The Delhi High Court has ruled that Western Union Financial Services Inc., a non-resident entity, does not have a Permanent Establishment (PE) in India under the India-US Double Taxation Avoidance Agreement (DTAA). Consequently, the income earned by the company from international money transfers during the years 2001 to 2016 cannot be taxed under the Income Tax Act, 1961.

A Bench comprising Justices Yashwant Varma and Ravinder Dudeja delivered the judgment on December 18, dismissing the appeals filed by the Income Tax Department against the decision of the Income Tax Appellate Tribunal (ITAT). The ITAT had previously held that the activities conducted by Western Union in India, including the operation of a Liaison Office (LO) and the provision of software to Indian agents, did not constitute a PE under Article 5 of the DTAA.

“The Tribunal rightly came to the conclusion that the LO of the respondent-assessee 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 observed.

Western Union operates its global money transfer business through agents, including banks and financial institutions. Customers in the US transfer funds to recipients in India, facilitated by agents using a unique Money Transfer Control Number (MTCN) for transaction tracking. The Income Tax Department argued that Western Union's activities in India amounted to a PE, given its agreements with local agents and the operation of a Liaison Office. Additionally, it was contended that the use of proprietary software by Indian agents constituted a fixed place of business.

Western Union maintained that its Indian Liaison Office was restricted to auxiliary and preparatory activities as approved by the Reserve Bank of India (RBI). It provided no revenue-generating services and was not authorized to engage in any commercial operations. The company highlighted its compliance with RBI regulations, which explicitly barred the Liaison Office from undertaking trading or commercial activities.

The Bench undertook a detailed examination of Article 5 of the DTAA, which defines a PE as a fixed place of business through which the activities of an enterprise are conducted in whole or in part. However, Article 5(3) excludes preparatory and auxiliary activities from the scope of a PE.

The court noted: “The liaison office acted as a conduit for communication and training, and its functions were auxiliary to the business conducted outside India. The LO did not engage in any core business activities.”

On the issue of the software provided to Indian agents, the court observed that its role was confined to facilitating communication with Western Union’s servers located outside India. “The software utilised for connecting Indian agents to the mainframe, being intangible property, would invariably be excluded from the threshold of PE,” the court clarified. The Bench also rejected the contention that the premises of independent agents could constitute a PE, observing that these agents had their own business portfolios and operated independently.

The training and support provided to agents were also deemed auxiliary activities. The court ruled: “The training, software facilitation, and communication activities performed by the Liaison Office did not amount to carrying on the core business of the company in India.”

The court addressed the allegation that Indian agents acted as Dependent Agents for Western Union, enabling the creation of a DAPE. It concluded: “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.”

Case Title: Director of Income Tax (International) vs. Western Union Financial Services Inc.
Case Numbers: ITA 1288/2006 & Connected Matters
Bench: Justice Yashwant Varma and Justice Ravinder Dudeja