Taxability of Liaison offices in India

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Section 9 of the Income Tax Act creates a deeming fiction by categorizing the incomes and situations in which the income shall be deemed to accrue arise in India. The provisions of these sections apply irrespective of the residential status of the person.  

As per Section 9(1)(i) of the Act, LO would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India. As per Article 5 read with Article 7 of the relevant DTAA, an LO would be taxable in India, in case it constitutes a PE of its foreign parent in India.


Generally, the tax authorities have been raising a contention that the LO constitutes a Permanent establishment / or under section 9 has a business connection with its foreign parent in India. Therefore, any receipt (or part thereof) due to the LO or to its foreign parent from any activity in India have been held as liable to tax in the hands of the LO in India (in certain cases without appropriate allowance for expenses).


Against the aforesaid contention LO’s are raising a contention that,


  1. They are prohibited from carrying on business in India (as per RBI guidelines) and that no profits could be attributable to the activities carried out by them in India.
  2. The activities carried out by these offices are incidental to the main business of the company and they neither earn any income from their activities in India, nor will it be possible to earn any income in India and hence no income can be deemed to have accrued or arisen in India.
  3. Though they have a fixed place of business they are carrying on the activities which are of preparatory and of auxiliary character.
  4. They are carrying on the activities of supportive or auxiliary nature to the main activity undertaken by their respective head office and hence profit attributable to the activities are not taxable in India as per the DTAA.


(AAR) has recently pronounced a ruling in the case of Angel Garment Ltd (287 ITR 341) that an LO established with a view to merely undertaking ‘purchasing activities’ in India (such as collecting information about Indian suppliers, acting as a communication channel between the foreign parent and Indian suppliers etc.) cannot be held liable to tax in India.


However, if a liaison office engaged itself into the commercial or revenue generating activity it may said to have constitute a PE of a foreign enterprise or has a business connection within the meaning of section 9 of Income Tax Act. Consequently, the profit attributable to the said activity would be liable to tax in India. If the significant part of the main revenue generating activity of the foreign entity is carried out in India the liaison office may be treated as a permanent establishment and hence may be taxable for the profits attributable to it.


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