| Jul-28-2021

Topsy-Turvy Rulings on Taxability of Liaison Office in GST

1. Introduction

There are many modes by which a foreign company may set up their business/an entity in India. Most popular modes are establishing a Liaison office (hereinafter "LO”), Branch Office (“BO”), Project Office (“PO”), Wholly owned subsidiary (“WOS”), Joint Ventures (“JV”) etc. The present article deals with the cloud of uncertainty relating to taxability of Liaison office under the Indian GST (Goods and Service Tax) laws.

2. Liaison office – Meaning & Scope

Since the term 'Liaison Office' has not been defined in GST law, reference can be made to the definition under Foreign Exchange Management Regulations 2016 which is reproduced below:

'Liaison office' means a place of business to act as a channel of communication between the principal place of business or Head Office (hereinafter “HO’) or by whatever name called and entities in India but which does not undertake any commercial/trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

LO is permitted to render only following activities:

• Representing in India, the parent company/group companies.
• Promoting export / import from / to India.
• Promoting technical/ financial collaborations between parent/group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

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[1] Regulation 2 (e) of the Foreign Exchange Management Regulations 2016

In terms of conditions stipulated by Reserve Bank of India (RBI), LO is not allowed to generate any income in India. LO is debarred from engaging in any trade/commercial/industrial activities in India. It has to meet all its expenses through reimbursement from HO and maintain detailed account for the same.

RBI approval for setting up LO invariably contains following restrictions on the functioning of LO

• LO shall not enter into any business contract in its name without RBI permission
• LO shall work only for liaison activities and not for any indirect entry into service
• LO shall not charge any commission/fees/any other remuneration for liaison activities rendered to HO
• In addition, restrictions are prescribed for borrowing, acquiring and disposing of assets etc.

Further, under the Companies Act, 2013 LO is always registered/incorporated in the name of a foreign LO.

Having understood the statutory framework of LO, let us have look at GST issues faced by LO.

3. GST issues plaguing LO

Foreign companies are grappling with the below-mentioned issues and expect authoritative pronouncement to uplift their sentiments on the Indian economy:

• Whether LO is having an identity separate from its HO?
• Whether LO is carrying out any business activity?
• Whether LO and HO are an establishment of a distinct person?
• Whether LO and HO are related persons in the context of GST law?
• Whether element of consideration is present in activities carried out between LO and HO?
• Whether LO is providing any supply to HO? Whether such activities can be construed as ‘deemed supply’?
• Whether activities rendered by LO is classifiable as ‘Intermediary’ services’?
• Whether services rendered by Indian LO to foreign HO can be classified as ‘Export of Services’?
• Whether LO is required to take GST registration and pay GST on its liaison services?

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[1]  Regulation 4 (b) along with Schedule II of FEMR

As aforesaid issues are very fundamental in nature and likely to create huge liability in future, many applicants, therefore, have filed an advance ruling application to get an authoritative ruling on aforesaid issues. Unfortunately, cure (Rulings) seems to be more dangerous than the disorder (aforesaid fundamental issues) itself. Before we proceed further it would do us good to get an overall feeling of recent advance rulings on the taxability of LO.

4. Contradictory Advance Ruling

4.1 Takko Holding GMBH

AAR held that “the liaison activities being undertaken by the LO when strictly in line with the condition specified by RBI permission letter do not amount to supply under GST law.  LO, therefore, is not liable to pay GST on such activities.  Further, LO is not required to get itself registered under GST for such liaison activities.”

4.2 Habufa Meubelen B.V

AAR has followed the view of Takko Holding GMBH (supra) & ruled as under:

The reimbursement of expenses and salary paid by HO to LO, is not liable to GST, as no consideration for any services is being charged by the LO. Further, the kind of reimbursement claimed by them from their HO is also falling out of the purview of supply of service and as there are no such taxable supplies made by the LO, they are not required to get themselves registered under GST

4.3 Fraunhofer-Gessellschaft Zur Forderung Der Angewwandten Forschung

This ruling has raised the eyebrows of many foreign companies and professionals. Distinguishing facts from the above-referred rulings, AAR controversially held as under:

• LO is a separate person from its HO.
• LO is engaged in the business activity.
• LO and HO are deemed to be a related person.
• Activities performed by the LO falls under the scope of supply as such activities are in relation to the furtherance of business
• LO and (HO) shall be treated as establishments of distinct persons, in terms of Section 8 of the IGST Act. LO and HO are therefore establishments of distinct persons
• Activities performed by LO does not fall within the ambit of export of services
• LO should take GST registration and pay applicable GST on their supply

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2018 (19) G.S.T.L. 692 (A.A.R. - GST) – Tamilnadu AAR
2018 (14) G.S.T.L. 596 (A.A.R. - GST) - Rajasthan AAR
2020 (42) G.S.T.L. 384 (A.A.R. - GST - Kar.)

