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Liaison Office of Non-Resident not taxable : Advance Ruling
AIT News Network
NEW DELHI. Authority for Advance Rulings(Income Tax) has ruled vide a significant ruling AIT-2006-244-AAR that 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 Income Tax Act, 1961

T H E F A C T S

The applicant is a non-resident company incorporated under the Companies Ordinance of Hong Kong and is having its registered office at Hong Kong. The applicant is proposing to set up a liaison office in India after duly obtaining the permission from the Reserve Bank of India. The activities of the liaison office, as enumerated , 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.

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

It was submitted that the liaison office will not carry on any commercial activity in India and will not earn any income in India. It will not have any power or authority to enter into any contract for sale or any other contract to earn income in India.

The entire expenses of the proposed liaison office shall be met through remittances from applicant’s head office at Hong Kong. On the basis of these facts the applicant has set-forth the following question to seek advance ruling of the Authority :-

“Whether looking to the nature of activities to be carried on by the Liaison Office and the nature of the powers of the Liaison Office (as proposed to be set up in India by the Applicant, which is a Hong Kong based company and a non-resident as per the provisions of Section 6(3) of the Income Tax Act, 1961), the Applicant can be held to have earned any income taxable in India as per the provisions of the Income Tax Act, 1961?”

T H E R U L I N G:

It would be appropriate to refer to clause (b) of explanation 1 to Section 9(1)(i) of the Act which reads as follows:-

Income deemed to accrue or arise in India

Section 9

(1) The following income shall be deemed to accrue or arise in India :-

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India.

[Explanation 1]- For the purposes of this clause –

(a) x x x x x

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;

A plain reading of the provisions, extracted above, would show that no income shall be deemed to accrue or arise to a non-resident through or from operations which are confined to the purchase of good in India for the purpose of export.

Admittedly in this case the proposed activities of the liaison office is confined to purchase of goods for the purpose of export. It is immaterial whether the export of goods is to Hong Kong to any other country because clause (b) of the explanation 1 to Section 9(1)(i) does not specify that the export should only be to the country of which the applicant is a tax resident.

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 Income Tax Act, 1961.

( Click here for full text of Ruling AIT-2006-244-AAR )

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