Delhi High Court rules in favour of Western Union in income tax dispute

The Delhi High Court has ruled that Western Union Financial Services Inc. does not have a Permanent Establishment (PE) in India and therefore cannot be taxed under the Income Tax Act, 1961 for transactions between 2001 and 2016, under the India-US Double Taxation Avoidance Agreement (DTAA), with respect to its earnings outside India [Director of Income Tax (International) Vs Western Union Financial Services Inc]..A Bench of Justices Yashwant Varma and Ravinder Dudeja delivered the judgment on December 18, dismissing the income tax authority's appeals against a Income Tax Appellate Tribunal's (ITAT) ruling in favour of Western Union. “The Tribunal rightly came to the conclusion that the LO (Liaison officer) of the respondent-assessee (Western Union) did not constitute a PE in India, there was no DAPE (Dependent Agent Permanent Establishment) and that the software did not result in the creation of a permanent establishment (to attract any income tax liability)," the Court said..Significantly, the Bench has ruled that mere provision of software by a foreign company to agents in India does not constitute a PE to attract tax liability.“The software utilised for the purpose of connecting the Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE. The argument of the premises of the Indian agents constituting a PE is clearly misconceived since these were independent third parties having their own business portfolio. Their premises, in any case, would not satisfy the test of virtual projection,” the judgment said. .Under the Income Tax Act, 1961, a foreign entity becomes taxable in India if it has a PE in the country, which refers to a fixed place of business (such as a branch, office, or dependent agent) through which its business is wholly or partly conducted in India. If a Double Taxation Avoidance Agreement (DTAA) exists, its provisions prevail, and only the income attributable to the PE is taxed, with preparatory or auxiliary activities often excluded. .The ITAT had earlier ruled that Western Union's activities in India, including the provision of software to its agents, did not meet the threshold for establishing a PE. The tribunal held that the income earned by Western Union from customers outside India was not liable to by taxed under Indian law. The income tax authority challenged this ruling before the High Court. Its appeals covered several assessment years from 2001-02 to 2015-16, with the primary legal question being whether income generated from international money transfers could be taxed in India..Western Union, a non-resident company registered in the United States, has been providing money transfer services since 1890. The company's operational model involves customers in the US transferring money to individuals or entities in India through various agents, including banks and financial institutions. The remittance process is facilitated via a unique Money Transfer Control Number (MTCN), which is essential for tracking transactions.The Income Tax Department contended that Western Union's activities in India constituted a PE since it had a liaison office and agency agreements with local entities. The income tax authority argued that these arrangements allowed Western Union to earn income from Indian customers, thus making it liable to taxation in India. Furthermore, it was contended that since Western Union’s agents in India were operating its software, it amounts to the establishment of a PE.Conversely, Western Union maintained that their operations were strictly limited to liaison activities as approved by the Reserve Bank of India (RBI). The liaison office was established solely for communication purposes and did not engage in any commercial activities within India. Furthermore, Western Union provided evidence showing compliance with RBI regulations, which explicitly prohibited their liaison office from conducting any trading or commercial functions..The High Court noted that while Western Union had established a liaison office in India, this office was not authorised to engage in any business activities or generate income directly. The Court emphasized that the liaison office's role was confined to facilitating communication between agents and the head office in the US.The Court also considered the nature of the software provided by Western Union to its Indian agents. It held that the software was merely a tool to facilitate communication and data transfer, and that its provision did not mean that Western Union had a fixed place of business or a PE in India. The Court further clarified that the training and support provided by Western Union to its agents were auxiliary activities and did not amount to carrying on the core business of the company in India."The software was the property of the respondent-assessee (Western Union) and mere use thereof would not lead to a PE coming into existence,” the Court held.On the aspect of the Liaison Office being considered a PE, the Court held:“On an overall conspectus of the various decisions handed down by this Court as well as the Supreme Court insofar as Fixed Place PE and DAPE are concerned as well as the language of Article 5, we have no hesitation in holding that the LO failed to meet the threshold requirements so as to constitute a PE.”.The Income Tax Department was represented by advocates Aseem Chawla, Ruchir Bhatia, Anant Mann and Pratishtha.Western Union was represented by Senior Advocate Ajay Vohra with advocates Gaurav Jain Shubham Gupta and Shalini..[Read Judgment]