Delhi High Court Says that Liaison and Project Offices Don’t Qualify as ‘Permanent Establishments’
Recently, the High Court of Delhi in its judgement of DIT Vs. Mitsui & Co. Ltd (ITA 13/2005) clarified the criteria of classification of taxpayers as being a Permanent Establishment in India and the income directly or indirectly attributable to them being taxable. The judgement established that where the taxpayer is not carrying on any activity of a business, it cannot be regarded as Permanent Establishment. Since they didn’t set up a Liaison office in India for business purposes, the Liaison and Project Offices cannot be regarded as a Permanent Establishments.
The present judgement has endorsed the fact that, the taxpaying foreign offices are not involved in business transactions with Indian customers. That means no income accrues or arises in India. Accordingly, they should not be construed as a Permanent Establishment to enable them tax exemption in the view of DTAA. This will be beneficial to promote investments in India in the long run.
The Tribunal held by the Indian tax authorities noted during an inspection of a Multinational Company (MNC) which set up a liaison office in India. That is the assignees’ activities created a permanent establishment (PE) in India based on the following facts:
The assignee is a non-resident company with its headquarter in Japan, and it only has two projects in India.
Income Tax Return filed by the taxpayer was subsequently revised.
The assignees were involved in all pre- and post-sale activities, including marketing, sales, negotiations, and concluding contracts with clients in India.
The nature of activities of the assignees was considered as the apex of the activities of the group of companies established overseas. As services performed by the assignees were not secondary; therefore, their presence created a PE in India.
The assignees had unrestricted access and dedicated resources of the LO to carry out their tasks and services. Office cabins and desks were assigned to them for the duration of their assignment in India, and they were also allowed to use the business premises of the LO to carry out the business activities of the overseas group companies.
The MUC contended that it complied to the RBI regulations to set up a liaison office in India and that the said LO merely provided information to the overseas offices and, thus zero income was declared in respect of its liaison activity in India. The income from the project was considered as taxable by the AO under Section 44BBB of the Act by taking 10 percent profit of the total turnover and thus added some amount to the taxpayer’s income disallowing the loss claimed. The Income Tax Appellate Tribunal concluded that the taxpayer was not a PE and any income directly or indirectly attributable to these branches or offices is not taxable in India.
The Court justified the ruling based on the following points:
- A fixed establishment of business through which the usual business of an enterprise is carried out and not just have an office, factory or workshop will establish that the taxpayer is a PE. (Articles 5(1) & (2) of DTAA).
- The use of facility solely for search, display or for the maintenance of the place for business solely for the purchases of goods, collecting information or for any other activity “preparatory or auxiliary in character” would put them outside the ambit of a PE.
- It is insufficient to claim that the LO was used to carry on the business of an enterprise. Simply because some portion of the telephone expenses were attributable to the LO or that the chief representative set up a Liaison Office and a project office as well.
To establish their business in India, the foreign companies enter the country through Liaison offices and Project Offices.
Primarily Liason offices are an extension of the Company headquarter abroad. They act as a media to connect the Parent Company with the Indian counterparts. In order to set up a Liaison Office in India, it is mandatory to comply with the RBI regulations. The LO is, however, prohibited from carrying out any commercial activities in India directly or indirectly.
On the other hand, Project Offices do not only function as channels of information but can also undertake all activities related to the execution of a project. The RBI regulations permitting the setting up of project offices in India imposes restrictions on them preventing them from undertaking any activity other than execution of a project.