Taxability of Liaison Offices under the GST regime – A double whammy for Foreign Companies?
The last decade has witnessed an exponential growth in globalization, barring the past two years owing to the COVID pandemic. As clichéd as it may sound, such has been the impact of globalization on international trade that the world has virtually become a single marketplace. Businesses have deemed it expedient to have a multinational presence to penetrate the global markets and strengthen their operations.
In the Indian context, setting up a 'subsidiary' has been the most preferred way for many foreign players; but the same entails significant costs and may be suitable only for businesses looking to have a strong foothold in the country.
On the other hand, foreign companies looking to have limited operations in India seem to adopt the more cost-effective and quicker route of setting up a Liaison Office or Project Office or Branch Office, with prior approval of the Reserve Bank of India under the provisions of Foreign Exchange Management (FEMA) Act, 1999. A Liaison Office (LO) represents the Head Office (HO) and acts as a link between the HO and business connections in India. However, its activities are restricted, and only the following can be undertaken in India1:
- 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 company and Indian companies.
It may be noted that the FEMA Regulations prohibit an LO from carrying out any business or commercial activity in India, and it is required to maintain itself out of the inward remittances received from abroad through normal banking channels.
Therefore, the following moot questions arise in relation to the taxability of LO under the GST law:
- Whether the activities performed by the LO constitute a 'supply' exigible to GST?
- Whether the LO would be required to obtain registration in India?
What does the GST law say about LO?
The concept of LO has not been directly dealt with by the GST law. The implications of GST on LO would depend on one's interpretation of Section 7 of the CGST Act, 2017, which lays down the 'scope of supply.' Broadly, it can be said that for an activity/transaction to qualify as 'supply', two conditions should be fulfilled, viz. i) it has to be in the course or furtherance of business, and ii) it has to be for consideration.
In the case of LO, FEMA Regulations prohibit conducting of any 'business' and it is also not allowed to charge any 'consideration,' including commission and fees, to any party (as it has to maintain itself out of the funds received from abroad). Moreover, although the term 'business' is inclusively defined in the GST law, it essentially involves commercial activities involving the exchange of goods and/or services with or without any monetary consideration.
Hence, while one school of thought suggests that GST registration is not required since LO is merely an extended arm of the foreign HO, acting as a communication channel between the HO and entities in India and with no authority to undertake any commercial/trading activity whether directly or indirectly, the second school of thought propagates that for the purposes of GST, such activities would qualify as 'supply' and in turn, constitute 'business' of such LO. A view is also being adopted that LO and HO qualify as establishments of distinct persons, and therefore, the supply would be taxable even if made without consideration.
Advance rulings on LO
While most of the advance rulings have accepted the applicants' view and ruled that GST registration is not required, there have been some instances where contrary rulings have confirmed that the activities of LO are commercial in nature, qualifying as 'intermediary services,' liable to GST.
In the case of Takko Holding GmbH2, the Tamil Nadu AAR ruled that liaison activities undertaken by the applicant while acting as a communication channel between the parent company and Indian supplier of goods in line with the condition specified by the RBI permission letter do not constitute 'supply' under GST law. Referring to the definition of 'supply' given under Section 7 and Schedule I of the CGST Act, 2017, the AAR stated that although the supply of services between related parties or distinct persons constitutes a 'supply' as per Section 25, even without consideration, the applicant is acting as an extension of German Office in its procurement activities and therefore, they are neither related nor distinct persons but working as employees of the foreign office.
Similar view has also been adopted by Karnataka Appellate AAR in Fraunhofer - Gesellschaftzurforderung Der Angewandtenforschunge3 (overturning the ruling of AAR), as well as by various AARs in the cases of Wilhelm Fricke SE4, Habufa Meubelen B.V.5 and World Economic Forum6.
However, the Maharashtra AAR seems to have unsettled the industry sentiments vide its ruling in the case of the Dubai Chamber of Commerce and Industry (DCCI)7. It has ruled that by connecting businesses in India with business partners in Dubai, the applicant is acting as an 'intermediary' as defined in Section 2(13) of the IGST Act, 2017, and since they are a liaison office of Dubai HO, there are no services being provided on own account. Disregarding the prohibition under FEMA Regulations, the authority has held that the reimbursement of expenses received from the HO is, in fact, 'consideration' for services and that the conditions of pure agent reimbursements are not satisfied. In view thereof, activities undertaken by the applicant are nothing but 'business' under Section 2(17) of the CGST Act, 2017 and, accordingly, covered under the scope of 'supply,' has ruled the AAR.
Conclusion
It may be worth noting that advance rulings do not set any judicial precedent, but they do have a persuasive impact in similar cases. Hence, the ruling in the case of DCCI, LO could open Pandora's box for other similarly placed LOs of foreign governments and industry chambers involved in promoting trade relationships between businesses in India and their respective countries.
Even if the LO and HO were treated as establishments of distinct persons, it would be imperative to evaluate the precise nature of activities undertaken by the LO on a case-tocase basis to ascertain the requirement of GST registration. This is considering the GST exemption granted vis-à-vis services supplied by an establishment of a person in India to any establishment of that person outside India, subject to the place of supply of service being outside India.
Also, it would be equally important to evaluate the implications of treating activities of LO as 'business' under GST law vis-à-vis the FEMA Regulations, as it could otherwise prove to be a double whammy for foreign companies looking to set up operations in India.
1. 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
2. TS(DB)-GST-AAR(TN)-2018-316
3. 2021(2) TMI 1164
4. 2020 (1) TMI 690 - AAR, Haryana
5. 2018 (7) TMI 883 - AAR, Rajasthan
6. 2021 (8) TMI 1020 - AAR, Maharashtra
7. TS(DB)-GST-AAR(MAH)-2021-293