Liaison offices under pressure over tax

Liaison offices of foreign companies are under strict scrutiny by tax authorities as regards their activities in India. Recently the Income Tax Appellate Tribunal and the Authority for Advance Ruling were faced with the question of whether activities undertaken by the liaison office of two separate Korean companies constituted a permanent establishment (PE) of such companies in India.

The authority dealt with this question in the case of KT Corporation (the applicant), where the liaison office in India was set up as a communication channel and was primarily involved in collecting information, holding seminars and receiving trade enquiries.

The liaison office had no authority to conclude contracts on behalf of the applicant. Pursuant to setting up the liaison office, the applicant entered into a reciprocal carrier services agreement (RCSA) with Vodafone Essar South Limited (VESL), an Indian company, for provision of certain services. The liaison office was not involved in the pre-bid survey or technical analysis with respect to the RCSA. The authority held that the liaison office’s activities were essentially auxiliary and preparatory in nature and therefore did not constitute a PE in India.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.