Liaison Office - Legal requirements and Income Tax issues - A study

by Ms.B.Mala, CA, Associate and
Ms.Bhavya Rangarajan, Advocate,

M/s Subbaraya Aiyar, Padmanabhan & Ramamani Advocates, Chennai

A foreign company planning to set up business operations in India has the following options to set up a business entity:-

1. As an incorporated entity under the Companies Act 1956 through Joint Ventures or wholly owned subsidiaries or
2. As an unincorporated entity through Liaison Office/representative office or project office or branch office of a foreign company.

Such offices can undertake activities permitted under the Foreign Exchange Management (establishment in India of branch office or other place of business) Regulations 2000.

The setting up of a Liaison Office in India is regulated by the Foreign Exchange Management Act (FEMA) 2000. The approving authority is the Reserve bank of India (RBI ). A Liaison Office could be established with the approval of Reserve Bank of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitating technical/financial collaborations.

Definition

'Liaison Office' means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel;

No person resident outside India shall, without prior approval of the Reserve Bank, establish in India a branch or a Liaison Office or a project office or any other place of business by whatever name called.

Further, no person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, without prior permission of the Reserve Bank, shall establish in India, a branch or a Liaison Office or a project office or any other place of business by whatever name called.

Permitted activities

The Liaison Office cannot undertake any commercial activity directly or indirectly.

Permitted activities for a Liaison Office in India of a person resident outside India

• Representing in India the parent company/group companies.
• Promoting export import from/to India.
• Promoting technical/financial collaborations between parent/group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

As per statutory provisions, the activities of a Liaison Office are much restricted and it cannot legally venture into securing orders from the customers in any manner either directly or indirectly. No doubt, the Liaison Office is a fixed place and the activities conducted by it are seemingly business activities but these activities are restricted to preparatory or auxiliary activities only. Besides, the plain meaning of the word ‘auxiliary’ is ‘aiding or supporting, ancillary and subsidiary’. Such ‘aiding’, ‘assisting’ or ‘supporting’ are in relation to the main activities of the enterprise

Procedure for setting up a Liaison Office

A person resident outside India desiring to establish a branch or Liaison Office in India shall apply to the Reserve Bank in form FNC 1 (see Annexure 1)

The Accompanying documents to the form are as under:

• English version of the certificate of incorporation/ registration, and Memorandum and Articles of Association attested by the Indian embassy/ notary public in the country of registration
• Certified copy of the latest audited balance sheet of the applicant company / firm
• Letter of Authority authorizing the Liaison Office representative of the proposed Indian Liaison Office to submit the application, provide clarifications to the RBI and to also receive original letter of approval from the RBI

In addition it is recommended that the brochures of the parent company setting out its various operations, products on sale etc be submitted to the RBI

There is no fee for incorporation / establishment or statutory or filing fee.

The typical terms of approval as issued by the RBI would contain the following

• Except the proposed liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature, nor shall it enter into any business contracts in its own name without the prior permission of RBI

• The office in India will not render any consultancy or any other services directly or indirectly with or without any consideration

• No commission/ fees will be charged or any other remuneration received/ income earned by the office in India for the liaison activities / services rendered by it or otherwise in India

• The entire expenses of the office in India will be met exclusively out of funds received from abroad through normal banking channel

• The office in India will not borrow or lend any money from/ to any person in India without the prior permission of the RBI

• The office in India shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior permission of the RBI under s. 31 of the Foreign Exchange Regulation Act, 1973.

• The office in India will furnish to the RBI regional office, on a yearly basis,

(a) a certificate from the auditors to the effect that that the Liaison Office has complied with the terms and conditions stipulated in the letter of approval issued by the RBI and that all the expenses are met by way of inward remittances only and no income was earned by/or accrued to the office in India; 

(b) details of remittances received from abroad duly supported by inward remittance certificates;

(c) certified copy of the audited final accounts of the office in India; and

(d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during period in respect of which the office had rendered liaison services.

