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Standing Committee has to only prima facie examine allegations of profiteering and not record any reasons of its satisfaction while referring matter to DGAP for detailed investigation: NAAAssessee cannot be expected to explain source of cash payments in respect of entries made in creditor's books of accounts: ITATAdditions framed u/s 68 on account of advances received, cannot be sustained if no tangible evidence is put forth in their support: ITATComputing ALV of unsold housing units & taxing the same under income from house property, is incorrect, if assessee is engaged in real estate sector: ITATProvisions of Section 10AA are applicable onto existing SEZ units under erstwhile regime, which did not exhaust deduction for 10 consecutive AYs: ITATCus - Charges of aiding or abetting fraud are not tenable if no evidence exists to show that appellants had any knowledge of it - penalty u/s 114A quashed: CESTATST - Penalty u/s 76 need not be imposed if assessee is unable to pay tax at correct rate on account of different rates being payable for services provided, during relevant period: CESTATCX - Cenvat credit allowed on manpower used to operate Jetty in factory premises, which was used for import and export purposes in relation to assessee's business: CESTATStriking down ST levy on Ocean Freight - Whether a mirage or a true relief?New GST Return Filing - Joint Secretary, GST Council, Mr S K Rahman to join Webcast with GSTN speaker at 11 AM to 2 PM todayImpact of CoronaVirus - Customs goes for 24 x 7 cargo clearance at all Customs formationsST - There being no relation of service provider and service receiver, SCN demanding service tax is totally misconceived, holds Member(J), but Member(T) disagrees; matter referred to third Member: CESTATCus - 21/2002-Cus - Impugned aircraft Hawker 850 XP, post import is not for non-scheduled (passenger) services or non-scheduled (charter) services but only for private use of Oberoi group - benefit of exemption unavailable: CESTATCus - Department has refunded sale proceeds of gold as was received in year 2001 - appellant is, therefore, not entitled for the gold as such nor its market value as prevalent in the year 2015: CESTATImport of aircraft - Neither Aviation nor Aircraft Rules empower DGCA to investigate about compliance of undertaking given in terms of Customs notification - decision on entitlement definitely lies with Customs only: CESTATCX - Revenue preferring appeal against O-I-A , therefore, when matter was lis pendens , no application for refund could be filed - not hit by limitation: CESTATCX - Notification 4/2006-CX - Exemption notification is is qua processes and not even qua manufacture or the manufacturer: CESTATCX - Appellants did not use power for packing or bundling of match boxes but the machine dipped match splints purchased by them from other match manufacturers were manufactured with the aid of power - benefit of 4/2006-CX unavailable: CESTATCX - Classification - between a residuary entry and a more specific entry, the latter has to be preferred - Beneficiale Liquid & DSN capsules are rightly classified under CETH 3004 as medicaments: CESTATCus - charges of undervaluation of imported goods must be established through proper methods specified in law - such burden of proof cannot be shifted onto the importer: CESTATAO cannot put self into shoes of a businessman so as to gauge reasonableness of business expenditure or its nexus with commercial expediency: ITATExercising power of revision is sustained where original assessment order is based on bald claims of assessee & involves to enquiry by AO into such claims: ITATCIT(A) cannot refuse to dispose off appeal on merits on grounds of non-payment of tax u/s 249 where assessee seeks more time to pay the same: ITAT
When does Liasion Office become a PE?

FEBRUARY 18, 2009

By Neeraj Dubey, Advocate

A Liaison Office (LO) is a place of business which is permitted to act as a conduit of communication between the principal place of business and entities in India. For opening a LO in India, the Reserve Bank of India (RBI) grants permission under section 29(1) (a) of the Foreign Exchange Regulation Act, 1973, subject to certain conditions which defines the ambit of work that can be performed by LO. The scope of LO activities includes representing in India the parent company/group companies, promoting export import from/to India, promoting technical/financial collaborations between parent/group companies and companies in India.

A LO is required to operate and maintain solely out of inward remittances received from abroad through normal banking channel. Generally, without prior permission of the RBI, a LO is not supposed to undertake any activity of a trading/commercial/industrial nature or enter into any business contracts in its own capacity, charge any commission/fee for LO activities/services rendered by it or otherwise in India, borrow/lend any money from/to any person in India, acquire (otherwise than by way of lease for a period not exceeding 5 years) transfer or dispose of any immovable property in India.

