A foreign company/ investor intending to expand business in India can do so by opening a branch office, project office, etc., or by establishing a liaison office in India among various other options. However, if the foreign company/investor is entering the Indian market for the first time, they would want an establishment that is not only economically viable and tax efficient but also a safe option considering the nitty gritty of Indian laws and the risks involved.
Liaison office as per FEMA
A liaison office, commonly speaking acts as a communication channel between the foreign company/investor and prospective buyers/ customers or prospective vendor in India without undertaking business in India as such. Reserve Bank of India regulates such establishments through 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 dated March 31, 2016 (for short FEMA regulations). As per the FEMA regulations, 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.
The activities undertaken by a liaison office in India of a person resident outside India may amount to supply of service for a consideration in the form of inward remittance from head office. It can argued that remittance from head office is not a consideration but only funds for payment of salary etc. or a reimbursement of expenses like rent, etc. Section 7(1)(c) of the CGST Act states that the activities specified in Schedule I to the CGST Act, shall be treated a supply of goods or services, even if made without consideration.
To understand if the activities undertaken by liaison office for its head office falls in either of the two entries in Schedule I or not, we need to first examine if the liaison office and head office are related persons or distinct persons. Related person has been defined in Explanation to Section 15 of the CGST Act and it states that persons shall be deemed to be related if one of them directly or indirectly controls the other. Employer and employee, legally recognized partners and members of same family are some of the other persons deemed to be related. Liaison office and head office do not fit under the list of persons deemed to be related as per the explanation to Section 15 of CGST Act.
Explanation 1 to Section 8 of Integrated Goods and Services Tax Act, 2017 (‘the IGST Act’) lays down that where a person has an establishment in India and any other establishment outside India, then such establishments shall be treated as establishments of distinct persons. Explanation 2 to Section 8 of IGST Act states that a person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory. In other words, the person, through a branch or an agency or a representational office, should carry on business in India. However, as per the FEMA regulation, liaison office shall not undertake any commercial /trading/ industrial activity, directly or indirectly.
The term ‘business’ has been defined in a wide manner in CGST Act. To answer the question as to whether liaison office is carrying on or conducting business in India, the activities of such liaison office needs to be observed on individual fact to fact basis. Where liaison office is simply acting as communication channel or engaged in the activities of market research, promotion, which are not the core business operations of the head office and are merely ancillary in nature, in such a case it may be argued that head office is not carrying on business in India. In such cases, liaison office would not be treated as an establishment in India.
Notification No.15/2018-Integrated Tax (Rate) dated 26.07.2018 (in short Notification No.15/2018) provides exemption for 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 IGST Act. This is subject to the condition that the place of supply of the service is outside India. Thus, even if liaison office and head office are establishments of distinct persons, exemption from GST is available if the conditions of this notification are satisfied. It may be noted that this kind of exemption is made available only from 26.07.2018 and so for the period from implementation of GST i.e. from 01.07.2017 till 26.07.2018, no such exemption is available to such establishment of distinct persons.
Assuming the liaison office carries out other activities, not permissible under FEMA regulations, the question may arise as to whether the liaison office is still not required to discharge its GST liability? Is the liaison office an intermediary for its head office? The term ‘intermediary’ is defined under Section 2(13) of IGST Act to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services on his own account. The liaison office, who undertakes activities which involves arranging or facilitating supply of goods or services with the head office may get covered in the aforesaid definition.
If the liaison office is providing intermediary service to its head office, let us test if the exemption provided to establishment of distinct persons as per Notification No.15/2018 discussed above is available to such liaison office. As per Section 13(8) or IGST Act, place of supply in case of intermediary service is location of supplier of service i.e. location of intermediary, which in this case would be the liaison office situated in India. As the condition of place of supply being outside India as per Notification No. 15/2018 is not fulfilled, the liaison office working as an intermediary of head office will not be in a position of claim exemption form payment of GST. However, depending on the nature of activities undertaken by the liaison office, such exemption may require to be examined on case to case basis.
The Rajasthan Authority for Advance Ruling [In Re: M/s. Habufa Meubelen B. V. (Indian Liaison Office) dated 16.06.2018] held that “when the liaison office is working as per the terms and conditions as mentioned in FEMA regulations, the reimbursement of expenses and salary paid by head office to the liaison office, is not liable to GST, as no consideration for any services is being charged by the liaison office..” Further, the ruling by Tamil Nadu Authority for Advance Ruling [In Re: Takko Holding GmbH dated 27.09.2018] considers that liaison office works as employees of foreign office and none of the activities of liaison office is covered under the definition of service and therefore not liable to GST.
To sum up, one school of thought is that the liaison office and head office are not establishments of distinct person. As they are one and the same person, the question of providing service to self does not arise and therefore, no GST liability arises on liaison office undertaking activities as permitted by FEMA regulations. However, the other school of thought can be that the liaison office and head office are establishments of distinct person when activities beyond FEMA regulations are undertaken. In such a case, depending on the nature of activities undertaken by the liaison office for its head office, applicability of Notification No.15/2018 would require examination on case to case basis to ascertain if exemption from payment of GST is available to the liaison office. Companies will have to be mindful of the activities that the liaison office in India will be required to undertake for its head office abroad in order to be tax efficient in India.
[The author is a Senior Associate in GST Practice in Lakshmikumaran & Sridharan, New Delhi]