(e) The number of staff engaged/appointed and duties assigned to each staff.

• The office in India will not have any signing/ commitment powers accept than those that are required for the normal functioning of the office on behalf of the head office

• In case the Principal wishes to open a head office account in the books of the Liaison Office in India, the RBI can grant their approval to maintain such an account subject to the conditions that the credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the Liaison Office. Debits to the account can be raised only for meeting the expenses of the Liaison Office.

• The permission of the RBI is limited to and for the purposes of the provisions of the FEMA 2000, only and shall not be construed in any way as regularizing, condoning or in any manner validating any irregularities, contraventions, or other lapses, if any, under the provisions of any other law

• The Liaison Office is to obey the law of the land and there shall be no compromise or excuse for the ignorance of the Indian Legal System in any manner

• It should maintain a QA22C account with any nominated bank in India. This is a special type of account where only inflows are allowed from foreign countries.

• While no specific permission is required for crediting security refunds, income refunds, insurance claims and Government refunds to the bank account of the Liaison Office, specific permission of the RBI is necessary for the remittance of these amounts

• It cannot make remittances outside of India except upon closure of the Liaison Office

• The time limit for approval is three years from the date of approval, extendable for a further period of three years at the discretion of the RBI. Application for renewal should be made before the expiry of the validity period of the Liaison Office through the AD-Category 1 Bank.
• After the expiry of the time period and if no extension is approved by the RBI, the Liaison Office should wind-up its operations. It may however convert the Liaison Office into Joint venture or wholly owned subsidiary in pursuance to existing FDI policy of Indian Government.
  
  

Post incorporation regulatory filings

• After receipt of the necessary approval from the RBI, and the Liaison Office is set up, the principal is required to inform the RBI of the detailed address of the Liaison Office.
  
  
• Under Sec 592 of the Companies Act the Liaison Office is required to register with the Registrar of Companies in the jurisdiction where the Liaison Office is located by filing prescribed form 44
  
  
• The Liaison Office is required to register under the local laws such as the Shops & Establishment Act, the relevant employment laws such as Provident Fund in case number of employees employed exceed twenty
  
  
• Annually, the Liaison Office should submit with the RBI its audited accounts and APR (Annual Performance Report) from a practicing chartered accountant in India.

Income Tax

• A Liaison Office is not subject to taxation in India as it is not meant to earn any income in India.
  
  
• However, it is required to obtain Permanent Account Number and Tax Deduction Account Number from the jurisdictional Income Tax office and report the same in the Annual Activity Certificate. 
  
  
• It is required to comply with the TDS provisions in respect of payments made by it for example towards rent, salaries etc
  
  
• It is required to file a statement of affairs setting out the inward remittances as received and expenses made in India during the financial year.

Whether a Liaison Office constitutes a permanent establishment / ‘business connection’

There are several judicial decisions on this issue. The AAR and Courts have analysed the issue with reference to Section 9 of the Income tax Act and the relevant DTA. The activities of the Liaison Office in these decisions are detailed, to understand the reasoning of the Courts/ AAR in arriving at their conclusion as to whether or not the Liaison Office constitutes a PE in India. The Courts/ AAR however, have not considered whether these activities will also come within the permission granted by the RBI 

Case Laws

In the following decisions, the Court held that the liaison office does not have business connection in India 

1. Gutal Trading Est. In Re 278 ITR 643 (AAR)

The applicant set up a "Liaison Office" in India for carrying out following activities: 

(a) to hold seminars, conferences, shows so as to provide information about the technology being used by Glaverbel Belgium (GVB) in manufacturing reflective glasses of different kinds and to give replies to the queries of the customers at large;

(b) to receive trade enquiries from the customers and to pass on the same either to the Dubai office or directly to GVB;

All the expenses which are required to be incurred for maintenance of the "LO" as aforesaid, are to be met by the applicant and no income whatsoever shall be earned/generated by the "LO". In other words, the "LO" will be merely a "cost centre" having no element of profit to meet the expenses incurred therein. The situs of the source of income, if any, of the applicant shall continue to remain at Dubai and on this premise, it is stated that no income whatsoever can be said to have accrued or deemed to have accrued to the applicant in India, by virtue of its setting up of the "LO", so as to attract the charging provisions as contained in the IT Act, 1961.

