Can liaison office generate taxable income?

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 doesn’t create any of the aforesaid relationship, liaison office will not attract any income tax in India.