21 November 2009
I assume you are running a liaison office for a foreign company in India. Your permission from RBI indicates the activities you can do and cannot do. The books of accounts would basically have the QA22 type bank account (only foreign inflow allowed and no other forms of crediting). Foreign company remits money to this account for the expenses incurred. Your audit report is more of an activity report and you have to maintain your record of expenses incurred for the parent and what activities were done. The activities have to be auxiliary as specified and no core activity can be done. There is no income being received by the liaison office. It cannot have any liabilities by way of loan. Only recurring sundry creditors for expenses incurred. You have to apply TDS as applicable to any resident. You have to audit account for all expenses made from the foreign exchange remittances. Of course there may be deposits to landlord on account of premises acquired on lease and at the end RBI gives the permission to get the refund and repatriate it back abroad.
Based on audit you have to file the activity report every year with the RBI and basically that should indicate only what activities are allowed.
Sunil Sir has very well narrated the requriements.
Also note following; 1) You may have to verify FBT compliances for prior years, if it is questioned to audit. 2) Q2AA accounts are outdated and now L O are allowed to open resident account as liaison office in India falls under the defination of person resident in India ref 2(v)(iii) of FEMA 1999 and are subjected to restrictions on credit of funds/income other wise than outward remittance from the principal company. 3) Give a thought on whether your liaison office consitute PE for your pricipal company and if so you may require to comply with other DT laws.
22 November 2009
There is a case of UAE Exchange in which AAR had ruled that the LO was a PE because it was doing a core activity for the parent organisation by printing out cheques and couriering them to the customers.
Refer to this case of UAE Exchange Centre Ltd. vs Union of India [183 Taxman 495] wherein the Delhi High Court has reversed the AAR’s ruling. It was ruled that the RBI specifically prohibited the liaison offices from charging any commission or fee or from receiving or earning any remittances from any activity undertaken by them. Furthermore, the expenses of the liaison offices in India were required to be met exclusively out of the funds received from abroad through normal banking channels.
The Article 5 (3) of DTAA with UAE there is an exclusionary clause that maintenance of fixed place of business solely for the purpose of carrying on, any activity of a preparatory or auxiliary character is not regarded as PE.
Refer to the article in the following link:- http://www.business-standard.com/india/news/when-does-liaison-office-attract-i-t-in-india/374978/
Therefore ensure that no authority is given to any dependent employees to conclude contracts on behalf of the parent. They can collect information about prospective customers, collect market condition reports and pass on to the parent. The employee can be present at the negotiation and be a communication channel but under no circumstances should anyone be authorised to bind the parent company.
Regarding account to be opened, the condition is that it can only receive funds from abroad from the account of the parent's head office or another branch. It cannot receive remittance from any other source, even a Wholly owned subsidiary of the parent. If remittance comes from anyone else it will not be credited to the account. You cannot deposit any cheques locally. You have to take permission from RBI for depositing cheque received back from landlord when vacating premises. When the LO is closed, these surplus funds can be remitted back to the parent.
As CA is needed to file the activity report of the LO he will have to determine on case by case basis if LO is a PE depending on what activity it does. The permission is given for 3 years. If the business with India is significantly large the parent may have to consider taking approval as a BO in case the main activity is selling to India and the BO would become BOPE. From my experiences, renewals are done without problems for LOs that support exports from India but not the other way round as RBI would insist that once the 3 years is over they should apply for BO / PO if they have high volume of sales to India or are executing long term projects.
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