So long as the ‘Liaison Office’ does not enter into negotiations with the customers in India for import or purchase of goods by the Indian customers from the ‘principal company, it cannot be said that an intimate relationship exists between the trading activity of the ‘principal company outside India and the activities of the ‘Liaison Office’ within India. Therefore, the activities of the ‘Liaison Office’ in India would not constitute a course of dealing or continuity of relationship and cannot be said to contribute directly or indirectly to the earning of income by the non-resident, in its business outside India. Therefore, it follows that the activities of the ‘Liaison Office’ as given above would not tantamount to having a "business connection" in India. as used in s. 9(1)(i) of the Act.

2. Mitsui & Co. Ltd. Vs. Assistant Commissioner of Income Tax (International Taxation) (2008) 114 TTJ (Del) 903

Assessee is a Japanese company having its head office (HO) in Tokyo, maintaining liaison offices (LOs) in India. For asst. yrs. 1980-81 and 1981-82, Tribunal held that such LOs did not constitute assessee’s PE in India as their activities were auxiliary and preparatory in character. The said decision was followed by the Revenue throughout but in asst. yr. 2001-02 under consideration, the AO took a contrary view and held that LOs constituted assessee’s PE in India amenable to Indian income-tax.

The burden is on the Revenue to establish that the LOs of the assessee in India constituted a PE in the instant year because of the order of the Tribunal in the past years. As per cl. 6(e) of art. 5 of DTAA between India and Japan, if a fixed place of business is maintained by an enterprise in the other State solely with the purpose of carrying out activities of preparatory or auxiliary in character, then such a fixed place of business shall not constitute a PE so as to establish a business connection.

There is no evidence to suggest that any of the business contracts have been concluded by the LO on its own or that the LO is authorized to transact and conclude business on behalf of HO. It is also not the case of the Revenue that any of the funds received by the LO are expended for trading activities, an aspect which is on the prohibited list of the Reserve Bank of India approval or that the LOs are rendering services to third parties for consideration or generating revenue to their activities.

The mechanics of the activities of LOs as described by the AO for taking a different view do not lead to an inference that the LO by itself was authorized by HO or that it was competent to take independent business decisions for the HO. The said domain vested with the HO only. On the contrary the LO was engaged in providing support services to its HO, of course in the realm of the business being undertaken by the HO which is preparatory and auxiliary in character for the business of HO.

No contracts brought on record indicate that LO carried out any marketing activities., no business connection for assessee in India

3. Motorola Inc. vs. Deputy Commissioner of Income Tax (2005) 96 TTJ (Del)(SB) 1

Assessee-company, incorporated in Finland, undertook contracts both for supply of GSM cellular equipment to Indian cellular operators and installation thereof and later assigned the installation part of the contract to NTPL, its 100 per cent Indian subsidiary. NTPL engaged itself in activities to support assessee’s main activity and therefore, a business connection existed within the meaning of s. 9(1)(i).

The liaison office (LO) in India has not carried out any business activity for the assessee in India and its role has been only to assist the assessee in the preliminary and preparatory work. By the rules of the RBI, a LO is not permitted to carry on any business activity for a foreign enterprise. Its activities are closely monitored by the RBI. The RBI has not found any violation of the rules under which permission has been granted to the LO. The LO had certain staff who have been paid salary and perquisites but there is no evidence to show that they were transacting any business in India on behalf of the assessee. The LO has only carried out advertising activity which cannot by any means furnish business connection. The IT authorities held that the LO carried out marketing activities for the assessee in India but for this finding, there is no evidence and none of the contracts which have been brought on record indicate that the LO has carried out any marketing activities. No material or evidence to say that the LO was a business connection to the assessee in India and liaison offices were not having powers to conclude contracts on behalf of the assessee.

