| Liaison
offices could be taxable in India! |
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The Authority for Advance Rulings
(AAR) is likely to set the road map for assessment
of foreign companies that operate through liaison
offices (LOs) in India. A ruling was given in
case of ‘UAE Exchange Centre’, a company
incorporated in Abu Dhabi and having liaison offices
in Kochi and several other places in India. This
UAE company had sought an advance ruling on whether
any income would accrue or arise in its hands
in India, from the activities carried on by it
in India.
Relying on the Indo-UAE tax
treaty, the AAR observed that activities carried
on by the LOs that were preparatory and auxiliary
in nature, would not lead to the existence of
a permanent establishment (PE) in India. In the
absence of a PE, there would be no tax incidence
in India.
However, those activities carried
out in India that were part of the main work of
the UAE-company would create a PE in India. India
can tax the business profits of a foreign entity,
only if a PE exists in India.
The AAR closely examined, the
entire gamut of activities carried out by the
LOs. UAE Exchange Centre, the UAE-based company,
had entered contracts in the UAE with NRIs to
remit Indian currency to nominated banks or beneficiaries
in India. One particular mode of remittance, resulted
in the LOs downloading data such as the details
of the beneficiaries and the amount to be remitted.
The LOs then proceeded to print the cheques or
drafts and dispatched the same.
The AAR held that these activities
amounted to performing the contract, at least
in part in India, and a PE was created in India.
Thus, as per Indo-UAE
treaty norms, the profits of the UAE Exchange
Centre would be taxable in India, but only to
the extent that they could be attributed to such
activities carried out by the LO.
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Our Say |
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| The
recent ruling has stirred up a hornet’s
nest between tax authorities and foreign
companies. The rational assumption is
that since the Reserve Bank of India
prohibits LOs from carrying on any trade
or commerce in India, there can’t
be any profit attribution in India and
consequently no tax incidence if the
foreign companies operated through LOs.
Based
on the facts of this case, it is evident
that the AAR was right in its stand.
But it cannot be ipso facto applied
generically in all cases since not all
LOs carry out business activities in
India. There are however practical difficulties
which tax professionals are bringing
out-e.g. if the services performed in
India are remote from actual realisation
of profits, attribution of profits would
be difficult. Likewise if an LO constitutes
a PE, only that part of the profits
‘attributed’ to activities
in India, should be taxable, and not
a ‘considerable portion’
of the profits (as was stated in the
earlier CBDT circular covering BPO activities). |
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| A
tale of many cities!! |
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| With US companies
moving several important operations India and using
Indian employees to run them, these companies are
getting to be akin to their Indian MNC counterparts.
Syntel, a US
software services company has more than 65 % of
its total workforce in India. While the company
is not listed in India and its ownership is clearly
American, the chief financial officer and most of
the company’s senior management are based
in India. It has development centres in Mumbai,
Pune and Chennai. As of December 31, 2003, Syntel
had approximately 52 % of its billable workforce
(the percentage of workers who generate revenue)
in India, and is expecting this percentage to increase
over time. It employed around 1,280 people in the
US and 2,415 people in India. Bharat Shah, the owner
of Syntel is an American citizen.
Sapient, once
a high-flier positioned as a high-end consulting
firm, is now repositioned as a software services
company with heavy dependence on its India strategy.
The company has nearly 50 % of its workforce located
in India, though the ownership of the company is
wholly American. The US operations of Sapient are
largely staffed by sales and marketing professionals,
while most of the project delivery is done from
India. If the current trends continue, it will have
more people in India than in the US despite its
listing on the US bourses.
Cognizant, a
fast-growing mid-rung software services firm employs
more people in India than it does in the US. The
company has more than 10,000 employees, while 70
% of its delivery takes place from India. This means
that at least 7,000 of Cognizant’s employees
are based in India. If one looks at the ownership
of the Nasdaq-listed company, however, it is again
clearly American. |
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Our Say |
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| The
changing face of today’s corporations
and the fact that their identities and
origins are getting more and more indistinct
is in line with the shifting economic
paradigms that globalisation brings.
It is pertinent to note that in most
of these cases, employees own a chunk
of the company through employee stock
options. While a substantial part of
the ownership is with American employees,
this will change as the delivery and
employee base increases in India. Over
the next few years, all these companies
have chalked out aggressive plans for
recruitment and investment in India.
Interestingly,
Indian software services companies also
have corresponding large foreign ownerships.
Infosys has a foreign ownership of 50.45
%, which includes foreign funds and
ADR subscribers, and Satyam has foreign
ownership of 63.28 % of its total equity
capital. HCL tech has foreign ownership
of 31.14 % and some of its promoters
are not even Indian citizens. |
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