In re Fraunhofer-Gessellschaft Zur Forderung Der Angewwandten Forschung (GST AAR Karnataka)
Q. Whether the Activities of a liaison office amount to supply of services, Whether a liaison office is required to be registered under CGST Act, 2017 and Whether liaison office is liable to pay GST?
The applicant, incorporated in Germany, undertakes the business of promoting applied research and hence established their liaison office in Bangalore, India, (herein after referred to as “Applicant” or “Liaison office / LO “), under the permission of RBI vide FE.CO.FID/27803/10.97.856/2013-14 dated 11.06.2014, to act as an extended arm of the head office and to carry out the activities that are permitted by Reserve Bank of India.
In the instant case the applicant has representational office i.e. LO in Bangalore, India and hence the applicant has an establishment in India. Further the applicant’s head office is outside India and hence the applicant’s head office has an establishment outside India. Thus the applicant (LO) and their head office (HO) shall be treated as establishments of distinct persons, in terms of Section 8 supra. Therefore the applicant (LO) and their head office (HO) are distinct persons and the activities performed by them can’t be called export of services.
The applicant has claimed exemption by virtue of SI. No. 10F of notification No. 09/2017-Integrated Tax(Rate) dated 28.06.2017 as amended by Notification No. 15/2018-IT (R) dated 26.07.2018. The condition mentioned in the Notification for claiming exemption is that the place of supply of service is outside India in accordance with Section 13 of IGST Act, 2017.. Since this Authority is not eligible to decide the matter of place of supply as per Section 97 (2) of CGST Act 2017.we will not be able to comment on the claim of exemption, claimed by the applicant. However, we proceed to comment on the submission made by the applicant that they are not an intermediary as per Section 2 (13) of IGST Act, 2017. There is no doubt that the applicant is facilitating supply between the HO and Indian customers. They have a mandate from RBI for this purpose. Further, they are not making any supply on their own, which anyway is a restriction placed upon them by RBI. Their contention that they are not “person” has already been dealt in the above para. We find that they are a distinct legal entity and are aptly covered under the definition of intermediary as per Section 2 (13) ofIGST Act, 2017.. Lastly, in regard to the submissions made by the applicant in respect of valuation, we observe that Rule 28 to Rule 31 of the CGST Rules, 2017 have to be resorted for the purpose of determining tax liability.
On the question whether they need to take registration, we observe that the supply of services by the applicant amount to inter-state supply of services in terms of Section 7(5) of the IGST Act, 2017.Further persons making any inter-state taxable supply shall be required to be registered compulsorily in terms of Section 24 of the CGST Act 2017.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING
ORDER UNDER SECTION 98(4) OF THE CGST TAX ACT, 2017
& UNDER 98(4) OF THE KGST ACT, 2017
1. Fraunhofer-Gessellschaft Zur Forderung der angewwandten Forschung e.V,Germany -Liasion Office, (called as the ‘Applicant’ hereinafter), # 405 & 406, Prestige Meridian Towers-II, 30, M G Road, Bengaluru-560 001, having User ID 291900000250ARV, have filed an application for Advance Ruling under Section 97 of CGST Act,2017 & KGST Act, 2017 read with Rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST ARA-01, discharging the fee of Rs.5,000/- each under the CGST Act and the KGST Act.
2. The applicant, incorporated in Germany, undertakes the business of promoting applied research and hence established their liaison office in Bangalore, India, (herein after referred to as “Applicant” or “Liaison office / LO “), under the permission of RBI vide FE.CO.FID/27803/10.97.856/2013-14 dated 11.06.2014, to act as an extended arm of the head office and to carry out the activities that are permitted by Reserve Bank of India. The UIN allotted by Reserve Bank of India is BGLO14007856. In view of this the applicant sought advance ruling in respect of the following questions:-
i. Whether the Activities of a liaison office amount to supply of services?
ii. Whether a liaison office is required to be registered under CGST Act, 2017?
iii. Whether liaison office is liable to pay GST?
3. Admissibility of the application : The applicant filed the instant application as an unregistered person, in relation to the establishment of Liaison office in Bangalore, India. Further the applicant have sought advance ruling in respect of the questions on the issues covered under Section 97(2) (g), (f) 8s (e) of the CGST Act 2017 respectively and hence the application is admitted.