In the following decisions, the Court held that the liaison office is a PE

1. Columbia Sportswear Company, In Re 337 ITR 407 (AAR)

The applicant established a Liaison Office in Chennai for undertaking liaison activities in connection with purchase of goods in India. The liaison activities have subsequently been expanded to Bangladesh and Egypt. Besides co-ordinating purchase of goods from India, the Indian Liaison Office also assists the applicant in purchase of goods from Egypt and Bangladesh and engages in quality monitoring and production monitoring of goods purchased from these countries. The Indian Liaison Office of the applicant has about 35 employees in the following capacities

(i) Material management

(ii) Merchandising

(iii) Production management

(iv) Quality control

(v) Administrative support constituting teams from finance, human resources and information systems.

The Indian Liaison Office is involved in activities relating to purchase functions for the applicant. The Indian Liaison Office is engaged in

(a) Inquiry into, consideration of potential suppliers and interaction with existing suppliers for purchase of Columbia product range.

(b) Collecting information and samples of various items from manufacturers with regard to various materials available in India.

(c) Quality check of various products at laboratories to see whether it adheres to the costing and quality parameters as prescribed by the applicant.

(d) Coordinate and act as a channel of communication between the applicant and the Indian vendors.

There is, thus, clear authority for the position that all activities other than the actual sale cannot be divorced from the business of manufacture and sale especially in a case like the present, where the sale is of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. The AAR, therefore, was not in a position to accept the argument that all the activities carried on in India are confined to the purchase of goods in India.

Whether all these activities will also come within the permission granted by the RBI, was not considered here.

The Liaison Office would qualify to be a PE in terms of Art. 5 of the DTAA with USA. In terms of Art. 7 of the DTAA only the income attributable to the Liaison Office of the applicant is taxable in India.

2. Jebon Corporation India Liaison Office vs. CIT (International Taxation) 55 DTR 113

The assessee, a South Korean based company is a trader in semi-conductor components manufactured by various companies across the world. It applied to the RBI for permission to set up a Liaison Office

The employees who are working in the Liaison Office, identify new customers by way of their past experiences in the field of sales and sometimes, the customers themselves will enquire with them regarding the products based on the market information. They have a thumb rule to calculate the sales margin depending upon the end-use of the product and the competition in the market and the volumes. They get only the buying price from the head office and the margins are decided by the sales team on a case to case basis. After this, there will be a negotiation for each enquiry between the customers and the sales personnel of the office and if the customer is not happy with the price and if he asks for more discount, the personnel at Korea will discuss the same with the suppliers. After this, if the deal is through they have to process the order. They fill the details in the order processing chart and send the same to the head office which will process and place the order to the supplier. The goods will be shipped directly to the customer. The payments will be made by the customer to the head office account at Korea.

The Liaison Office work also involves following up of payments from the customers and offer sales support, if necessary.

The material on record clearly establishes that the Liaison Office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and merely because the officials of the Liaison Office are not signing any written contract would not absolve them from liability.

Further, merely because no action is initiated by RBI till today would not render the findings recorded by the authorities under the IT Act as erroneous or illegal.

The finding recorded by the Tribunal is based on legal evidence and therefore, the Liaison Office is a PE as defined under art. 5 of DTAA and the business profits earned in India through the Liaison Office are liable for tax

In the following decisions, the Court held that the liaison office does not constitute a PE

1. Deputy Director Of Income Tax (International Taxation) Vs. M. Fabricant & Sons Inc (2011) 48 SOT 576 (Mumbai)

Assessee is a regular liaison agency established in India for purchase of the entire raw materials required for the purpose of manufacture and sale abroad. The mere existence of an agency established by a nonresident in India will not be sufficient to make the non-resident liable to tax , if the sole function of the agency is to purchase goods for export. Assessee’s Liaison office cannot be considered as a PE in India and no profits can be attributed to the PE as no profit accrued or arises in India.

