Liaison office acts a channel of communication /facilitator of trade between the foreign parent company and the market in India. It promote import/export and also facilitate collaborations between parent company and companies in India.
‘Liaison Office’ means
‘Liaison Office’ means a place of business to act as a channel of
communication between the foreign entity or principal place of business and
entities in India without entering into any kind of commercial contracts
directly or indirectly but functions wholly from its parent entity’s
remittances through normal banking channels.
As defined
under clause 2(e) of FEMA 22R:
‘Liaison Office’ means a place of business to act as a
channel of communication between the principal place of business or Head Office
or 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.
Such a Liaison Office (LO) can carry certain prescribed activities they are
- representing the non-resident entity or parent entity, promoting its export
import from or to India, promote technical or financial collaborations between
parent entity and group companies and companies in India may act as a
communicating channel between parent company and Indian companies. An LO is
allowed to accept inward remittance from the Principal or Head office through
normal banking channels.
In the definition
following is relevant
§ a place of business;
§ to act as a channel
of communication;
§ between the principal
place of business or Head Office or 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.
Thus, an LO is opened
to act like a medium of communication by way of promoting the business of its
parent company in India, promoting collaboration in India, etc. An LO is not
allowed to earn profit in India. It cannot undertake any commercial, trading,
industrial activity either through itself or through any other entity. It has
to meet its expenses by way receiving money from its parent company.
Governing Authority
For establishing a Liaison
Office (LO) in India, approval of Reserve Bank of India (RBI) is required. Thus,
no
person resident outside India shall, without prior approval of the Reserve
Bank, establish in India a Branch or an LO or a PO or any other place of
business by whatever name called. The power of RBI has been delegated to AD
Banker in certain cases.
The application in
prescribed form for seeking permission to establish Liaison Office shall be
forwarded to Reserve Bank India through an AD Category – I Bank.
Governing Law
(a)
Foreign
Exchange Management Act, 1999 regulated by Reserve Bank of India
(b) Master circulars issued by
the Reserve Bank of India from time to time
Salient
features of Liaison Office
The fact whether a liaison
office constitutes a PE will have to be examined based on fact and
circumstance of each case and it cannot be presumed that a liaison office will
always be excluded from the purview of Article 5. Multi-national Companies can
set up their offices in India subject to the relevant regulations in the form
of liaison office. Such offices are set up by MNCs to understand the Indian
market and to carry out certain predefined limited activities or execution of
certain projects.
§
The
name of Indian liaison office shall be same as parent company.
§
GOVERNING
BODY FOR LIAISON OFFICE is AD banker/ Reserve Bank of India.
A non-resident can open a liaison office
in India with the permission of the Reserve Bank of India. Liaison offices are
not PEs inasmuch as they are not permitted to conduct business activities. If a
liaison office is engaged in the activities which creates a “business
connection” in India and is not confined to mere purchases of goods for exports
out of India, it may create a PE.
§
Suitable
for foreign Companies looking to setup a temporary office in India to liaison
its existing business with Indian clients.
§
The
Liaison office does not have any ownership, It is just extension of the
existing foreign company.
§
EXPENSES
OF THE LIAISON OFFICE ARE MET BY THE HEAD OFFICE, HENCE THE FUNDS SHALL BE
RECEIVED FROM HEAD OFFICE ACCOUNT ONLY
All
the expenses of Liaison Office are to be met entirely through inward
remittances of foreign exchange from the Head Office outside India. The role of
such offices is, therefore, limited to collecting information about possible
market opportunities and providing information about the company and its
products to the prospective Indian customers.
§
License
for the Liaison office is given for three years and the same can be renewed
every 3 years.
§
Liaison
Office is not subjected to taxation in India as there is no mechanism for the
income tax department to examine and ascertain as to whether the activities
under taken by it result in any taxable income in India
§
Liaison
Offices are allowed to open non-interest bearing INR current accounts in India.
Such Offices are required to approach their Authorised Dealers for opening the
accounts.
§ Liaison office will not constitute Permanent Establishment if it
confines its activity solely to liaison work.
§ Where LO is engaged in collection of specifications and
requirements of the customers, supplies them to the head office and on the
instructions of the head office, provides details of purchase price, further
technical details, availability of product and lead time to the prospective
buyers, and thereafter the sales are clinched, purchase orders are obtained,
sent to the head office out of India on the basis of which the head office
would place the orders to the suppliers, and LO would also follow up the
payments and offer after sale services to the customers, it would create a
business connection in India.
§ Likewise, where LO assists the taxpayer not only in purchase of
goods from the manufactures in India, but also carries out activities relating
to ensuring selection of quality material, quality testing, conveying requisite
designs, picking out competitive sellers, ensuring quality, ensuring policy of
the assessee and complying on behalf of the taxpayer with the local
regulations, such a LO would constitute a business a connection in India.
Establishment
of Liaison Office in India
Liaison
Office can be established in India with the permission of Reserve Bank of India
(RBI). Permission is initially granted for a period of 3 years and may be
extended from time to time. Application in Form FNC is made to obtain
permission from the Reserve Bank under provisions of FEMA 1999. Permission can
be given under two routes:
(a)
Reserve
Bank Route
Where
100 per cent Foreign Direct Investment (FDI) is permissible under the automatic
route, application is considered under this route.
(b)
Government
Route
Where
100 per cent FDI is not permissible under the automatic route and applications
from Non - Government Organizations / Non - Profit Organisations / Government
Bodies / Departments are considered by the Reserve Bank in consultation with
the Ministry of Finance, Government of India.
Opening a Bank Account with any authorized dealer
An LO may approach the designated AD Category I Bank
in India to open an account to receive remittances from its Head Office outside
India. If an LO
wants to open more than one account, it has to obtain prior permission of the
Reserve Bank of India (RBI) through its Authorized Dealer (AD) bank justifying
the reason for the additional account. Liaison office (LO) is
allowed to open current account with any authorized
dealer. The following documents are to be submitted:
§ A certified true copy of the Memorandum and Articles / Charter of
the foreign company with the Certificate of Incorporation.
