Background:-
Liaison office is in the nature of representative office set up primarily to explore and understand the business and investment climate. It is not permitted to undertake any business activity, directly or indirectly, and is required to maintain itself out of inward remittances received from parent company through normal banking channel. Generally speaking, the activities of liaison office cannot be held to be earning any income from the activities in India, and if it is established that there is no business connection in India, no income could be said to be accruing to the parent company in India.
Taxability:-
The taxability, if any, of liasioning offices in India could be said to be broadly governed by Sec. 9(1)(i) of the Income Tax Act, 1961 (Act), and, Article 5 (on permanent establishment [PE]) read with Article 7 (on business profits) of the relevant Double Tax Avoidance Agreement (DTAA).
It is at the assessee’s discretion to apply provisions of the Act or the relevant tax treaty, whichever are more beneficial to it.
As per Sec. 9(1)(i) of the Act, an Liasioning Office would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India. As per Article 5 read with Article 7 of the relevant DTAA, an liasioning office would be taxable in India, in case it constitutes a permanent establishment of its foreign parent in India.
Generally, the tax authorities have been adopting a position that the liasioning office constitutes a permanent establishment/ business connection of its foreign parent in India. Consequently, any receipt (or part thereof) due to the liasioning office or to its foreign parent from any activity in India have been held as liable to tax in the hands of the Liasioning Office in India (in certain cases without appropriate allowance for expenses). This has been contrary to the Liasioning Office’s contention that they are prohibited from carrying on business in India (as per RBI guidelines) and also that no profits are attributable to the activities carried out by them in India
CASE STUDY
Gutal Trading Est. In Re [(2005) 278-ITR-643 (AAR)]
The applicant set up a “Liaison Office” in India for carrying out following activities (a) to hold seminars, conferences, shows so as to provide information about the technology being used by Glaverbel Belgium (GVB) in manufacturing reflective glasses of different kinds and to give replies to the queries of the customers at large;
(b) to receive trade enquiries from the customers and to pass on the same either to the Dubai office or directly to GVB;
All the expenses which are required to be incurred for maintenance of the “Liaison Office” as aforesaid, are to be met by the applicant and no income whatsoever shall be earned/generated by the “Liaison Office”. In other words, the “Liaison Office” will be merely a “cost centre” having no element of profit to meet the expenses incurred therein. The situs of the source of income, if any, of the applicant shall continue to remain at Dubai and on this premise, it is stated that no income whatsoever can be said to have accrued or deemed to have accrued to the applicant in India, by virtue of its setting up of the “Liaison Office”, so as to attract the charging provisions as contained in the Income Tax Act, 1961.
So long as the ‘Liaison Office’ does not enter into negotiations with the customers in India for import or purchase of goods by the Indian customers from the ‘principal company, it cannot be said that an intimate relationship exists between the trading activity of the ‘principal company outside India and the activities of the ‘Liaison Office’ within India. Therefore, the activities of the ‘Liaison Office’ in India would not constitute a course of dealing or continuity of relationship and cannot be said to contribute directly or indirectly to the earning of income by the non-resident, in its business outside India. Therefore, it follows that the activities of the ‘Liaison Office’ as given above would not tantamount to having a “business connection” in India. as used in Sec. 9(1)(i) of the Act.
Mitsui & Co. Ltd. Vs. Assistant Commissioner of Income Tax [(2008) 114-TTJ-903 (Del.)]
Assessee is a Japanese company having its head office (HO) in Tokyo, maintaining liaison offices (LOs) in India. For asst. yrs. 1980-81 and 1981-82, Tribunal held that such liaison office did not constitute assessee’s permanent establishment in India as their activities were auxiliary and preparatory in character. The said decision was followed by the Revenue throughout but in asst. yr. 2001-02 under consideration, the Assessing Officer took a contrary view and held that liaison office constituted assessee’s permanent establishment in India amenable to Indian income-tax.
The burden is on the Revenue to establish that the liaison office of the assessee in India constituted a permanent establishment in the instant year because of the order of the Tribunal in the past years. As per clause 6(e) of article 5 of DTAA between India and Japan, if a fixed place of business is maintained by an enterprise in the other State solely with the purpose of carrying out activities of preparatory or auxiliary in character, then such a fixed place of business shall not constitute a permanent establishment so as to establish a business connection.
