual projection/fixed place PE of the Taxpayer in India. 

^[1][TS-920-HC-2024(DEL)]