A non-resident company operates in India either through a Branch/Project Office (‘BO/PO’) or a Liaison Office (‘LO’) after getting approval from the Reserve Bank of India (‘RBI’). The BO/PO constitutes a Permanent Establishment of such foreign entity and is, therefore, required to file return of income declaring the taxable income generated in India. However, the foreign entity operating through a LO does not require to file return of income on the ground that LO is not permitted by RBI regulations to undertake commercial activities.
Therefore, in order to seek regular information from LOs, the Fiscal Budget, 2011 introduced a new provision (i.e. section 285) in the Indian income tax laws requiring the non-resident entity having a LO in India to file annual statement. Such statement is to be submitted electronically within sixty days from the end of a financial year in the format recently prescribed by the Central Board of Direct Taxes (‘CBDT’).
Let’s try to understand the thought process of introducing this provision. Generally, LO is set up to undertake preparatory & auxiliary services which primarily includes exploring and understanding the business environment for its parent company, acting as communication channel and promoting technical/financial collaborations with Indian companies. However, LO is not permitted to undertake any commercial/trading/industrial activities in India either directly or indirectly. There is a fine distinction between commercial business activities and auxiliary activities which are carried out by the LO. What is an auxiliary activity to a non-resident entity may not be so in view of the tax authorities.
Therefore, the taxability of LOs in India have for long been a matter of debate between the Indian tax authorities and foreign companies. Based on the functions rendered by the LOs, the tax authorities generally take a view that these activities represent the principal activities of the non-resident business in India and hence are liable to tax in India. On the other hand, the non-resident entity argue that the activities performed by the LO are within the purview of approval granted by RBI and are merely ‘preparatory & auxiliary’ in character. Given this divergent views, the tax authorities took an aggressive approach and conducted surprise checks in the last 3 years in the premises of various LOs of the non-resident located all over India. The purpose was to collect first-hand information about the actual activities undertaken by the LOs and thus forming an opinion that whether the activities undertaken by LOs are permissible activities or not. However, such surprise checks cannot be conducted at each LO.
Given this, the Indian government took a pragmatic view of introducing the new provision seeking regular information from non-resident entities regarding the activities of their LOs in India. Though, per the RBI guidelines, LOs are required to submit an Annual Activity Certificate (‘AAC’) to the RBI as well as to the tax authorities, yet such AAC is not providing the exhaustive information/details of the activities of the LOs to the tax authorities.
The annual statement (i.e. Form No 49C) requires providing information seeking set-up details of LO, activities undertaken by LO, and employees of LO etc. However, such annual statement also covers all the activities of the non-resident having any relation with India i.e. details of income/expenses of the non-resident earned from/in India, purchase/sale/service transaction from/to Indian parties etc and thus not restricted to LO only.
To sum up, the non-resident entity would be required to obtain and submit a large volume of information relating to their operations in India. Furthermore, they would be required to document the role played by the LO in the overall operations since the tax authorities may use such information from annual statement to question the activities of the LOs and thus determining the taxability of non-residents in India.
Therefore, in order to seek regular information from LOs, the Fiscal Budget, 2011 introduced a new provision (i.e. section 285) in the Indian income tax laws requiring the non-resident entity having a LO in India to file annual statement. Such statement is to be submitted electronically within sixty days from the end of a financial year in the format recently prescribed by the Central Board of Direct Taxes (‘CBDT’).
Let’s try to understand the thought process of introducing this provision. Generally, LO is set up to undertake preparatory & auxiliary services which primarily includes exploring and understanding the business environment for its parent company, acting as communication channel and promoting technical/financial collaborations with Indian companies. However, LO is not permitted to undertake any commercial/trading/industrial activities in India either directly or indirectly. There is a fine distinction between commercial business activities and auxiliary activities which are carried out by the LO. What is an auxiliary activity to a non-resident entity may not be so in view of the tax authorities.
Therefore, the taxability of LOs in India have for long been a matter of debate between the Indian tax authorities and foreign companies. Based on the functions rendered by the LOs, the tax authorities generally take a view that these activities represent the principal activities of the non-resident business in India and hence are liable to tax in India. On the other hand, the non-resident entity argue that the activities performed by the LO are within the purview of approval granted by RBI and are merely ‘preparatory & auxiliary’ in character. Given this divergent views, the tax authorities took an aggressive approach and conducted surprise checks in the last 3 years in the premises of various LOs of the non-resident located all over India. The purpose was to collect first-hand information about the actual activities undertaken by the LOs and thus forming an opinion that whether the activities undertaken by LOs are permissible activities or not. However, such surprise checks cannot be conducted at each LO.
Given this, the Indian government took a pragmatic view of introducing the new provision seeking regular information from non-resident entities regarding the activities of their LOs in India. Though, per the RBI guidelines, LOs are required to submit an Annual Activity Certificate (‘AAC’) to the RBI as well as to the tax authorities, yet such AAC is not providing the exhaustive information/details of the activities of the LOs to the tax authorities.
The annual statement (i.e. Form No 49C) requires providing information seeking set-up details of LO, activities undertaken by LO, and employees of LO etc. However, such annual statement also covers all the activities of the non-resident having any relation with India i.e. details of income/expenses of the non-resident earned from/in India, purchase/sale/service transaction from/to Indian parties etc and thus not restricted to LO only.
To sum up, the non-resident entity would be required to obtain and submit a large volume of information relating to their operations in India. Furthermore, they would be required to document the role played by the LO in the overall operations since the tax authorities may use such information from annual statement to question the activities of the LOs and thus determining the taxability of non-residents in India.
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