Facts of the Case

The present appeal formed part of a large batch of appeals filed by the Revenue against orders of the Income Tax Appellate Tribunal holding that Western Union Financial Services Inc., a non-resident company incorporated in the United States and engaged in money transfer services, did not have a Permanent Establishment in India for several assessment years including AYs 2001–02, 2002–03, 2003–04, 2004–05, 2006–07, 2007–08, 2008–09, 2011–12, 2013–14, and 2015–16.

Western Union operated a global money transfer system whereby remittances were initiated by customers outside India and paid to beneficiaries in India through independent Indian agents such as the Department of Posts, banks, NBFCs, and other entities. Contracts with remitters were concluded outside India and commission income accrued outside India.

Western Union had established a liaison office in India with the approval of the Reserve Bank of India. The liaison office was permitted only to carry out liaison, communication, training, promotional, and support activities and was expressly prohibited from undertaking any commercial or revenue-generating activity, concluding contracts, or earning income in India. All expenses of the liaison office were met through foreign remittances.

The Assessing Officer held that the liaison office, Indian agents, and installation of proprietary software at agent locations constituted a fixed place Permanent Establishment and a dependent agent Permanent Establishment in India. The Tribunal rejected these findings and ruled in favour of the assessee.

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 contended that the liaison office was actively involved in core business functions such as training agents, ensuring compliance, providing proprietary software, and facilitating transactions, thereby constituting a fixed place Permanent Establishment. It was further argued that installation of proprietary software at agent premises amounted to leasing of intangible property and that Indian agents effectively functioned as dependent agents of Western Union.

Respondent’s Arguments (Assessee)

The assessee submitted that the liaison office performed only preparatory and auxiliary activities strictly within the limits of RBI permission and had no authority to conclude contracts or earn income in India. It was contended that Indian agents were independent entities, remunerated at arm’s length, carried on substantial independent business, and had no authority to bind Western Union. The proprietary software merely facilitated communication and verification with servers located outside India.

Court Order / Findings

The Delhi High Court upheld the Tribunal’s findings and held that the liaison office activities clearly fell within the exclusion under Article 5(3)(e) of the India–USA DTAA, being preparatory and auxiliary in nature. The Court noted that RBI permissions strictly circumscribed the functions of the liaison office and prohibited any commercial or income-generating activity.

The Court further held that installation of proprietary software at agent locations did not result in a fixed place being at the disposal of Western Union in India. The software merely enabled communication with servers situated outside India and could not, by itself, constitute a Permanent Establishment.

The contention of dependent agent Permanent Establishment was also rejected. The Court held that Indian agents were independent entities, remunerated at arm’s length, and lacked authority to conclude contracts on behalf of Western Union.

The Court relied on 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 consistent with settled international tax jurisprudence.

Important Clarification

The Court clarified that activities which merely support or aid the main business, without themselves constituting core revenue-generating functions, are to be treated as preparatory or auxiliary under Article 5(3). Mere use of software or communication infrastructure does not satisfy the “fixed place at disposal” test required to establish a Permanent Establishment.

Final Outcome

The appeal filed by the Revenue was 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/1769841504_THECOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION3VsWESTERNUNIONFINANCIALSERVICESINC.pdf

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