What does it mean by a Liaison Office?
As the name suggests, a Liaison office is setup by a foreign business entity in India to carry out the liaison activity for its business. Liaison office is suitable for a foreign business to test and understand the Indian market, explore business opportunities or to gather relevant business operation.
RBI regulation defines that, 'Liaison Office' means a place of business to act as a channel of communication between the Principal place of business or Head Office 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. Generally, a person desiring to establish any kind of presence in India requires RBI’s prior permission. The application for Liaison office Licenses is required to be approved by the RBI.
RBI regulations do not allow the companies to do business through Liaison offices, but just to be in the market and understand the Indian market or carry out the Research & Development activities or to understand the problem of existing clients of the company and serve them better. A company cannot have any revenue from the Indian Liaison office; It has to meet all its expenses of Indian office through remittances from the Head office. The Liaison office is not allowed to earn any income in the India.
What are the Legal Issues Involved?
As in GST laws, different offices are treated as separate persons; a question arises as to whether the liaison offices can be treated as distinct person from the head office; and remittance received from the head office can be treated as consideration on which GST is required to be paid. If the answer is in affirmative, liaison offices are required to be registered under GST; otherwise they are not required to be registered.
As per RBI guidelines [RBI/2015-16/54 Master Circular No.7/2015-16 Dated 01.07.2015], A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
A Liaison Office can undertake the following activities in India:
1. Representing in India the parent company / group companies.
2. Promoting export / import from / to India.
3. Promoting technical/financial collaborations between parent/group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies.
Thus, it is clear that a liaison office cannot undertake any business activity in India, and more specifically cannot engage themselves in any supply of goods or services or both. A 'business vertical' as defined in Section 2(18) of the CGST Act means a component of an enterprise that is engaged in supply of goods or services. A 'fixed establishment', as defined in Section 2(50) of the CGST Act refers to establishment with sufficient resources to supply services. As a liaison office in India, cannot supply any goods or services, it cannot be treated as a business vertical or fixed establishment. Under Section 22 of the CGST Act, only a supplier of goods or services are required to be registered under GST. As liaison offices are not supplying any goods or services, they are not required to be registered under GST.
Similar issue arose in case of IN RE : HABUFA MEUBELEN B.V. [2018 (14) G.S.T.L. 596 (A.A.R.-GST), wherein the issue was whether a Liaison Office is required to get registered under GST? The Authority held,
'As mentioned in the facts itself that the liaison office does not have any independent revenue or clients. The office has been established for the purpose of liaising with the suppliers for quality control. Further the liaison office is set up only to represent the interest of the head office in Netherlands. Therefore, they are not separate person. The liaison office as such is prohibited to undertake any other activity other than that those incidental and related to the liaising with the suppliers for quality control. The applicants are merely an executing arm of the head office and do not have resources to carry on the business activity. From this it can be safely concluded that the liaison office does not have independent existence of their own. Head office and the liaison office are the same entity and the liaison office do not have any entity of their own, thus there cannot be a flow of services inter se the liaison office and head office as it amounts to service to one self.'
The Authority further held that,
'As regards the requirement of getting registered under GST, the requirement of registration under that Act is governed by the provisions of Section 22 of the CGST Act, 2017 which provides that
'Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees:'
And the liaison office is strictly prohibited to undertake any activity of a trading, commercial or industrial nature nor it is entering into any business contracts in its own name. Further, the reimbursement claimed by them from their HO is also falling out of the purview of supply of service. Therefore, there is no taxable supplies made by the Liaison office and hence, there is no requirement of getting registered under Section 22 Further, applicant is not falling under any of the category of persons specified under Section 24 for obtaining compulsory registration under the Act.'
In view of the above the Authority Ruled that;
(1) A liaison office is not required to be registered under GST.
(2) A liaison office has no separate existence from its head office.
(3) Remittance from head office to liaison office cannot be treated as consideration for any supply of services.
In view of above, it is clear that there is no GST liability on liaison offices in India, and they are not required to be registered under GST.