Foreign companies planning to do business in India often set up a liaison office for undertaking promotional work as a prelude to their actual commercial activities. It is generally believed that a liaison office does not affect the taxability of the parent company in India because commercial activities are not permitted from such offices. But if the liaison office results in the creation of a “permanent establishment” in India, the foreign company may become liable to tax in India.
This issue has been examined in several cases by Authority for Advance Ruling (AAR). While in case of UAE Exchange [139 Taxman 82] the Authority ruled that the activities of the foreign company created a permanent establishment (PE) in India, in other cases reported in 278 ITR 646 and 308 ITR 422 the Authority held that the respective liaison offices did not result in creation of any PE in India.
In the above context the recent decision of Delhi High Court in case of UAE Exchange Centre Ltd. vs Union of India [183 Taxman 495] must be referred to wherein the AAR’s ruling (supra) has been reversed. In the above case the foreign company opened liaison offices in India. The RBI specifically proh-ibited the liaison offices from charging any commission or fee or from receiving or earning any remittances from any activity undertaken by them. Furthermore, the expenses of the liaison offices in India were required to be met exclusively out of the funds received from abroad through normal banking channels.
The authority considered that the liaison offices are involved in downloading of data, preparation of cheques, despatching the same through courier etc., This all constituted an important part of the main work. The Authority concluded that the work of the liaison offices in India, being a significant part of the main work of foreign company, would constitute a 'PE' within the provisions of the Indo-UAE DTAA. The above decision was however challenged by way of writ in Delhi High Court. It was argued that although PE includes an office, but article 5(3) of DTAA which opens with a non-obstante clause, is illustrative of instances where various activities would not fall within the ambit of the expression “PE”. One such exclusionary clause is maintenance of fixed place of business solely for the purpose of carrying on, any activity of a preparatory or auxiliary character.
The High Court held that the exclusionary clause has to be given a wider and liberal play. “Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-à-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an ‘auxiliary’ character.”
It was held that “In our view, the activity carried on by the liaison offices in India did not, in any manner, whatsoever, contribute directly or indirectly to the earning of profits or gains by the petitioner in UAE. As indicated above, every aspect of the transaction was concluded in UAE. The commission for the services of remittances offered by the petitioner was also earned in UAE. The activity performed by the liaison office in India was only supportive of the transaction carried on in UAE.”
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The above case virtually puts at rest the controversy whether liaison office creates a PE or not. Where the activities in India are of preparatory or auxiliary character or, in simple words, liaison office is only an aid or support to the transactions carried on in the foreign country, such offices will not create any PE in India.
H P Agrawal (Author is a Sr Partner in S S Kothari Mehta & Co.)
E-mail: hp.agrawal@sskmin.com