Complexity of Indian Tax Laws
This query is : Resolved
14 September 2007
Complexity of Indian Tax Laws
14 September 2007
Hello Mr Rahul,
What exactly are you looking for, can u please be specific.
What exactly are you looking for, can u please be specific.
14 September 2007
If a new foreign company is going to establish their undertakings in India in retail market like Wal- Mart.As Wal Mart is the largest retailer in the world then how they will tackle with the tax law issues in India. As we know our tax laws are quite a bit complex than the other countries.
14 September 2007
Hi Rahul,
These could be some of the ways to tackle the situation.
Liaison office of a foreign company in India – Income Tax Perspective
India is a very alluring destination for foreign investments in India. There are several options to start a legal entity in India which includes
1. Opening a wholly Owned Subsidiary Company in India or Private Limited Company in India
2. Opening a Branch in India
3. Opening a Project Office in India
4. Opening a liason Office in India
5. Opening a Representative Office in India
Establishing a liaison office (LO) is one of the common modes adopted by certain MNCs for creating an initial presence in a foreign jurisdiction.
The taxability, if any, of LOs in India could be said to be broadly governed by Section 9(1)(i) of the Income Tax Act, 1961 (Act), and, Article 5 (on permanent establishment [PE]) read with Article 7 (on business profits) of the relevant Double Tax Avoidance Agreement (DTAA) (in a scenario where the foreign parent is from a country with whom India has entered into a DTAA). It is at the assessee’s discretion to apply provisions of the Act or the relevant tax treaty, whichever are more beneficial to it.
As per Section 9(1)(i) of the Act, an LO would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India. As per Article 5 read with Article 7 of the relevant DTAA, an LO would be taxable in India, in case it constitutes a PE of its foreign parent in India. Further, even if the LO is held to be a ‘business connection’/ PE of its foreign parent in India, only so much of the profits as are attributable to the operations carried out by the LO in India, would be liable to tax in India. Also, under the Act, no income shall be deemed to accrue or arise in India to the foreign parent through or from ‘operations which are confined to the purchase of goods’ in India for the purpose of export.
Generally, the tax authorities have been adopting a position that the LO constitutes a PE/ business connection of its foreign parent in India. Consequently, any receipt (or part thereof) due to the LO or to its foreign parent from any activity in India have been held as liable to tax in the hands of the LO in India (in certain cases without appropriate allowance for expenses). This has been contrary to the LO’s contention that they are prohibited from carrying on business in India (as per RBI guidelines) and also that no profits are attributable to the activities carried out by them in India.
The judicial precedents on the subject have not rendered adequate certainty to the issue. Recently, the Authority for Advance Rulings (AAR) in the case of Angel Garment Ltd (287 ITR 341) has held that an LO established with a view to merely undertaking ‘purchasing activities’ in India (such as collecting information about Indian suppliers, acting as a communication channel between the foreign parent and Indian suppliers etc) cannot be held liable to tax in India, as there is a specific exclusion to this effect prescribed under Section 9(1)(i) of the Act (this ruling was pronounced in a non DTAA scenario). However, the issue as regards what activities can be said to be comprised within the meaning of the term ‘operations which are confined to the purchase of goods’ (ie the specific exclusion laid down in Section 9(1)(i) of the Act) was not raised before the AAR.
Other favourable key precedents on this subject include the special bench ruling of the Delhi Tribunal in the case of Motorola Inc and Others v DCIT (95 ITD 269), AAR ruling in the case of Gutal Trading Est (278 ITR 643), the Delhi Tribunal ruling in the case of Western Union Financial Services Inc (101 TTJ 56) and a special bench ruling of the Delhi Tribunal in the case of IAC v Mitsui and Co Ltd (39 ITD 59). To broadly summarise the above rulings, it has been consistently held that an LO cannot be liable to tax in India unless the LO undertakes any commercial or revenue generating activities in India. .
However, an unfavorable ruling in the case of UAE Exchange Centre LLC (268 ITR 9) should also be kept in perspective, wherein the AAR on specific facts of the case has held that the LO constituted a PE of its foreign parent in India.
Thus to conclude, though there are quite a few judicial precedents in favour of the fact that an LO should not be liable to tax in India, taxability of LOs still continues to be a litigative proposition
Also his can be considered
Foreign Companies can set up their operations in India through:
• Liaison Office/Representative Office
• Project Office
• Branch Office
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
2. a) Liaison Office/ Representative Office
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.
Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
2. b) Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
2. c) Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
i. Export/Import of goods
ii. Rendering professional or consultancy services
iii. Carrying out research work, in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying/selling agents in India.