On appeal, the Appellate authority (AAAR)[1] has fortunately set aside the findings of the AAR and held that the activities of the liaison office do not amount to supply of service. Further, liaison office is not liable to pay GST and also not liable to registered under GST as there is no taxable supply.

4.4 Wilhelm Fricke Se

Haryana AAR had occasion to decide on a similar issue. AAR concurred with the ruling of Takko Holding GMBH & Habufa Meubelen B.V

4.5 Dubai Chamber of Commerce and Industry

In what could be termed as a shocker, Maharashtra AAR surprisingly held that LO is acting as an intermediary. It was further held that liaison activities performed by LO shall fall within the ambit of supply and therefore LO should obtain GST registration and pay applicable GST on such activities.

4.6 Hitachi Power Europe GMBH

In marginally different facts, UP AAR observed that Project Office is merely an extension of the foreign company in India to undertake the project in India and limited to undertake compliances required under various tax and regulatory requirements in India. AAR, therefore, held that the transactions between the foreign company and Indian project office are an intra-company affair and shall not be subject to GST.

In the above-discussed rulings, it is evident that there is potential for significant litigation on fundamental issues listed in para 2 above. After a brief review of rulings on the instant subject, let us now conduct a threadbare analysis of statutory provisions and attempt to delve deep into issues faced by liaison office.

5. Analysis of Statutory provisions

5.1 Whether LO is having an identity separate from its HO?

To begin with let us answer the basic question of whether LO is a separate person from HO? It is to be noted that LO is always registered with the Registrar of Companies (ROC) in the same name as the foreign HO. Even PAN/TAN carries the name of foreign HO. In the opinion of the paper writer, LO does not have a separate legal existence in law. LO at best can be considered as a geographical extension of the HO having the same legal identity as that of HO.

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2021-TIOL-10-AAAR-GST
2021-TIOL-50-AAR-GST
2021-TIOL-145-AAR-GST
2020 (32) G.S.T.L. 804 (A.A.R. - GST - U.P.)

5.2 Whether LO is carrying on any business activity?

Due to RBI stipulations mentioned in para 2 above, LO is not permitted to carry out any business activity. Assuming without accepting that LO is providing any services/supply to HO, such service will still fall within the domain of ‘self-service’. It is trite of law that no one can render service to oneself. Further, this position will not change even after the recent GST amendment , as such amendment is for the limited purpose of the transactions between a person (e.g. Club, Society etc) and its members.

5.3 Whether LO and HO are an establishment of a distinct person?

In GST law[1], a person carrying on a business through a branch or an agency or a representational office in any territory is treated as having an establishment in that territory. However, since LO is not carrying on any business (In fact LO is not permitted to carry on any business), therefore LO and HO can’t be construed as establishment of a distinct person.

5.4 Whether LO and HO are related persons in the context of GST law?

GST law explains the term ‘related person’.  To decide whether LO and HO are related persons or not reference is invited to clause (c) of explanation to section 15. The said clause reads that “persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related”. Though one of the stated object for LO is to promote the business of HO however ipso facto such intention is not sufficient to decide whether LO and HO are related. As per clause (c) of said explanation, there should be a mutual relationship. Further for mutuality to exist there should be a presence of a minimum 2 persons. As discussed earlier LO is merely an extension of HO and therefore a test of plurality fails in this case. Accordingly, a view can be taken that LO and HO are not deemed as related persons.

5.5 Whether element of consideration is present in activities carried out between LO and HO?

As discussed in para 2 above, LO only receives reimbursement of expenses from HO in order to meet its daily expenses. Mere reimbursement of expenses cannot be termed as consideration. It is pertinent to note that RBI mandate does not allow LO to charge any commission/fees or such other separate consideration for liaison activities carried out in India.

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[1] Insertion of section 7(1)(aa) in the CGST Act
[1] Explanation 2 to Section 8(1) of the IGST Act

5.6 Whether LO is providing any supply to HO? Whether such activities can be constructed as ‘deemed supply’?

Liaison activities conducted by LO does not fall within the scope of various forms of supply made for a consideration by a person in the course or furtherance of business [1]. However, GST law extends the scope of supply to specified transactions[2] even if made without consideration.   Relevant entry of schedule I of the CGST Act reads as under:

“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”

Since in preceding paras we took a view that LO and HO are neither related persons nor a distinct person, a corollary view emerges that such activities may remain outside the purview of supply/deemed supply.

5.7 LO and ghost of an Intermediary

Coming to the most vexed issue of Intermediary, term Intermediary broadly refers to a person who connects 2 or more parties to the contract. Therefore, the presence of a minimum of 3 legally identifiable separate persons is a must in transactions arranged by an intermediary. Ostensibly when LO interacts with Indian customers of foreign HO, only 2 identifiable separate persons are present as LO is not a separate independent entity but a geographical extension of HO.

