The main question that arose in the appeal was whether it is liable to pay income-tax in India on the footing that a part of its activities are carried out in India.  Several incidental questions also arose, such as whether it has a business connection in India as understood by the Income Tax Act, 1961, whether it has a permanent establishment (PE) in India as understood by the DTAA between India and USA, and whether if it is found to have a PE in India then whether any profits can be attributed to the PE and further if so, what would be the percentage of such profits.

T H E   F A C T S :

The assessee , a non-resident company registered in USA, was engaged in the business of rendering money transfer services since 1890.  The business includes transfer of monies across international borders.  A person who is in USA, if he wants money to be transferred to his relative in India, first approaches the assessees outlet in USA.  He remits the money in dollars together with the charges.  He is given a receipt by the assessee along with a computer generated unique number which is referred to as MTCN (Money Transfer Control Number).  The remitter sends the number to his relative in India who takes it to the assessee representative/agent in India.  The MTCN is fed into the computer with the help of a software and the mainframe computer of the assessee in the USA is accessed by the agent.  He matches number, which means that the transaction has to be honoured.  He then satisfies himself about the identity of the recipient/claimant of the money from his passport, election identity card and so on.  Once he is satisfied, the money is paid to the claimant in India.  For his service the agent is remunerated by the assessee by way of a commission at an agreed percentage.  This in very brief is the transaction.

For the purpose of carrying out its business in India, the assessee has entered into agreements appointing agents in India.  There are four types of agents the Department of Posts, commercial banks, non-banking financial companies and tour operators.  Generally the appointment of the agents is for a period of 5 years in the beginning and can be extended any number of times for periods of one year at a time.  The agents are remunerated at 30% in the case of the Department of Posts and 25% in the case of others, of the money handed over by the agent in India.  The percentage may be reduced if the assessee assumes responsibility for advertising and promotion of the services in India or establishes a customer service center to handle telephonic queries.  One other feature of the agreement is that the money is to be first paid out by the agent in India and thereafter he will be reimbursed the same together with the commission due to him.  The commission is called the base compensation in the agreement.  The agreements, specimen copies of which have been filed in the paper book, are elaborate and provide for various contingencies.  One more noticeable feature of the agreement is that the agent has been given the power to appoint sub-agents/representatives.  However, it is the responsibility of the agents to pay the sub-agents.  The assessee can ask the agent to terminate the services of a sub-agent if it is found that the sub-agent is acting in a manner prejudicial to the interests of the assessee.  There are the usual clauses providing for security and confidentiality and reserving the intellectual property rights of both the parties in the trade names, trademarks, copyrights etc. belonging to them.  There is a clause which enjoins the agent to maintain records of all the transactions of money transfer routed through him.

T H E  R U L I N G :

• Business Connection-expression means something more than a business, that it presupposes an element of continuity between the business of the non-resident and activity in the taxable territory though a stray or isolated transaction would not be taken in, that the connection may take several forms, that it may include carrying on a part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business.  We are of the view that applying these tests to the present case, particularly the test underlined by us, it must be held that there is a business connection.

The assessee admittedly does not have an outlet of its own in India.  That way, there is no fixed place of business in India.  A PE should project the foreign enterprise in India.  The assessee before us has appointed different agents in India.  These agents are the Department of Posts of the Government of India, commercial banks, non-banking financial companies and tour operators.  These agents have their own or hired premises from which they operate.  All that they have to show that they are agents of the assessee is a display board which shows that they are the agents of the assessee.  This cannot be any stretch of imagination amount to projection of the assessee in India.  It cannot be postulated that the post offices of the Department of Posts which functions under the concerned ministry of the Government of India would permit themselves to be looked upon as projection the presence of Western Union Financial Services Inc., in India! The same would be the case of commercial banks such as the Karnataka Bank Ltd., Bank of Punjab Ltd., etc. and others which have been appointed agents.  They have their own presence and business with which they are perhaps more concerned and may be surprised to find themselves characterized as projecting the assessee in India soil.  There is no evidence to show that the assessee can, as a matter of right, enter and make use of the premises of these agents for its business.  We therefore hold that there is no fixed place PE of the assessee in India within the meaning of Art.5.1 of the DTAA.

• The LO cannot be considered to be the fixed place PE of the assessee as it carried out activities which are of a preparatory or auxiliary character.  It has not carried on any trading activity for the assessee in India.  It has only a small number of executives and a support staff.  The LO has also filed status reports to the RBI listing out the activities which it actually carried on during the years.  None of the activities can be described as anything other than of preparatory or auxiliary character.  In  the AAR noticed that the applicant, which was engaged in money transfer business, had adopted the mode of remitting money to India through the liaison offices in India.  The LOs downloaded the data about the beneficiaries in India, printed cheques/drafts and dispatched them to the beneficiaries.  On these facts, it was held that the Los constituted PE in India.  The test laid down by the AAR was that role of the LO should be nothing short of performing the contract of remitting the amounts at least in part, before it could be called a PE of the foreign enterprise.  The performance of the contract of remitting the amounts, at least in part, was held to constitute an essential activity in the performance of the contractual obligation, and such activity was held not to constitute an auxiliary activity.  In the present case, the LO performs no part of the contract of remitting the money into India.  Further, as we have already noticed from the nature of the activities carried on by the LO, its activities can properly be called auxiliary or preparatory in nature.  We therefore hold that the LO cannot be considered to the PE of the assessee in India.

• Mere use of the software for the purpose from the premises of the agents cannot lead to the decision that the premises-cum-software will be the PE of the assessee in India 

  There can be no PE account of the use of the credit cards.

  The agents are acting in the ordinary course of their business; their activities are not devoted wholly or almost wholly to the foreign enterprise and the transactions are under arms length.  Therefore the agents are independent agents under Art.5.5 of the treaty.  

  There is no agency PE of the assessee in India.  In the absence of any PE in India, it follows that the profits, if any, attributable to the Indian operations cannot be assessed as business profits under Art.7 of the treaty.

  There is business connection and hence the assessee is liable to tax under sec.9(1) of the Income Tax Act; (b) but since there is no PE in India under Art.5 of the DTAA between India and the USA, no profits can be attributed to the Indian operations of the assessee and taxed in India.