§ Board resolution to open the account together with the names of
persons authorized to operate the account.
§ Power of Attorney to open the Bank Account.
§ Copy of RBI approval.
Acquisition of property
No property can be purchased/acquired. If the foreign
company has established a Liaison Office in India, it cannot acquire immovable
property.
Miscellaneous Matters
§ A power of Attorney may be executed in favour of an Indian employee
authorizing to carry on the activities in India.
§ An employment agreement is normally required to be executed between
the foreign company and the Country Manager.
§ It is advisable to obtain Foreign Inward remittance Certificates
from Bank.
§ Registration under the Shops and Establishments Act; and
§
Registration under the Profession Tax Act
if required
Eligibility
Criteria for registration of Liaison Office
(LO)
For
registration of LO, a foreign entity should have profit making
track record during the immediately preceding three financial years in the home
country and the Net Worth of not less than US$ 50,000 or its equivalent.
Net Worth is
defined to be total of paid-up capital and free reserves, less intangible
assets as per the latest Audited Balance Sheet or Account Statement certified
by a Certified Public Accountant or any Registered Accounts Practitioner by
whatever name.
Where
eligibility criteria is not satisfied
Applicants
who do not satisfy the eligibility criteria and are subsidiaries of other
companies can submit a Letter of Comfort from their parent company as per
Annexure I.
“I, subject
to the condition that the parent company satisfies the eligibility criteria for
net worth and profit”.
The RBI
gives due consideration to applicant’s background, antecedents of the promoter,
nature and location of activity, sources of funds, etc, while giving the
permission for establishment of LO.
Permissible
Activities in India through Liaison Office.
An LO is not
allowed to undertake any business activity in India and cannot earn any income
in India. Expenses of such offices are to be met entirely through inward
remittances of foreign exchange from the Head Office outside India. The role of
such offices is, therefore, limited to collecting information about possible
market opportunities and providing information about the company and its
products to the prospective Indian customers.
An LO can undertake the
following activities in India:
§
Representing in
India the parent company/group companies in India
§
Undertake market
research
§
Promoting
export/import from/to India
§
Promoting
technical/financial collaborations between parent/group companies and companies
in India
§
Acting as a
communication channel between the parent company and Indian companies
An entity undertaking any
activity beyond the activity mentioned above shall be considered to be in
contravention of FEMA.
Liaison Office (LO) - Prohibited/Restricted Activities
§
The
LO in India is not allowed to carry on any business activity in India.
§
It
shall not take any trading, commercial or industrial activity.
§
There
shall be no generation of revenue by LO in India.
§
It
shall not enter into any contracts with Indian residents on its own behalf.
§
No
commission/fees shall be charged or any other remuneration received/income
earned by the office in India for the LO activities/services rendered by it or
otherwise in India.
§
All
the expenses for the set-up, operation and maintenance of the LO have to be met
out of foreign exchange remittances from the foreign company through normal
banking channels.
§
It
shall not acquire any immovable property in India except on lease for period
not exceeding five years.
Liaison
Office (LO) - Procedure of Registration
With
effect from 01.10.2010, Foreign Companies/ entities desirous of putting in of
Liaison Office/ Branch Office are reqired to submit their application in Form
FNC together with the documents through an Authorised Dealer Bank.
(a)
Application to be submitted in Form FNC
A person resident outside India desiring to establish an LO,
BO or a PO or any other place of business in India shall submit an application
in Form FNC (Annex B) to an Authorised Dealer Category-I bank.
Other documents to be submitted with an application:
(a) Copy of the Certificate of
Incorporation/Registration; Memorandum of Association and Articles of
Association attested by the Notary Public in the country of registration. [If
the original Certificate is in a language other than in English, the same may
be translated into English and notarized as above and cross verified/attested
by the Indian Embassy/ Consulate in the home country].
(b) Audited Balance sheet of the applicant company
for the last three/five years in case of branch office/liaison office
respectively. [If the applicants’ home country laws/regulations do not insist
on auditing of accounts, an Account Statement certified by a Certified Public
Accountant (CPA) or any Registered Accounts Practitioner by any name, clearly
showing the net worth may be submitted].
(c) Bankers’ Report from the applicant’s banker in
the host country/country of registration showing the number of years the
applicant has had banking relations with that bank.
(d) Power of Attorney in favour of signatory of
Form FNC in case the Head of the overseas entity is not signing the Form FNC.
(e) Declaration by the applicant company.
(f) Letter of comfort, where applicable, stating
that the parent company undertakes to provide the necessary financial support
for its subsidiary/group company’s operations as a branch/liaison office in
India and that any liability that may arise due to the functioning of the
branch/liaison office in India will be met by the parent company/group company,
in case of inability on part of the branch/liaison office to do so.
(b)
Onward submission of Form FNC to RBI by AD Bank:
In case of automatic route, the approval may be given by AD
Bank and in case of approval route, the approval is given by the RBI. An
application under approval route is forwarded to RBI seeking for grant of
approval.
Although in automatic route the approval is given by AD bank
yet a copy of the Form FNC along with the other details of the approval
proposed to be granted is also submitted by AD Category–I bank to RBI for
allotment of Unique Identification Number (UIN) to each LO. The UIN allotted by
RBI can be accessed at the following link
http://rbidocs.rbi.org.in/rdocs/Content/docs/UIN100001.xls
Onward
submission of Form FNC to RBI by AD Bank
(c)
Approval Letter:
After receipt of the UIN from the Reserve Bank, the AD
Category-I bank shall issue the approval letter to the non-resident entity for
establishing LO/BO in India.
Due diligence to be exercised by AD Bank: The AD Category-I
bank shall after exercising due diligence in respect of the applicant’s
background, and satisfying itself as regards adherence to the eligibility
criteria for establishing LO/BO, antecedents of the promoter, nature and
location of activity of the applicant, sources of funds, etc. and compliance
with the extant KYC norms grant approval to the foreign entity for establishing
LO in India.