4. Applicant’s statement of relevant facts: The applicant furnishes the following facts which have a bearing on the questions raised by them in the instant application:
4.1 M/s. Fraunhofer-Gesellschaft ZurForderung der angewandten Forschung e.V, (herein after referred to as Head office/HO) is incorporated in Germany and undertakes the business of promoting applied research. The HO established their liaison office in Bangalore, India (herein after referred to as “Applicant” or “Liaison office / LO “) which is acting as an extended arm of the HO and carryout the activities as are permitted by Reserve Bank of India vide FE.CO.FID/27803/10.97.856/2013-14 dated 11.06.2014. The UIN allotted by Reserve Bank of India is BGLO 14007856. Copy of the said RBI permission letter dated 11.06.2014 has been enclosed.
4.2 The Reserve Bank of India stipulated certain conditions for the establishment of liaison office in India. They are:-
(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.
4.3 Further Annexure-I of the RBI permission letter provides 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.
4.4 In addition, certain other conditions were also stipulated such as:-
(i) It shall work only for liaison activities and not for any indirect entry into service.
(ii) Shifting the liaison office to any other city shall be made only with the prior approval from RBI.
(iii) Except the proposed liaison work, the office will not undertake any other activity of trading, commercial or industrial nature nor shall it enter into ami business contracts in its name without RBI permission.
(iv) No commission/ fees will be charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.
(v) The entire expenses of the office in India will be met exclusivelu out of the funds received from abroad through normal banking channels.
(vi) The liaison office shall not borrow or lend money from/to any person in India without prior permission of Reserve Bank of India.
(vii) It shall not acquire, hold (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India without obtaining permission by Reserve Bank of India. Under the Foreign Exchange Management Act (Acquisition and transfer) of immovable property in India.
(ix) It shall furnish and submit the Annual Activity Certificate of the activities of the Liaison office from the Auditors at the end of 31st March and same needs to be submitted on or before September 30 of that year. In case the annual accounts of the Liaison Office are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted -within six months from the due date of the Balance Sheet.
(x) It shall also submit a copy of Annual Report to the Directorate General of Income Tax (International Taxation), New Delhi.
(xi) It will not render any consultancy or any other services directly/ indirectly with or without consideration.
(xii) It will not have any signing/ commitment powers, except than those which are required for normal functioning of the office, on behalf of the head office.
(xiii) The activities/affairs of the offices may be verified/examined by RBI by carrying out a scrutiny as and when found necessary.
4.5 Later, the liaison office vide letter dated 21.03.2017 requested for Renewal/Extension of Approval of Liaison Office from RBI. The same is renewed for 3 years till 11.06.2020 by Deutsche Bank vide letter Ref -DB/PCC_GCO/REM/2017/80 dated 29.03.2017. Copy of renewal/extension of approval letter dated 29.03.2017 has been enclosed.
4.6 The Liaison office also obtained a Chartered Accountant certificate dated 20.04.2019 affirming that they had undertaken only those activities that have been specifically permitted by Reserve Bank of India and had complied with the terms and conditions specified therein. Copy of certificate dated 20.05.2019 has been enclosed.
4.7 The Applicant/Liaison office, Bangalore understands that the activity of the liaison office is merely an extended arm of the Head office as the liaison office is not engaged in any business activity on its own, not charging or collecting any fee or consideration and had adhered to the conditions stipulated in the RBI approval letter. Moreover, Liaison is neither related nor distinct persons, but are in fact working as employees of the Head Office. Therefore, the activities performed by the liaison office to the Head office customers in India are considered to be provided by the Head office itself.
4.8 In addition, the liaison office do not account any form of income as forthcoming in the Financials of the liaison office and the only income being the remittance from the Head office which is purely to meet the working of the liaison office.
4.9 In order to have clarity on certain issues under the CGST Act confirmation as to their understanding and the issue being covered under Section 97 of the CGST Act, 2017, the Applicant makes the present application to obtain the advance ruling on the following:-
(a) Whether the Activities of a liaison office amount to supply of services?
