Liaison office may not attract income tax

Foreign enterprises are allowed to have liaison offices in India subject to the Reserve Bank of India (RBI) approval. Where a liaison office creates a permanent establishment in India or a business connection is established through the liaison office, income attributable to such permanent establishment or business connection becomes taxable in India.

But, if the activities of a liaison office do not result in any permanent establishment or business connection, there will be no tax in India.

In the case of the UAE Exchange Centre LLC, (2004) (268 ITR 9 AAR), while interpreting the tax treaty between India and the UAE, a liaison office was held to be a permanent establishment and further a business connection was also held to be established through the liaison office.

But in a recent case of Gutal Trading Est (2005) (278 ITR 643 AAR), while interpreting the same treaty, liaison office has neither created a permanent establishment nor any business connection although in both the cases, liaison offices were carrying on activities strictly in terms of the conditions specified by the RBI.

In the former case, the applicant was engaged in offering, among others, remittance services for transferring amounts from the UAE to various places in India. The RBI permitted the applicant to set up liaison offices in India for undertaking following activities:

undertaking reconciliation of bank accounts held in India with correspondent bank under draft drawing agreement;

acting as a communication centre receiving computer advices of mail transfer from the UAE and transmitting to Indian correspondent banks;

printing drafts and dispatching the same to the addresses; and

following up with the Indian correspondent banks.

The AAI ruled that "the role of the liaison offices was nothing short of performing the contract of remitting the amounts at least in part. That constituted an essential activity in the performance of the contractual obligation and that activity of the liaison offices could not be said to be of an auxiliary nature. The liaison offices in India constituted a 'permanent establishment' within the meaning of the agreement for avoidance of double taxation and income attributable to the liaison offices would be taxable in India even under the agreement for avoidance of double taxation."

In the latter case, applicant set up liaison offices, for performing the following acts:

to hold seminars and conferences to cover information about the technology used by parent company;

to receive trade enquiries and pass on the same to the Dubai office;

to transmit information received from the Dubai office to the customers and other organisations; and

to collect feed back and pass on the same to the Dubai office.

The liaison office in India was not allowed to carry on negotiations by itself in import or purchase of the goods by the Indian customers in any manner.

The AAI ruled that "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 can not 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 will 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."

Thus if proper care is taken regarding what activities should a liaison office perform in India, tax incidence in India may be avoided.

agar@nda.vsnl.net.in