The transfer pricing provisions cannot apply in respect of transactions between the Indian head office and branch office in Canada. (para 8)

IN THE ITAT DELHI BENCH ‘I-1’

Aithent Technologies (P.) Ltd.

v.

Deputy Commissioner of Income Tax, Circle-1(1)

IT APPEAL NO. 6446 (DELHI) OF 2012
[ASSESSMENT YEAR 2008-09]

SEPTEMBER  21, 2016

Akhilesh Gupta, Advocate for the Appellant. Neeraj Kumar, Sr. DR for the Respondent.

ORDER

R.S. Syal, Accountant Member – This appeal by the assessee emanates from the final assessment order dated 31.10.2012 passed by the Assessing Officer (AO) u/s. 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2008-09.

2. The first issue agitated in this appeal is against the determination of arm’s length price (ALP) in respect of transactions of the assessee with its Branch Office in Canada.

3. Briefly stated, the facts of the case are that the assessee is an Indian company having branch office in Canada. In addition to that, it has a 100% subsidiary in USA. There were certain transactions between the assessee and its branch office in Canada, which were treated by the Transfer Pricing Officer (TPO)/AO as international transactions and their ALP was determined. The assessee is aggrieved against such determination of ALP of the transactions between the head office and branch office.

4. We have heard the rival submissions and perused the relevant material on record. It is undisputed that the assessee is an Indian enterprise having its branch office in Canada. Under these circumstances, a question arises as to whether a separate determination of ALP of the transactions between Indian head office and branch office, Canada, should be made so as to make an addition on account of transfer pricing adjustment.

5. It is simple and plain that no person can transact with self in common parlance. As such, one can neither earn any profit nor suffer loss from self. The same is true in the context of business as well. Neither any person can earn income nor suffer loss from dealings with self. It is called the principle of mutuality. When expanded commercially, the proposition which follows is that there can be no profit from trade with self. This has been fairly settled through a catena of judgments from the Hon’ble Apex Court including Sir Kikabhai Premchand v. CIT[1953] 24 ITR 506 and also the Hon’ble High Courts. In Betts Hartley Huett & Co. Ltd. v. CIT [1979] v. CIT [1979] 116 ITR 425 (Cal.), it has been held that there cannot be a valid transaction of sale between branch office and head office and hence profit on such sales is not includible in assessee’s computation of total income. Similar view has been taken in Ram Lal Bechairam v. CIT[1946] 14 ITR 1 (All.).

6. Coming to the context of transfer pricing provisions, it is noticed that section 92B(1) defines ‘International transaction’ to mean a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale . . . or provision of services. Going by this definition, there can be an international transaction only between two or more associated enterprises (AEs). Since branch office is not a separate enterprise, there can be no question of treating transaction between head office and branch office as an international transaction. At this juncture, it is pertinent to note that section 92F(iii) defines “enterprise” to mean ‘a person (including a permanent establishment of such person) who is. . . . . . engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods. . . . . . of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights. . . . . . . whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places.’ When we consider the definition of ‘international transaction’ u/s. 92B(1) in juxtaposition to the definition of ‘enterprise’ u/s. 92F(iii), the position which prima facie appears is that since a branch office which is selling goods or providing services is an ‘enterprise’ as a permanent establishment of the general enterprise, all the transactions between the branch office and the general enterprise be subjected to the transfer pricing provisions. However, this prima facieimpression loses its substance when the general enterprise is an Indian entity and the branch office is located outside India. It is so for the reason that section 5 defining scope of total income provides through sub-section (1) that ‘Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year’. Thus it is apparent that a resident assessee is liable to tax for its world income, which not only comprises of Indian income but also the income which ‘accrues or arises to him outside India during such year’. The final accounts of foreign branch office, including all the items of income, expenses, assets and liabilities are merged with the accounts of head office and the accumulated income so determined is liable to tax in India. When the sale made by the Indian Head office is considered as purchase of the foreign branch office and the figures of head office and branch office are consolidated, any under or over invoicing becomes tax neutral. Even if for a moment, we accept the contention of the Revenue as correct that the head office earned profit from its branch office, then such profit earned would constitute additional cost of the Branch office. On aggregation of the accounts of the Head office and branch office, such income of the HO would be set off with the equal amount of expense of the BO, leaving thereby no separately identifiable income on account of this transaction. This can be understood with the help of a simple example. Suppose the Indian head office purchases goods worth Rs. 95 and transfers the same to foreign branch office at Rs. 100, which are in turn sold by the branch office for a sum of Rs. 120. The profit of the head office will be Rs. 5 (Rs. 100 minus Rs. 95) and the profit of the branch office will be Rs. 20 (Rs. 120 minus Rs. 100). The Indian general enterprise will be chargeable to tax in India on its world income of Rs. 25 (Rs. 5 plus Rs. 20). If for a moment, it is presumed that the ALP of the goods transferred to the branch office is Rs. 110 and not Rs. 100 and the figure is accordingly altered, the profit of the head office will become Rs. 15 (Rs. 110 minus Rs. 95) and that of the branch office at Rs. 10 (Rs. 120 minus Rs. 110). Again the Indian general enterprise will be chargeable to tax in India on its world income of Rs. 25 (Rs. 15 plus Rs. 10). There can never be any reason for an Indian enterprise to over or under invoice the goods or services to its foreign branch office because by virtue of section 5(1), it is its world income which is going to be charged to tax in India, which in all circumstances will remain same at Rs. 25 in the above example. So the over or under invoicing between the Indian head office and foreign branch office is always income-tax neutral in the case of an Indian enterprise having a permanent establishment outside India. Making a transfer pricing adjustment in respect of the international transactions between the Indian head office and the foreign branch office will result into charging tax on income which is more than legitimately due to the exchequer. Obviously, this is impermissible.