Rendering services in Information Technology
vi. and development of software in India.
vii. Rendering technical support to the products supplied by the parent/ group companies.
viii. Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
These could be some of the ways to tackle the situation.
Liaison office of a foreign company in India – Income Tax Perspective
India is a very alluring destination for foreign investments in India. There are several options to start a legal entity in India which includes
1. Opening a wholly Owned Subsidiary Company in India or Private Limited Company in India
2. Opening a Branch in India
3. Opening a Project Office in India
4. Opening a liason Office in India
5. Opening a Representative Office in India
Establishing a liaison office (LO) is one of the common modes adopted by certain MNCs for creating an initial presence in a foreign jurisdiction.
The taxability, if any, of LOs in India could be said to be broadly governed by Section 9(1)(i) of the Income Tax Act, 1961 (Act), and, Article 5 (on permanent establishment [PE]) read with Article 7 (on business profits) of the relevant Double Tax Avoidance Agreement (DTAA) (in a scenario where the foreign parent is from a country with whom India has entered into a DTAA). It is at the assessee’s discretion to apply provisions of the Act or the relevant tax treaty, whichever are more beneficial to it.
As per Section 9(1)(i) of the Act, an LO would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India. As per Article 5 read with Article 7 of the relevant DTAA, an LO would be taxable in India, in case it constitutes a PE of its foreign parent in India. Further, even if the LO is held to be a ‘business connection’/ PE of its foreign parent in India, only so much of the profits as are attributable to the operations carried out by the LO in India, would be liable to tax in India. Also, under the Act, no income shall be deemed to accrue or arise in India to the foreign parent through or from ‘operations which are confined to the purchase of goods’ in India for the purpose of export.
Generally, the tax authorities have been adopting a position that the LO constitutes a PE/ business connection of its foreign parent in India. Consequently, any receipt (or part thereof) due to the LO or to its foreign parent from any activity in India have been held as liable to tax in the hands of the LO in India (in certain cases without appropriate allowance for expenses). This has been contrary to the LO’s contention that they are prohibited from carrying on business in India (as per RBI guidelines) and also that no profits are attributable to the activities carried out by them in India.
The judicial precedents on the subject have not rendered adequate certainty to the issue. Recently, the Authority for Advance Rulings (AAR) in the case of Angel Garment Ltd (287 ITR 341) has held that an LO established with a view to merely undertaking ‘purchasing activities’ in India (such as collecting information about Indian suppliers, acting as a communication channel between the foreign parent and Indian suppliers etc) cannot be held liable to tax in India, as there is a specific exclusion to this effect prescribed under Section 9(1)(i) of the Act (this ruling was pronounced in a non DTAA scenario). However, the issue as regards what activities can be said to be comprised within the meaning of the term ‘operations which are confined to the purchase of goods’ (ie the specific exclusion laid down in Section 9(1)(i) of the Act) was not raised before the AAR.
Other favourable key precedents on this subject include the special bench ruling of the Delhi Tribunal in the case of Motorola Inc and Others v DCIT (95 ITD 269), AAR ruling in the case of Gutal Trading Est (278 ITR 643), the Delhi Tribunal ruling in the case of Western Union Financial Services Inc (101 TTJ 56) and a special bench ruling of the Delhi Tribunal in the case of IAC v Mitsui and Co Ltd (39 ITD 59). To broadly summarise the above rulings, it has been consistently held that an LO cannot be liable to tax in India unless the LO undertakes any commercial or revenue generating activities in India. .
However, an unfavorable ruling in the case of UAE Exchange Centre LLC (268 ITR 9) should also be kept in perspective, wherein the AAR on specific facts of the case has held that the LO constituted a PE of its foreign parent in India.
Thus to conclude, though there are quite a few judicial precedents in favour of the fact that an LO should not be liable to tax in India, taxability of LOs still continues to be a litigative proposition
Also his can be considered
Foreign Companies can set up their operations in India through:
• Liaison Office/Representative Office
• Project Office
• Branch Office
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
2. a) Liaison Office/ Representative Office
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.
Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).
2. b) Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
2. c) Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
i. Export/Import of goods
ii. Rendering professional or consultancy services
iii. Carrying out research work, in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying/selling agents in India.
Rendering services in Information Technology
vi. and development of software in India.
vii. Rendering technical support to the products supplied by the parent/ group companies.
viii. Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
14 September 2007
ANY ORGANISATION WHEN THEY DO BUSINESS GLOBALLY,THEY ARE BEFORE HAND AND BEFORE ENTRY ARE CLEARLY AND UNAMBIGUOUSLY ADVISED BY INTERANATIONAL LAWYERS AND CONSULTANTS ON MODALITIES/PRACTICES,ENVIRONEMAENT OF THE ECONOMY OF THE COUNTRY,REGULATORY COMPLIANCES,TAX COMPLIANCE,TAX PLANNING,DOUBLE TAX AVOIDANCE TREATIES.
