Generally, a liaison office ("LO") set up by a foreign enterprise in India is not subject to tax in India as it is not allowed to undertake any commercial activities. However, the controversy of taxing an LO as a Permanent Establishment ("PE") of the foreign enterprise in India has gained momentum in the past few years. The tax authorities generally argue that an LO is an extension of the foreign enterprise in India through which the foreign enterprise is doing its core business, commercial and marketing activities in India.
Consequentially, the foreign parent company defaults in tax withholding on payment made to expatriates assigned on a short-term basis to the Indian LO on the fair (general) assumption that liaison office is not treated as a PE, and, hence, there is no liability to withhold tax on his remuneration. The income-tax department has become quite aggressive with regard to withholding tax compliances, and, therefore, the possible implications may be considered before deputing a person to the Indian LO.