Activity to start within six months of the approval: The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse.
Extension
of time:
In cases where the non-resident entity is not able to open
the office within the stipulated time frame due to reasons beyond its control,
the AD Category-I bank may consider granting extension of time for a further
period of six months for setting up the office. Any further extension of time
shall require the prior approval of the Reserve Bank of India in this regard.
Application
for Additional Offices and Activities
Requests for establishing additional LOs/BOs may be submitted
to the AD Category-I bank in a fresh FNC form. However, the documents mentioned
in form FNC need not be resubmitted, if there are no changes to the documents
already submitted earlier.
(a)
Number
of offices: If the number of offices exceeds 4 (ie, one LO/BO in each zone,
viz, East, West, North and South), the applicant has to justify the need for
additional office/s and it shall require prior approval of RBI.
(b)
Nodal
office to be identified: The applicant may identify one of its offices in India
as the Nodal Office, which will coordinate the activities of all of its offices
in India.
(c)
Additional
Activities: Requests for undertaking activities in addition to what has been
permitted initially by the Reserve Bank of India/ AD Category-I bank may be
submitted by the applicant to the Reserve Bank through the designated AD
Category-I bank justifying the need.
Closure
of Liaison Offices
At
the time of winding up of Liaison offices, the company has to approach the
designated AD Category – I bank with the following documents:
1. Copy of the Reserve Bank’s
permission/ approval from the sectoral regulator(s) for establishing the BO /
LO.
2.
Auditor’s certificate-
(i) indicating the manner in which the remittable
amount has been arrived at and supported by a statement of assets and
liabilities of the applicant, and indicating the manner of disposal of assets;
(ii) confirming that all liabilities in India
including arrears of gratuity and other benefits to employees, etc., of the
Office have been either fully met or adequately provided for; and
(iii) confirming that no income
accruing from sources outside India (including proceeds of exports) has
remained un-repatriated to India.
3. Confirmation from the
applicant/parent company that no legal proceedings in any Court in India are
pending and there is no legal impediment to the remittance.
4. A report from the Registrar of
Companies regarding compliance with the provisions of the Companies Act, 2013,
in case of winding up of the Office in India.
5. Any other document/s, specified by
the Reserve Bank while granting approval. The designated AD Category – I banks
have to ensure that the LOs had filed
their respective Annual Activity Certificates with the Reserve Bank for the
previous years, in respect of the existing Branch/Liaison Offices. Confirmation
about the same can be obtained from the Central Office of the Reserve Bank in
the case of BOs and from the Regional Office concerned in the case of LOs.
With
reference to the application made by a LO for making remittance of its winding
up proceeds, the designated AD Category – I bank may permit the remittance
subject to the directions issued by the Reserve Bank in this regard from time
to time and payment of applicable taxes in India if any.
Closure
of such LO has to be reported by the
designated AD Category – I bank to the Reserve Bank (the Regional Office
concerned for LOs and Central Office for BOs), along with a declaration stating
that all the necessary documents submitted by the LO have been scrutinized and
found to be in order. If the documents are not found in order or cases are not
covered under delegated powers, the AD Category – I bank may forward the
application to the Reserve Bank, with their observations, for necessary action.
All the documents relating to the LO operations may be retained by the AD
Category – I bank for verification by the internal auditors of the AD /
inspecting officers of the Reserve Bank.
Annual Activity Certificate (AAC)
Annual Activity Certificate (AAC), submitted
by the LO itself at the end of the year (as on 31st March) bank; In case of a
multiple LOs a combined AAC needs to be submitted to the designated AD
Category-I and the director general of the Income Tax (International Taxation).
Taxability of Liaison Office (LO) in India
§ Since a liaison office is not meant
to earn any income in India, it is generally not liable to pay any Income tax.
§ Where an LO becomes a Permanent
Establishment in India, it will be taxed as a foreign entity at the rate of
40%. (Plus surcharge and health and education cess as applicable).
§ Liaison Office (LO) in India will be governed by Section
9(1)(i) of the Income-tax Act, 1961 which deals with ‘Indirect Transfer’
provisions and Article 5 which deals with Permanent Establishment (PE), read
with Article 7 which deals with Business Profits (BP) of the relevant Double
Tax Avoidance Agreement (DTAA) where India has entered with its ‘Parent entity’s
resident country.
§ According to Section 9(1)(i), an LO 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. Similarly, Article 5, read with
Article 7 of the relevant DTAA, an ‘LO’ would be taxable in India, in case it
constitutes a PE of its parent entity.
§ However, if the ‘LO’ is held to be a PE or BC, only so much
of the profits as are attributable to the operations carried out by the ‘LO’ in
India, would be liable to tax in India.
Assessee’s discretion to apply provisions
of the Act or the relevant tax treaty
Assessee’s discretion to apply provisions of the Act
or the relevant tax treaty, whichever are more beneficial to it. As per Section
9(1)(i) of the Act, an LO 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 LO would
be taxable in India, in case it constitutes a PE of its foreign parent in
India.
Statutory Requirements and Procedures
§ Under Income Tax Act, 1961, a company has to file its Income-tax
return irrespective of whether they earn any Income or not.
§ Liaison office of a body corporate registered outside India is thus
required to file its Income-tax return.
§ Under the erstwhile FERA, Liaison office was permitted to earn
interest on Bank Fixed Deposits. However, under FEMA, no such permission is
included in the Regulations.
§ Further, expatriate and Indian resident employee’s Income-tax
returns are required to be filed and tax has to be withheld on remuneration
paid to them.
§
Further, Permanent Account Number and Tax
Deduction Account Number has to be obtained from Income-tax authorities.
