It is quite common that foreign companies planning to do business in India set up a liaison office for undertaking promotional work as a prelude to actual commercial activities. A liaison office needs prior approval from Reserve Bank of India. Since the liaison office is not permitted to do any commercial activities, it is generally believed that the existence of a liaison office will not generate any taxable income in India.
It may be clarified that where the liaison office creates a permanent establishment or establishes a business connection, the foreign company would become liable to pay tax on the profits, which can be attributed to the liaison office. But if liaison office doesnâ€™t create any of the aforesaid relationship, liaison office will not attract any income tax in India.