India: Annual Statement Filing for Liaison Offices

Last June, we reported on increased scrutiny of Liaison Offices in India when the tax law was amended to give the Indian government greater access to information on the activities of liaison offices (LOs).  Under Section 285 of the Income Tax Act, nonresidents with an LO in India are now required to file a detailed annual statement (Form 49C) within 60 days of the close of the LO’s financial year. The tax authorities will use information from this filing to determine taxability.

Over the course of the past year, the Indian tax authorities have been challenging the claims of many LOs that their activities do not constitute PE. At the same time the transfer pricing authorities have also ramped up investigations, finding significant profits attributable to some LOs.

We encourage clients with liaison offices in India to examine the operations carried out by their LOs in India for potential PE exposure. If this risk assessment uncovers possible PE, voluntary disclosure may help avoid the scope of penalty and investigation likely if the authorities were to make the discovery.

The form of the annual statement was not made clear until earlier this year, but the Indian Central Board of Direct Taxes (CBDT)’s Notification No. 9/2012 has outlined the requirements below regarding Form 49C, effective April 1, 2012. 

• Form 49C must be verified by a chartered accountant or signatory duly authorized by the nonresident. This form must be submitted electronically with a digital signature.
• The form requires the nonresident to provide extensive and detailed information about the operations of the LO in India and the role of the LO in the overall operations of the company.  This information includes details of purchases and transactions, employee and salary details, names and addresses of agents, representatives and distributors, India specific financial details for the financial year, names and addresses of the top five parties in India with whom the LO has been liaising, details of products or services for which liaising activity is done by the LO, and details of group entities present in India.