NOVEMBER 03, 2014

By Shirin Palanpurwala

TO explore Indian markets, a foreign company may envisage setting up a structure in India either as an unincorporated entity (i.e. liaison, project or branch office) or an incorporated entity (i.e. wholly owned subsidiaries and joint venture companies). A Liaison Office ('L.O') is a set up predominantly meant to explore business investment climate exclusively for its foreign company (i.e. parent company) in India. Such an L.O can be established by obtaining approval from RBI who has limited its scope of activity only to collecting information about possible market opportunities and supplying information of its overseas parent company/ products to prospective Indian customers and all that listed below:

++ Representing in India the overseas parent company/ group companies

++ Promoting export/ import of goods and services from/ to India

++ Promoting technical/ financial collaborations between overseas parent/ group companies and companies in India

++ Acting as a communication channel between the overseas parent company and Indian companies

Further, an L.O receives an ad-hoc amount in advance or as & when demanded from its overseas parent/ group company to run its day-to-day activities.

As restricted by RBI, an L.O cannot per se undertake any commercial/ trading activity, directly or indirectly in India, therefore, it would be interesting to evaluate its taxability under prevailing taxation laws in India. The Income Tax law mulls over the structure and the income whereas the Service Tax law crops up from the activity/ transaction.

L.O as a Service Provider:

At present, Service Tax law covers all the services provided within the taxable territory. To levy a charge on any activity under Section 66B of the Finance Act, 1994, the following essentials are to be met:

++ The activity must be a "Service";

++ The activity should neither be specified in the negative list nor exempted by way of notification;

++ The activity should be provided or deemed to be provided in the taxable territory.

To confirm whether the activities performed by an L.O is a "Service", we may refer to Section 65B(44) of the Act, where the term 'service' is defined. "Service" in its widest scope subject to certain exclusions, means:

++ any activity;

++ carried out by a person for another;

++ for consideration; &

++ includes declared service

'Activity' has not been defined anywhere under the Service Tax Act. However, the Education Guide dated 20 June 2012, issued by the Tax Research Unit of Central Board of Excise and Customs hints that an 'activity' could be an operation carried out or execution of an act or provision of a facility , etc. Thus, an L.O. could indeed be said to be carrying out an activity.

The said activities carried out by an L.O. are neither included specified in the Negative List nor exempted by way of any notification.

Going further, can it be said that an L.O. is carrying out activity for another person ? One may argue saying that an L.O and its parent company are one & the same entity and therefore the activities carried out by an L.O are in effect carried out by the parent company only.

The said argument can be defeated in terms of Explanation 3 (b) to Section 65B(44) of the Act, wherein it is stated that an establishment located in the taxable territory is to be treated as an establishment other than its parent company located in non-taxable territory (i.e. both are to be treated as distinct persons). Explanation 4 further extends to say that if the parent company is carrying on business through its Representational Office in taxable territory than such a Representational Office is to be considered as an 'establishment' in that taxable territory.

It thus follows that an L.O is to be treated as a distinct person other than its overseas parent company for the purpose of Service Tax law.

Furthermore, as regards to consideration , the Education Guide clarifies that everything received or recoverable in return for a provision of service including monetary/ non-monetary/ deferred nature as well as recharges between establishments located in a non-taxable territory and the taxable territory shall be construed as "consideration" for the service. Thus, the expenses reimbursed by the overseas parent/ group company are to be treated as consideration for the activity carried out by the L.O for its parent/ group company.

In light of the above, the activities of an L.O carried out for its overseas parent/ group companies cannot be expelled from the definition of "Service".

Once the activity performed by L.O. qualifies as a service, it is imperative to test the place of provision of such activities under Place of Provision of Services Rules, 2012 (hereinafter referred to as 'PPS Rules') as in force from 1 July 2012.

In the present case, Rule 9 of PPS Rules appears to be of relevance. The place of provision of service in such a case would be the location of the service provider.

Therefore, it is vital to scrutinize the activities of an L.O under the term "intermediary".

Presently, "Intermediary" defined in Rule 2(f) of PPS Rules means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the 'main' service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account.

Thus, any person who arranges or facilitates a supply of goods or services between two or more persons is covered under the term "Intermediary". An L.O may be pushed into the scope of "intermediary" only if it "arranges or facilitates" the provision of main service or supply of goods, for its parent company and not render the activities as its main service or supply of goods on his own account.

