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THE INSIGHT

GST on liaison office of an Overseas entity set up in India – CBIC needs to intervene
By K V Srinivasamurthy, Sr. Consultant – Indirect Taxes, PKF Sridhar & Santhanam LLP, CA, Chennai
Nov 26, 2020

RECENTLY in an advance Ruling in FRAUNHOFER GESSELLSCHAFT ZUR FORDERUNG DER ANGEWWANDTEN FORSCHUNG E V, - 2020-TIOL-267-AAR-GST it was ruled as below:

(a) The liaison activities being undertaken by the applicant (LO) in line with the conditions specified by RBI amount to supply under Section 7(l)(c) of the  CGST Act 2017.

(b) The applicant (LO) is required to be registered under CGST Act 2017.

(c) The applicant (LO) is liable to pay GST if the place of supply of services is India.

Before going to discuss as to the GST applicability with regard to liaison office in India, one has to look into the legal provisions under GST which would come into play as below –

- Scope of Supply – Section 7(1) of the CGST Act, 2017 -

(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;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

- Schedule I of the CGST Act, 2017 - ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION –

Entry 2: 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:

- SCHEDULE III of the CGST Act, 2017 - ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES –

Entry 1: Services by an employee to the employer in the course of or in relation to his employment.

- Distinct person – Section 25 (5) -

"Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act."

- Business – Section 2 (17) –

(a) "any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit."

(b) "any activity or transaction in connection with or incidental or ancillary to sub-clause(a)."

- Recipient of Supply of Service – Section 2(93) –

(a) "where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;"

- Consideration – Section 2(31) –

(a) "any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;"

- Service -Section 2(102) –

"Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;"

Liaison Office – (Reserve Bank of India vide FE.CO.FID/27803/10.97.856/2013-14 dated 11.06.2014.) and Master Circular No.7/ 2015-16 Dt. July 01, 2015 of RBI

Permissible Activities for a Liaison Office –

A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank.

A Liaison Office can undertake the following activities in India:

 i. Representing in India the parent company / group companies.

 ii. Promoting export / import from / to India.

 iii. Promoting technical/financial collaborations between parent/group companies and companies in India.

 iv. Acting as a communication channel between the parent company and Indian companies.

Further RBI has stipulated certain conditions for the establishment of liaison office in India:

(i) The liaison office shall be established within six months from the date of the permission letter.

(ii) The liaison office will not generate income in India and will not engage in any trade / commercial activity and undertake only permissible activities as mentioned in Schedule II of FEMA Notification No. 22/2000-RB dated May 3, 2000 , as amended from time to time.

(iii) It should restrict its activities to those given in Para 4 (iii) (a) of Form FNC submitted by the Applicant.

(iv) It will function as per the conditions mentioned in the Annexure-1 of RBI approval letter.

(v) It will represent only the applicant company and approach RBI for prior approval if it wants to represent any group company.

In addition, certain other conditions were also stipulated such as:-

(i) It shall work only for liaison activities and not for any indirect entry into service.

(ii) Shifting the liaison office to any other city shall be made only with the prior approval from RBI.

(iii) Except the proposed liaison work, the office will not undertake any other activity of trading, commercial or industrial nature nor shall it enter into any business contracts in its name without RBI permission.

(iv) No commission/ fees will be charged, or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.

(v) The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels.

(vi) The liaison office shall not borrow or lend money from/to any person in India without prior permission of Reserve Bank of India.

(vii) It shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India without obtaining permission by Reserve Bank of India. Under the Foreign Exchange Management Act (Acquisition and transfer) of immovable property in India.

(ix) It shall furnish and submit the Annual Activity Certificate of the activities of the Liaison office from the Auditors at the end of 31st March and same needs to be submitted on or before September 30 of that year. In case the annual accounts of the Liaison Office are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted -within six months from the due date of the Balance Sheet.

(x) It shall also submit a copy of Annual Report to the Directorate General of Income Tax (International Taxation), New Delhi.

(xi) It will not render any consultancy or any other services directly/ indirectly with or without consideration.

(xii) It will not have any signing/ commitment powers, except than those which are required for normal functioning of the office, on behalf of the head office.

(xiii) The activities/affairs of the offices may be verified/examined by RBI by carrying out a scrutiny as and when found necessary

In the instant case the applicant M/s. Fraunhofer-Gessellschaft Zur Forderung der angewwandten Forschung had submitted as below:

The liaison office in Bangalore undertakes only those approved works as permitted by the RBI and is neither engaged/involved in any other activity of trading, commercial or industrial nature nor into any business contract in their own name without prior permission. No commission/fees are charged, or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India

The certificate issued by Chartered Accountant vide letter dated 20.05.2019 reaffirms that the Liaison office undertakes only those activities that have been specifically permitted by RBI vide its approval letter dated 11.06.2014 and has complied with the terms and conditions specified therein. Further, the liaison office does not receive any consideration or fee and it is purely maintained by inward remittances from the Head office to meet the expenses. The Financials of the liaison office also put forth the same.

Thus, an office which is established in strict adherence to above RBI stipulations and conditions shall be considered as a liaison office and the same cannot be said to carry on any business activity as provided below;

- Except the proposed liaison work, the office will not undertake any other activity of trading, commercial or industrial nature nor shall it enter into any business contracts in its name without RBI permission.