Submission
of statement by a non-resident having Liaison Office (LO) in India
To overview and regulate 'LO’s functions, a Section 285 was
inserted by the Finance Act, 2011 with effect from 01.06.2011. Hence, a Section
285 provides that a non-resident to file an 'Annual Information Statement' in
respect of activities of an ‘LO’ in India. According to this Section, every
non-resident having an ‘LO’ in India shall file a Statement with prescribed
particulars within sixty (60) days from the end of the financial year, i.e.,
30st May of every year. The Rule 114DA of the Income Tax Rules, 1962,
prescribes the form of Statement and particulars to be furnished in Form 49C in
electronic form by using Digital signature. The said Annual Statement shall be
duly verified by the Chartered Accountant of the authorised person on behalf of
such non-resident person who is Authorised Signatory, as far as such LO is
concerned.
Text of Section 285
285. Every
person, being a non-resident having a liaison office in India set up
in accordance with the guidelines issued by the Reserve Bank of India under the
Foreign Exchange Management Act, 1999 (42 of 1999), shall, in respect of its
activities in a financial year, prepare and deliver or cause to be delivered to
the Assessing Officer having jurisdiction, within sixty days from the
end of such financial year, a statement in such form and containing such
particulars as may be prescribed.
Annual
Statement under section 285 of the Income-tax Act, 1961 by Liaison Office (LO) [Form No. 49C - See rule 114DA]
No ‘Income’ in the hands of 'LO', hence, they are not subject
to 'Tax Audit or 'Transfer Pricing Regulations'. However, they are also
required to comply with certain Income Tax provisions, such as filing of
Quarterly Tax Deduct at Source (TDS) Returns, if applicable, Yearly filing of
Audited Accounts of the 'LO' with the Directorate of Income Tax, New Delhi (in
quadruplicate) and Form 49C with the concerned Assessing Officer having
jurisdiction over such 'LO'.
Contents of Form 49C
Annual
Statement under section 285 of the Income-tax Act, 1961, read with Rule 114DA.
The said Form extensively seeks the following particulars—
(i)
Nature of working of the ‘LO’
including products or services for which liaisoning activity is done or is
carried by it.
(ii)
India-specific financial
details for the relevant financial year, i.e., receipts, income and expenses of
the non-resident person from or in India (not only of the ‘LO’)
(iii)
Details of all purchases,
sales and services from or to Indian parties during the year by the
non-resident person (not limited to transactions made by ‘LO’).
(iv)
Name & Designation of
Officer In charge for each Office of the non-resident person in India.
(v)
Details of any salary or
compensation of any sort payable outside India to any employee working in India
or for services rendered in India.
(vi)
Employees of the liaison
office, i.e., number of employees, salary details (including salary received
overseas), designation, location, etc.
(vii)
Details of agents,
distributors and representatives of the foreign company in India.
(viii)
Names & addresses of the
top five parties in India with whom the 'LO' has been doing the liaisoning.
(ix)
Information on group
companies present in India and their activities, whether the liaison office is
liaising on behalf of the group companies?
(x)
Details of other liaison
offices of group companies in India, group entities operating from the same
premises as the liaison office, etc.
The said requirements apply to all those ‘LOs’ established as
per the Foreign Exchange Management Act, 1999, 'Foreign Exchange Management
(Establishment in India of a branch office or a liaison office or a project
office or any other place of business) Regulations, 2016, and other
'Guidelines', Master Circulars, etc an issued by the RBI.
Liaison Office not PE where employees conduct preparatory or auxiliary coordination
Mumbai ITAT allows Assessee’s appeal, holds that Liaison
Office (LO) of Swiss company’s subsidiary in India does not
constitute a PE, deletes addition of business income of Rs. 1.50
Cr made by attributing 50% of income from repairs and maintenance and
integrated component services; Assessee, engaged
in the business of maintenance, repair and
overhaul of aircrafts, engines and leasing out components
and spare engines on lease, filed its return of income for Assessment year
2015-16, offering receipts from lease charges to tax in India as royalty at 10%
on gross basis under Article 12(2) of India-Switzerland DTAA; Revenue observed
that Assessee had also earned income from repairs and maintenance and from
integrated component services, which were not offered to tax in India, on the
ground that the same were not in the nature of technical services and
thus, not taxable in terms of India-Switzerland DTAA; However, Revenue
held that the LO of Assessee’s Switzerland-based subsidiary constitutes Service
PE or Dependent Agency PE of the Assessee and accordingly computed Assessee’s
income under Rule 10 of the Income Tax Rules, by attributing 50% of income
to the PE in India; ITAT notes that the Liaison Office (LO): (i) was permitted
to be set up with RBI approval to act only as communication channel with
parties in India, (ii) pertains to Assessee’s subsidiary and not the Assessee
and (iii) can perform only those activities as approved by RBI, which included
that Assessee could not carry on any business or trading activity in the LO;
Observes that the employees of the LO carried out merely communication/ coordination
function, remarks that It is settled position that such support activities fall
within the exclusionary provisions under Article 5(3)(d)/5(3)(e)
of the India-Switzerland DTAA, i.e. they are preparatory/auxiliary in
nature, therefore, the LO does not constitute a PE; Further
notes that the employees of LO do not negotiate, finalise or discuss the
mechanics of contracts including pricing with the Assessee’s customers, likewise
observes that the LO does not constitute a fixed place through which business
of Assessee is carried out in India; Points out that LO did not have any
infrastructure, facilities and relevant stocks of spare parts to carry out
repairs and maintenance, piece part repairs, integrated component service and
replacement of parts and also that the staff existing in India were not of that
level in the hierarchy of such a big giant who can negotiate with the
customers, sign and finalize the contracts and run the office of the Assessee
at their own; Remarks that “The fact that the LO was adhering to
the conditions imposed by the RBI and the RBI had accepted the functioning of
the LO for quite some time points out to the fact that the LO has complied to
the condition one of which was that it could not carry on any business or
trading activity…. Till the time LO is fulfilling the conditions imposed by the
RBI, the case of the Revenue cannot stand on its own feet.”; Also takes
note of the sample engine repair and maintenance agreement and invoices
thereto which evidences that the Assessee does not carry any activity
through LO other than routine communication and client coordination, which can
