Tax ruling hits foreign companies with liaison staff

In a significant ruling by the Authority for Advance Rulings (AAR) titled Singapore Tourism Board v Director of Income Tax-II (International Taxation) Delhi, it was clarified that a foreign company cannot escape its tax liabilities on benefits provided to employees in its India-based liaison offices on the pretext that such income did not arise in India.

The applicant, a company incorporated in Singapore seeking to promote Singapore tourism, had established several liaison offices in India and had employees based in these offices. The company did not carry out any business activities through these liaison offices, no income accrued in India and the expenses relating to the liaison offices were reimbursed by the Singapore office of the company.

The company contended that it was not liable to pay fringe benefit tax in India because its employees generated no income in the country. It argued that the employees of its liaison offices merely worked there and that the expenses relating to the Indian offices were reimbursed from its Singapore headquarters. The applicant also enclosed copies of approvals obtained from the Reserve Bank of India for the establishment of the liaison offices, an audited balance sheet and a statement of income and expenditure.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in, lbhasin@vsnl.com or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.