FEBRUARY 13, 2018

By Shivani Bhatnagar

THE newly introduced GST regime in India, espouses that the Indian economy has joined the cohort of nations, largely aiming at reducing the complexity of indirect taxation within national frontiers. As amongst the youngest member in the group, Indian GST law is still evolving and acclimatizing to the challenges faced by the stakeholders, both domestic and overseas. This article throws light on one such challenge which would have significant ramifications on "openness" of the Indian economy- transactions between Head Office (hereinafter "HO") and Liaison Office (hereinafter "LO"). The article pries into the legislative gaps exposed while determining taxability of activities performed by LO in India, for HO located outside India.

Liaison Office: A primer

LO and the procedure of its establishment is governed by FEMA Regulations, 2016.Regulation 2(e) defines "Liaison Office" as 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. Regulation 4(b) read with Schedule II, enlists permitted activities for an LO in India. The LO is allowed to (i) Represent the parent company / group companies in India. (ii) Promote export / import from / to India. (iii) Promote technical/ financial collaborations between parent / group companies and companies in India and(iv) Acting as a communication channel between the parent company and Indian companies.

Relevant Provisions under the GST regime

IGST Act has been enacted to inter alia govern transactions that involve export or import of goods, services or both. Export of Services, as defined under the Act, is said to take place when conditions enlisted therein are satisfied, namely,(i) the supplier of service is located in India; (ii) the recipient of service is located outside India; (iii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and (v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Section 8.Explanation 2 to Section 8 of the IGST Act provides that a person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.

Whether activities undertaken by LO in India, qualify as export of services

The gamut of activities undertaken by LO in India range from market research, promotion of business activities performed by HO abroad, etc. As per FEMA regulations, in sofar as LO is concerned, it shall not undertake any commercial/trading/industrial activity, directly or indirectly.

To study whether the activities of LO qualify as export of services to HO, the following questions are to be answered:

1. Can LO and HO be said to be establishments of distinct persons as per Explanation 2 to Section 8 of the IGST Act?

Explanation 1 to Section 8, inter-alia states that for the purposes of this Act, where a person has an establishment in India and any other establishment outside India, then such establishments shall be treated as establishments of distinct persons. On careful reading of Explanation 2 to Section 8, a person shall be treated as having an establishment in a territory, if the person is "carrying on business through" a branch, agency or representational office.

At this juncture, the next question that surfaces for our consideration is herein below -

2. Can HO be said to be carrying on business in India through LO?

This implies that in order to qualify as an establishment in India, the HO must carry on business through the LO in India.

The answers to be these questions are not readily available in the GST law, in its present form. Yet, given the gravity of its implications on the Indian economy, it is imperative that there exists some clarity on applicability of GST, to existing and future corporations, having or desirous of having a presence in India through LO.

Borrowing from Foreign Jurisprudence

Indian GST law borrows major principles from the EU VAT regime. Hence, legal reasoning enunciated by European courts in their judgments concerning taxability under the European law, offer jurisprudential assistance in answering such questions. The Court of the EU in FCE Bank [Ministerodell 'Economia e delle Finanze and Agenziadelle Entrate v. FCE Bank plc., C-210/04.], ruled that: "a fixed establishment, which is not a legal entity distinct from the company of which it forms part, established in another Member State and to which the company supplies services, should not be treated as a taxable person by reason of the costs imputed to it in respect of those supplies". In accordance with the case law of the Court, supplies are taxable only if there exists a legal relationship between the provider and the recipient, in which mutual payments are made in connection with the services for consideration. In order for such a relationship to be established, it is necessary to determine whether the branch carries out an independent economic activity. It is necessary in this regard to determine whether the branch may be regarded as being independent, in particular, that it bears the economic risk arising from its business [Paragraph 35, C-210/04].

The analysis above offers substantial clues for solving the questions posed in this article. The restriction on activities performed by LO, stated under FEMA regulations, and the established jurisprudence on the concept of "independent economic activity"may be adopted to ascertain whether the LO and HO are separate legal entities or not.