7. The rationale in not applying the provisions of Chapter-X on transactions between the head office and branch office is limited only on an Indian enterprise having branch office abroad. It is not the other way around. If a foreign general enterprise has a branch office in India, such Indian branch office will be considered as an ‘enterprise’ u/s. 92F(iii) and the transactions between the foreign head office and the Indian branch office will be ‘International transactions’ in terms of section 92B. This is for the reason that the total income of a non-resident in terms of section 5(2) includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Thus it is only the Indian income of a non-resident, which is chargeable to tax in India. In such circumstances, there can be an allurement to some non-resident assesses to resort to under or over-invoicing so as to mitigate the tax burden in India. It is with this background in mind that the legislature introduced Chapter X with the caption ‘Special provision relating to avoidance of tax’ so to ensure that the international transactions are reported at ALP. Some foreign associated enterprise instead of having an Indian enterprise may opt to have a branch office in India and then claim that since the Indian branch office is not a separate enterprise, the transfer pricing provisions should not be applied. Section 92F(iii) has been incorporated to ensure that not only the transactions between the foreign enterprise and its Indian associated enterprise but also the transactions between the foreign enterprise and its branch office in India are also determined at ALP so that the Indian tax kitty is not deprived of the rightful amount of tax due to it. Thus, the definition of ‘enterprise’ as per section 92F(iii) as also including its permanent establishment for the transfer pricing provisions is confined only in respect of a foreign general enterprise having a branch office in India and not vice versa.

8. Adverting to the facts of the instant case, we find that the extant assessee is also an Indian resident and as such is liable for tax in respect of the income earned in India (through its Head office in India) and also the income accruing from outside India (through its Branch office in Canada). The assessee has rightly offered income for taxation not only the amount earned by the Indian head office, but also whole of the income earned by Canada branch office. This position can be ascertained from the Annual accounts of the assessee, whose copy has been placed on record. Page C-6 of the paper book is copy of the Profit & Loss Account of the assessee, which gives a figure of ‘Revenue from services rendered.’ This figure has been depicted at Rs. 45.42 crore. Its break-up is available on page C-19, from where it is discernible that revenue earned by the Indian head office from exports stands at Rs. 9.50 crore and revenue of Canadian foreign branch at Rs. 35.92 crore. Not only the income but, also the expenses and all the items of balance sheet of branch office, Canada have also been merged with the figures of head office. It is the total income as also including the total revenue earned by branch office Canada, which has been offered for taxation. Under such circumstances and in the backdrop of the foregoing discussion, the transfer pricing provisions cannot apply in respect of transactions between the Indian head office and branch office in Canada. The impugned order is set aside pro tanto.