There is no evidence to suggest that any of the business contracts have been concluded by the liaison office on its own or that the liaison office is authorized to transact and conclude business on behalf of head office. It is also not the case of the Revenue that any of the funds received by the liaison office are expended for trading activities, an aspect which is on the prohibited list of the Reserve Bank of India approval or that the liaison offices are rendering services to third parties for consideration or generating revenue to their activities.
The mechanics of the activities of liaison offices as described by the Assessing Officer for taking a different view do not lead to an inference that the liaison office by itself was authorized by head office or that it was competent to take independent business decisions for the head office. The said domain vested with the head office only. On the contrary the liaison office was engaged in providing support services to its head office, of course in the realm of the business being undertaken by the head office which is preparatory and auxiliary in character for the business of head office.
No contracts brought on record indicate that liaison activities carried out any marketing activities, no business connection for assessee in India.
Deputy Director Of Income Tax (International Taxation) Vs. M. Fabricant & Sons Inc [(2011) 48-SOT-576 (Mum.)]
Assessee is a regular liaison agency established in India for purchase of the entire raw materials required for the purpose of manufacture and sale abroad. The mere existence of an agency established by a nonresident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export. Assessee’s Liaison office cannot be considered as a permanent establishment in India and no profits can be attributed to the permanent establishment as no profit accrued or arises in India.
Sojitz Corporation Vs. Assistant Director of Income Tax (International Taxation) (2008) 117- TTJ- 792 (Kol.)]
Activities of the liaison offices of the assessee are restricted to collecting and sending of information from India to Japan. This is borne out from the conditions subject to which approval has been granted by the RBI. Assessee has been admittedly furnishing to the RBI the details of remittances and copy of the final accounts along with auditor’s certificate confirming that the conditions as laid down by the RBI have been adhered to. Since approval is being granted to the assessee by RBI, it can be safely presumed that the liaison offices are not indulging in any activity other than collecting information and sending the same to Japan which are preparatory/auxiliary in nature. It is not the case of the Revenue that the liaison offices were having powers to conclude contracts on behalf of the assessee. Thus, assessee’s case falls within the exclusionary cl. (e) of art. 5 of the DTAA. Further, assessee has been engaged in similar operations for the last 45 years and the Department has been consistently accepting the fact that the liaison offices of the assessee in India are not permanent establishment of the assessee. Therefore, the liaison offices cannot be treated as permanent establishment of the assessee in India.
Contract already concluded outside India, only payment part of undertaking is executed by agents in India, no agency permanent establishment of the assessee in India.
Linmark International (Hong Kong) Ltd. Vs. Deputy Director Of Income Tax (Internation Taxation) [(2011) 57- DTR-340 ( )]
Activities of liaison office in India. Assessee is a buying agent of the LD Ltd. which has been carrying on the business of buying and procuring agent for its customers located in the USA, Canada, Australia, Europe and other developed countries from various countries done by a commission agent. Substantial part of business operations of commission agent being carried out in India by the Indian office, it cannot be argued that no income accrues or arises in India. Provision contained in Sec. 9(1)(i) is subject to the limitation contained in cl. (b) of the Expln. 1 which scales down the rigor of Sec. 9 in a certain situation but such a limitation cannot obviously be read into the first part of the provision contained in Sec. 5(2)(b) which stands independent of Sec. 9. located in Asian region including India. Assessee receives commission on the value of goods exported by vendors in India to customers of that company. Indian offices of assessee practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, which in any case cannot be done by a commission agent.
Commissioner Of Income Tax Vs. Interra Software India (P) Ltd (2011) 50 DTR 83
As per Expln. 3 to Sec. 10A, even if the profits and gains are derived from onsite development of computer software outside India, they are also treated as profits and gains from the export of computer software outside India. In order to qualify as “onsite development”, the foreign office of the assessee should be only a liaison office acting as an intermediary between the principal enterprise and the customers and not working as a separate branch carrying on full-fledged marketing operations. Where substantial part of business operations of commission agent is carried out in India by the Indian office, it cannot be termed a liaison office.
