Delhi High Court rejects tax defense against Western Union, relies on India-US tax treaty

Citing the provisions of the Indo-US Double Taxation Avoidance Agreement (DTAA), the Delhi High Court dismissed the Income Tax Department’s plea against US multinational Western Union Financial Services.

On December 18, the court ruled that Western Union does not have a so-called permanent establishment (PE) in India and therefore cannot tax transactions between 2001 and 2016 under the Income Tax Act, 1961.

A high court judge has ruled that mere supply of software by a foreign company to its Indian agents does not constitute a permanent establishment to attract tax liability.

“The software used to connect the Indian agents to the host machine, being intangible property, has always been excluded from the threshold of PE. The premise argument that the Indian agents constitute a permanent establishment is patently false as these agents are independent third parties, own business portfolio. In any event, their premises failed to meet the test of virtual projection,” the judgment said.

Under the Income Tax Act, 1961, a foreign entity is taxable in India if it has a permanent establishment, which is a fixed place of business such as a branch, office or affiliated agent carrying on business wholly or partly in India. India.

Article 5 of the India-U.S. tax treaty stipulates that a foreign enterprise only conducts business through an independent agent such as a broker or commission agent. As long as the agent conducts business in a normal manner, it cannot establish a permanent establishment in the other country.

However, if the agent works exclusively or almost exclusively for the business and the transactions are not at arm’s length, the business may be deemed to have a permanent establishment.

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Court Overly Supports Western Union

The India-US DTAA was signed on September 12, 1989 and came into effect on December 18, 1990, to prevent double taxation and allocate taxing rights between the two countries.

India’s tax department has challenged the Income Tax Appellate Tribunal’s decision to dismiss its claim against Western Union.

The tribunal issued several orders for different assessment years and always found in favor of Western Union. The impugned order, passed on July 20, 2009, raised the legal question: “Whether income earned from customers outside India is liable to tax in India under the DTAA with the United States?”

The tribunal held that the US company’s provision of software to agents did not meet the criteria of a permanent establishment and that its income from customers outside India was not taxable under Indian law.

Western Union is a non-resident company registered in the United States and has been providing money transfer services since 1890. The company’s operating model allows U.S. customers to transfer funds to recipients in India through agents, including banks and financial institutions.

India’s income tax department argued that Western Union’s activities in the country, including setting up liaison offices and agency agreements with local entities, constituted a permanent establishment.

It maintains that the Indian agent’s use of Western Union software showed it had a fixed place of business and therefore the company was subject to tax.

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For communication purposes only

Western Union argued that its liaison office in India was approved by the Reserve Bank of India (RBI) and was used for communication purposes only and did not engage in any commercial activities.

The company provided evidence of compliance with Reserve Bank of India regulations, which specifically prohibit such offices from carrying out trading or commercial functions.

The Delhi High Court dismissed the Income Tax department’s complaint saying the liaison office had no authority to conduct business or generate revenue.

It clarified that the software provided to agents is a communication tool and does not establish a fixed place of business or permanent establishment. Furthermore, training and support provided to agents are considered ancillary activities and do not amount to conducting the company’s core business in India.

Double Taxation Agreements are bilateral treaties designed to avoid double taxation, encourage cross-border investments and benefit non-resident Indians. India has signed such agreements with nearly 100 countries.

Recently, Switzerland suspended the most-favored-nation clause in its double taxation agreement with India from 2023, citing the Supreme Court’s ruling in the Nestlé case.

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