be called to constitute a PE in India, thus holds that in absence of any PE,
the business income earned by the Assessee is not taxable under Article 7 of
the India-Switzerland DTAA; Further rejects the contention of treating
Assessee’s Indian subsidiary (which was a dormant company with its name struck
off the RoC records) as its PE; Holds that “merely because an
Indian company in controlled by a Switzerland company or fact that Switzerland
Company carries business in India, does not result in Indian company being
considered as a PE of Switzerland Company in India.”; Remarks that
the Revenue could have conducted an enquiry under section 131
and 133(6) to strengthen its allegations about non-fulfilment of the
conditions imposed by the RBI, states that “Instead of following this
procedure to substantiate his allegation, Assessing Officer rather worked on
the documents available on record supplied by the assessee that is too by
applying wrong principles on the given set of facts.” (Related Assessment year : 2015-16) – [S.R. Technics Switzerland Ltd. v. ACIT (International
Taxation) [TS-1018-ITAT-2022(Mum)]
– Date of Judgement : 25.11.2022 (ITAT Mumbai)]
Dismisses Revenue’s appeal on question of liaison office constituting permanent establishment (PE), basis concurrent finding of ITAT & CIT(A)
Bombay High Court dismisses Revenue’s
appeal against J. Ray Mc Dermott Eastern Hemisphere Ltd., holds the
question of constitution of PE to be factual in nature and no
susbtantial question of law arose for High Court's consideration since CIT(A)
and ITAT gave concurrent findings in Assessee’s favour; High Court
finds that Revenue did not establish that any substantial business was done
from the office as alleged by the Revenue to constitute a PE and ITAT’s
view could not be considered as perverse; Assessee-Company was subjected
to a survey based on which the Revenue held that Assessee’s
liaison office constituted a PE in terms of Article 5(2)(c) of the
India-Mauritius DTAA whereas the ITAT held that such office did not constitute
a PE against which Revenue preferred an appeal; Before High Court, Revenue
submitted that Assessee did not have any functional office in Mauritius and the
Mumbai office was used for the project implemented by the Assessee, and that
since it was an admitted position that there was an office in Mumbai, the same
would fall within the definition of PE as per Article 5 of the DTAA; High Court
finds that the ITAT in its order elaborately discussed the evidence produced
through the documents impounded during the survey and that it also noted the
documents exchanged by the persons co-ordinating in the activities carried out
at the site, list of messages, including fax and radio messages; High Court
observes that ITAT also examined the roles performed by the employees
and recorded a finding that none of the documents showed any business done
from office; Thus, upholds ITAT’s finding that Assessee’s case fell under
Article 5(3)(e)(ii) and not Article 5(2)(c) as contended by the Revenue.
[In favour of assessee] (Related Assessment year : 1998-99) – [CIT v. J. Ray Mc Dermott
Eastern Hemisphere Ltd. – Date of Judgement : 08.06.2022 (Bom.)]
UK company’s telecom
services to VSNL, not royalty; Liaison Office in India, not PE
Mumbai ITAT holds that
assessee-company (non-resident incorporated in UK) engaged in the business of
providing telecommunication services to VSNL ( now Tata Communication Ltd
(TCL)) cannot be construed to have PE in India for Assessment year 2007-08 to Assessment
year 2012-13, rejects Revenue's stand that location of Space Segment Monitoring
System (SSMS) equipment in India and the presence of the liaison office
constituted a PE ; Revenue had contended that assessee owned SSMS and liaison
office played a critical role in providing telecommunication services to VSNL
and therefore receipts from VSNL were attributable to a 'business connection'
in India, DRP affirmed that liaison office activities
could not be considered to be preparatory and ancillary, as it constituted
fixed place with respect to the final agreements being entered into by the
clients like ISRO, VSNL with the assessee ; Notes that RBI under FERA 1973 had
granted permission to set-up a liaison office under which assessee was strictly
prohibited from undertaking any other activity of trading, commercial or
industrial nature, further observes that till now there was no infringement or
any other adverse view taken by the RBI qua the activities which are being
carried out by the liaison office in India ; Relies on Delhi High Court ruling
in Mitsui & Co. Ltd. to hold that if assessee was found adhering to the
conditions imposed by the RBI for running of a liaison office, the onus was on
Revenue to prove that the liaison office construed PE in India, notes that
there was not even an iota of evidence referred to by the Assessing Officer in
this regard for the current and past Assessment years
; Separately on Revenue's contention that telecommunication services to TCL
should be taxed as Royalty under India-UK DTAA, ITAT followed the precedent in
assessee’s own case for Assessment year 2000-01 to 2005-06 wherein ITAT
disagreed with Revenue's stand that the nature of receipts for providing
telecommunication services was Royalty. [In favour of assessee] – [Inmarsat
Global Ltd. v. Asst. Director of Income
Tax (Intl. Taxation)
[TS-736-ITAT-2018(Mum)] - Date
of Judgement : 12.12.2018 (ITAT Mumbai)]
Section 9(1)(i) : Income
deemed to accrue or arise in India - Business connection - Liaison Offices In
India is not permanent establishment - Income directly or indirectly
attributable to these branches or offices was not taxable in India
Delhi High Court
confirms ITAT's order for Assessment years 1994-95 and 1995-96, holds that
assessee’s (a Japanese company) liaison office (LO) in India, doesn't
constitutes its PE and accordingly assessee's income from business
turnover/imports in India not taxable under India-Japan DTAA; Notes that
Revenue could not demonstrate that assessee’s LO was PE within the meaning of
Article 5 of DTAA, clarifies that it was not enough for the Revenue to
show that the assessee had an office, factory or a workshop
etc.”; Observes that RBI had accepted the functioning of assessee’s LO for
over three decades and that assessee was adhering to the conditions imposed by
RBI, one of which was to not carry any business or trading activity in the LO;
Holds that merely keeping books of accounts, apportioning some portion of
telephone expenses to LO or having a common manager for LO and Project Office
(PO) was not sufficient to conclude that LO was being used to carry on the
business, relies on co-ordinate bench ruling in National Petroleum Company
Construction; With respect to assessee's POs in India, High Court observes
that POs were treated as separate taxable units under section 44BBB and
hence the said POs cannot also be treated as PEs for the purpose of the
DTAA. [In favour of assessee] (Related Assessment years : 1994-95 and 1995-96) – [DIT v. Mitsui And
Co. Ltd. . [TS-310-HC-2017(DEL)] – Date of Judgement : 27.07.2017 (Del.)]
