2021 (1) TMI 690 - AAR - GST

Classification of supply - supply of services or not - expenses and salary paid by Wilhelm Fricke SE, Germany to the liaison office established in India - no consideration is charged/ paid - requirement of registration of Liaison Office or not - levy of CGST/SGST/IGST on reimbursement received from HO - HELD THAT - The HO in Germany reimburses the expenses incurred by the applicant for their operations in India which are in the nature of salary, rent, security, electricity, travelling etc. The applicant does not have any other source of income and it is solely dependent on the HO for all the expenses incurred by the applicant, which are subsequently reimbursed by the HO. Therefore the HO and Liaison Office cannot be treated as separate persons. Since, HO and Liaison Office cannot be treated as separate persons, there cannot be any flow of services between them as one cannot provide service to self and therefore, the reimbursement of expenses made by the HO cannot be treated as a consideration towards any service. The amount received from HO are the funds for payment of salary, reimbursement of expenses like rent, security, electricity, travelling, etc. No consideration is being charged by the applicant from the HO for such services - Further the liaison office is strictly prohibited to undertake any activity of trading, commercial or industrial nature or entering into any business contracts in its own name. Also the reimbursement claimed by them from their HO is also falling out of the purview of supply of service. As there are no taxable supplies made by the Liaison office, they are not required to get registered.

Summary

Issues:
1. Whether the reimbursement of expenses and salary paid by a foreign company to its liaison office in India constitutes a supply of services under the CGST Act, 2017.
2. Whether the liaison office is required to register under GST.
3. Whether the liaison office is liable to pay CGST/SGST/IGST on reimbursements received from the foreign company.

Analysis:

Issue 1: Reimbursement of Expenses and Salary
The applicant, a liaison office in India, operates as per RBI conditions without charging any consideration for its services. The reimbursement of expenses and salary by the foreign company does not amount to a supply under the CGST Act as no consideration is charged. The liaison office acts as a communication channel and does not engage in business activities independently. The reimbursement is not for services rendered but for operational expenses, hence not taxable.

Issue 2: Registration Requirement
The liaison office is not required to register under GST as it does not engage in taxable supplies. It acts solely as an extension of the foreign company for communication purposes, following RBI guidelines. The office does not have an independent legal existence and does not conduct business activities beyond the liaison role, as specified by RBI.

Issue 3: Liability to Pay GST on Reimbursements
Since the liaison office and the foreign company are not considered separate entities, there is no flow of services between them. The reimbursement of expenses is not a consideration for services provided, and no GST is applicable on such transactions. The activities of the liaison office do not fall under the purview of taxable supplies, and hence, no GST is payable on reimbursements.

Conclusion:
The Advance Ruling Authority determined that the reimbursement of expenses and salary by the foreign company to the liaison office in India does not constitute a supply of services under the CGST Act. The liaison office is not required to register under GST and is not liable to pay GST on reimbursements received. This ruling is based on the operational structure of the liaison office, its role as a communication channel, and compliance with RBI guidelines.