India: Taxability of procurement activities undertaken by a liaison office

The taxpayer, a US company (US Co) engaged in worldwide wholesaling and retailing of outdoor apparel, set up a LO in India to act as a liaison for the purchase of the goods in India. The LO also assisted the US Co in procuring goods from Egypt and Bangladesh. The Indian Tax Law (ITL) provides for an exemption from income attributable to business operations in India, where the activity of a nonresident is limited to purchase of goods for the purpose of export (purchase exclusion). Also, under most tax treaties, a place of business maintained solely for the purpose of purchasing goods, or activities that are preparatory or auxiliary in nature, does not create a taxable presence/permanent establishment (PE) for the non-resident enterprise. The issue before the AAR was to determine whether the LO of US Co would come within the purview of the purchase exclusion under the ITL or not create a PE under the applicable India-US tax treaty.

Based on the facts of the case, the AAR observed that the activities of the LO are not used solely for purchasing goods, but it is practically involved in all the activities connected with the business of the US Co. The worldwide outdoor apparel business of the US Co broadly covered: designing; purchasing of raw material; getting goods manufactured; selling the goods. Other than the actual function of sale, all the other activities of US Co are conducted by the LO. Further, the LO is also engaged in carrying out similar activities for US Co in other countries. Since the LOs activities are not limited to the purchase of goods in India for the purpose of export, the purchase exclusion would not apply under the ITL. Under the treaty, the activity profile of the LO cannot be termed as preparatory or auxiliary to US Co's business, nor can the LO be a place of business solely for the purpose of purchasing goods. Therefore, the LO would create a PE in India for US Co. Accordingly, the income attributable to US Co's operations in India from the business of designing, manufacturing and selling the products imported, would be taxable in India in accordance with the provisions of the tax treaty.

Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)
Ernst & Young
Tel: +91 80 2224 5646
Fax: +91 80 2224 0695
Website: www.ey.com

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