9. The next issue raised in this appeal is against the addition due to transfer pricing adjustment amounting to Rs. 2,59,26,400/-. Succinctly, the facts apropos this issue are that the assessee entered into international transaction of ‘Software development services’ with its AE, namely, Aithent Inc., USA. The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit level indicator (PLI) of OP/OC. Certain comparables were chosen after applying certain filters, which have been listed on page 3 of the TPO’s order. That is how, the assessee claimed that its international transactions were at ALP. Not satisfied, the AO made reference to the TPO for determination of the ALP of this international transaction. The TPO disagreed with certain filters adopted by the assessee and finally applied the following filters for selecting the comparable companies: —

		Companies whose data is not available for the FY 2007-08 were excluded.
		Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded.
		Companies whose software development service revenue <Rs. 1 cr. were excluded.
		Companies who have less than 25% of the revenues as export sales were excluded.
		Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded.
		Companies whose employee cost to revenues is less than 25% of the revenues were excluded.
		Companies having different financial year ending (i.e., not March 31, 2008) or data of the company does not fall within 12 months period i.e., 01.04.2007 to 31.03.2008, were rejected.
		Companies who have diminishing revenues/persistent losses for the period under consideration were excluded.
		Companies whose onsite income is more than 75% of the export revenues were excluded.
		Companies that are functionally different from that of taxpayer.

10. By applying the above filters, the list of comparables drawn by the assessee underwent change inasmuch as the TPO inducted certain new companies as comparable and also disqualified some of the companies which were considered as comparable by the assessee. The TPO computed arithmetical mean of the finally selected companies (after allowing working capital adjustment) at 24.66%. This arm’s length margin was applied to determine the transfer pricing adjustment amounting to Rs. 3.09 crore. The assessee objected to the calculation made by the TPO before the Dispute Resolution Panel (DRP). The DRP vide its order dated 24.9.2012 issued certain directions. Giving effect to the direction given by the DRP, the TPO passed the consequential order on 9.10.2012 down scaling the amount of transfer pricing adjustment to Rs. 2.59 crore by way of revision in the arithmetical mean of OP/TC at 20.57% of the surviving 18 companies in the list of comparables. The assessee is aggrieved against the inclusion of several companies in the list of comparables and also the exclusion of some of the companies which were claimed by it as comparable. The main thrust of the ld. AR’s arguments was on the application of some of the above filters, which in his opinion, were not correctly appreciated and resulted into the inclusion of unwarranted companies and the exclusion of certain requisite companies from/in the final list of comparables. The ld. AR urged us to decide on the correctness of some of the filters applied by the authorities below and then remit the matter to the TPO for passing order in the light of our decision on the correctness of such filters. The ld. DR fairly agreed to this proposition. Ex consequenti, we will take up the filters as adopted by the TPO that are under challenge.

(i) Companies whose software development service revenue <Rs. 1 crore were excluded.

11.1 The ld. AR contended that the assessee company earned revenue from services to the tune of Rs. 45.42 crore. It was submitted that the filter of exclusion of companies with service revenue of less than Rs. 1 crore was not fully correct. He did not raise any objection to the application of lower limit of filter at Rs. 1 crore, but, challenged the upper limit of turnover, which was left open by the TPO. The ld. AR contended that some sort of cap on the upper limit of turnover should have been considered by the TPO.

11.2 We are not convinced with the argument advanced on behalf of the assessee in this regard. When functionally similar companies are chosen and then average of the profit rate of such similarly functional companies is taken into account for determining the ALP of the international transaction undertaken by the assessee, the size of some of the companies in the whole lot of comparable companies, becomes meaningless. Averaging of the profit rates of the whole lot of functionally similar companies of different sizes, viz., some having higher while some others having lower turnover vis-à-vis the assessee, irons out the effect of such differences. The Hon’ble jurisdictional High Court in the case of ChrysVapital Investment Advisers (India) (P.) Ltd. v. Dy. CIT[2015] 376 ITR 183  (Delhi) has held that high profit/turnover cannot be a criteria to exclude an otherwise comparable company. This issue being no more res integra, does not deserve the acceptance by us of the argument advanced on behalf of the assessee. We, therefore, hold that the TPO was justified in applying this filter.