(b) Whether a liaison office is required to be registered under CGST Act, 2017?
(c) Whether liaison office is liable to pay GST?
5. Applicant’s interpretation of law : The Applicant submits their interpretation of law as under:
5.1 The levy and collection of the CGST is governed by the CGST Act 2017. (hereinafter referred to as the ‘CGST AcC) and levy and collection of SGST is governed by Karnataka Goods and Services Tax Act (KGST), 2017 for the state of Karnataka & levy and collection of IGST is governed by Integrated Goods and Services Act, 2017 (hereinafter referred to as the ‘IGST Act’). Further, GST is a tax to be levied on supply of goods and/or services. Any transaction to be taxed under Section 9 of the CGST Act 2017. first it should be covered within the scope of supply as stipulated in Section 7 of the CGST Act 2017. Any transaction must be a supply made in the course or furtherance of business, for a consideration, in terms of Section 7 of the CGST Act 2017., to get covered within section 7(1)(a) under the CGST Act 2017.
5.2 The liaison office in Bangalore undertakes only those approved works as permitted by the RBI and is neither engaged/involved in any other activity of trading, commercial or industrial nature nor into any business contract in their own name without prior permission. No commission/fees are charged or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.
5.3 The certificate issued by Chartered Accountant vide letter dated 20.05.2019 reaffirms that the Liaison office undertakes only those activities that have been specifically permitted by RBI vide its approval letter dated 11.06.2014 and has complied with the terms and conditions specified therein. Further, the liaison office do not receive any consideration or fee and it is purely maintained by inward remittances from the Head office to meet the expenses. The Financials of the liaison office also put forth the same. Copy of Financial statement for the period 2018-19 has been enclosed
5.4 The activity of the liaison office does not fall within Section 7(1)(a) of the CGST Act 2017. as the same is not engaged in supply of any goods and/or services for consideration and not engaged in any business activity and it merely acts as extended arm of the Head office.
5.5 Schedule II of the CGST Act, 2017 provides that certain transaction even if made without consideration to be treated as supply. SI.No.2 of the Schedule is as follows,-
“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”
5.6 The Head office and the liaison office, in this case, are one and the same and they are not distinct persons. They are not related persons as there is only one legal entity and no relationship can be established. Further, they are not distinct persons under Section 25, as distinct persons should have two or more establishments. In this case, the liaison office is mere extension of the Head office and no separate identity can be established. Hence, they are neither related nor distinct persons, but are in fact working as employees of the foreign office. Accordingly, activities undertaken by the Liaison office are not covered under the definition of supply.
5.7 Therefore, the liaison office situated in Bangalore, is nothing more than an extended arm of the Head office/HO and the liaison office performs no separate functions other than those specified and approved by the RBI. In other words, the liaison office acts on behalf of the Head office/HO for its customers in India.
5.8 Further, in the GST regime, the Authority for Advance ruling in the case of IN RE: TAKKO HOLDING GmbH 2018 (19) G.S.T.L. 692 (A.A.R. – GST) had held in a similar matter as under,-
In the case at hand, Takko are working as the liaison Office of M/s. Takko Holding GmbH, Germany with the prior permission of RBI. Liaison Activities 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. Further the liason office is strictly prohibited to undertake any activity of trading, commercial or industrial nature or entering into any business contracts in its own name.
5.9 Based on the above rationale the Authority for Advance ruling in the case cited supra had ruled as under:-
1) The liaison activities being undertaken by the applicant when strictly in line with condition specified bu RBI permission letter do not amount to supply under CGST and 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.
5.10 Further in the case of IN RE: HABUFA MEUBELEN B.V. 2018 (14) G.S.T.L. 596 (A.A.R. – GST), also the Authority for Advance ruling took similar view wherein it was ruled as under;-
In view of the submissions made by the applicant and as discussed in above paras, when the applicant/liaison office is working as per the terms and conditions as mentioned under Para 1.1 to 1.5 above, the reimbursement of expenses and salary paid by M/s. HabufaMeubelen B.V. to the liaison office, is not liable to GST as no consideration for any services is being charged by the liaison office. Further, the kind of reimbursement claimed by them from their HO is also falling out of the purview of supply of service and as there are no such taxable supplies made by the Liaison office, they are not required to get themselves registered under GST. Further, the kind of reimbursement claimed by them from their HO is also falling out of the purview of supply of service and as there are no such taxable supplies made by the Liaison office, they are not required to qet themselves registered under GST.
