Defining arms of foreign firms

Many a foreign enterprises doing regular business in India find it commercially expedient to float subsidiary companies and/or open liaison offices (LO) in India to look after their business interest. But a subsidiary or an LO sometimes results in creating a Permanent Establishment (PE) for the foreign company in India rendering its business profits liable to income tax in India. But only that part of foreign income is taxable in India which is found attributable to the PE in India.

There has been a long-drawn controversy as to which activities in India would come under a PE and which would not. The courts have also given conflicting decisions. For example ,in case of UAE Exchange 268 ITR 9 Authority for Advance Rulings held that the liaison office in that case would constitute a PE. On the other hand, in a large number of other cases, it has been held that a liaison office does not create any PE.

Similarly, in certain cases a subsidiary company in India has been held to have created a PE (see 223 ITR 416), while in other cases a reverse decision has been taken (see 272 ITR 99).

As a matter of fact the deciding factor is not the legal status of the entity "" whether an LO or a subsidiary, but the nature of activities carried out in India.

A recent case of the Delhi Tribunal (UOP LLC V. Addl. DIT 108 ITD 186) indicates in an excellent manner the circumstances which may lead to the creation of a PE in India through a subsidiary or, an LO. The relevant factors are:

The Indian company is a 100 per cent subsidiary of the foreign company, and is devoted entirely for the business of its parent company.

Both the foreign company and its subsidiary in India are in fact one and the same. This can be seen from the fact that the employees of both the companies get transferred inter-se amongst both the entities. Further, the employees of Indian company get training from the foreign company particularly in areas where the foreign company enters into contracts with Indian customers.

The Indian company acts as an agent of the foreign company for securing orders, and in fact is like a projection of the foreign company in India.

The Indian company has an authority to submit bids on behalf of the foreign company and is also authorised to negotiate contract on its behalf.

Initially a consolidated contract with the Indian customer is finalised, which is subsequently split into various contracts in such a manner that presence of the PE in India could be avoided.

The agreements are finalised in India and after getting the same signed from Indian customers, final agreements are sent to the foreign company for its signatures.

The technical qualification and experience of the employees of liaison office is sufficient to show that they are technically specialised to negotiate contracts and render technical services rather than doing liaison work.

The liaison office is located on the premises of the Indian subsidiary company.

The liaison office and Indian subsidiary company have been projected as the office of the foreign company in India on its own official website.

The various factors enumerated above may not individually lead to creation of a PE in India, but collectively they will certainly support the existence of a PE in India.

The foreign companies are therefore advised to keep the aforesaid factors in mind while conducting their business affairs in India.

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