ALSO IN INDIAN IT WE HAVE SEC 90 AND 91 TO TAKE CARE OF THE DOUBLE TAXATION ISSUES.
UNLESS YOU TAKE RISK NO REWARD COMES THROUGH.
WHAT YOU PERCEIVE AS COMPLEXITY IS A BUSINESS OPPORTUNITY ,SPECIALLY IN GLOBAL BUSSINESS.COKE,PEPSI,UNILEVERETC... ARE SUCCESS STORIES RIGHT?TODAY THEY ARE LEADERS IN THEIR FIELDS.
ULTIMATELY IT IS THE BILLION PLUS MIDDLECLASS PURCHASING POWER AND MARKET ON WHICH THEY RELY AND LATEST CONSUMERISM IN INDIA.A GIANT CALLED WOKE UP TO ITS REAL MIGHT. WHO CAN STOP ?
ALL GLOBAL LEADERS COME TO INDIA TO EXACTLY BENEFIT FROM THIS PHILOSOPHY.
SPECIALLY IN GLOBAL BUSINESS, THE BRAND NAME PLAYS AS A VITAL ENTRY STRENGTH .THERE IS OFCOURSE SWOT ANALYIS.
IF YOU HAVE ANY EXACT QUERY ON INDIAN OR GLOBAL TAXING ISSUES DO WRITE AT www.taxworry.com and also ADDRESS YOUR SPECIFIC QUERIES TO THE EXPERTS IN OUR OWN caclub forum .
C.A.R.V.RAO
ALSO IN INDIAN IT WE HAVE SEC 90 AND 91 TO TAKE CARE OF THE DOUBLE TAXATION ISSUES.
UNLESS YOU TAKE RISK NO REWARD COMES THROUGH.
WHAT YOU PERCEIVE AS COMPLEXITY IS A BUSINESS OPPORTUNITY ,SPECIALLY IN GLOBAL BUSSINESS.COKE,PEPSI,UNILEVERETC... ARE SUCCESS STORIES RIGHT?TODAY THEY ARE LEADERS IN THEIR FIELDS.
ULTIMATELY IT IS THE BILLION PLUS MIDDLECLASS PURCHASING POWER AND MARKET ON WHICH THEY RELY AND LATEST CONSUMERISM IN INDIA.A GIANT CALLED WOKE UP TO ITS REAL MIGHT. WHO CAN STOP ?
ALL GLOBAL LEADERS COME TO INDIA TO EXACTLY BENEFIT FROM THIS PHILOSOPHY.
SPECIALLY IN GLOBAL BUSINESS, THE BRAND NAME PLAYS AS A VITAL ENTRY STRENGTH .THERE IS OFCOURSE SWOT ANALYIS.
IF YOU HAVE ANY EXACT QUERY ON INDIAN OR GLOBAL TAXING ISSUES DO WRITE AT www.taxworry.com and also ADDRESS YOUR SPECIFIC QUERIES TO THE EXPERTS IN OUR OWN caclub forum .
C.A.R.V.RAO
14 September 2007
Dear Experts,
Thanks for your instant replies,
but i wnt is that What are the issues that they will have to face if they starts to trade in india?
Suppose you are going to establish a company in any foreign country, and the benefits which we may have availed if it would be established in india now u dont have in these foriegn country
Thanks for your instant replies,
but i wnt is that What are the issues that they will have to face if they starts to trade in india?
Suppose you are going to establish a company in any foreign country, and the benefits which we may have availed if it would be established in india now u dont have in these foriegn country
14 September 2007
Dear Rahul,
As for Indian laws are concerned, any foreign company opening their operations in India ,has to follow the law of the land. Thus the MNCs have to plan in such way that our Indian Laws viz, Factories Act, P.F.Act, ESI Act, Minimum Wages Act, Income TAx Act, Sales TAx Act, Central Excise and Customs Act.
Becuase of the origin of the company, some acts viz the IT act may exempt in certian situations but basically that MNC has to comply with the law of the land.
As for Indian laws are concerned, any foreign company opening their operations in India ,has to follow the law of the land. Thus the MNCs have to plan in such way that our Indian Laws viz, Factories Act, P.F.Act, ESI Act, Minimum Wages Act, Income TAx Act, Sales TAx Act, Central Excise and Customs Act.
Becuase of the origin of the company, some acts viz the IT act may exempt in certian situations but basically that MNC has to comply with the law of the land.
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