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Liaison offices carrying out preparatory and auxiliary activities does not constitute a PE


A Japanese company had established its liaison office (LO) in India for many years. In earlier years, pursuant to a dispute, the Income tax Appellate Tribunal (Tribunal) held that the LO did not constitute a Permanent Establishment (PE) under the Agreement for Avoidance of Double Taxation (Treaty) between India and Japan since its activities were preparatory and auxiliary in nature.

The Assessing Officer (AO), subsequently (for the year under consideration) observed that the activities were not auxiliary in nature, instead, were core to its business operations. It was held that the LO was actively carrying out commercial business activities on a regular basis and accordingly, constituted a PE in India.

On further appeal, the Tribunal observed that the LO was providing support services to its head office, which were preparatory and auxiliary in nature. Further, no evidence was brought on record by Revenue authorities to hold that the LO concluded business contracts on behalf of its head office or rendered services to a third party. Also, the funds of the LO were being utilized for restricted activities and not for trading purposes. In the absence of any evidence, it was held that LO did not constitute a PE in India.

The Reserve Bank of India (RBI) has proposed to amend regulations governing operation of branch / liaison offices (BO / LO) in India. A draft circular has been uploaded on RBI's website for public comments. If approved, the new regulations would apply from July 1, 2008. Key highlights of the proposed amendment are:

  • Application (other than those engaged in insurance and banking) seeking approval for establishing a BO/ LO to be routed through Authorised Dealers (ADs) to RBI. ADs to verify the application and then forward to RBI for approval
  • A Unique Identification Number proposed to be allotted to both existing as well as new BO / LO, which is required to be quoted in all correspondence with RBI
  • Annual activity certificate from the auditors to be submitted to ADs instead of RBI
  • Power to extend validity period of LO proposed to be delegated to ADs
  • Track record of profitability and net worth of the applicant to be considered for granting approval.

For further information please contact:
Bobby Parikh, Mumbai
T. +91 22 3021 7010

Mukesh Butani, New Delhi
T. +91 11 3081 5010



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