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Stringent Reporting Requirements for Liaison Offices
Indian Exchange Control regulations allow foreign companies to open a Liaison office ("LO") in India, which can undertake promotional and liaison work. LOs are similar to the concept of Representative Offices as exists in several jurisdictions. Taxand India discusses the details required in the case of a foreign companies that file a return in India with or without an LO in India.
An LO can be opened with the prior approval of the Reserve Bank of India and the regulations place restrictions on the activities of the LO. Broadly, an LO cannot carry on any activity of commercial, trading or industrial activity, but can carry on promotional activities, or act as a channel of communication between the head offices and Indian prospects, etc. Consequently, an LO would normally not be liable to tax in India, as it does not carry on any income generating activity and also, generally, it is not treated as a permanent establishment of the foreign company. Most Tax Treaties also carve out an exception from the scope of PE for any place which is used primarily for advertising, supply of information, or any other activity which is considered to be auxiliary and preparatory in nature.
The objective of introducing Section 285 of the Act is to monitor the activities of the LO and determine if the LO carries on any business activity and consequently, whether there would be a liability to pay taxes in India. However, the statement mandates the furnishing of vast amounts of information, much of which is not called upon to be furnished in the case of a foreign company that files a return in India without an LO in India.
The extent of information being sought seems to clearly signal that the Revenue department is gearing up to analyse the activities of the LO from several aspects and it could lead to regular interface with the authorities and potentially, to protracted proceedings. It is evident that these requirements would increase the cost of compliance for the LOs in India and it could dissuade foreign companies to adopt the LO mechanism in India. The reason for allowing a window for foreign companies to set up an LO was to attract foreign companies to test waters in India and to eventually attract investments into India. If the monitoring mechanism is so rigorous, it could dissuade investors from even taking the first step.
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