WP(C) 14869-04 Page 1 of 27 HIGH COURT OF DELHI : NEW DELHI + Judgment delivered on: 13.02.2009 % WP(C) No. 14869/2004 U.A.E.EXCHANGE CENTRE LTD. ..... Petitioner Through : Mr.H.P.Ranina and Mr.Vivek B.Saharya, Advocates versus U.O.I. & ANR. ..... Respondents Through : Mr.R.D.Jolly, Advocate CORAM : HON’BLE MR JUSTICE BADAR DURREZ AHMED HON’BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to Reporters or not ? Yes 3. Whether the judgment should be reported in the Digest ? Yes RAJIV SHAKDHER, J. 1. By this writ petition, the petitioner seeks to challenge the advance ruling of the Authority For Advance Rulings (Income Tax), New Delhi (hereinafter referred to as “the Authority”) dated 26.05.2004 passed in A.A.R.No.608/2003 pursuant to an application made by the petitioner under Section 245Q(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). 2. In the application filed under Section 245Q(1) of the Act by the petitioner before the Authority, it had sought an advance ruling by the Authority with respect to the following question : “Whether any income is accrued/deemed to be accrued in India from the activities carried out by the Company in India?” WP(C) 14869-04 Page 2 of 27 2.1 The aforesaid question was posed by the writ petitioner in the background of the following facts as stated in its application to the Authority. 2.2 The petitioner is a limited liability company incorporated in the United Arab Emirates („UAE‟), with its head office at Abu Dhabi. The petitioner is engaged, among others, in offering remittance services for transferring of monies from UAE to various places in India. In order to facilitate the said purpose, the petitioner had opened liaison offices in India on 01.01.1997 under a licence granted by the Reserve Bank of India („RBI‟) vide its communication dated 24.09.1996. As per the RBI communication dated 24.09.1996, the petitioner‟s liaison offices, in India, are permitted to undertake only the following activities:- (i) responding to enquiries from correspondent banks with respect to drafts issued; (ii) undertaking reconciliation of bank accounts held in India with correspondent banks under Drafts Drawing Arrangement; (iii) acting as a communication centre receiving computer advices of mail transfer from UAE and transmitting to the Indian correspondent banks; (iv) printing drafts and dispatching the same to the addressees and; (v) following up with the Indian correspondent banks. 2.3 By the very same communication, the RBI has specifically prohibited the petitioner‟s liaison offices, in India, from charging any commission or fee or from receiving or earning any remittances from any activity undertaken by WP(C) 14869-04 Page 3 of 27 them. Furthermore, the expenses of the liaison offices in India are required to be met exclusively out of the funds received from abroad through normal banking channels. 2.4 Pursuant to the aforesaid permission granted by the RBI, the petitioner set up its first liaison office in Cochin, in the State of Kerala, in January, 1997. At present, the petitioner has liaison offices in Cochin, Chennai, New Delhi, Mumbai and Jalandhar in India. 2.5 It is the stand of the petitioner both before the authority below, as well as, before this court, that, through its six liaison offices, in India, it provides certain „auxiliary‟ services to Non-Resident Indians („NRI‟) in UAE to remit funds either on their account or for the benefit of their relatives/dependents. For the said purpose, a contract between the NRI remitter and the petitioner is executed in UAE, whereupon the NRI hands over his or her funds for remittance to the petitioner at any of the centres/outlets/camps of the petitioner in UAE. Each such transaction is a separate contract between the NRI remitter and the petitioner; governed by the UAE laws. Upon funds being collected, the petitioner makes an electronic remittance of the funds on behalf of its NRI customers‟ in either of the two ways: (i) funds are remitted by telegraphic transfer through banking channels; or (ii) on the request of the NRI remitter, the petitioner sends instruments/cheques though its liaison offices to the beneficiaries in India designated by the NRI remitter. WP(C) 14869-04 Page 4 of 27 2.6 In the second option, the liaison offices in India download the particulars of remittances through the electronic media and then print cheques/drafts drawn on the banks in India, which, in turn, are couriered/despatched to the beneficiaries in India, in accordance, with the instructions of the NRI remitter. In order to facilitate downloading of the information with regard to remittances, the liaison office in India, are connected with the main server of the petitioner in UAE. This information, which is contained in the main server is accessed by the liaison offices in India for the purpose of remittances of funds to the beneficiaries in India by the NRI remitters. 