Liaison Offices: Debate & uncertainty on taxability of liaising services under GST continues

The Economic Times By ET CONTRIBUTORS Oct 05, 2018, 10.31 AM IST

Owing to the divergent AR and the Notification, the dilemma is that where the LO goes by the reasoning pronounced in the AR, then no GST is payable.

By Achal Chawla

The Goods and Services tax (GST) regime has replaced the diverse Indirect tax structure prevalent in the country prior to July 1, 2017, with the aim of simplifying the indirect tax structure and filling the various gaps and failings of the erstwhile regime.

The article focuses on the debate pertaining to taxability of liaising services provided by liaison offices ('LO' / 'LOs') to its parent company under GST regime.

The above issue has become more contentious on account of an Advance Ruling announced in this context, wherein the LO is treated merely as an extended arm of the parent company and it has been held that the LO cannot render services to its parent company holding that one cannot provide services to self. However, at the same time, the intention of the Government seems otherwise in as much as it has issued a Notification recently on July 26, 2018 granting an exemption to the supply of service by an establishment in India to an establishment outside India of the same entity (subject to fulfilment of prescribed condition), deeming such activity to be a supply under GST, making the topic more dubious.

Liaison offices - The background

Liaison offices, which are regulated by the Reserve Bank of India (RBI), are set up by the foreign companies in India, to seek business opportunities in India.

In terms of the RBI Master Circular, LOs can undertake only liaising activities, i.e. it can act merely as a communication channel between the parent company and customers in India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the parent company and its products to the prospective Indian customers.

Further, the LOs are not allowed to undertake any business activity in India; therefore, it cannot earn any income in India. In absence of such source of income, the expense incurred for running such offices are met through inward remittances of foreign exchange from the parent companies.

Considering the above business model and with the advent of GST in India with effect from July 1, 2017, the question which arises for determination is whether the liaising services rendered by LOs shall be subject to GST, particularly in light of the fact that the LOs are not authorised to carry any business activity and are merely marketing wings of the parent company and do not receive any consideration for provision of such liaising services?

GST Implications

On a bare perusal of the provisions of GST legislation, it seems that the liaising services may be subject to GST, though the same appears to be against the intent of lawmakers.

The term 'distinct person' defined under GST law includes an establishment of a person in India and any other establishment of the said person outside India. Accordingly, the LO and its parent company shall qualify as 'distinct persons' in terms of GST legislation. Further, per GST law(s), some activities / transactions have been considered to be a 'supply' even in absence of consideration. One of such activities includes the services between distinct persons.

Accordingly, liaising services provided by LO to its parent company, even in absence of consideration, shall be construed as 'supply' under GST. Further, since the services are being rendered to the parent company, the Place of Supply ('PoS') in case of liaising services shall be the location of recipient of service i.e outside India, in terms of principles laid down under Section 13 of Integrated Goods and Services Tax ('IGST') Act.

Since, the supplier (LO) is located in India and the place of supply is outside India, the transaction shall qualify as an inter-state supply and shall be subject to IGST.

Having said the above, we wish to mention that the liaising services would have been exempt from IGST, had the said services qualified as 'export of service'. However, one of the mandatory conditions for a transaction to qualify as 'export of service' is that the supplier and the recipient should not merely be establishments of a distinct person.

Since, LOs and parent company are establishments of distinct persons in terms of GST legislation, therefore, the liaising services undertaken by LOs shall not qualify as "export of service' and accordingly shall not be exempt from IGST.


With the implementation of GST kicking in for almost a year, various deliberations were being made as regards taxability of the liaising services rendered by LOs. The taxability of LOs was challenged in one of the writ petitions filed with the Delhi High Court. However, the same had been subsequently withdrawn.

Another resort available to assessees under GST regime is to seek an Advance Ruling ('AR') to determine the tax treatment of the doubtful transaction.

The AR pronounced by the Rajasthan Authority for Advance Rulings ('AAR') in the application filed in this regard, by M/s. Habufa Meubelen B.V. (Indian Liaison Office) gave another angle to the taxability of the LOs. It stated that the LO is just an extended arm of its foreign counterpart and cannot operate in itself. It runs only on the reimbursements received from abroad and does not have any source of income. Since it is an extended arm, both cannot be said to be separate persons and therefore, there can never be a 'supply' by one to itself. To sum up, the AAR had acknowledged the fact that there is no flow of service amongst both the establishments and therefore, the question of 'supply' does not arise.

On the other hand, the GST Council in its meeting held on 21 July 2018 decided to provide requisite relief to transactions between establishments of a distinct persons under IGST Act.

Consequently, vide Notification No. 15 /2018 - Integrated tax (rate) issued on 26 July 2018, services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as distinct persons under GST, have been exempted from payment of IGST provided the PoS is outside India.

The above relief being given by way of an exemption from IGST to such transactions amongst distinct persons leads to another school of thought that the Government had always considered such activities as 'supply'.

Owing to the divergent AR and the Notification, the dilemma is that where the LO goes by the reasoning pronounced in the AR, then no GST is payable. However, where the LO goes by the Notification, then GST shall be payable for the period 1 July 2017 till 26 July 2018. Further, post 26 July 2018, the taxability would depend upon determination of PoS.

Further, since the exemption had kicked in w.e.f. July 27, 2018, there is an exposure of demand being raised by the Authorities for the period during which the exemption wasn't in place, in case GST had not been paid by the LO on provision of liaising services.

Clarity required

Amid the unceasing efforts of the Government to clarify and simplify industry issues, it would be interesting to see how the Authorities deal with the issue of taxability of liaising services rendered by LOs during the period 1 July 2017 to 26 July 2018. A clarification to this effect would be welcome relief for the LOs set up in India.

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