06 十一月 2014

Doing business in India through Liaison Office

by Ashish Karundia

The way Indian economy withstood global economic slowdown has made India a very alluring destination for foreign investments. For testing Indian waters, many Multinational Companies (‘MNCs’ or 'HO' or 'Non-resident') prefer opening a Liaison Office (‘LO’) in India. LO can be set up in India only after obtaining permission from Indian central bank i.e., Reserve Bank of India (‘RBI’). LO can carry out only restricted activities viz.,

  • Representing parent company/ group companies in India;
  • Promoting export/import from/to India;
  • Promoting technical/financial collaborations between parent company/ group companies and companies in India
  • Acting as a channel of communication between the MNC and the potential customers in India

In a nutshell, LO is not permitted to undertake any business activity in India and thus, cannot earn any income in India. Further, expenses of LO are to be met fully through permitted channels from HO outside India.

MNCs are liable to Income tax in India as per Income Tax Act, 1961 ('the Act') if, inter-alia, there exists a business connection with India. The Double Taxation Avoidance Agreements (‘DTAA’) with other countries however supersede the Act and the Act applies only to the extent it is more beneficial to the non-resident. As per the DTAA, business profits of a non-resident can be taxed in India only if the Non-resident carries on its business in India through a permanent establishment (PE).

In recent past, Indian Revenue Authorities have found that some MNCs carried on commercial operations in India under the guise of an LO and sought tax on it as if it was a PE. There has been extensive litigation surrounding the issue as to when does an LO cross the boundaries and become a PE.


Functions of LO that were viewed as taxable presence in India

  • Identifying new customers, pursuits and follow-ups with customers, price negotiation and finalization, securing orders, payments for material and post-sale support [see end note 1];
  • Conducting substantial activities such as designing of apparel with material to the taste of the customers and after adequate research, supervision of the manufacturing process etc. [see end note 2];
  • Payment of salaries and managing pay rolls of corporate audit staff [see end note 3];
  • Vendor development, developing garment designs jointly with the vendors and overseas clients, sample preparation/approval, price negotiation, order tracking, production/process control, supply chain management etc.[see end note 4];
  • Procuring purchase orders, identifying the buyers, negotiating with the buyers, agreeing to the price and thereafter requesting them to place a purchase order [see end note 5];


Functions viewed as not creating a taxable presence

  • Holding seminars, directing trade enquiries received to HO, advertising the technology used by the group [see end note 6];
  • Communicating the decision of the HO to the customers in India [see end note 7];
  • Activity of downloading information from servers, printing and forwarding to beneficiaries in India [see end note 8];
  • Enabling Indian manufactures to manufacture goods of particular specification as required by HO [see end note 9];
  • Providing training, conducting refresher course for agents about standards of service and security, accounting procedures, telecommunication systems and configurations, merchandising standards etc. [see end note10];


Filing of annual statement by MNC for their LO

In addition to the requirement of ascertaining the taxable presence, the Act requires MNCs to comply with reporting requirement for an LO in India. MNCs are required to file an annual statement with the jurisdictional income-tax officer within 60 days from the end of the financial year containing information about regulatory approval for setting up the LO, its address, tax registration of HO, details of salary to staff in LO, etc. There have been many cases of failure to make due compliance regarding taxability of employees of LO including non-compliance of tax withholding provisions in that regard. It is therefore imperative to take stock of affairs and compliance with respect to LO. The said annual statement is to be filed in electronic form along with digital signature.



Ensuring proper tax and regulatory compliance in relation to the LO is extremely important and requires meticulous planning with careful execution. The extent to which an LO is duly compliant is to be carefully analyzed in light of the activities carried out by each LOs and judicial interpretations. MNCs, therefore, have to be vigilant in structuring the format of LO so that it is not exposed to tax liability or penalties by the regulator.

[The author is Senior Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, New Delhi]


End Notes:

  1. [2012] 206 Taxman 7 (Karnataka High Court).
  2. Columbia Sportswear Co. [2011] 337 ITR 407 [Authority for Advance Rulings (AAR)].
  3. General Electric International Operations Co. Inc. [2014] 44 taxmann.com 436 (ITAT Delhi).
  4. Linmark International (Hong Kong) Ltd. [2011] 57 DTR 340 (ITAT Delhi).
  5. Jebon Corporation India - 2011-TII-15-HC-KAR-INTL
  6. K. T. Corpn. [2009] 181 Taxman 94 (AAR).
  7. Mitsui & Co. Ltd. [1991] 39 ITD 59 (ITAT Delhi-Special Bench).
  8. UAE Exchange Centre Ltd. [2009] 313 ITR 94 (Delhi High Court).
  9. Nike Inc. [2013] 217 Taxman 1 (Karnataka High Court).
  10. Western Union Financial Services Inc. [2007] 104 ITD 34 (ITAT Delhi).


Browse articles