The basic premise to decide whether LO is a Permanent Establishment (PE) or not is to draw an inference from what it does in India and not from what it is ordinarily expected to do. This inference can be drawn from various rulings of the Income Tax Tribunal and the Authority for Advance Ruling that have defined the scope of activity of a LO. In UAE Exchange Centre LLC, In re [2004-TIOL-03-ARA-IT), it was held that any LO engaged in part-performance and not merely auxiliary services is deemed to be a PE . The service involved in such cases will itself be understood as business in view of the regularity and continuity of such service. However, if the activities undertaken by a LO are merely “preparatory and auxiliary” in nature, there can be no inference of a PE. Further, in Western Union Financial Services, 2006-TIOL-58-ITAT-Del, maintenance of fixed place of business, solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which had a preparatory or auxiliary character was not considered a PE.

In order to verify whether the activities of an LO are auxiliary or have transgressed the scope of the permitted conditions, there needs to be clarity on the meaning of “auxiliary”. Per Black's law dictionary, “auxiliary” means “aiding or supporting” and “subsidiary”. Any activity beyond the scope of the defined functions such as the frequent use of the premises by the parent company staff, “soliciting and receiving” on behalf of the parent company and part performance of any contract by a LO would impact the LO and constitute it as a PE in India.

A non-resident or a foreign company is treated as having a PE in India under Article 5 of the Double Taxation Avoidance Agreements (DTAA) entered into by India with different countries, if the said non-resident or foreign company carries on business in India through a branch, sales office etc. or through an agent (other than an independent agent) who habitually exercises an authority to conclude contracts or regularly delivers goods or merchandise or habitually secures orders on behalf of the non-resident principal.

This notion of PE excludes “sporadic or isolated activities”, but covers activities which have “continuity” or “durability.” PE shall not include enterprises engaged for the maintenance of fixed place of business solely for the purpose of purchasing goods or merchandise, or collecting information for the enterprise, or maintenance of a stock of goods or merchandise belonging to the enterprise solely of processing by another enterprise, or the purpose of advertising for the supply of information, or scientific research, or other activities which have a preparatory or auxiliary character for the enterprise, or any combination of activities mentioned hereinabove, business through a broker, commission agent or any agent of independent status, provided that such person is acting in the ordinary course of their business.

Clearly LO is not a PE, but it can come within the meaning of PE in case some of its activities goes beyond the prescribed/permitted premise by the RBI. When a PE, the profits of the non-resident or foreign company attributable to the business activities carried out in India by the PE becomes taxable in India under Article 7 of the DTAA.

If a foreign enterprise carries on business in India through a PE situated here, the profits of the enterprise may be taxed in India but only to the extent attributable to the PE. Even the profits which those enterprises might expect to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE, will be taxed in India. The profits to be attributed to a PE are those which that PE would have made if instead of dealing with its head office, it had been independently dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. This corresponds to the “arm's length principle” which per the section 92F (iii) of the Income Tax Act means a transaction in which the buyers and sellers of a product act independently, have no relationship to each other and ensure that they are acting in their own self interest and are not subject to any pressure or duress from the other party.

In a matter concerning taxation of Sony Entertainment Television (“SET”) Singapore, t he Bombay High Court ( “HC”) in August 2008 held that foreign companies remunerating their Indian subsidiaries on an arm's length basis will not be liable to pay tax in India. If the arm's length basis is not maintained then the parent company is very likely to be taxed in India. The HC upheld the contention of SET Singapore, according to which even if the foreign company has a PE in India, it is not liable to pay tax if the foreign entity pays arm's-length remuneration to the PE of the company and accordingly, SET Singapore is not liable to pay tax in India and only SET India is liable for tax with regard to its own income.

A non-resident entity may outsource certain services to a resident (Indian) entity. If there is no business connection between the two, the resident entity will not be a PE of the non-resident entity, and the resident entity would have to be assessed to income-tax as a separate entity. However, it is possible that the non-resident entity may have a business connection with the resident (Indian) entity. In such a case, the resident (Indian) entity would be treated as the PE of the non-resident entity. Clearly, for a LO, if the scope of its activity expands from being auxiliary or preparatory to anything more, it would be a PE.

(The author is with PSA, Legal Counsellors)