2.7. However, the point to be noted, is that, in either situation, that is, whether the option exercised by the NRI remitter for remittance of the funds is through telegraphic transfer of funds to a bank in India or, through a liaison office in India; the petitioner collects a fixed charge of Dirhams 15 in UAE. There is no additional or extra charge payable by the customer to the petitioner if the customer choses the second option. 2.8 On the aforesaid basis, as averred in the writ petition, the petitioner, in compliance of provisions of Section 139 of the Act, has been filing its return of income since, the assessment year 1998-99 right through till assessment year 2003-04. In all these years, returns have been filed showing „Nil” income as according to the petitioner, no income accrued or deemed to have accrued in India both under the Act, as well as, the agreement entered into between the Government of Republic of India and the Government of UAE which is ubiquitously known as the Double Taxation Avoidance Agreement (in short „DTAA‟). The point to be noted at this stage is that the Government WP(C) 14869-04 Page 5 of 27 of India entered into a DTAA with the government of UAE in pursuance of its powers under Section 90 of the Act, for the purposes of avoidance of „Double Taxation and Prevention of Fiscal Evasion‟, with respect to, taxes and income on capital; which stood notified vide Notification No.G.S.R.No.710(E) dated 18.11.1993. 2.9 The 2nd respondent had accepted the returns for the aforesaid assessment years without demur. However, pursuant to impugned ruling of the Authority dated 26.05.2004, the 2nd respondent issued four notices of even date i.e., 19.07.2004 under Section 148 of the Act for assessment years 2000-01, 2001-02, 2002-03, 2003-04 respectively. The petitioner, being aggrieved by the action of the respondent in initiating proceedings under Section 148 of the Act on the purported ground that the respondent had reasons to believe that income for the assessment years mentioned in the aforesaid notices had escaped being taxed, preferred a writ petition before this court under Articles 226 and 227 of the Constitution of India. In the writ petition filed before us, the following reliefs have been claimed:- (i) Issue a Writ of Certiorari or any other Writ or Order quashing the Ruling of the AAR dated 26th May, 2004 passed at New Delhi; (ii) Issue a Writ of Certiorari or any other Writ or Order quashing the notice and assessment proceedings under Section 148 of the Income Tax Act, 1961, dated 19th July, 2004 for Assessment years 2000-01, 2001-02, 2002-03, 2003-04 and declare that the petitioner is not liable to tax in India; (iii) Issue a Writ, Order or Direction including Writ of Mandamus directing the respondents not to tax the petitioner in India because no income accrues or is deemed to accrue in India from its activities of liaison offices in India; (iv) Pending the disposal of this Writ petition, pass such ad- interim order as may be thought fit and proper directing Respondent No.2 not to initiate any assessment proceedings WP(C) 14869-04 Page 6 of 27 pursuant to the notices issued under Section 148 of the Income Tax, 1961 for the assessment years 2000-01 to 2003-04; (v) pass such other order as this Hon‟ble Court may deem fit in the facts and circumstances of the case. Submissions of petitioner‟s counsel 3 Learned counsel for the petitioner, Mr.H.P.Ranina has broadly made the following submissions:- (i) the petitioner does not carry on any business/trade in India. Its business is carried out in UAE. This was sought to be demonstrated by alluding to the following facts:- (a) after the contract for remittance of funds is executed in UAE, funds are handed over by the NRI remitter to the petitioner‟s collection centre/camp etc. located in UAE; (b) the commission, which is equivalent to Dirhams 15 is received in UAE; (c) the funds thereafter are remitted in accordance with the instructions of the customers either telegraphically through banking channels via banks nominated by the NRI remitter, or through cheques/drafts drawn on banks in India based on information downloaded by the petitioner‟s liaison offices in India by despatching the same through courier to the NRI remitter‟s beneficiaries in India. WP(C) 14869-04 Page 7 of 27 (ii) if the NRI remitter in UAE exercises the option of having funds transferred through the liaison office in India, no extra commission or fee is charged; (iii) the liaison office in India does not carry out any trading, commercial or industrial activity, in India. As a matter of