Since, the terms "arrange" and "facilitate" are nowhere defined in the Act, one may rely on the ordinary meaning which means "co-ordination" or "rendering a task easy", respectively.

Based on ordinary meaning, the activities carried out by a representative such as marketing/ promotion of goods/ services by using strategies like direct, freebie, free sample marketing, etc., negotiation of price or terms & conditions of the contract, carrying-out customization of product or its packaging, and all other processes wherein that appointed person is required to intervene with a motive to bridge the gap between the customer and the parent company for provision of services/ products would qualify as "intermediary."

Further, an "intermediary" will be involved with two supplies:

++ supply of goods/ services between Principal and Third party

++ supply of own service by Intermediary to Principal

In terms of the definition and the clarifications provided by the Education Guide, the essentials of an "Intermediary" may be summarized as under:

++ Services provided by an intermediary are clearly identifiable from the main supply of service/ goods of the parent company/ principal, itself;

++ The services provided in the capacity of an intermediary, shall not alter/ affect the supply between the principal and third party;

++ Value charged for intermediary service shall be easily identifiable from the value charged to principal for its main supply of service/ goods of the intermediary, itself;

++ Once the intermediary service is executed, the relationship between the principal and the intermediary for the same transaction shall also end until renewed.

In the present case, the activities of an L.O relating to collection of information pertaining to market opportunities for its overseas parent company, representing or promoting the parent company in India, or acting as a communication channel for its parent company, certainly constitutes a "supply of its own service to its overseas parent company".

However, going further it can be said that the aforesaid services do not really trigger the "supply of service/ goods between the Principal and the Third party". This is because the third party may or may not become the actual purchaser/ buyer of the goods/ services supplied by the principal on the basis of the activity carried out by the L.O.

Last but not least in terms of the relationship between an L.O & its overseas parent company, the said relationship is an independent function of any service transaction and thus will continue until the L.O's closure which is very contrary to that of an intermediary.

Thus, an L.O does not qualify as an "Intermediary" under the purview of Rule 9 of PPS Rules. Hence, the services rendered by an L.O. will now be said to fall under the default rule i.e. Rule 3.

By virtue of Rule 3, the place of provision of service for an L.O shall be the location of parent company i.e. outside the taxable territory. Hence, an L.O as a service provider cannot be made liable to Service Tax in India. However, Rule 6A(f) of Service Tax Rules, 1994 would restrict the benefit under "Export of Services" to an L.O on account of 'deemed establishment'.

L.O as a Service Recipient:

In terms of Section 68(2) of the Act read along with Notification No. 30/2012-ST dated 20 June 2012, the liability to discharge Service Tax on certain notified services accrues in the hands of a notified person, which is usually a service recipient. Is this a Catch-22 position for an L.O?

On analyzing the notified services, it appears that L.O will be liable to Service Tax on receipt of following notified services:

Taxable in hands of L.O (Refer (2) below)

Taxable in hands of L.O (Refer (3) below)

(1) "Body Corporate" defined u/s 2(11) of the Companies Act, 2013 includes a company incorporated outside India. An L.O therefore qualifies as a "Body Corporate."

(2) "Business Entity" defined u/s 65B(17) of the Act to mean any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. In terms of the aforesaid definition, an L.O. thus can be treated as a "Business Entity".

(3) "Person" defined u/s 65B(37) of the Act to include any Individual, Hindu Undivided Family, Company, Firm, Society or Limited Liability Partnership (LLP), Government, Local Authority, Association of Persons or Body of Individuals, whether incorporated or not, Every Artificial Juridical Person. The L.O. would therefore qualify as a 'Person".

Paradoxically true that in a country like India, where the Prime Minister is dreaming to re-position India in the 'Ease-Of-Doing-Business’ ranking by inter alia inviting foreign entities to invest and carry out business in India, the tax regulatory structure that plays a crucial role lacks unambiguity in quite a few cases, turning out it to be diabolical. Therefore, it’s time that the Government comes up with a suitable logical law to address the above issues pertaining to an L.O. and other foreign establishments in India. In terms of our timeless Indian culture, we ought to treat the foreign entities serving its entry to India as "Atithi devo bhava" and hope that continues forever.

(The author is Asst. Manager, M/s. Suresh Surana & Associates LLP.)