By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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Profits of branch office (BO) established after closure of liaison office cannot be attributed to the liaison office; Attribution should be done only after BO comes into existence and profits of holding company cannot be attributed on BO of its subsidiary
Facts: • The Taxpayer, a Hong Kong Company, was a Wholly Owned Subsidiary (WOS) of an US Company (USCo),and was engaged in the business of selling heart valves, a life saving medical produce. Further USCo was also engaged in the same line of business in the Asian region including India.
• The Taxpayer had set up a Liaison Office (LO) in India with the permission of the Reserve Bank of India (RBI).
• Role of LO was limited to coordinatefor market survey;support services to the new clients; etc. It was a common ground that the Taxpayer as also parent USCo conducted sale through independent distributors.
• At a later date, the Taxpayer set up a Branch Office (BO)and closed its LO.
• For the period up to the closure of LO, NIL return of income was filed on the ground that LO’s operations in India were restricted to RBI permitted activities and LO did not earn any income in India.
• The Tax Authority, based on documents impounded in the course of survey on BO , held that the Taxpayer was involved in business activity in India and was liable in respect of profits earned by HO as also USCo,
Held:
• The procedure adopted by the Tax Authority, to attribute income of USCo in the hands of the Taxpayer, was not correct since there should be separate proceedings for two separate companies established in different countries. It is legally not possible to consider the profits attributable to USCo in the hands of the Taxpayer and therefore, profit of USCo was excluded from the income of the Taxpayer
• There was a clear distinction between the liaison activities and the branch activity and the Taxpayer was not involved in business activity when they were only permitted to do liaison activity by the RBI and accordingly the profit attributable to the liaison period was deleted.