fact, the RBI has specifically imposed a prohibition, while granting approval on opening liaison offices in India. (iv) based on the aforesaid facts, he submits, that the activity carried out in India cannot be construed as „business connection‟ within the meaning of Section 5(2)(b) or Section 9(1)(i) – so as to hold that income is deemed to accrue or arise in India 3.1 As a necessary adjunct to his submissions above, the learned counsel for the petitioner further contended that, even if it is assumed, that the income is deemed to arise or accrue to the petitioner under the provisions of Sections 5(2) and 9(1)(i) of the Act, the business profits of the petitioner would be liable to tax, only if, it has permanent establishment within the meaning of Article 7(3) read with Articles 5(1) and (3) of DTAA . 3.2 It is the submission of the learned counsel for the petitioner, that the Authority in holding that, the income earned in UAE by the petitioner by virtue of business activity carried out in U.A.E. has a real and intimate relationship with the business activity carried out in India, has misconstrued the ratio of the judgments of the Supreme Court in the case of CIT, Punjab vs. R.D.Aggarwal & Co;(1965) 56 ITR 20 and Anglo French Textile Co Ltd vs. CIT;(1953) 23 ITR 101. WP(C) 14869-04 Page 8 of 27 3.3 It is also the contention of the petitioner that the Authority having recorded findings of fact in paragraph 6 of the impugned ruling, to the effect: that the business of the Petitioner is carried on in UAE; a contract for remitting the amounts is entered into with NRIs and is executed outside India; the commission for remitting the amounts is also earned by the Petitioner outside India, therefore no income accrues/arises or is deemed to accrue or arise in India in view of the principle that the income accrues in the country, in which, the contract is executed- it could not have, in paragraphs 7 to 11, more particularly, in paragraph 11, of the impugned ruling held that the income shall be deemed to, accrue/arise in UAE from a business connection in India. 3.4 It may be noted here that, apart from the above submission in the writ petition, one of the grounds which has been taken to challenge the ruling of the Authority, is that, the Authority has rendered its ruling beyond the period of six months as prescribed under Section 245R(6) of the Act. It is averred that the petitioner had filed the application with the Authority on 10.01.2003; while the ruling was rendered by the Authority on 26.05.2004 well beyond the period prescribed under the said provision. It may, however, be noted that at the stage of arguments, this ground was not pressed before us. We have taken note that the petitioner has given up the said ground of challenge. Submission of the Respondent 4. As against this, the learned counsel for the respondent, Mr.R.D.Jolly, has raised a preliminary objection, which is that, in view of Section 245S, which provides, that the advance ruling pronounced by the Authority under the provisions of Section 245R shall be binding on the petitioner/applicant, WP(C) 14869-04 Page 9 of 27 the Commissioner and the Income Tax authorities subordinate to him in respect of the application and the transactions on which ruling has been sought – this Court ought not to exercise its extra ordinary jurisdiction under Article 226 of the Constitution of India as, there is no case made out by the petitioner that the Authority has acted either without jurisdiction or in breach of the principles of natural justice. 4.1 As regards merits, the learned counsel for the Revenue, has largely placed reliance on the ruling of the Authority, by reiterating, that the activity undertaken by the liaison offices had a „real and intimate‟ connection with business activity of the petitioner in UAE and hence, the business connection was established in terms of Section 9(1)(i) read with Section 5(2)(b) of the Act. He further contended that the liaison offices of the petitioner, in India, also represented the permanent establishment of the petitioner in India in terms of Articles 5(1) and 7 of the DTAA, and that, in respect of the second mode of remittance, whereby the liaison offices in India performed the function of downloading information in India, which was, stored in the main server in UAE for the purposes of printing cheques which were then, despatched/couriered to the NRI remitter‟s beneficiaries, in India, has a crucial link, which enabled fulfillment of obligation undertaken by the petitioner under the contract with the NRI remitter in UAE and hence, could not be termed as an activity of an „auxiliary‟ character, so as to, fall within the ambit of an exclusionary clause contained in Article 5(3) (e) of DTAA Our