(ii) Companies who have less than 25% of the revenues as export sales were excluded.

12. After considering the rival submissions and perusing the relevant material on record, we find that the assessee’s export sales are Rs. 9.49 crore as against the total sales of Rs. 45.42 crore. This shows that the assessee’s export revenue is roughly 21% of total revenue. If we apply the filter of excluding the companies having less than 25% of the revenue’s from export sales, it would tend to eliminate the companies which are similarly placed as the assessee. In our considered opinion, this filter should not have been applied by the TPO, which has actually upset the selection process. Both the sides agreed that if, in the given circumstances, the filter of excluding the companies with export sales of more than 30% of the total revenue is applied, that would serve the purpose. In our considered opinion, this proposition put forth by the ld. AR and as accepted by the ld. DR, is in order.

(iii) Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the operating revenues were excluded.

13.1 The TPO applied the filter of related party transactions (RPTs) of more than 25% of the operating revenue and accordingly short listed the companies in the final set of comparables. The ld. AR did not dispute the percentage of 25%. He, however, objected to the application of this 25% related party transactions to ‘sales as well as expenditure combined.’

13.2 Having heard the rival submissions and perused the relevant material on record, we find that the TPO has included sales as well as expenses in a combined manner as numerator with the denominator of operating revenue. This approach, in our considered opinion, is not correct. The percentage of numerator to denominator can be rightly calculated only when the contents of a part representing the RPT of a particular nature is seen with reference to the contents of whole of that nature. Both the numerator and denominator need to have the same nature of contents. This can be done by segregating transactions of one nature, like, comparing RPT of purchase with the total purchases or RPT of sales with the total amount of sales of the company. It is also possible to club small transactions of a distinct but related income producing activity with a large transactions of major income producing activity as one unit, both in the numerator as well as in the denominator. For example, RPT of major sale transaction and minor job income can be combined to find out the percentage of RPTs with the total of sales and job income taken together. This entire exercise can be done by firstly calculating the percentage of RPT purchases with total purchases and then of RPT sales and service income as one unit with the total of sales and service income again as one unit. The decision as to whether a company should be included in the list of comparables by applying the filter of more than 25% RPTs, would depend on the outcome of two such percentages of RPTs. If either of the two breaches the 25% threshold, then the company will cease to be comparable. The impugned order, combining sales and expenses, for calculating the percentage of the RPTs is set aside to this extent and the TPO is, accordingly, directed to apply this filter in the manner discussed above.

(iv) Companies who have diminishing revenues/persistent losses for the period under consideration were excluded.

14.1 The TPO applied this filter for excluding the companies from the final set of comparables which were having diminishing revenues or persistent losses. The ld. AR argued that this filter ought not to have been applied. This was controverted by the ld. DR who submitted that the Delhi Bench of the Tribunal in the case of Navisite India (P.) Ltd. v. Asstt. CIT[2015] 67 SOT 145 (URO) has approved this filter.

14.2 After considering the rival submissions and perusing the relevant material on record, we find the position of profit/loss earned by the assessee during the period relevant to the assessment year under consideration and six earlier years is as under:—

Financial Year	Profit/loss (as per Audited Financials)
2001-02	2,81,18,307
2002-03	-5,58,88,557
2003-04	-7,62,57,307
2004-05	-4,85,47,772
2005-06	-1,32,74,909
2006-07	92,74,632
2007-08	62,39,414

14.3 A careful perusal of the pattern of profit/loss earned by the assessee as per its audited accounts divulges that as against the current year’s profit of Rs. 62.39 lac, the earlier years’ profit was Rs. 92.74 lac. This manifests that the profit for this year has diminished from the earlier year. When we consider the figures of losses for the financial years 2005-06 and earlier years, it comes to light that there were losses right from financial year 2002-03 up to 2005-06. On an overview of the above extracted Table, it can be seen that the assessee’s profit is not steady, but, has diminished during the instant year from the preceding year. In such a situation, if we exclude the companies having diminishing profits, it would mean that the companies whose profit pattern is also similar to that of the assessee would face the axe. Doing so would mean excluding the comparable companies from the final tally, which is not appropriate. However, the companies having persistent losses, obviously, cannot be compared with the assessee because it has earned positive income not only in this year, but, in the preceding year as well. We, therefore, hold that the companies having diminishing revenue should not be excluded, but, only the companies having persistent losses should be expelled from the final tally of comparables.

