GST muddle: AARs’ rulings clash on similar queries in two States

Shishir Sinha New Delhi | Updated on October 23, 2018

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Payments made by foreign companies to liaison offices in the country will not attract GST, Authority of Advance Rulings (AAR) - Tamil Nadu has ruled. This is similar to a ruling recently given by AAR-Rajasthan.

However, this contradicts a ruling given by AAR-Karnataka a few months ago in the case of domestic firms with branches in other States. AAR-Karnataka had said salaries paid by the head office for staff in accounting, IT and HR, and so on for services rendered to its branch offices in other States would attract a GST of 18 per cent.

The AAR-TN ruling

Germany-based Takko Holding GmbH had sought an advance ruling on the tax liabilities related to its proposed liaison office in India. The Indian office would be a communication channel between the parent company and local suppliers of readymade garments, said Takko.

The ruling was sought on three points — whether the liaison office is liable to pay GST, whether it is required to be registered under the GST Act, and whether its activities amount to supply of services. Since the liaison office is maintained by inward remittances from the German office to meet expenses, the activities are not a supply, Takko argued.

The AAR agreed that the liaison office doesn’t have business activities of its own, and doesn’t earn anything. Also, it acts as an extension of the German head office in its procurement activities, as has been spelt out in the RBI permission letter. Hence, the liaison office staff are neither ‘related’ nor ‘distinct’ persons, but are in fact employees of Takko’s head office. Therefore none of their activities can be termed ‘supply’, and hence it was “not required to obtain registration under Section 22 of CGST /SGST Act or pay CGST, SGST or IGST as applicable,” the ruling said.

Varying interpretations

Experts believe the ruling may open a Pandora’s box, primarily on two counts.

“This ruling has held that reimbursement of expenses cannot be treated as a consideration towards any service,” said Harpreet Singh, Partner (Indirect Taxes) at KPMG. “Unfortunately, there is another school of thought which believes that the ambit of the words ‘supply’ and ‘consideration’ under GST are wide enough to cover all sorts of reimbursements, making them taxable.”

AAR-TN has observed that the employees of the liaison office are, in fact, employees of the headquarters located abroad, said Singh. Other AARs have held that for the purpose of cross-charge, ‘employees’ refers only to those of the corporate office and not of other offices within India, Singh said, adding: “It’s all confusing and contradictory.”

What AAR-Karnataka said

Earlier this year, AAR-Karnataka had ruled that employees’ services in the corporate office for managing units located in other States would attract GST.

The applicant, Columbia Asia Hospitals, had sought an advance ruling on whether or not the activities performed by its employees at the corporate office for the units located in other States would be treated as ‘supply’.

It shall be treated as supply, the AAR had ruled. It means that GST can be levied on their salaries.

Published on October 23, 2018

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