Delhi Tribunal rules on whether sales promotion activity of Liaison Office is taxable in India

This Tax Alert summarizes a recent ruling of the Delhi Income Tax Appellate Tribunal (Tribunal) in the case of Brown & Sharpe INC, (Taxpayer) on the taxability of sales promotion activities carried out by Liaison Office (LO) on behalf of its Head Office (HO).

Having regard to the facts of the case, the Tribunal ruled that the LO was engaged in promoting sales in India and, hence, income attributable to the LO is taxable in India.

Establishing an LO in India is one of the modes available for a foreign company for setting up an initial presence in India. The exchange control regulations in India permit setting up of an LO, amongst others, for the purpose of (i) representing the parent/group company in India, (ii) promoting export/ import from or to India, (iii) promoting technical collaboration of parent company with Indian companies and (iv) acting as a communication channel between the parent company and Indian companies. In most cases, LOs are set up to provide information about the Indian market to their overseas HO.

In terms of applicable exchange control regulations, an LO is not permitted to perform commercial, trading or industrial activities and should maintain itself out of inward remittances received from its HO. Thus, an LO may not earn income in India. From a tax treaty perspective, the activities that are permitted to be carried on by an LO in India under the exchange control regulations may generally be regarded as “preparatory and auxiliary”in nature. Hence, even though an MNC may establish an office in India in the form of an LO, it may not be regarded as constituting a Permanent Establishment in India. However, actual conduct of LO will need to be determined having regard to the exclusions provided under the applicable tax treaty to arrive at a definitive conclusion. Whether or not the activities of an LO is preparatory and auxiliary has been a subject matter of investigation and debate.

The present ruling indicates that where the LO engages in promoting the product range of the HO, its activities may not be regarded as being of a preparatory or auxiliary in nature, so as to be excluded from taxation in India.