FOREIGN FIRMS\' LIAISON OFFICES TAXABLE HERE

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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."

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