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Liaison
Office held not to be taxable in India - holds AAR
In
a recent case decided by the Authority for Advance Ruling ("Authority"),
in Gutal Trading Est [2005] 278 ITR 643 (AAR) ("Applicant"),
it has been held that the liaison office of the Applicant would
not be taxable in India. The Authority examined in detail whether
the activities carried on by the liaison office of the Applicant
amounted to establishing a business connection in India, as contemplated
under the Income Tax Act, 1961 ("ITA").
A
liaison office set up in India, in accordance with Reserve Bank
of India regulations, does not prima facie attract any tax liability,
unless it constitutes a "business connection" with India as stipulated
under the ITA, or a Permanent Establishment ("PE") in India
under the applicable Double Taxation Avoidance Agreement (“Tax
Treaty”).
In
the present case the Applicant was engaged in Dubai as an agent
of a company, for which company the Applicant performed marketing
activities. The Applicant was merely to disseminate information
about the products of the "principal company", to provide direct
support to the principal company for obtaining data related to
the credit risk and credit rating of the customers/ potential
customers, and to provide assistance for collecting the amount
of outstanding dues from customers. The terms of the agreement
specified that all the business dealings were to be carried out
by the customer/potential customers directly with the "principal
company”. The Applicant had no authority to conclude contracts
on behalf of the principal. Based
on the above assignment agreement, the Applicant had set up liaison
office in India to carry out the following activities:
- holding
seminars, conferences, or shows to provide information about
the technology being used by the principal in manufacturing
reflective glasses of different kinds and to give replies to
the queries of the customers; and
- receiving
trade enquiries from the customers so as to pass on the same
either to their Dubai office or directly to principal company.
The Applicant
had a status of an "individual establishment" in Dubai, which
was not a taxable entity under the UAE tax regime.
The Authority,
did not examine whether the liaison office of the Applicant would
constitute a PE as it relied on the reasoning given in the case
of Abdul Razak and held that the provisions of the
Tax Treaty between India and UAE, the respective contracting states,
would not apply, as the Applicant was not a resident for taxation
purposes in Dubai (UAE). This was because of the fact that the
tax regime in UAE did not tax the Applicant.
The Authority
scrutinized the above activities of the liaison office to see
whether it amounted to having a business connection in India.
It examined the term business connection as defined under the
ITA and as discussed in the cases of UAE Exchange Centre, LLC
and Sutron Corporation. It held that the scope of activities
of the liaison office were not contemplated either under the definitions
of business connection or the judicial elucidation on the same.
It also held that since the activities were only in the nature
of dissemination and collection of information and not for the
procurement of any contracts, the liaison office operated only
on the lines of a "Communication Channel". It further stated that
since this communication channel was between the potential customers,
traders, and industry on the one hand and the principal company
on the other, there was no intimate connection between the two
for the liaison office to be termed as a business connection.
The Authority
further held that since the agreement did not authorize the liaison
office to either negotiate or conclude contracts, there was no
business connection with India. It was contended before and noted
by the Authority that the principal company had made separate
arrangements through its independent agents in India for the sale
of its products, and thus the liaison office did not earn any
income in India.
The Authority
concluded that the activities of the liaison office cannot be
held to be earning any income for the Applicant in India, and
since there was no business connection in India no income could
be said to be accruing to the Applicant in India.
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You
can direct your queries or comments to the authors
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Source:
Gutal Trading Est [2005] 278 ITR 643 (AAR)
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