reasoning with respect to preliminary objection of the respondent 5. The provisions for advance ruling are contained in chapter XIX-B of the Act, which was introduced in the Act, by virtue of the Finance Act, 1993 WP(C) 14869-04 Page 10 of 27 with effect from 01.01.1993. The said chapter consists of Sections commencing from Section 245N to Section 245V. Section 245N deals with definitions of various terms used in the chapter which, in sum and substance, define as to who can approach the Authority and, the kind of transactions on which the Authority can render its advance ruling. Section 245-O deals with the constitution of the Authority. The said Section provides for a three member authority, with the Chairman being a retired Judge of the Supreme Court and the other two members from Indian Revenue Service and Indian Legal Service respectively. Section 245P provides that no proceedings before, or pronouncement of advance ruling by the authority shall be questioned or become invalid on the ground of any vacancy or defect in the constitution of the authority. Section 245Q provides for the procedure for filing of an application before the authority, in the manner prescribed, stating the question, on which the advance ruling is sought by the applicant. Section 245R, significantly, provides for the procedure which the authority is required to adopt in deciding the question posed before it by the applicant. Under sub-section (1) of Section 245R, on receipt of an application, the Authority is required to forward a copy of the same to the Commissioner and, if necessary, call upon him to furnish the relevant records. After examining the application and the records, the Authority is empowered to allow or reject the application. Under the first proviso, the authority‟s jurisdiction to allow the application is excluded, with respect to issues which are also pending before Income Tax Authority or the Appellate Tribunal or involves determination of fair market value of any property or relates to a transaction or an issue, which is designed prima facie to avoid income-tax except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of Section WP(C) 14869-04 Page 11 of 27 245N. The second proviso to Section 245R clearly mandates that the Authority shall not reject any application unless the applicant has been given an opportunity of being heard. Under the third proviso, the said section, specifically, provides that where the application is rejected, reasons for rejection shall be given in the order. Under sub-sections (4) and (5) of the said Section, the Authority is required to give its advance ruling after examining the material placed before it by the applicant or that obtained by the Authority and after providing an opportunity to the applicant of being heard in person or his duly authorised representative. Section 245S specifies that the advance ruling pronounced by the Authority under Section 245R shall be binding both, on the applicant, as well as the Commissioner and the Authority below, in respect of, the applicant and the transaction with regard to which a ruling has been sought. Section 245T provides that the authority may declare its ruling as void ab initio based on the representation by the Commissioner or otherwise that the same has been obtained by fraud or misrepresentation of facts. Significantly, under Section 245U, the authority has been conferred with all the powers of the Civil Court under the Civil Procedure Code, 1908 (CPC) as referred to in Section 131 of the Act, while exercising its power under this chapter. Sub-section 245U(2) provides that the Authority is deemed a Civil Court for the purposes of Section 195 of the Criminal Procedure Code, 1973 (Cr. P.C.) and every proceeding before the Authority shall be deemed to be a judicial proceedings within the meaning of Sections 193 and 228 and also, for the purpose of Section 196 of the Indian Penal Code (IPC). The last Section in the Chapter being Section 245V. Under this Section, the Authority has been conferred with the power to WP(C) 14869-04 Page 12 of 27 regulate its own procedure in all matters arising out of the exercise of its power under this Act. 6. At this point, it would be important to note that the powers given under Section 131 of the Act are the same powers which are vested in a Court under the CPC when trying a suit in respect of discovery, production of evidence, enforcing attendance of persons, issue of commission etc. A perusal of Section 245S of the Act shows that, while it is binding on the applicant, the transaction in relation to which the ruling is sought, the Commissioner and the Income Tax authorities subordinate to him, in respect of, the applicant and the transaction, it does not exclude the jurisdiction