NOTE
Article 5 of India-Japan DTAA
provides as under:
(1) For the purposes of this
Convention, the term permanent establishment means a fixed place of business
through which the business of an enterprise is wholly or partly carried on.
(2. The term permanent
establishment includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
ITAT upholds PE
constitution for Arrow’s Liaison Office; Accepts 40
profit-attribution based on FAR
Bangalore ITAT upholds 40%
profit attribution to Indian operations of Arrow Group for Assessment
years 2000-01 to 2004-05 in reassessment proceedings pursuant to survey
conducted at liaison office premises, however, upholds restriction of
TP-adjustment to 40% of net sales; Noting that assessee had filed returns under
section 148 for its Liaison Office declaring income on the basis of cost + 6%,
ITAT holds that assessee itself has admitted to income having arisen in India
from Liaison Office operations and the indirect existence of PE; ITAT further
upholds Assessing Officer’s computation of 40% profit attribution to Liaison
Office by considering sectoral weightage of 50:25:25 for functions performed,
assets employed and risks involved and a further intra-sectoral ratio of 70:30
for functions and 10:90 towards assets and risks between Head Office and Liaison
Office; Noting that TPO proposed adjustments for Assessment years 2002-03 to
2004-05 on the basis of TNMM, and Assessing Officer had substituted these
figures in his working of profit, ITAT upholds relief granted CIT(A) by
directing consideration of only 40% of total sales for ALP determination; Also
upholds grant of working capital adjustment, notes that CIT(A)’s findings were
consistent with the findings for Assessment years 2001-02 and 2002-03. [In
favour of Both, Partially] – [Arrow Electronics India Ltd. [TS-142-ITAT-2017(Bang)]
– Date of Judgement : 11.04.2017 (ITAT Bangalore)]
Liaison office of Japanese
-company not fixed place PE ; Rejects core-business activity plea
Delhi ITAT rules that
liaison office (LO) of assessee (a Japanese company) cannot be regarded
as assessee's fixed place PE in India for AY 2011-12; Rejects Revenue's stand
that in terms of power of attorney (POA) executed in favour of person in-charge
of LO in India, assessee was engaged in core business activities in India and
thus constituted its fixed place PE; Refers to various clauses of POA,
observes that powers given therein were LO specific, further it did not
grant unfettered powers to its LO employee to do all or any acts for and
on behalf of the assessee; Also rejects Revenue's submission that
assessee filed false declarations with RBI while taking permission for opening
LO, holds that No doubt the Assessing Officer can
investigate, call for evidences and come to a conclusion where any income
earning activity has been carried out by the L.O. so as to construe it as fixed
P.E. but, in our view it is beyond the jurisdiction of the Assessing Officer to
adjudicate and conclude that the assessee has filed false declarations before
the RBI ”; Further notes that Revenue did not bring any documentary
evidence in support of his contention that assessee has PE in India. [In favour
of Both, Partially] (Related
Assessment year : 2011-12) – [Kawasaki
Heavy Industries Ltd. v. ACIT (International Taxation) [TS-79-ITAT-2016(DEL)]
– Date of Judgement : 11.02.2016 (ITAT Delhi)]
Quashed AAR’s Columbia
Sportswear ruling; Liaison office not taxable absent permanent establishment
Karnataka
High Court sets-aside AAR order,
assessee’s Indian Liaison Office (LO) engaged in purchasing activity not
permanent establishment (PE) under Article 5 of India-USA DTAA ; High Court notes various activities carried
by LO such as identifying competent manufacturer, price negotiation, discussion
on material to be used, quality control & testing of products, coordination
with supplier and customers etc, High Court further observes that 'an
obligation is cast on the petitioner to see that the goods, which are purchased
in India for export outside India is acceptable to the customer outside India';
High Court holds that ' the authority was not justified in recording a finding
that those acts amounts to involvement in all the activities connected with the
business except the actual sale of the products outside the country’; Quoting
Article 7 of India-USA DTAA and Explanation 1(b) to Sec 9 of the Act, High Court
observes that “when a non-resident
purchases goods in India for the purpose of export, no income accrues or arises
in India for such non-resident”; Rejects Revenue’s stand that LO qualifies to
be a PE in terms of Article 5 of the DTAA, holds LO established only for
purchasing goods for exports and thus
all activities fall within the meaning of “collecting information” for
enterprise; Relies on coordinate bench rulings in CIT v. Nike Inc. [ITA
No.976/2008] and DIT v. Mondial Orient Ltd. [ITA No.204/2010] [In
favour of assessee] - [Columbia Sportswear Company v. Director of Income Tax
(International taxation) [TS-600-HC-2015(KAR)] – Date of Judgement : 03.09.2015
(Karn.)]