5.11 In terms of section 103 of the CGST Act 2017. , even though Advance rulings are applicable only to the respective applicants, the principles and rationale applied in the cases cited supra can be applied to the instant case since the facts and activities are similar in nature.
5.12 The liaison work done by the Indian liaison office is nothing but the Head office/HO itself , as one cannot provide service to oneself and for supply to be established the presence of two or more parties is required.
5.13 Based on the above understanding, the applicant is on the view that the liaison office established by its Head office/HO would not fall within the scope of ‘supply’ as defined under Section 7 of CGST Act 2017.and they are not required to be registered and not required to pay GST on the activities undertaken by them.
PERSONAL HEARING / PROCEEDINGS HELD ON 20.02.2020 & 28.07.2020
6. Sri. Rajesh Kumar T R, Chartered Accountant & duly authorised representative of the applicant appeared for personal hearing proceedings held on 20.02.2020 & reiterated the facts narrated in their application. Further they also requested for additional hearing opportunity, vide their letter dated 25-05-2020. An additional hearing opportunity was given on 28-07-2020 and the authorised representative of the applicant appeared & furnished written submissions, in support of their argument, inter alia stating as under:
6.1 The term ‘liaison office’ is not defined under CGST Act 2017, but defined in 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 as,-
“‘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.”
6.2 Further as per Regulation 4(b), the permissible activities for a person resident outside India who is permitted by RBI to establish a liaison office in India are the activities specified in Schedule II. To carry on any other activity unless it is specifically permitted by the RBI. The activities listed out in the said Schedule II are as follows:-
i. Representing the parent company / group companies in India.
ii. Promoting export / import from / to India.
iii. Promoting technical/ financial collaborations between parent/ group companies and companies in India.
iv. Acting as a communication channel between the parent company and Indian companies.
6.3 RBI approval letter dated June 11, 2014 specifically puts certain conditions as per Annexure – 1 to the said letter the essence of which is pointed out at para E in brief facts above. Among them some of the relevant conditions are as follows:-
i. It shall work only for liaison activities and not for any indirect entry into service.
ii. Except the proposed liaison work, the office will not undertake any other activity of trading, commercial or industrial nature nor shall it enter into any business contracts in its name without RBI permission.
iii. No commission/fees will be charged, or any other remuneration received/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India.
iv. The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels.
v. It will not render any consultancy or any other services directly/indirectly with or without consideration.
vi. It will not have any signing/commitment powers, except than those which are required for normal functioning of the office, on behalf of the head office.
6.4 The levy of GST is governed by Charging Section 9 of CGST Act /SGST Act, in case of intra-state supplies and Charging Section 5 of IGST Act in case of Interstate supplies.-
a. Those charging section authorizes levy of GST on:-
• Supply of goods or services;
• On the value determined in terms of Sec. 15 of CGST Act;
•At the rate notified;
• To be collected in the manner prescribed;
• Paid by the taxable person;
b. ‘Supply’ is explained in Section 7 of CGST Act to essentially include,-
• All forms of supply of goods or services made or agreed to be made;
• For Consideration (except for certain cases set out in Sch. I);
• By a person;
• In the course or furtherance of business;
c. Cumulatively to establish taxability the following elements should exist:-
• There should be a person•
• The person should be engaged in Business;
• The person should make or agree to make supply of goods or services;
• The supply should be in the course or furtherance of such Business;
• The supply should be for a consideration except in cases covered under
Sch. I;
• The value should be arrived in terms of Sec. 15 of CGST Act;
• There should be prescribed rate of tax for such supply;
• Tax on such supply is to be paid by the “taxable person’;
•It has to be paid in the prescribed manner;
d. LO submits their understanding on each of aspects relating to taxability as is relevant to them as follows:
Re : Person and establishment of distinct person
