Monday, 26 October 2015

Karnataka High Court rules procurement activity carried out by a liaison office in India is not taxable



This Tax Alert summarizes a recent ruling of the Karnataka High Court (HC) in the case of Columbia Sportswear Company (Taxpayer) on whether procurement activity undertaken by a liaison office (LO) created a taxable presence in India. The HC noted that the purchase exclusion provided in the Tax Laws (ITL), as well as permanent establishment (PE) exclusion under the India–US Double Taxation Avoidance Agreement (DTAA), is available where a non-resident (NR) purchases goods in India for the purpose of exports. Having regard to the facts of the case and its earlier decisions, the HC held that the various activities performed by the LO were for carrying on the activities of purchasing goods for exports. Additionally, they could also fall within the ambit of PE exclusion for “collecting information” under the DTAA. Accordingly, the Taxpayer is not taxable in India.

The ITL, as well as the DTAA, provides for an exclusion from taxable presence where the activity of an NR is limited to purchase of goods in India for the purpose of exports. However, whether or not the exclusion applies is a question of fact that has to be examined in each case. Under the facts of this case, the HC reached a conclusion that, as the LO is engaged in activities that are connected to and necessary for the purchase activity, it satisfies the requirement of PE exclusion under the DTAA provisions. Hence, it does not result in a taxable presence for the Taxpayer in India.

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