No evidence on record to
suggest that Liaison Office had indulged in carrying on commercial activities
and that it was a permanent establishment so as to classify that it does not
fall within the ambit of Explanation 1(b) to section 9(1) (i)
TISL, Hong
Kong was established in Hong Kong to act as a buying agent for the Tesco Group
Companies. Tesco Hong Kong sourced products for the Tesco Group companies and
ensured that the prices were competitive while maintaining the quality
standards prescribed by Tesco Group. TISL - India Liaison
Office - assessee company - was established in the year 2001. Liaison
Office acted as a communication channel between Tesco Hong Kong and the
manufacturers in sourcing apparels from India and undertakes liaising activities
like coordinating with the manufacturers and Head Office. A survey was
conducted in the office premises of assessee and in compliance to the notice
issued under section 148, assessee filed its ROI admitting nil income. Assessing
Officer summed up that although assessee maintains that operations in India
were insignificant or negligible but the operations in India contributed
significantly to earning the commission income. The attribution of profit to PE
was done based on assigning certain points to different inputs which were essential
in earning the profit. Assessing Officer concluded that activities of Liaison
Office were not confined to the activities which were related to the purchase
of goods in India for the purpose of exports and the activities of Liaison
Office relate to supply chain management activities for Tesco Hong Kong company
and, hence, they were not covered in the exception provided in Explanation 1(b)
of section 9(1) (i). Assessing Officer passed the draft assessment order.
Assessee filed objections before DRP which were rejected and Assessing Officer
passed the final order. Being aggrieved, assessee went on appeal before
Tribunal.
Held : All the activities of the Liaison
Office, such as liaisoning between the manufacturer and assessee, opined
of reasonability of prices, monitoring the progress and quality at the
manufacturing end etc, were activities of Liaison Office prior to purchase of
good by the Tesco Hong Kong. There was no evidence on record to suggest that
the Liaison Office had indulged in carrying on commercial activities and that
it was a 'permanent establishment' so as to classify that it doesn't fall
within the ambit of Explanation 1(b) to section 9(1) (i). Explanation 1(b) to
section 9(1)(i) was clearly applicable and thus, no income was derived by the
assessee in India through its operations as Liaison Office in India. In
the result, appeal was answered in favour of assessee. [In favour of assessee]
(Related Assessment years :
2003-04 to 2007-08) – [Tesco International
Sourcing Ltd. v. Deputy Director of Income Tax (International Taxation) . (2014)
159 TTJ 569 : 41 taxmann.com 241 (ITAT Bangalore)]
Liaison Office involved in
marketing goods, not mere communication channel, constitutes Indian-PE
High Court confirms Tribunal’s order that
assessee’s (US company) Indian liaison office (LO) constituted a permanent establishment (PE), making
assessee liable to tax in India on its business income attributable to such PE;
Rejects assessee’s contention that LO came under exclusion of Article 5(3)(e)
of Indo-US DTAA and was merely a communication link between Head Office in the
US and prospective buyers in India; Holds that since LO’s activities included
explaining of products to buyers in India, furnishing intimation in accordance
with buyers’ requirements, discussion of commercial issues etc, it was involved
in marketing activities and was not confined to being a communication channel
alone; Also noting that assessee had a sales incentive plan under which its
employees were entitled to receive up to 25% of their annual remuneration as an
incentive based on orders generated, High Court concludes that 'purpose of the
liaison office in India was not merely to advertise the products of the
assessee or to act as a link of communication between the assessee and a
prospective buyer but involved activities which traversed the actual marketing
of the products of the assessee in India '; Rejects assessee’s reliance on
Delhi High Court rulings in U.A.E. Exchange Centre Ltd. v. UOI (2009) 313
ITR 94 (Del.) and DIT v. Noikia Networks OY
(2012) 253 CTR 417 (Del.), as
distinguishable on facts. [In favour of revenue] (Related Assessment year : 2003-04) – [Brown
And Sharpe Inc. v. CIT [TS-692-HC-2014(ALL)] – Date of Judgement : 11.11.2014 (All.)]
Liaison Office does not create PE despite subsequent branch set-up
The assessee, St. Jude Medical (Hongkong)
Limited, is a Hong Kong based company. It is wholly owned subsidiary of St.
Jute Medical Inc. (SJMI USA), a US based company. SJMI USA is a pioneer in
Heart Valves which is a life saving medical produce. The assessee was engaged
in the business of selling heart valves in the Asian region including India.
The assessee had set up a liaison office in India with the permission of the
RBI. Even though it had a liaison office, the assessee as well as SJMI USA were
conducting their sales through a network of distributors. Considering the
potential in India of the life saving medical products, the liaison office was
coordinating the market survey, propagation etc. as permitted by the RBI. Later
on, the liaison office was closed and a branch office was set-up vide RBI
permission letter dated 30.09.1998. The liaison office was closed on 31.12.1999
and branch office had started functioning on 01.01. 2000.
For Assessment years 1999-2000 and 2000-01, the assessee declared taxable income at Nil on the ground that its operations in India were restricted to act as a liaison office which had not earned any income in India.
Held : Hong Kong company’s Indian branch cannot be treated as PE of its US parent company; Separate proceedings for US parent company should be initiated to attribute its Indian profits; Revenue's action of treating Hong Kong company's liaison office (existing prior to Branch) as PE rejected; Liaison office engaged in activities as permitted by RBI; Business activity of branch office established after closure of liaison office cannot be attributed to the liaison office for determining existence of PE. [In favour of assessee] – [St. Jude Medical (Hongkong) Ltd. [TS-229-ITAT-2013(Mum)] – Date of Judgement : 06.05.2013 (ITAT Mumbai)]
Liaison office (LO) of UAE based company does not constitute a Permanent Establishment in India as activities carried on by LOs in India were in the nature of ‘preparatory or auxiliary character’
The
taxpayer had filed its nil return of income for the Assessment Year 1998-99 to
2003-04. The taxpayer claimed that no income had accrued or deemed to have
accrued to it in India, both under the Income-tax Act, 1961 (the Act) as well
as under the tax treaty. These returns were accepted by the tax department
without any question. However, to remove certain doubts, the taxpayer filed an
application before the Authority for Advance Ruling (AAR). The issue before the
AAR was whether any income is accrued or deemed to be accrued in India from the
activities carried out by the taxpayer in India. The AAR held that the taxpayer
had a PE in India and therefore certain profits need to be attributed to the PE
in India. It would be taxable in India under the Act as well as under the tax
treaty.
