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TDS on payments by liasion office

Sindhu (A) (34 Points)

10 December 2009

HI,

i have case here- A foreign company has opened a liasion office regisered in India managed by a Non resident. The expenses are paid out of the QA22 ac. He has few queries

a>should a separate books of accounts on daily basis be maintained or the QA22 ac is enough by law?

b>Should closure of accounts with Trial balance & PL ac & B/s necessary or the annual activity report from QA22 is enough?

c>Whatever the case may be - should it be maintained on a daily basis by a local CA or himself(i.e Non resident) would do?

d>should the liasion office deduct tds for payments (expenses like rental of office& apartment, hire of local driver cum oddman)- to resident?

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6 Replies

Sunil (Trader) (2611 Points)
Replied 10 December 2009

QA 22 Account is not necessary nowadays. RBI allowed a normal current account with restirction of inflow funds that may come ONLY from the overseas head office or any overseas branch of the entity. The funds cannot even come from wholly owned subsidiary. At the end of 3 years or if you need to change office in the interim, you apply for permission to deposit the cheque for repayment of deposit amount by landlord. They give it without hassles.

The books may be maintained by the liaison office themselves but they have to be audited by the CA. It is a limited scope audit. There is no question of 44AB as the liaison office is not permitted to carry out any business activity with anyone. It is only receiving funds from its HO or other foreign branch. The scope of audit is for following:-

1) You have to check compliance with Income Tax Act (TDS etc. as well as filing the TDS Returns)

2) You have to check compliance with all local laws of State (Prof Tax, Shops Est Act etc.)

3) In the unlikely event they have too much staff, you will have to check compliance with ESIC / PF etc.

You have to also see that expenses are by bank for over Rs.20,000.

As the company having liason office has to register with Registrar of Companies, you have to ensure compliance and audit reports have to be provided as required.

RBI requires an annual activity report signed by the CA. Therefore you have to practically audit the books even if there is no income. You have to ensure that the activities done by the liaison office are within what is authorised by RBI in the permission. You have to report the activities.

Audit is important in the event the Liaison Office may be considered a BOPE of the Parent Company for purpose of the Income Tax Act if its activities are not within the exclusionary clauses provided by the DTAA or Section 9 of Income Tax Act. In such case, although the LO is not having income, the Parent may have to file returns of the head office with Income Tax department for income accrued in India by virtue of existence of PE. In these cases, the expenses as per audited books will be allowed to the head office. However, the PE and LO are two seperate entities by law.

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venkatesh (articled assistant) (22 Points)
Replied 10 December 2009

hi sunil,

u have not yet tell about the concept whether tds is to be deducted by the liason office for payments made by them

Sunil (Trader) (2611 Points)
Replied 11 December 2009

Refer to Point No. 1 above. TDS is applicable on liason office. Foreign Company is a specified person also u/s 194C. Therefore if LO hires cars for transportation or pays rent for office or engages professional, TDS has to be done.

Sindhu (A) (34 Points)
Replied 11 December 2009

Hi Sunil,

Thanks for the reply. What about the final accounts itself?i.e PL & BS - should it be maintained by a CA or can the NR director of the LO can do by himself?

Sindhu (A) (34 Points)
Replied 11 December 2009

Also is TDS issued for the salary paid to the Non Resident for his work done in India by the LO Office?

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Sunil (Trader) (2611 Points)
Replied 11 December 2009

Sindhuji, you have to comply with all TDS procedures that are applicable to the Resident persons otherwise the LO will be treated as an assessee in default to the extent of TDS not deducted and also liable for interest and penalty as applicable. LO is engaging Non Resident Person on behalf of principal. TDS will be applicable depending on DTAAs or Section 9 for dependent personal services. Salary to resident including expatriate will also be subject to TDS. Obviously you have a balance sheet as the capital account for the LO is fully funded by HO. Therefore Source of funds is from the HO and you have to audit the application of funds (assets like bank and cash balances, computers, vehicles purchased and also apply depreciation as you would be disposing these off when LO closes and goes back). you have to record advances paid for any work to be carried out and also liabilties on current account for such expenses.

When you audit expenses, then only you can ascertain what the expenses are for. When you know these facts you will be able todetermine what activity the LO has done for your report to RBI showing that the activities are within scope of the permission granted.