A look into the above signifies that the activities carried out by the liaison office does not concur with the definition of business as provided under GST, which reads as below:

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a).

In the absence of the above activities, the liaison office is not line with the scope of supply as provided under Section 7(1)(a).

As the inducement to supply of goods or services are absent, there is no consideration arising in line with the definition of consideration under Section 2(31). Also, the provisions of Section 2(93) as to 'Recipient of supply of services 'are also missing.

Also, clause (b) of the definition of business under Section 2(17) has no role to play in the event of non-existence of clause (a) in respect of liaison office.

Further meeting the entire expenses of the liaison office through the funds received from abroad is to be treated as reimbursement of expenses. Reimbursement is defined as 'Repayment of what is spent; to reimburse is to repay what is expended; restoration of an equivalent for something paid or expended' - P. Ramanathan Aiyar Law Lexicon. Reimbursement of actual expenses does not have an element of income embedded in it. It is mere recovery of expenditure incurred at a common place and is merely a matter of logistic convenience. Hence, reimbursements cannot be regarded as a transaction at all

Thus, this cannot be considered as consideration paid for inducement of any service.

Distinct Person –

In absence of any commercial activities being carried out by the liaison office, this cannot be treated as a separate establishment of its overseas entity. Rather it appears to be extension of the arm of the overseas entity.

Any activity carried on by the liaison office, which do not contribute directly or  indirectly to the earning of profits or gains of the overseas entity, then the liaison office does not constitute an establishment.

In this regard it would be pertinent to look into the following case law(s), where in the Apex Court observed as below:

'UOI & Anr. Vs U.A.E. Exchange Centre (Civil Appeal No. 9775 of 2011) ' -

The activities carried out by the LO were in conformity with the conditions mentioned in the RBI approval. Few prohibitory conditions mentioned in the RBI approval were that the LO would not enter into any business contracts without prior approval of the RBI or undertake any trading, commercial or industrial activity or render any consultancy or any other services. Also, the LO could not even charge commission/fee or receive any remuneration or income in respect of the activities undertaken by it in India. Accordingly, the Hon'ble SC, after referring to its own earlier decisions in the cases of  'ADIT-1 vs. E-Funds IT Solutions Inc. 13 SCC 294 (2018) (SC)', concluded that based on the onerous stipulations levied by the RBI, it could be safely deduced that the activities of the LO in India were restricted by the RBI permission, and were preparatory and auxiliary in nature.

Thus, the activities carried out at the fixed place (i.e. the LO) in India did not qualify as a 'PE' of the taxpayer as per Article 5 of the India-UAE tax treaty.

Thus, it was held that there was no business being carried on by the liaison office.

As such the liaison office does not come within the purview of distinct person to attract GST in accordance with Schedule I.

Conclusion:

The liaison office set up in accordance with RBI stipulation could be viewed as not coming within the ambit of service. In fact, it would be appropriate to consider the same as an extended arm of its overseas entity. Hence being an extended arm, the persons employed in the liaison office are to be construed as employees of the overseas entity. Further, as there is no separate establishment, the requirement of registration in GST would not arise. In fact, LO appears not to fit into definition of a separate person as stipulated under Section 2(84) of CGST since it being an extended arm of the overseas establishment.

It would be pertinent to note the observations of the Apex court in UAE exchange case wherein it observed that the activities which were restricted by RBI permission were preparatory and auxiliary in nature. This is in contrast to the stand taken by the AAR wherein it stated that the compliance of mere Clause (b) of Section 2(17) would amount to business which reads as below:

(a) any activity or transaction in connection with or incidental or ancillary.

The above factors have be reasoned well in the following advance Rulings:

1. IN RE : TAKKO HOLDING GMBH - TOG-398-ARA-GST-2018 - Applicant acting as an extension of German Office in its procurement activities from suppliers in India and neither related nor distinct persons, but working as employees of foreign office -

Liaison activities of applicant not covered under definition of supply - Applicant not supplier and not required to obtain registration or pay GST

IN RE : HABUFA MEUBELEN B.V. - TOG-273-ARA-GST-2018 - Reimbursement of expenses and salary paid by M/s. Habufa Meubelen B.V. (HO) to the Liaison Office, established in India, not liable to GST and applicant, i.e., M/s. Habufa Meubelen B.V. Jaipur, not required to get itself registered under GST, if liaison office in India not renders any consultancy or other services directly/indirectly, with or without any consideration and the liaison office does not have significant commitment powers, except those required for normal functioning of office, on behalf of Head Office

Such offices are set up by foreign enterprises to understand the Indian market and to carry out certain pre-defined limited activities. They do not have any significant commitment powers, except those required for normal functioning of office on behalf of its overseas head office. L.O. are not authorised to do core business activity

Thus, neither any of the provisions to bring the activity of the liaison office within the ambit of 'Supply' seems to be in existence nor appearing. There seems to be no business on standalone for the liaison office.

Rather these activities could be viewed in accordance with provisions of Schedule I of CGST as ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES - Services by an employee to the employer in the course of or in relation to his employment.

Thus, one needs to consider the above factors while considering the applicability of GST relating to liaison offices of an overseas entity. It would be appropriate if the Government would come with a clarification on the above, especially when there are conflicting advance rulings, which in turn would immensely benefit overseas entity venturing to Indian market. This would lead to the economic growth in the form of foreign exchange earnings.

[The views expressed are strictly personal.]