Income attributable to the Liaison office (LO) engaged in promoting sales in India on behalf of its head office is taxable in India.
Facts:
The Taxpayer, a US company, has set up an LO in India with the RBI approval. The RBI approval was granted on the condition that the LO will not render any services, directly or indirectly, in India.
The Tax Authority contended that the LO was not merely a communication channel but it was also promoting the Taxpayer’s product brands in India, which was evident from the fact that the performance incentive of LO’s employees was calculated on the basis of number of orders received by the Taxpayer.
The Taxpayer contended that LO was established only as a communication channel between the Taxpayer and its customers or prospective customers in India. The LO did not render any service for the procurement of order or sale of the product in India. Hence, there was no income earned in India. In this regard, the Taxpayer referred to various decisions like Angel Garment Ltd. [287 ITR 341 (AAR)], U.A.E. Exchange Centre Ltd. [313 ITR 94], and K. T. Corporation [181 Taxman 94 (AAR)] etc.
Furthermore, the payments made to the LO were merely reimbursement of expenses incurred by the LO on behalf of the Taxpayer. Hence, it cannot be liable to tax in India.
Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
The LO was engaged in promoting the Taxpayer’s product and brands in India. Other than the Chief Representative Officer, the LO had also appointed a Technical Support Manager. The employees of the LO were offered sales incentive plan as per which they were to be provided with remuneration, based on the achievement of the sales target of the Taxpayer in India.
The Taxpayer was registered with the Registrar of Companies for carrying on business in India. It had also, on its own volition, filed a return of income declaring loss under the head ‘Profits and gains of business or profession.’ Thus, the Taxpayer itself has taken a stand that it derives income from business in India.
The decisions relied on by the Taxpayer involved, the activities of preparatory and auxiliary nature. Such as:
• LO downloading information contained in the main server located in the UAE; (UAE Exchange Centre (supra))
• LO collecting information and sample of garments and textiles which was passed on to its HO and LO acted as a communication channel between the HO and its customers; (Angel Garment Ltd. (supra))
• LO was merely holding seminars, conferences, receiving trade enquiries, collecting feedbacks and advertising the technology used by its HO (K.T. Corporation (supra)).
However, in the present case, the employees were promoting the sale of the Taxpayer’s goods in India. Thus, income attributable to LO is taxable in India.
Though reimbursement of expenses cannot be treated as income, the receipt, in excess of expenses actually incurred has to be treated as income.
