Establishing your presence in India

Are you a foreign entity, i.e. a company incorporated outside India including a firm or a group of individuals, looking to explore the business environment in India? If yes, then consider having a representative office in India. It will help you get an insider’s perspective of the local market and help you plan your investment strategies accordingly. With India being the fastest growing economy of the world, we believe this is the right time for you to enter the Indian market. Therefore, this post discusses the ways by which you can represent yourself in India which are as follows – a liaison office or a branch office or a project office in India. This post aims at giving you a clear idea about the roles and responsibilities of your representative offices so that you can grow your business presence in India and at the same time avoid any legal complications.

The establishment of your liaison/branch or project office will be regulated by subsection 6 of Section 6 of Foreign Exchange Management Act, 1999 [1](the “FEMA”) read and any notifications under Foreign Exchange Management Regulations,2000[2], which are amended from time to time. In July, 2014 the Reserve Bank of India (the “RBI”) published a master circular[3] consolidating the existing guidelines on the “establishment of liaison/branch/project office in India. You will also need to register your representative office under Section 592 of the Indian Companies Act,1956.[4]As some of these terms may not be familiar, we will review the meaning of liaison/project/branch office.

What is a liaison office?

A liaison office acts as a communication channel between the head office abroad and suppliers/prospective customers in India. It cannot undertake any business activity and earn any income in India. If you decide to have a liaison office, its primary role will be to collect information about the prevalent opportunities in the Indian market and also apprise the local buyers about the parent company and its products. Liaison office maintains itself through funds received from abroad. The permission to establish a liaison office is initially granted for a period of three years which may be extended by an AD category 1 bank[5].

Permitted activities of the liaison office include –

  • Representing in the Indian market the parent company/group companies
  • Promoting export/import from/to India
  • Promoting technical/financial partnerships between parent/group companies and companies in India

What is a branch office?

Branch offices are representative offices of companies incorporated outside India which are engaged in manufacturing and trading activities. They can be opened with the approval of the RBI and undertake the following activities[6]:

  1. Export /Import of goods to/from India to any other country;
  2. Provide quality consultancy services;
  3. Conduct research work, in areas in which the parent company is engaged;
  4. Promote technical/financial collaborations between Indian companies and parent company;
  5. The branch office may represent itself as the buying/selling agent of the parent company in India;
  6. Provide services in information technology and development of software in India
  7. Provide technical support to the products supplied by parent/group companies;

Your branch office should substantially carry out the same business activities carried out by its head office. It cannot carry out manufacturing or processing activities in India, directly or indirectly. Profits earned by branch offices are freely remitted from India, subject to applicable taxes.

Eligibility Criteria – liaison /branch office

You will need to obtain permission from the RBI by applying through the Form FNC that can be obtained from the official website of the RBI.[7]The RBI will consider your application in the Form FNC on the basis of two criteria – basic and additional criteria.

  1. Basic criteria – The RBI checks the scope of your principal business to determine the sectorunder which it falls. If your business falls under sectors where 100% Foreign Direct Investment (FDI)is allowed then your application is considered under the RBI route.In this case, you do not need a prior approval from the Government of India or the RBI before investment. Whereas, if your business falls under sectors where 100% FDI is not allowed then your application is considered under the Government route. Applications under this category are considered by the RBI in consultation with the Ministry of Finance, Government of India.
  1. Additional Criteria –You are required to have aprofit making track record during the immediately preceding three financial years for a liaison office and five financial years for a branch office in the home country. You should have aNet Worth[8] of not less than USD 50,000 or its equivalent for a liaison office and not less than USD 100,000 or its equivalent for a branch office.

If your application is successful, the RBI will allot a unique identification number (the “UIN”) and send it to you. You will need to quote this number while communicating with the RBI. The Indian Income Tax Authorities will allot you a Permanent Account Number (the “PAN”). Using the PAN, the Income tax department willlink all the transactions of your liaison/branch office to itself. These transactions include filing of income tax statements, payment of taxes and correspondence.

Taxation

If you set up a liaison office in India, you will have to submit an annual statement in respect of your activities to the Indian tax authorities. This annual statement has to be provided in the Form 49 C.[9] As you are not allowed any commercial activity, there is no direct tax liability on you. But it is vital that your liaison office should carry only preparatory activities to avoid any tax liability in India. As discussed in a recent judgement[10] of the Delhi Bench of the Income Tax Tribunal, the preparatory activitiesmay include holding of seminars and conferences, receiving trade enquiries from buyers, collecting feedback from prospective buyers and providing information about the technology being used by you in your product.

The profits of a branch office are taxed on the basis of income received in India. The rate of tax applicable to the branch office for the year 2013-2014 was around 43%[11] provided the profits of your branch office do not exceed Rupees one Crore.

