Taxing Liaison Offices under GST regime

By Simran Jalan (simran@vinodkothari.com)

Introduction

A company resident outside India may initiate business in India by setting up a subsidiary or branch office or liaison office or project office or any other place of business by whatever name called after taking prior approval of the Reserve Bank of India (RBI). Setting up any of the aforementioned place of business has different tax implications. The present discussion focuses on the tax implication on Liaison office under the Goods and Services Tax (GST) regime.
The Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (FEMA Regulations) defines Liaison office as:
‘Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office 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.
Therefore, RBI permits the Liaison offices to undertake the following activities:

  • Representing the parent company/group companies in India.
  •  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 and Indian companies.

However, Liaison offices are not permitted to undertake the following activities:

  • Export/import of goods
  • Domestic sale and purchase of goods
  • Rendering any professional or consultancy services
  • Payment of dividend
  • Borrowing/ Lending money
  • Any other activity which generates income

The FEMA Regulations provides an eligibility requirement for opening a liaison office in India. It states that a person resident outside India can establish a liaison office in India provided it has a profit-making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000.

Therefore, the role of liaison office is limited to acting as a communication channel between the head office and the Indian customers. It is prohibited to undertake any income generating activities. It receives reimbursements from the head office for the expenses incurred. The question that now arises is that whether the activities undertaken by the liaison office and expenses reimbursed by the head office to the liaison office is liable to GST or not. To answer this, we must first understand the following concepts.

Certain important concepts

Persons liable for registration under the GST Act

As per section 22 of the CGST Act, every supplier, having aggregate turnover of more than twenty lakh rupees in a financial year is liable to get themselves registered under the GST framework in the state from where he makes a taxable supply of goods or services or both.

Meaning of supply

Section 7 of the Central Goods and Services Act, 2017 (CGST Act) has defined supply which reads as under:

7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Further, Schedule I lists down the activities which are to be treated as supply even if it is made without consideration. It includes the supply of goods/services/both between related parties or between distinct persons as specified in Section 25 of the CGST Act, when made in the course of furtherance of business.

Explaining the concept of “distinct persons”

Section 25 of the CGST Act defines distinct persons as “A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act”.

The intention of this provision is to distinguish between two entities or two components of a single entity for the purpose of indirect taxation, which would otherwise, in natural course, not be treated as a separate entity. For example, two branches of the same entity located in two different states would be treated as distinct persons, even though, practically, they are part of the same entity.

This logic of distinct person cannot be applied in case of Liaison office because, a liaison office does not operate independent of its head office or principal and the former is just an extension of the latter one. A liaison office is not allowed to carry out any activities at all, it is just the face of a foreign entity in India, while the operations are carried out from outside in India.

This acts as a precursor to a couple of Advance Authority Rulings passed by the GST Council on taxability of liaison offices in India under GST, the same have been discussed at length below.

Rulings by Advance Authorities

I. M/s Takko Holding GmbH

Facts of the case:

Takko Holding is a company incorporated in Germany. They are permitted by RBI to have liaison office of the Company (hereinafter referred to as ‘Takko’ or the ‘Applicant’). The Applicant is not registered under GST. The Applicant is acting as a communication channel between the parent company located outside India and Indian companies. The applicant does not charge any fees /commission or does not earn any remuneration or income for the liaison services rendered by it.

Sought advance ruling on the following matters:

  • Whether Liaison office is liable to pay GST?
  • Whether Liaison office is required to be registered under GST Act?
  • Whether the Activities of a Liaison office amount to supply of services?

Discussion

It was stated that no consideration is being charged for the activities undertaken by the Liaison office and the liaison office does not have any business activities of its own. Further, the Liaison office and the head office are not related person as there is only one legal entity and no relationship can be established. They are not distinct person as per Section 25 of the CGST Act as distinct person has establishments in more than one state or Union territory. Therefore, the services provided by the Liaison office does not amount to supply.
As there is no supply of services, the Applicant would not be a supplier and hence, is not required to obtain registration under the CGST/SGST Act.

Ruling

  • The liaison activities are in line with the conditions specified by the RBI and it do not amount to supply under CGST and SGST Act.
  • Therefore, the applicant is not liable to pay CGST, SGST or IGST.
  • The applicant is not required to get itself registered under GST for the liaison activities.

II. Habufa Meubelen B.V.

Facts of the case

Habufa Meubelen B.V. (Head Office) is a company incorporated in Netherlands. They are permitted by the RBI to have a Liaison office in India (hereinafter referred as ‘Applicant’). The liaison office has been established for the purpose of liaising with the suppliers with the quality control of goods. Since, Liaison office do not have any source of income, it is dependent on the Head Office and all expenses incurred by such office are reimbursed by the Head Office.

Sought advance ruling on the following matters:

  • Whether the reimbursement of expenses and salary paid by the HO to the Liaison office established in India is liable to GST as supply of service, especially when no consideration for any services is charged / paid.
  • Whether the applicant is required to get registered under GST?
  • If it is assumed that the reimbursement of expenses and salary claimed by liaison office is a consideration towards a service, then what will be the place of supply?

Discussion

A perusal of definition of ‘service’ as per Section 2(102) of the CGST Act shows that for any activity to be considered as service under GST law there has to be charging of a separate consideration. If there is no separate consideration charged then it would not qualify as a service under the GST law.

Further, on reading the definition of ‘service’ and ‘supply’ in harmony, a conclusion can be drawn that a supply of service can be liable to GST only if a separate consideration is charged. Therefore, the activities undertaken by the liaison office neither amounts to supply nor to service. Further, the reimbursements claimed by them from their Head Office is also falling out of the purview of supply of service. Since there are no taxable supplies made by the Liaison office there is no requirement of getting registered under the GST Act.

Ruling

If the Liaison office in India does not render any consultancy or other services directly/indirectly, with or without consideration and the liaison office does not have significant commitment powers, except those which are required for the normal functioning of the office, on behalf of the Head Office, then the reimbursement of expenses or salary paid by the Head office to the Liaison office is not liable to GST and the Applicant is therefore, not required to get itself registered under GST.

Conclusion

Liaison office is only a communication channel between the Head office and the Indian customers and does not undertake any income generating activities of its own. It does not charge any separate consideration for the services provided to the Head Office. Therefore, it is difficult to distinguish a liaison office from the principal office. Therefore, the services provided by the Liaison Office does not fall under the purview of the term ‘supply’ under GST and hence, Liaison office is neither required to pay GST nor get themselves registered under the GST regime.

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