of the Courts either expressly or by implication. There is no provision which gives finality to the decision of the Authority. In our view, even though the provisions of Section 245S provide that the orders of the Authority would be binding, this, by itself, cannot exclude the jurisdiction of the Courts by implication or otherwise, as it does not provide for any adequate remedy to mitigate or deal with the grievance of the aggrieved party. Therefore, in our view the Courts would have jurisdiction to entertain actions under Article 226 of the Constitution impugning the ruling given by the Authority under Section 245R of the Act. [See : Dhulabhai vs. State of MP; AIR 1969 SC 78 at page 89 (para 32) and Gurbax Singh vs. Financial Commissioner and Anr; 1991 Supp (1) SCC 167 at pages 174-175 (para 19)]. The principles enunciated in the aforementioned judgments clearly point to the fact that Section 245S in Chapter XIX-B of the Act cannot be construed as an ouster clause, ousting the jurisdiction of the Courts. WP(C) 14869-04 Page 13 of 27 7. This brings us to a question as to whether the Authority is a Tribunal within the meaning of Article 227 of the Constitution. The broad test which has been laid down by the Courts are that an Authority shall be construed to be a Tribunal within the meaning of Article 227 of the Constitution of India if it is invested with the judicial power of the State, which is, that it should act judicially after ascertaining the facts placed before it and upon application of the relevant law applicable to the facts obtaining in a case. Broadly, the expression used in various judgments rendered by various Courts is that an Authority would be a Tribunal if it has the „trappings of a Court‟. What are the indices of the expression „trappings of a court‟ are best illustrated in the judgment of the Supreme Court in the case of Jaswant Sugar Mills Ltd, Meerut vs. Lakshmi Chand & Ors; AIR 1963 SC 677, Justice Shah (as he then was) at page 685 (paras 19 & 20) observed as follows:- “Their primary function is administrative and not judicial. In deciding whether an authority required to act judicially when dealing with matters affecting rights of citizens may be regarded as a tribunal, though not a court, the principle incident is the investiture of the "trappings of a court" - such as authority to determine matters in cases initiated by parties, sitting in public, power to compel attendance of witnesses and to examine them on oath, duty to follow fundamental rules of evidence (though not the strict rules of the Evidence Act), provision for imposing sanctions by way of imprisonment, fine, damages or mandatory or prohibitory orders to enforce obedience to their commands. The list is illustrative; some, though not necessarily all such trappings will ordinarily, make the authority which is under a duty to act judicially, a 'tribunal'. 20. Mahajan, J., in Bharat Bank Ltd. v. Employees of Bharat Bank Ltd. [(1950) S.C.R. 459] observed at p. 476 : "As pointed out in picturesque language by Lord Sankey L.C. in Shell Co. of Australia v. Federal Commissioner of Taxation [[1931] A.C. 275], there are tribunals with many of the "trappings of a Court" which, nevertheless, are not Courts in the strict sense of exercising judicial power. It seems to me that such WP(C) 14869-04 Page 14 of 27 tribunals though they are not full-fledged Courts, yet exercise quasi-judicial functions and are within the ambit of the word 'tribunal' in article 136 of the Constitution. It was pointed out in the above case that a tribunal is not necessarily a Court in this strict sense because it gives a final decision, nor because it hears witnesses on oath, nor because two or more contending parties appear before it between whom it has to decide, nor because it gives decisions which affect the rights of subjects, nor because there is an appeal to a Court, nor because it is a body to which a matter is referred by another body. The intention of the Constitution by the use of the word 'tribunal' in the article seems to have been to include within the scope of article 136 tribunals adorned with similar trappings as Court but strictly not coming within that definition." 8. Seen in the light of the principles enunciated above, it is clear that the Authority constituted under Chapter XIX-B of the Act is a Tribunal as it is invested with powers of a civil court by virtue of provisions of Section 131 of the Act; which includes all such powers a court is vested with under the CPC when trying a suit in respect of matters relating to discovery, inspection, enforcing attendance of persons including officials of banking company and examining such persons on oath, compelling production of books of accounts, summons of