Without prejudice to the above argument, characterising LO services as intermediary services call for treading a fine line. At the outset, each and every facilitation/support service can’t be characterised as intermediary services. Back-end activities like call centre support, market research, feasibility study etc will not fall within the ambit of Intermediary services.

Further following facts tilt the balance towards argument that LO is not an intermediary:

1. LO is not permitted to carry out price negotiations on behalf of HO.
2. Value of so-called intermediary’s service is not identifiable from the main supply of service that he is arranging.  In fact, LO is not allowed to charge any amount towards its liaison activities
3. Applying the doctrine of ‘Noscitur a sociis’ concept of an intermediary shall take its colours from services of broker or agent. It is to be noted that LO is not permitted to undertake broking activities

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Section 7(1)(a) of the CGST Act.
Section 7(1)(c) of the CGST Act r.w. Schedule I to the CGST Act.
Reference is invited to discussion in Service Tax Education Guide

In the opinion of the paper writer if LO is carrying out activities permitted by RBI/FEMA then there is a strong argument against considering such services as intermediary services. However, if the sphere of activities carried out by LO exceeds activities permitted then the argument of intermediary may succeed.

5.8 Whether services rendered by Indian LO to foreign HO can be classified as ‘Export of Services’?

As discussed in earlier para liaison activities of LO does not amount to a supply. Therefore, the question of treating such activities as export supply does not arise. Arguing without accepting that such activities fall within the ambit of supply than a conjoint reading of various provisions of GST law it is possible to take a view that such activities tantamount to the export of services in the context of GST. Please note in earlier para we have made strong arguments against LO and HO not being an establishment of a distinct person. Further, there is a strong force in taking a view that LO is not an intermediary.

5.9 Is there any exemption available for transactions between LO and HO?

In terms of Notification No. 15/2018- Integrated Tax (Rate) dated 26th July 2018, “any services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation 1 in section 8 of the Integrated Goods and Services Tax Act, 2017 is exempted from tax provided the place of supply of the service is outside India”. It is highlighted that in the preceding para we have argued that LO and HO are not an establishment of a distinct person, if same view is maintained then LO is not entitled to the above exemption. Otherwise, also this exemption is very narrow in its scope as only those services whose place of supply falls outside India is exempted from the levy of taxes.

5.10 Liability for Registration and GST payments

Coming to the final issue since a view has been advanced that LO is not engaged in making any supply of goods or services and therefore there may not be a liability to obtain registration under GST law[1]. As a corollary, LO is not required to pay GST on their activities specifically permitted by RBI/FEMA.

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Section 2(6) and Section 13(2) of IGST Act

6. Foreign Jurisprudence on the taxability of LO

The Court of the European Union (EU) in FCE Bank [Ministerodell 'Economia e delle Finanze and Agenziadelle Entrate v. FCE Bank plc., C-210/04.], ruled that "a fixed establishment, which is not a legal entity distinct from the company of which it forms part, established in another Member State and to which the company supplies services, should not be treated as a taxable person by reason of the costs imputed to it in respect of those supplies”

Aforesaid EU ruling will surely carry persuasive value for LO facing issues of taxability/registration.

7. Parting Remarks

The taxability of transactions between a LO and HO has become a burning issue today. Divergent and incongruent advance rulings have created more uncertainty amongst the taxpayers and sown seed of further litigation. Finance Act 2019 has introduced a provision for establishment of ‘National Appellate Authority for Advance Ruling. (NAAR) to bring clarity on contrary orders by advance ruling authorities. However, till date, NAAR provisions have remained only on paper. Post COVID-19 Governments are making an all-out attempt to attract foreign investments. Suitable clarification from Central Board of Indirect Taxes and Customs (CBIC) on the subject issue goes a long way to put varied interpretations to rest and to market India as an attractive investment destination.

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Section 23(1) of the CGST Act

Author : Jignesh Kansara - Chartered Accountants by Profession and practise in the area of Indirect Taxation including GST.

Email: jignesh@jkaca.in

Disclaimer

The views expressed herein are strictly personal to the authors and should not be construed as advice/ legal opinion. The contents of this article are based on the interpretation of the facts, relevant legislation, rules, notifications, circulars, judgments/rulings, etc. on the date of publishing of this article.  One should not act upon the information in this article without obtaining specific professional advice. The authors are not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission pertaining to this article.

Further, the said article is only for information and guidance purposes and should not be construed as any kind of advertisement or solicitation of work

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We are pleased to release our next weekly blog titled *Topsy-Turvy rulings on taxability of Liaison Office in GST*. Blog deals with the cloud of uncertainty relating to taxability of Liaison office under the Indian GST (Goods and Service Tax) laws and contrary rulings on the subject matter.