2. K.T. Corporation In Re 224 CTR 234 (AAR)

Assessee, a Korean company, had a Liaison Office (LO) in India, which as per statutory provisions was prohibited from securing orders from customers but was permitted only to act as a communication channel between the head office and parties in India.

From the facts made available, it has emerged that the LO, in this case, has not performed any ‘core business activity’ and has confined itself to preparatory and auxiliary activities only. In fact, all that seems to have been done by the LO fall within the parameters of supplying information which is preparatory to and auxiliary to the formation of the final contracts entered into by the applicant with VESL. The LO is very much covered within the exclusionary cls. (e) and (f) of art. 5(4) of the treaty and consequently cannot be regarded as a PE.

3. Sojitz Corporation Vs. Assistant Director of Income Tax (International Taxation) (2008) 117 TTJ (Kol) 792

Activities of the liaison offices of the assessee are restricted to collecting and sending of information from India to Japan. This is borne out from the conditions subject to which approval has been granted by the RBI. Assessee has been admittedly furnishing to the RBI the details of remittances and copy of the final accounts along with auditor’s certificate confirming that the conditions as laid down by the RBI have been adhered to. Since approval is being granted to the assessee by RBI, it can be safely presumed that the liaison offices are not indulging in any activity other than collecting information and sending the same to Japan which are preparatory/auxiliary in nature. It is not the case of the Revenue that the liaison offices were having powers to conclude contracts on behalf of the assessee. Thus, assessee’s case falls within the exclusionary cl. (e) of art. 5 of the DTAA. Further, assessee has been engaged in similar operations for the last 45 years and the Department has been consistently accepting the fact that the liaison offices of the assessee in India are not PE of the assessee. Therefore, the liaison offices cannot be treated as PE of the assessee in India

Contract already concluded outside India, only payment part of undertaking is executed by agents in India, no agency PE of the assessee in India

4. Western Union Financial Services Inc. Vs. Additional Director of Income Tax (2006) 101 TTJ (Del) 56

Assessee, a non-resident company registered in USA, engaged in the business of rendering money transfer services across international borders through agents in India. Transaction of transfer of monies is not complete unless the monies are paid to the claimant in India through an agent. Further, assessee has provided software to the agents to enable them to access assessee’s mainframe computer in the USA. Thus, there is business connection within the meaning of s. 9(1).

However, neither the liaison office (LO) of the assessee in India nor the agents constituted any PE. Assessee has appointed Department of Posts of the Government of India, commercial banks non-banking financial companies and tour operators as its agents in India. They have their own presence and business and do not project the presence of assessee in India.

Assessee cannot, as a matter of right, enter and make use of the premises of these agents for its business. Therefore, there is no fixed place PE of the assessee in India within the meaning of art. 5.1 of the DTAA.

Also, LO cannot be considered to be fixed place PE of the assessee as it carries out activities which are of a preparatory or auxiliary character and not any trading activity for the assessee in India.

Software used by the agents in order to gain access to the mainframe computer in the USA is the property of the assessee and the latter has not parted with its copyright. Thus, mere use of the software by the agents from their premises did not make the premises-cum-software the PE of the assessee in India.

Further, the agents are independent agents within the meaning of art. 5.5 and it cannot be said that the activities of money transfer was not carried out by the agents in the ordinary course of business.

No finding contrary to the claim of the assessee that the rates of compensation paid to agents are uniform throughout the world. Hence, it cannot be said that the transactions between the assessee and the agents are not at arm’s length.

Contract is already concluded outside India. It is only the payment part of the undertaking that is executed by the agents in India.

