Do you know what is a liaison office? What it does? Or the purpose of a liaising office? Let us understand some points about liaising offices first-

Companies which are incorporated outside India can establish liaison office in India with the specific approval of the Reserve Bank. A Liaison Office (also known as Representative office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. A Liaison Office can undertake the following activities in India:

1) Representing in India the parent company/group companies.

2) Promoting export import from/to India.

3) Promoting technical/financial collaborations between parent/group companies and companies in India.

4) Acting as a communication channel between the parent company and Indian companies.

Liaison/representative offices have to file an Annual Activity Certificate from a Chartered Accountant to the Regional Office of RBI. The Certificate is obtained to ensure that the Liaison Office has undertaken only those activities that have been approved by RBI.

Now, we read that the liaising office is not allowed to earn income in our country. What if they do earn some income? Is it tax free or do they have to pay taxes?  This question can be answered by a recent ruling by the Income Tax Tribunal.

“Liaison Office of a foreign company is taxable when such foreign company is registered with ROC; LO was engaged in promoting sales of assessee which was established when its employees were remunerated with sales incentives on achieving the sales target. Whether income of LO attributable to these activities would be taxable in India – Held, Yes – Whether the amount received by the LO over and above the expenses incurred by it were to be treated as its income taxable in India” – Held, Yes

Facts of the case:

1. The assessee, Brown & Sharpe Inc. incorporated in USA,had started a LO in India for which permission of the RBI was taken.
2. The Assessing Officer held that since LO was promoting sales of assessee’s product, income attributable to LO’s activities was taxable in India.

The Tribunal held in favour of revenue as under: 

• The assessee-company was registered with the Registrar of Companies in India for carrying on the business. The LO, apart from having Chief Representative Officer and other staff, was also having a technical expert;
• The employees of LO were promoting the sales of the goods of the assessee-company as per service conditions. There was a sales incentive plan by which employees were provided the incentive for achieving the sales target and the performance of the employees was being judged by the orders secured by the assessee-company;
• All these activities established that the LO of the assessee was promoting the sales of the assessee-company in India and, therefore, the revenue was fully justified in holding that the income attributable to LO was taxable in India;
• The liaison office received more amount than the expenses actually incurred by it. Thus, the sum received by it over and above the expenses actually incurred, year after year, were rightly treated as income by revenue.

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