Analyses of various judicial decisions reveal that the following activities are considered as preparatory or auxiliary activity:
i) Services like data processing, account reconciliation etc performed by a back office unit.
ii) Basic operations carried out by a foreign enterprise before its business actually commences, like:
- Industry analysis;
- Market survey;
- Furnishing of product information;
- Ensuring technical presentations to potential users;
- Development of market opportunities;
- Ensuring distributorship & their warranty obligation;
- Accounting and financing.
iii) Scientific research activities.
iv) Providing a communications link between suppliers and customers.
v) Relaying information through a mirror computer server for security purposes.
vi) Pre-designing or pre-engineering survey in respect of contracts, which on their own, were not capable of generating any income;
vii) Advertising;
viii) Holding of seminars, conferences;
ix) Receiving trade inquires from the customers;
x) Collecting feedback from the prospective customer / consumers;
xi) Identifying Customers;
xii) Supply of information regarding customer requirements and specifications;
Each of the above activities, by itself may be of preparatory or auxiliary in nature, yet a combination of them may result in the emergence of a permanent establishment. An item by itself may not be of significance and yet combined with another may become significant enough to be more than just preparatory or auxiliary in nature. The test is whether the activities jointly result in the emergence of a facility which would be economically viable if separated from the enterprise to which it belongs. If it does than permanent establishment is established. It is essential that liaison office should carry out only non core activities that are not economically viable on a standalone basis.
The following activities have not been considered as preparatory or auxiliary character, thereby attracting tax liability in the foreign jurisdiction.
i) Managing an enterprise or its part.
ii) A research establishment which engages in manufacture.
iii) An ISP which operates computer servers, for hosting websites of customers.
iv) Supervision or control over performance of a contract between a resident and the foreign company.
v) After sales services to customers.
vi) A fixed place of business for the delivery of spare parts to customers.
Under FEMA Regulation
‘Liaison Office’ [Regulation 2(e)]
‘Liaison Office’ means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial/trading /industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.
Permission for establishing place of business in India
Generally, a person desiring to establish any kind of presence in India requires RBI’s prior permission. For this purpose, application should be made in Form FNC.
Eligibility Criteria
An application from a foreign entity to establish liaison office in India is considered on the basis of two criteria- basic and additional:
Basic Criteria:-
RBI Route:-
Principal business of the foreign entity falls under the sectors where sectoral cap for foreign direct investment (FDI) under the Automatic Route is 100 per cent.
Government Route:-
Principal business of the foreign entity falls under the sectors where sectoral cap for foreign direct investment (FDI) under the Automatic Route is less than 100 per cent.
Additional Criteria:-
Track Record
For Liaison Office:- a successful, profit making track record during the immediately preceding three years in the home country.
Net Worth [total of paid-up capital and free reserves, less intangible assets as per latest Audited Balance Sheet or Account Statement certified by CA].
Permitted Activities:-
A liaison office of a non-resident is permitted to carry on the following activities, which are specified in Schedule II to Notification No.22
a) Representing to India the parent company/group companies
b) Promoting export import from/to India
c) Promoting technical /financial collaborations between parent/group companies and companies in India
d) Acting as a communication channel between the parent company and Indian companies
Annual Activity Certificate:-
Every liaison office is required to file an Annual Activity Certificate (AAC) at the end of March 31 along with the audited Balance Sheet with RBI, through its Bank, on or before September 30 of that year. This certificate is issued by a Chartered Accountant.
Conclusion:-
Liaison Offices are very popular forms of business in India since a long time. However, the issue of taxability of liaison offices still looms over the foreign entities and is not free from ambiguity. To capture the entities in tax clutches, tax authorities have been contending that the liaison offices are transgressing the list of permitted activities and constitute company’s permanent establishment in India.
In Conclusion, a liaison office would generally not constitute a PE and hence would not be liable to tax in the foreign jurisdiction, if it is only engaged in preparatory or auxiliary activities. It is recognised that a place of business may well contribute to the productivity of an enterprise, but the services it performs may be so remote from the actual realisation of profits that it would be difficult to allocate any profit to the fixed place of business. Examples are fixed place of business solely for the purpose of advertising, or for the supply of information or for scientific research, or for the servicing of a patent or know-how contract, etc.
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