(v) Companies whose onsite income is more than 75% of the export revenues were excluded.

15.1 The TPO excluded the companies whose onsite income was more than 75% of the export revenues. The ld. AR argued that the income earned by branch office, Canada was largely onsite income and, hence, this filter could not be applied. In support of his contention of the branch office, Canada earning onsite income, he placed on record certain agreements which show the rendering of onsite services by the branch office, Japan. The DR, however, opposed the argument of the ld. AR.

15.2 Having heard the rival submissions and perused the relevant material on record, we find that out of total revenue of Rs. 45.42 crore earned by the assessee, its revenue of the foreign branch is to the tune of Rs. 35.92 crore, which is roughly 80% of the total revenue. The ld. AR contended that the entire income earned by branch office, Canada, was from rendering onsite services. However, this proposition could be substantiated partly as only 2-3 copies of agreements entered into by the branch office, Canada with its clients were furnished as against numerous clients. If the argument of the ld. AR is correct that its foreign branch earned only onsite services income, then, the filter applied by the TPO excluding the companies whose onsite income is more than 75% of the export revenues, becomes meaningless. In such a situation, the companies whose onsite income is more than 75% of the export limit should be rather included. Since the necessary complete information is not available with the ld. AR for verifying the veracity of the contention of the foreign branch earning 100% onsite services, we consider it expedient to direct the TPO/AO to examine the break-up of the revenues earned by branch office, Canada, for seeing if the same is from onsite/offsite services. The application of the filter will be then decided accordingly by the TPO.

16. Having discussed the applicability or otherwise of the filters applied by the TPO as challenged before us, we now set aside the impugned order and remit the matter to the file of TPO/AO for considering the comparability or otherwise of the companies disputed by the assessee on the touchstone of the discussion made above and then determining the ALP of the international transaction.

17. The other objection taken by the ld. AR against the determination of ALP under this segment is in not allowing adjustment on account of idle capacity. The assessee claimed that during the year 42% of its employees remained idle and, hence, sought reduction in its operating cost to the extent of such extraordinary expense. The TPO jettisoned this proposition. The assessee now seeks reduction in its operating costs on account of such idle labour cost for the purposes of computing the transfer pricing adjustment.

18. We have heard both the sides and perused the relevant material on record. It is obvious that the TPO used the TNMM as the most appropriate method for calculating the ALP of this transaction, which was also considered by the assessee as the most appropriate method. The mechanism for determining the ALP under this method has been set out in Rule 10B(1)(e) as under:—

“(e) transactional net margin method, by which,—

(i)		the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;
(ii)		the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii)		the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv)		the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;
(v)		the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.”

19. It can be noticed from sub-clause (i) that the net profit margin realized by the enterprise from an international transaction is computed in relation to the costs incurred or sales effected, etc. Sub-clause (ii) talks of determining the net profit margin realized from comparable uncontrolled transactions. Sub-clause (iii) speaks of adjusting the net profit margin realized from comparable uncontrolled transactions determined in sub-clause (ii) by taking into account the differences, if any, between the international transaction and the comparable uncontrolled transactions. It is obvious from sub-clause (i) that the net profit margin actually realized by the assessee is always taken as such without any adjustment. The effect of differences between the international transaction and comparable uncontrolled transactions is always given in the net operating profit margin of the comparable uncontrolled transactions. There is no mandate for adjusting the assessee’s profit margin under the provisions of Rule 10B(1)(e). The assessee’s contention that its operating costs should be reduced to the extent its employees remained idle is, ergo, incapable of acceptance. The adjustment, if any, could have been allowed, if the assessee had demonstrated that the comparable companies had more under-utilization of their labour force vis-à-vis the assessee. The onus to prove such under-utilization of employees of the comparables, for claiming adjustment, squarely lies on the assessee. On a specific query, the ld. AR could not point out that the utilization of employees by the comparable companies was less than the assessee. Under such circumstances, we are of the considered opinion that no such adjustment can be granted. We, therefore, approve the view taken by the authorities on this issue.

