GST UPDATE ON REQUIREMENT OF REGISTRATION ON LIAISON OFFICE153/2020-21

There have been contradictory decisions by various Advance Rulings of different states even on settled issues like GST under RCM on director’s remuneration, GST on supply of goods without entering the Indian Territory etc. In this update, we shall be discussing another issue which is again debated between professionals about taking registration by a Liaison office in India of a company incorporated outside India in the case of M/s Fraunhofer- Gessellschaft Zur Forderung der angewwandten Forschung.
The applicant, incorporated in Germany, undertakes the business of promoting applied research and hence established their liaison office in Bangalore, India, under the permission of RBI, to act as an extended arm of the head office and to carry out the activities that are permitted. In view of this, the applicant sought a ruling in respect of the following questions:
i. Whether the Activities of liaison office amount to supply of services?
ii. Whether a liaison office is required to be registered under the CGST Act, 2017?
iii. Whether the liaison office is liable to pay GST?
The applicant submitted that they had followed the conditions stipulated by RBI which are as follows
(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.
Further Annexure-I of the RBI permission letter provided the terms and conditions according to which the liaison office in India will perform the following functions.-
a. Representing in India the parent company.
b. Promoting export/import from/to India.
c. Promoting technical/Financial collaborations between parent/group companies and companies in India.
d. Acting as a communication channel between the parent Company and Indian Companies.
Moreover the applicant stated that for any transaction to be taxed under section 9 of CGST Act, 2017, it should be covered under the scope of Supply as per section 7 of CGST Act 2017.

As the activities undertaken by the applicant are approved by RBI and does not cover under business transaction so it shall not fall under Section 7(1)(a) of CGST Act 2017. Further the applicant has stated two favourable decisions given in the case of the following wherein it was held that Liaison office is not required to get registered:-

Takko Holding GMBH 2018 (19) GSTL 692 (AAR GST)
Habufa Meubelen BV 2018 (14) GSTL 596 (AAR GST)

AAR discussed the definition of “Liaison Office” which is defined under 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 which is reproduced here for quick reference
“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.”
AAR held that liaison activity of the applicant actually falls under clause (b) of Section 2 (17) of CGST Act, 2017 as it is ancillary to the activities mentioned in clause (a) of Section 2 (17) of CGST Act, 2017. Further, it is to be noted that the definition of business for the purpose of GST is derived from its definition in the Act and RBI's injunction on business for the applicant can't decide the scope of business for the purpose of GST. So the applicant is involved in the business. So the AAR has concluded as follows

The liaison activities being undertaken by the applicant (LO) in line with the conditions specified by RBI amount to supply under Section 7(1)(c) of the CGST Act, 2017.

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

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

There are been similar opinion of experts even in the case of Income tax that transactions performed by liaison office is not subject to tax. Again it has created ambiguity on this issue and trade and industry will demand a clarification from Board. It has been seen in past also that CBIC has come with clarification against the verdict given by AAR. Else, the matter will go to High Court.
It has been felt that there should central authority of Advance Rulings rather than statewise Advance Rulings. These state level AARs are giving contradictory decisions and thus leading confusion in trade and industry. There is great difficulty in continuing the business in different states and running contrary to main objective of GST of “One tax, one nation”.
Secondly, it is felt that there is a urgent need of judicial members in AAR so that unbiased decisions are pronounced by them. Even this will also help the revenue by reducing litigation rather than increasing disputes by following pro-revenue approach.
Lastly, the controversial decisions by state level AARs have given the feeling in minds of trade as well as consultants that it is dangerous to seek Advance Ruling on any issue because they will unsettle even the settled issues. Even the authors of this article believe that the same feeling is now prevailing even at the level of CBIC as well as GST council also.

This is solely for educational purpose.
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GST UPDATE ON REQUIREMENT OF REGISTRATION ON LIAISON OFFICE153/2020-21

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