Reporting – liaison /branch office

  1. You will have to submit a report containing information as detailed in form to the Director General of Police in the state where the liaison/ branch office has been established. A copy of the report is also to be submitted with the AD Category Bank.
  2. You have to submit an Annual Activity Certificate[13]and the balance sheet to the AD Category Bank, and a copy to the Directorate General of Income Tax (International Taxation).[NTD: There was a reference to a 30 day report required under the Companies Act in an earlier draft. Is that not required?]

 Exit

If you decide to shut down your liaison or branch office, that entity in India will need to submit the documents as notified by the RBI[14] to the designated AD category 1 bank. The office may be closed within 5-6 weeks of the submission of the documents.

What is a project office?

A project office is set up by a foreign entity to execute specifics project. You can establish aproject office without the specific approval of the RBI. However, the precondition is that you should have secured a contract from an Indian company to execute a project in India. The following guidelines should be adhered to by the foreign company:

  1. The funding of the project is directly by inward remittance from abroad
  2. The funding is made by a bilateral or multilateral international financing agency
  3. The project is approved by an appropriate authority
  4. The Indian company awarding the contract has been granted term loan by a public financial institution or a bank in India for the project
  5. The income earned by the Branch offices is taxable under the Income Tax Act, 1961

 Reporting

If you set up a project office in India, you will be required to submit the following reports[15]:

  1. A Report to the Director General of Police in the format prescribed in the master circular.
  2. A report containing details like name and address of the foreign company, particulars of the authority awarding the projects/contract, the total amount of contract, address/email address/telephone number, fax number of the project ,tenure of project office brief details of the project undertaken etc.
  3. A certificate from a Chartered Accountant showing the Project Status and certifying that the accounts of the Project Office has been audited and the activities undertaken are in conformity with the General / Specific permission given by the Reserve Bank

 To conclude, your representative office will need to comply with above discussed RBI regulations, tax filings and also registration and reporting requirements.There are other general RBI guidelines which you need to follow while establishing your representative office which include instructions regarding acquiring immovable property, transfer of assets and opening of bank accounts in India. The RBI came up with a master circular to ensure transparency and procedural consistency in the establishment and functioning of the representative offices. Thus, making the process of entering the Indian market by way of a representative office fairly simple. Also, advantages like easy operations, less formalities and simple closure procedure further encourage you to have a representative office in India.

Please do not hesitate to contact us with any questions or comments. Please note that the information on this blog post or in any other part of this site does not constitute legal advice to you for your specific circumstances. For actual legal advice, please be in touch and we will attempt to assist you or refer you to the appropriate advisor.

[1] Ministry of Finance, The Foreign Exchange Management Act, 1999, http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/FEMA_act_1999.pdf

[2] The Reserve Bank of India, Foreign Exchange Management Regulations,2000 http://rbidocs.rbi.org.in/rdocs/notification/PDFs/13272.pdf

[3]The Reserve Bank of India, Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities, http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

[4] The Ministry of Corporate Affairs, Companies Act, 1956, Chapter XI, http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf

[5] The Reserve Bank of India, List of Authorised Category -1, http://rbidocs.rbi.org.in/rdocs/FEMAMASTER/PDFs/1061.pdf

[6] The Reserve Bank of India, Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities, http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

[7] The Reserve Bank of India, FNC Application for Establishment of Branch/Liaison Office in India,  http://rbidocs.rbi.org.in/rdocs/Forms/PDFs/form-fnc1.pdf

[8] Total of paid up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name.

[9] The Income Tax Department, Form No. 49 C, Annual Statement under section 285 of the Income Tax Act, 1961, http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/ITR62FORM49C.pdf

[10] Income Tax Appellate Tribunal, M/S Brown Sharpe Inc. v. ACIT(2014), http://www.itatonline.in:8080/itat/upload/432074638801812311713%245%5E1REFNO2015_%26_2_others__Brown_%26_Sharpe_INC_.pdf

[11] The Income Tax of India,  Tax Rates, http://www.incometaxindiapr.gov.in/incometaxindiacr/contents/taxrates/COMPANIES_2013_14.htm

[12] The Reserve Bank of India, , Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities, Annex 3, http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

[13] The Reserve Bank of India, Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities, Annex 4, http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

[14] The Reserve Bank of India, Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities, http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

[15] The Reserve Bank of India, Master Circular on Establishment of Liaison/ Branch/ Project offices in India by Foreign Entities,http://rbidocs.rbi.org.in/rdocs/notification/PDFs/11ELB010714FL.pdf

 Authored by:

Aditi Katyan

aditi

 Aditi Katyan is a law graduate of Delhi University (2009). She has worked for multinational companies where she was responsible for drafting, vetting and interpreting various types of international contracts / agreements including service agreements, resource and consulting agreements, agency agreements and employment contracts.

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Hari is a corporate lawyer with experience in Information Technology, Renewable Energy and Nuclear Energy. He has worked in Canada, the US, Denmark, the UK, and India. in addition to his big-law experience, he was General Counsel at an US based IT Services company supervising internal and external counsel in various jurisdictions.