Income Tax, Issue Update

Liaison Office in India: Factors leading to formation of Permanent Establishment in India

Case: Union of India vs. U.A.E. Exchange Centre, Supreme Court

Outcome: Assessee

Facts

  • The Assessee had set up its first liaison office in Cochin, India in January, 1997 and thereafter, in Chennai, New Delhi, Mumbai and Jalandhar in India. The activities carried on by the Assessee from the said liaison offices were stated to be in conformity with the terms and conditions prescribed by the RBI in its letter dated 24.9.1996. The entire expenses of the liaison offices in India were met exclusively out of funds received from UAE through normal banking channels. Indisputably, it was asserted by the Assessee that its liaison offices undertake no activity of trading, commercial or industrial, as the case may be. The Assessee had no immovable property in India otherwise than by way of lease for operating the liaison offices. No fee/ commission was charged or received in India by any of the liaison offices for services rendered in India. It was claimed that no income accrued or arose or deemed accrued or arose, directly or indirectly, through or from any source in India from liaison offices within the meaning of Section 5 or Section 9 of the Act.
  • The Assessee had approached the Authority for Advance Ruling, which in its decision had concluded that liaison office constituted permanent establishment in India and accordingly the profits attributable to it were chargeable to tax. Following the impugned order, the department issued notices pertaining to the same under section 148 of the Act.

Check out other issue in this case: Factors leading to the formation of Fixed Place Permanent Establishment

Key Points

  • The Reserve Bank of India had permitted the taxpayer to carry out limited activities in India. This permission did not allow Assessee to enter into a contract with anyone in India, but only to provide service of delivery of cheques/ drafts drawn on the banks in India. The Liaison Office was not supposed to undertake any other activity of trading, commercial or industrial, nor was it allowed it enter into any business contracts in its own name without the permission of Reserve Bank of India. The activities carried out by the Assessee was that of downloading particulars of remittances through electronic media and then printing cheques/ drafts drawn on the banks in India, in accordance with the instructions of the NRI remitter. While doing so, the liaison office of the Assessee in India remained connected with its main server in UAE and the information residing there was accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India.
  • Thus, it was inferred that services of the liaison office were in the nature of the preparatory and auxiliary character and therefore covered by Article 5(3)(e) of the tax treaty. Hence, such activities did not qualify as a permanent establishment in India. The transactions were completed with the remitters in UAE and no charges towards fee/ commission were collected by the liaison office in India in this regard.
  • Reliance was placed on the decision of Supreme Court in case of Assistant Director of Income Tax-1, New Delhi vs. E-Funds IT Solution Inc., wherein it was concluded that the documents/evidence filed by the assessee showed that no part of the main business and revenue-earning activity of the companies was carried on through a fixed business place in India which was at their disposal. It was clear from the above that the Indian company only rendered support services which enable the Assessees, in turn, to render services to their clients abroad. This outsourcing of work to India did not give rise to a fixed place Permanent Establishment in India.
  • Therefore, in the present facts of the case, the activities of the liaison office did not result in a permanent establishment in India. Accordingly, it was not liable to tax in India.

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