Facts of the Case

The batch of appeals was filed by the Revenue against a series of orders passed by the Income Tax Appellate Tribunal holding that Western Union Financial Services Inc., a non-resident company incorporated in the United States and engaged in the business of money transfer services, did not have a Permanent Establishment in India for various assessment years ranging from AY 2001–02 to AY 2015–16.

Western Union’s business model involved remittances initiated by customers outside India and paid to beneficiaries in India through independent Indian agents such as banks, NBFCs, the Department of Posts, and tour operators. The respondent also operated a liaison office in India with approval of the Reserve Bank of India, which was permitted to undertake only liaison and communication activities and was expressly prohibited from carrying out any commercial or revenue-generating functions.

The Assessing Officer held that the liaison office, the Indian agents, and installation of proprietary software constituted a fixed place Permanent Establishment and a dependent agent Permanent Establishment in India. The Tribunal rejected this view and ruled in favour of the assessee, leading to the present appeals.

Issues Involved

Whether the liaison office and Indian agents of Western Union constituted a fixed place or dependent agent Permanent Establishment in India under Article 5 of the India–USA Double Taxation Avoidance Agreement, and whether income from money transfer services initiated outside India was taxable in India.

Petitioner’s Arguments (Revenue)

The Revenue argued that the liaison office was actively involved in core business activities including training agents, providing proprietary software, and ensuring operational compliance, thereby constituting a fixed place Permanent Establishment. It was further contended that Indian agents functioned as dependent agents and that installation of software at agent locations amounted to leasing of intangible property, giving rise to a Permanent Establishment.

Respondent’s Arguments (Assessee)

The assessee submitted that all contracts for money transfer services were concluded outside India and that the liaison office carried out only preparatory and auxiliary activities strictly within the scope of RBI permissions. It was argued that Indian agents were independent entities remunerated at arm’s length, had no authority to conclude contracts on behalf of Western Union, and that use of software merely facilitated communication with servers located outside India.

Court Order / Findings

The Delhi High Court upheld the findings of the Tribunal and held that the liaison office activities were clearly preparatory and auxiliary in nature and therefore squarely covered by the exclusion under Article 5(3) of the India–USA DTAA. The Court noted that RBI permissions expressly prohibited the liaison office from undertaking commercial or revenue-generating activities and that all expenses were met through foreign remittances.

The Court further held that installation of proprietary software at agent locations merely enabled verification and communication with servers located outside India and did not result in any fixed place being at the disposal of the assessee in India. The contention of a dependent agent Permanent Establishment was also rejected, as the Indian agents were independent entities, remunerated at arm’s length, and lacked authority to conclude contracts.

The Court relied upon binding precedents including UAE Exchange Centre, Morgan Stanley, E-Funds IT Solution, and Formula One World Championship, and held that the Tribunal’s conclusions were fully aligned with settled legal principles.

Important Clarification

The Court clarified that preparatory or auxiliary activities carried out by a liaison office within the strict confines of RBI permission cannot be regarded as core business activities giving rise to a Permanent Establishment. Mere use of software or infrastructure that facilitates communication or verification does not satisfy the “fixed place at disposal” test under Article 5 of the DTAA.

Final Outcome

All appeals filed by the Revenue were dismissed. The Delhi High Court held that Western Union Financial Services Inc. did not have a Permanent Establishment in India for the relevant assessment years and that income earned from money transfer services initiated outside India was not taxable in India.

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769840860_DIRECTOROFINCOMETAXINTNLVsWESTERNUNIONFINANCIALSERVIC.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.