The
Delhi High Court quashed the AAR ruling and observed that the taxpayer was not
liable to tax in India because no income had accrued or deemed to have been
accrued from the activities of LOs in India. Nature of activities carried on by
the taxpayer in these LOs were only of preparatory and auxiliary character.
Such activities were clearly excluded under Article 5(3)(e) of the tax treaty
(PE provisions). The activities carried on by LOs did not in any manner
contribute directly or indirectly to the earning of profits or gains by the
taxpayer in UAE. Every aspect of the transaction was concluded in UAE, whereas,
the activities performed by LOs in India were only supportive of the
transactions carried out in UAE. Therefore, LO cannot be treated as taxpayer’s
PE in India under the tax treaty. Aggrieved, the tax department filed a Special
Leave Petition (SLP) before the Supreme Court.
The
Supreme Court upheld the order of the High Court and held that the services of
LOs were in the nature of ‘preparatory or auxiliary character’ and, therefore,
covered by Article 5(3)(e) of the tax treaty. Therefore, LO would not qualify
the definition of PE in terms of Articles 5(1) and 5(2) of the tax treaty on
account of non-obstante and deeming clause in Article 5(3) of the tax treaty.
The
transactions were completed with the remitters in UAE, and no charges towards
fee/ commission could be collected by the LO in India in this regard. The
Supreme Court referred the decision of ACIT v. E-Funds IT Solution Inc. (2018)
13 SCC 294 wherein the Court observed that no part of the main business and
revenue earning activity of the two American companies was carried on through a
fixed business place in India which has been put at their disposal. The Indian
company only renders support services which enable the taxpayers in turn to render
services to their clients abroad. This outsourcing of work to India would not
give rise to a fixed place PE in India.
There
was an amendment in Section 9(1)(i) of the Act by the Finance Act, 2003, with effect
from 01.04.2004 whereby the meaning of expressions ‘business connection’ and
‘business activity’ have been articulated. However, even if the stated
activities of the LO were to be regarded as business activity, the same were
held as preparatory or auxiliary in nature. Therefore, the activities of LO did
not result into PE and the taxpayer was not liable to tax in India
The
Supreme Court observed that activities carried on by LOs in India were in the
nature of ‘preparatory or auxiliary character’. Since such activities are
specifically exempt under Article 5(3)(e) of the India-UAE tax treaty (tax
treaty), LO of the taxpayer does not constitute a PE in India. (Related Assessment
years : 1998-99 to 2003-04) – [UOI v. U.A.E. Exchange Centre (Civil Appeal
No. 9775 OF 2011 (SC))]
Purchasing activity alongwith ‘quality control
and getting the goods manufactured as per own specification’ by liaison office
constitutes PE
The applicant Columbia Sportswear
Company, a tax resident of USA was a multinational wholesaler and retailer
of active outdoors apparels. In the year 1995, the applicant
established a liaison office in Chennai for undertaking liaison activities in
connection with purchase of goods in India which included vendor identification, recommendation
and evaluation. The LO was also engaged in quality monitoring and production
monitoring for the goods purchased from India. The LO also monitored vendors
for compliance with its policies, procedures and standards related to quality,
designs, delivery, pricing and labour practices.
The applicant claimed that such activities of LO
did not constitute a “Business Connection” or a “Permanent Establishment” (PE)
in India in the view of specific exclusions for purchasing activity in
explanation (2) to section 9(1)(i) of the Income-tax Act and in Article 5 of
Indo-US DTAA. The Applicant also claimed that its activities were in the nature
of 'preparatory and auxiliary activities' and would fall under exclusions as
per Article 5 defining PE. The applicant further claimed that there was no sale
of any product in India and hence no income accrued in India.
Rejecting applicant’s claim, Authority for
Advance Ruling (AAR) observed that the exclusion in Section 9 and Article 5 was
for activities ‘confined’ to purchasing of goods. In case of applicant,
activities of LO were not ‘confined’ only to purchasing but also included
activities such as designing, quality controlling & getting goods
manufactured as per its own policies. AAR also observed that the applicant
actually transacted its business through India as all such activities carried
on by LO could not be considered in isolation and were integral part of
applicant’s business. Accordingly, the AAR held that the applicant had a
business connection in India and the LO constituted a PE in India for the
applicant under Article 5 of the Indo-US DTAA. AAR also held that an
income attributable to activities carried out by LO in India would be taxable
in India.
AAR placed reliance on the decision of the Apex
Court in Anglo-French Textile Company Ltd. v. CIT (1953) 23 ITR 101 (SC). [In favour of revenue] – [Columbia Sportswear Company
- [TS-444-AAR-2011] – Date
of Judgement : 08.08.2011
(Authority for Advance Rulings)]
Liaison
Office for collecting information or purchasing goods not PE
The ITAT held that the
liaison office (LO) of the assessee engaged in purchasing goods or merchandise
or collecting information would not constitutes PE.
The ITAT observed that the
duties or activities of the LO are “confined to communicating and co-ordinating
of purchase and is not to be a part of contract of purchase by itself, other
than identifying the buyer to the manufacturer and the ultimate affiliates to
whom the goods are sent.”. The ITAT observed that all purchase orders
were issued by the office in USA and only the goods were supplied to various
affiliates.The ITAT observed that the liaison office was clearly not an office
which was floating tenders, placing purchase orders and taking physical
delivery of the goods, since it was only an agency office of the
assessee or buying agents for all its affiliates in the course of its
activity as agent to see that the various affiliates receive the goods they
want and to the quality they expect. The ITAT thus held that the LO of the
assessee did not constitute PE in India. The ITAT also held that the activity
of the liaison office, being well within the limits prescribed by the RBI and
its activity being strictly for purchasing for its affiliates out of
India, Explanation 1(b) of Section 9(1)(i) was attracted in
the case of the assessee and income was not deemed to accrue or arise in India.
[In favour of assessee] – [Nike
Inc v. ACIT (International
Taxation) [TS-116-ITAT-2008(Bang)] –
Date of Judgement : 28.05.2008 (ITAT Bangalore)]
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