Fact: Takko are working as the liaison Office of M/s. Takko Holding GmbH, Germany with the prior permission of RBI. The activity conducted by the Liaison office include acting as communication channel between the parent company and Indian supplier of goods to parent company at Germany in terms of the procurement, order placement, quality checks, and technical support shipping of the Readymade garments. Takko is not receiving any consideration for this from the suppliers, except this liaison work, this office in India would not undertake any activity of trading, commercial or industrial nature nor would they enter into any business contracts in its own name without RBIs prior permission. There is no commission/ fees being charged or any other remuneration being received/ income being earned by the office in India for the liaison activities/ services rendered by it. The HO, reimburses the expenses incurred by Takko for their operations in India which are in the nature of salary, rent, security, electricity, travelling etc. They do not have any other source of income.
Issues Involved: The petitioner is before the Tamil Nadu Authority for Advance Ruling (“the AAR”) for getting judgement in respect to following:
1. Whether liaison office is liable to pay GST?
2. Whether a liaison office is required to be registered under GST Act?
3. Whether the Activities of a liaison office amount to supply of services?
Held: The Hon’ble AAR of Tamil Nadu vide ORDER No. 14/AAR/2018 dated September 27, 2018 stated as follows:
1. In regards to question no 1, it was observed that the applicant/liaison office is working as per the terms and conditions stipulated by RBI and the reimbursement of expenses & salary of employees is paid by M/s Takko Holding GmbH to the liaison office. No consideration for any activity is being charged by the liaison office and the liaison office does not have any business activities of its own as specified by RBI conditions. Therefore, the liaison activities being undertaken by the applicant when strictly in line with condition specified by RBI permission letter do not amount to supply under CGST und SGST Act.
2. In view of Ruling at 1 above, the Applicant is not liable to pay CGST, SGST or IGST, as applicable.
3. In view of Ruling at 1 above, the Applicant is not required to get itself Registered under GST for the liaison activities.
Our Comments:
Section 2(6) of the IGST Act, 2017 (“IGST Act”), while defining export of services and enumerating requisite conditions to qualify as export of services in GST and hence zero-rated, debars the transaction where the supplier of service and the recipient of service are merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of the IGST Act. In nutshell, supply of services by an Indian establishment of a person to its foreign counterpart were not treated as export of services. Later, vide Notification No. 15/2018 – Integrated Tax (Rate) dated 26.07.2018, “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 I in section 8 of the IGST Act” were exempted from GST, provided the place of supply is outside India in accordance with Section 13 of IGST Act. Thus, Indian entities/branches/project offices/liaison offices of foreign companies are now relived from paying GST when place of supply falls outside the taxable territory of India as these transactions are exempted from 27th July, 2018. But, it is important to understand that benefit has not been granted in the form of exports by recommending elimination of the restricting clause (v) of Section 2(6) of the IGST Act, defining ‘export of services’. Meaning thereby that such services will not be zero-rated in GST, rather are made exempt from GST. In other words, by granting an exemption to these services, not only the benefit of direct input tax credit shall be denied, but the requirement of reversal of common credit will also be invoked.
Further, it also needs to be appreciated that in terms of Para 2 of Schedule I to the CGST Act, 2017 (“CGST Act”), 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, is chargeable to GST even if no consideration is flowing between them. Definition of related persons given under Explanation to Section 15 of the CGST Act is wide enough to cover two persons wherein one directly or indirectly controls the other and also if both these persons are directly or indirectly controlled by a third person. Thus, the mist still revolves around those transactions between Indian branches/ offices of foreign companies which does not involve consideration. Whether same shall be treated as supply of services in terms of Para 2 of Schedule I at first place? If yes, then corresponding issues of determining value of exempt supply and reversal of common credit will entail. The above AAR is an example of confusion persisting as regards Para 2 of Schedule I. Appropriate clarification on this para is required to restrict scope of taxability of inter-company services under Para 2 of Schedule I.
Citation: [TS-581-AAR-2018-NT]