FOREIGN FIRMS' LIAISON OFFICES TAXABLE HERE
A recent ruling by The Authority for Advance Rulings (AAR) is
likely to set the road map for assessment of foreign companies
that operate through liaison offices (LOs) in India. AAR's ruling
brings to light that business activities carried on in India,
even if these are carried out by LOs, will be subject to taxes
in India.
A ruling was given
in case of 'UAE Exchange Centre', a company incorporated in
Abu Dhabi and having liaison offices in Kochi and several
other places in India. This UAE company had sought an advance
ruling on whether any income would accrue or arise in its
hands in India, from the activities carried on by it in India.
Relying on the
Indo-UAE tax treaty, the AAR observed that activities carried
on by the LOs that were preparatory and auxiliary in nature,
would not lead to the existence of a permanent establishment
(PE) in India. In the absence of a PE, there would be no tax
incidence in India.
However, those
activities carried out in India that were part of the main
work of the UAE-company would create a PE in India. India
can tax the business profits of a foreign entity, only if
a PE exists in India.
The AAR closely
examined, the entire gamut of activities carried out by the
LOs. UAE Exchange Centre, the UAE-based company, had entered
contracts in the UAE with NRIs to remit Indian currency to
nominated banks or beneficiaries in India. One particular
mode of remittance, resulted in the LOs downloading data such
as the details of the beneficiaries and the amount to be remitted.
The LOs then proceeded to print the cheques or drafts and
dispatched the same.
The AAR held that
these activities amounted to performing the contract, at least
in part in India, and a PE was created in India.
Thus, as per Indo-UAE
treaty norms, the profits of the UAE Exchange Centre would
be taxable in India, but only to the extent that they could
be attributed to such activities carried out by the LO.
. A section of
tax professionals were of the view that as the Reserve Bank
of India prohibits LOs from carrying on any trade or commerce
in India, there can't be any profit attribution in India.
Thus, there would be no tax incidence, if the foreign companies
operated through LOs. With AAR's ruling, these views will
be difficult to sustain.
Based on the facts
of this case, the tax professionals agree with the crux of
the ruling, but are quick to point out that not all LOs carry
out business activities in India. Indraneel Roy Choudhury,
executive-director, PwC, echoes the views of tax experts by
pointing out that "there can't be a generic application
of this ruling."
Adds, VN Srinivasa
Rao, partner, E&Y, "If the services performed in
India are remote from actual realisation of profits, attribution
of profits would be difficult." Further, tax experts
say, "If an LO constitutes a PE, only that part of the
profits 'attributed' to activities in India, should be taxable,
and not a 'considerable portion' of the profits, as stated
in the CBDT circular covering BPO activities."