No agency PE of the assessee in India and the profits, if any, attributable to the Indian operations cannot be assessed as business profits under Art. 7

In the following decisions, the Court held that tax should be deducted at source

1. Cargo Community Network PTE Ltd., In Re 289 ITR 355 (AAR)

The assessee was engaged in the business of providing access to an internet based air cargo portal known as Ezycargo at Singapore. An agent who books cargo through various airlines can subscribe for the portal which enabled him to access the data bank of the airlines like flight schedules, availability of cargo space, etc. The assessee opened a Liaison Office in Chennai with the permission of RBI to act as a communication channel between the head office and parties in India. The Liaison Office did not take up any activity of a trading or commercial nature nor did it provide any consultancy or other services

The Liaison Office was headed by a general manager with two executives, one looking after administrative function and the other providing technical support. Training and helpdesk support was being provided by the assessee in India for the use of a complex portal, commercial equipment, for access to different airlines for booking air cargo.

The AAR held that the payments made by the Indian subscriber to the Cargo Community Network (P) Ltd. at Singapore, for providing a password to access and use the portal hosted from Singapore, were taxable in India and subject to deduction of tax at source

In the following decisions, the Court held that income arises or accrues in India

1. Linmark International (Hong Kong) Ltd. Vs. Deputy Director Of Income Tax (Internation Taxation) (2011) 57 DTR 340

Activities of liaison office in India. Assessee is a buying agent of the LD Ltd. which has been carrying on the business of buying and procuring agent for its customers located in the USA, Canada, Australia, Europe and other developed countries from various countries done by a commission agent. Substantial part of business operations of commission agent being carried out in India by the Indian office, it cannot be argued that no income accrues or arises in India. Provision contained in s. 9(1)(i) is subject to the limitation contained in cl. (b) of the Expln. 1 which scales down the rigor of s. 9 in a certain situation but such a limitation cannot obviously be read into the first part of the provision contained in s. 5(2)(b) which stands independent of s. 9. located in Asian region including India. Assessee receives commission on the value of goods exported by vendors in India to customers of that company. Indian offices of assessee practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, which in any case cannot be done by a commission agent.

In the following decisions, the Court held that income does not arise or accrue in India

1. Angel Garment Ltd., In Re 287 ITR 341 (AAR)

M/s Angel Garments Ltd., Hong Kong, was a non-resident company. It set up a Liaison Office in India after duly obtaining the permission from the Reserve Bank of India. The activities of the Liaison Office would be as follows:

(a) Collecting information and samples of various garments and textiles from various manufacturers, traders and exporters.

(b) Passing on information with regard to various garments and textile products available in India to applicant’s head office at Hong Kong.

(c) Coordinate and act as the channel of communication between the applicant and the Indian exporters.

(d) Follow up with the Indian exporters for timely export of goods ordered by the applicant.

In this case the proposed activities of the Liaison Office were confined to purchase of goods for the purpose of export. It was immaterial whether the export of goods was to Hong Kong or to any other country because cl. (b) of the Expln. 1 to s. 9(1)(i) does not specify that the export should only be to the country of which the applicant was a tax resident.

In view of this position the AAR ruled:

“Looking to the nature of the proposed activities to be carried on by and the nature of the powers of the Liaison Office which is proposed to be set up in India by the applicant, a non-resident company, it cannot be held to have earned any income taxable in India under the provisions of the IT Act, 1961.”

2. Ikea Trading (Hong Kong) LTD., In Re 308 ITR 422 (AAR)

The applicant has established a Liaison Office for the purpose of undertaking liaisoning activities in connection with purchase of goods from India.

The following functions are performed by the Liaison Office in India:

(i) Enquiry into and consideration of potential suppliers for the Ikea product range.

(ii) Collecting information and samples of various home furnishing items from manufacturers and passing on information with regard to various textiles, rugs and carpets and other material available in India.

(iii) Doing quality check of the various products at labs to see whether they adhere to the costing and quality parameters as prescribed by Ikea group.

