Contradictory verdicts on Applicability of GST on Activities of Liaison Office of Foreign Entity by the Authorities for Advance Ruling (AAR), Maharashtra and Appellate Authorities for Advance Ruling (AAAR), Karnataka under the goods and services tax (GST) regime have created confusion amongst the entities, who clearly appear unhappy with the rulings.
Recently, the Maharashtra AAR had held that the Goods and Service Tax is payable by the Liaison office (LO) of Dubai Chamber of Commerce and Industry as services provided to various businesses in India and Dubai.
This is contradictory to the Karnataka AAAR which ruled that the activities of a LO in India of a foreign entity do not amount to supply of services and are not liable to GST
The AAR Rulings and its Dilemma
The Karnataka Appellate Authority of Advance Ruling (AAAR) in its recent ruling wherein the application was filed by Fraunhofer-Gesellschaft Zur Forderung der angewandten Forschunge has set aside the order of Karnataka Authority for Advance Ruling (AAR) and held that the activities of a LO in India of a foreign entity do not amount to supply of services and are not liable to GST.
The AAAR opined that an LO is a place of business to act as a communication channel between the head office and does not undertake any commercial or trading or industrial activity. The LO cannot generate any income and also cannot earn any commission/fee or any remuneration.
Rationale
The LO cannot generate any income or engage in any commercial/trading activity. It is operating entirely on inward remittances from the HO for office maintenance in India. Such inward remittances received from HO for maintaining the office in India cannot be termed as consideration for liaison activity.
The LO is registered with the same name of the Head Office in the Foreign Nation and does not have a separate legal identity. The LO is a geographical extension of the Head Office.
As the Head Office is located in a Foreign Country and the LO in India is not a separate entity but one legal entity, so the liaison activity performed by the LO in India for the Head Office in foreign is in the nature of a service rendered to self. Therefore, a service rendered to self cannot come within the purview of supply under GST .
2. Ruling by Maharashtra AAR
The Authority of Advance Ruling (AAR), Maharashtra in its recent ruling wherein the application was filed by Dubai Chamber of Commerce and Industry, Liaison office held that the Goods and Service Tax is payable by the Liaison office of Dubai Chamber of Commerce and Industry as services provided to various businesses in India and Dubai.
Rationale
The LO is an intermediary under Section 13 (8) of the IGST Act, 2017, a supply of services by the applicant to various businesses in India and Dubai and such supply is done by the LO as an intermediary, so the LO is providing intermediary services for which it is liable to pay GST.
The Head Office is providing various services for which fees are charged. Thus it is clear that the applicant’s (LO) Head Office appears to be a profit making organization, in which case the applicant cannot be considered as a non-profit making organization.
Conclusion
In order to curb the Delima and tussles between the Advanced ruling of different states there is a strict need to constitute a National level Advance ruling authority so as to ensure tax certainty.
The AAR was no doubt set up to minimize business queries and boost transactions. But a lack of consensus on applicable GST rates coupled with ambiguities may force the Government to seek a fresh path to form a National level Advance ruling authority sooner than later.
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