The Advance Ruling Authority (ARA) was constituted under Indian goods and services tax (GST) law and entrusted with the responsibility of answering questions regarding:
- the applicability of tax;
- the admissibility of input tax credit;
- the classification of goods and services; and
- the eligibility to receive the exemption.
While an ARA ruling is binding only on the taxpayer that raises the question, it carries persuasive value in identical situations.
In a recent advance ruling,(1) the applicant, a company headquartered in the Netherlands, established its liaison office in Jaipur, India in December 2007 with the necessary prior regulatory approvals.
The Indian liaison office sought an advance ruling from the ARA on the following questions:
- whether the head office's reimbursement of the expenses and salaries of the liaison office was liable to GST (in particular, was the liaison office subject to GST, which would render the activity as a supply of services, even though no consideration for any services were paid or charged);
- whether the liaison office was required to register under GST law; and
- if the liaison office's claim for reimbursement of its expenses and salaries was treated as supply of services, what was the 'place of supply' (which would determine whether there was an exemption from tax if the expenses and salary could be treated as an 'export').
According to the liaison office:
- it undertook no commercial or industrial trading activities, nor did it enter into any business contracts in its own name or possess the appropriate regulatory permissions for such activities;
- it received no commissions or fees, nor did it receive any renumeration for its liaising activities;
- its expenses were paid exclusively out of funds received from the home office, through normal banking channels;
- it rendered no consultancy or other services and had no significant commitment powers, except those which were required for the normal functioning of the liaison office on the behalf of the home office;
- it was permitted to approach any Category-I bank in India in order to open an account and receive remittance from its home office;
- all of its liabilities – including arrears of renumeration and social security schemes for employees – were paid by the home office; and
- it had no independent revenue or clients – in short, it was established only to liaison with suppliers in order to ascertain the quality of goods. The home office made all payments to suppliers directly. Further, the home office paid for all of the liaison office's expenses, as permitted by the Reserve Bank of India. The liaison office charged no fees for the activities that it carried out in India (other than receiving reimbursement for its expenditures).
In light of the above, the liaison office submitted that its activities did not fall within the scope of 'supply', as defined by Sections 2(102) and 7 of the Central GST Act 2017. In order to qualify as supply, the taxable event should be triggered by a person in the course of furthering the business. Further, to qualify as a service, the activity must be carried out by a person for which a separate consideration is charged.
The liaison office further submitted that, as per Section 22 of the Central GST Act, the requirement to register in a state or union arises only when a supplier makes a taxable supply and crosses the applicable threshold (ie, turnover of more than Rs2 million in a financial year).
The liaison office was strictly prohibited from undertaking any commercial or industrial trading activities in its own name for fees or commission; thus, no taxable supply was made by the liaison office. Further, the liaison office was not covered under the compulsory registration category of persons specified under Section 24 of the Central GST Act.
After considering all of the submissions, the ARA held that the Indian liaison office rendered no consultancy or other services and had no significant commitment powers, except those which were required for the normal functioning of the liaison office on the home office's behalf. The ARA also observed that there was no separate consideration being charged by the liaison office for the activities carried out by it (except for the reimbursement of its expenses). Thus, the ARA found that the liaison office was not liable for GST. The ARA also noted that the liaison office need not register under Section 22 of the Central GST Act, as it made no taxable supplies.
The ARA's ruling is crucial, as many multinational companies have opened branches and liaison offices in India to undertake such activities. These branches and offices merely receive reimbursement for the expenses that they incur. Many companies have had considerable doubts as to whether they must register, pay GST and file returns in respect of these reimbursements. While the courts and tribunals have issued few judgments pertaining to the pre-GST era, the applicability of these decisions in the current context is doubtful. Thus, the ARA's decision has provided welcomed clarity.
For further information on this topic please contact Amit Kumar Sarkar at BDO in India by telephone (+91 22 3332 1600) or email ([email protected]). The BDO in India website can be accessed at www.bdo.in.
Endnotes
(1) AAR - Rajasthan, Habufa MEUBELEN BV, 16 June 2018.
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