(iv) Co-ordinating and acting as the channel of communication between the applicant and the Indian exporters.

(v) Follow up with the Indian exporters for timely export of goods ordered by the applicant and supervising the inland logistics.

(vi) Doing social audit of the suppliers to ensure that they adhere to various environmental and other regulations.

A foreign company having a Liaison Office in India was engaged only in purchase operations in India for export, this Authority held that no income was generated by such an activity in India to be taxed in India either from the standpoint of s. 5(2) or s. 9(1)(i) r/w Expln. 1(b) of the IT Act.

Held the applicant does not earn any income in India because its activities are confined to the purchase of goods which are exported by the Indian vendors to the applicant. Admittedly, the applicant does not effect any sales in India. Thus, no income accrues or arises in India. The next point is, no income can be attributed to the purchase operations in India by resorting to the deeming fiction under s. 9(1)(i) because the Explanation thereto excludes such attribution.

3. NIKE Inc. vs. Asst CIT 125 ITD 35

The only activity of the Liaison Office in India was procurement of materials, apparels, etc., for the purpose of export. The US office arranges for the goods, merchandise etc., for its subsidiaries all over the world and it is in connection with this business that it had established the Liaison Office in India so that its various subsidiaries would be in a position to purchase the merchandise from India.

In the absence of there being any prima facie contract between the assessee and the local manufacturer, the only relationship is that of buyer’s agent and the local manufacturer knows the assessee only as the agent of the buyers. The local manufacturers know that the agent of the buyer, viz., the assessee, has placed the orders on it with a view to buy the goods in the course of export and as directed exported it to various affiliates of the assessee. Therefore, the Expln. (1)(b) purchase for the purpose for export clearly applies to the assessee and hence, no income is derived by it in India through its operations of the Liaison Office in India.

In the following decisions, the Court held that it is not a liaison office.

1. Commissioner Of Income Tax Vs. Interra Software India (P) Ltd (2011) 50 DTR 83

As per Expln. 3 to s. 10A, even if the profits and gains are derived from onsite development of computer software outside India, they are also treated as profits and gains from the export of computer software outside India. In order to qualify as "onsite development", the foreign office of the assessee should be only a liaison office acting as an intermediary between the principal enterprise and the customers and not working as a separate branch carrying on full-fledged marketing operations. Where substantial part of business operations of commission agent is carried out in India by the Indian office, it cannot be termed a liaison office.

Conclusion

A Liaison Office is required to comply with the statutory obligations and is to obey the law of the land and there shall be no compromise or excuse for the ignorance of the Indian Legal System in any manner

The Liaison Office has to confine itself to preparatory and auxiliary activities only so as to not attract the charging provisions as contained in the IT Act, 1961. So long as the Liaison Office does not enter into negotiations with the customers in India for import or purchase of goods by the Indian customers from the principal company, it cannot be said to constitute a permanent establishment in India.

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Annexure 1

Form FNC 1

Application for Establishment of Branch/Liaison Office in India

A. General Instructions to Applicants:

The application form shall be completed and submitted to the AD Category - I bank designated by the applicant for onward transmission to the Chief General Manager-in -Charge, Reserve Bank, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai – 400001 along with the documents mentioned in item (viii) of the Declaration. No.	Details		Particulars
1.		Full name and address of the applicant. Date and Place of incorporation / registration Telephone Number(s) Fax Number(s) E-mail ID
2.		Details of capital i) Paid-up capital ii) Free Reserves/Retained earnings as per last audited Balance Sheet/Financial Statement iii) Intangible assets, if any
3.		Brief description of the activities of the applicant.
4.		i) Value of goods imported from and / or exported to India by the applicant during each of the last three years: a) Imports from India b) Exports to India ii)Particulars of existing arrangements if any, for representing the company in India. iii) Particulars of the proposed Liaison/ Branch Office: