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Indian Tax Court Rules that
Western Union Did Not Have a Taxable
Permanent Establishment in India under USA-India Double Taxation Treaty
International Tax Review
http://www.internationaltaxreview.com , October, 2007
The Delhi Bench of the Income
Tax Appellate Tribunal (ITAT) in the case of Western Union Financial
Services Inc. vs. ADIT [2007] 291 ITR (AT) 176 examined the taxability of a
foreign company carrying out money transmission services. The taxpayer, a
tax resident of US, was a company incorporated in the US and was engaged in
the business of rendering money transfer services across international
borders. For its activities in India, the taxpayer appointed agents in India
who were compensated by way of commission.
The taxpayer also had a
liaison office in India which acted as a communication link between the
taxpayer and the agents. The issue before the ITAT was the taxability of the
taxpayer in India. India has entered into a double taxation avoidance
agreement with the US (treaty) and therefore the taxability of the taxpayer
had to be determined in accordance with the provisions of the domestic tax
laws in India or the treaty, whichever is more favourable, shall be
applicable.
In order to create a permanent
establishment within the meaning of article 5(1) of the USA-India double
taxation treaty (basic rule), there should be a fixed place of business and
the business of the foreign enterprise should be carried on through that
fixed place. The ITAT held that the taxpayer did not have the right to enter
and make use of the premises of its agents for carrying out its business and
therefore it did not create a permanent establishment under article 5(1).
In relation to the activities of the liaison office, the ITAT held that such
activities were preparatory and auxiliary in nature and would be covered
within the exclusions provided under article 5(3) of the treaty and
therefore would not create a permanent establishment .
In order to create a permanent
establishment under article 5(4) of the USA-India double taxation treaty
(agency rule), there must be a dependent agent who is either legally or
economically dependent and such agent carries out certain specified
activities on behalf of the foreign enterprise. The ITAT observed that the
agents were acting in the ordinary course of their business. Also the agents
did not have authority to conclude any contracts and neither did they
habitually exercise such authority on behalf of the taxpayer. The ITAT
concluded by holding that there was no permanent establishment of the
taxpayer under article 5(4) of the treaty.
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