20. In the result, the appeal is allowed for statistical purposes.

May 12, 2016

To

All Authorised Dealers Category – I Banks

Madam / Sir,

Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) in
India by foreign entities – procedural guidelines

Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to Notification No. FEMA 22(R) /2016-RB dated March 31, 2016 viz. Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. The salient provisions of the procedure for a person resident outside India to open a branch office or a liaison office or a project office are outlined as under.

2. Eligibility criteria

i. Applications from persons resident outside India for establishing Branch Office (BO) / Liaison Office (LO)/ Project Office (PO) or any other place of business in India shall be considered by the AD Category-I bank as per the guidelines issued by the Reserve Bank of India. If the application to open a BO/LO/PO is received from an entity resident outside India whose principal business falls under sectors where 100 percent Foreign Direct Investment (FDI) is allowed in terms of FEMA Notification No. 20/2000-RB dated May 3, 2000, as amended from time to time, the AD Category-I bank may consider such applications under the delegated powers.

ii. An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India in the following cases:

1. the applicant is a citizen of or is registered/incorporated in Pakistan;
2. the applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
3. The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting. In the case of proposal for opening a PO relating to defence sector, no separate reference or approval of Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. There shall be no requirement of any approval from RBI also only for such cases;
4. The applicant is a Non-Government Organisation (NGO), a Non-Profit Organisation, or a Body/ Agency/ Department of a foreign government.

Such applications may be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi-110 001 who shall process the applications in consultation with the Government of India.

iii. The non-resident entity desirous of establishing a BO/LO in India should have a financially sound track record as provided in Regulation 4 (a) of the Notification.

iv. An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) [as provided in Regulation 4. a. of the Notification] from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit. The LOC should be issued by the applicant’s parent / group company which undertakes to fund the operations if required.

3. Procedure for applying

The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in Form FNC [as provided in Regulation 4.c. of the Notification], to a designated AD Category – I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the LOC, wherever applicable. The AD Category-I bank shall, after exercising due diligence in respect of the applicant’s background, and satisfying itself as regards adherence to the eligibility criteria for establishing BO/LO/PO, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms, grant approval to the foreign entity for establishing BO/LO/PO in India. The AD Category-I banks may frame appropriate policy for dealing with these applications in conformity with the FEMA Regulations and Directions.

4. Issuance of UIN by Reserve Bank of India

For the limited purpose of uploading and maintenance of up-to-date list of all foreign entities which have been granted permission for establishing BO/LO in India on Reserve Bank’s website, the AD Category-I bank shall before issuing the approval letter to the applicant forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO/LO. After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO/LO in India.

5. Validity of LO and PO

The validity of an LO is generally for three years [as provided in Regulation 4.d. of the Notification], except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity is two years only.

The validity of the PO is for the tenure of the project.

6. Other conditions

1. An applicant that has received a permission for setting up of a BO/LO/PO shall inform the designated AD Category I bank as to the date on which the BO/LO/PO has been set up. The AD category I bank in turn shall inform Reserve Bank of India accordingly. In case an approval granted by the AD category I bank has either been surrendered by the applicant or has expired without any BO/LO/PO being set up, the AD Category I bank shall inform RBI accordingly.
2. In accordance with Regulation 4.c. of the Notification, the approval granted by the AD Category-I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse. In cases where the non-resident entity is not able to open the office within the stipulated time frame due to reasons beyond its control, the AD Category-I bank may consider granting extension of time for a further period of six months for setting up the office. Any further extension of time shall require prior approval of Reserve Bank of India.
3. All applications for establishing BO/LO in India by foreign banks and insurance companies shall be dealt with as per the directions issued by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office and the Insurance Regulatory and Development Authority (IRDA) respectively. No UIN for such representative offices is required from the Foreign Exchange Department, Reserve Bank of India.
4. There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions as provided in Regulation 3.c. of the Notification.

7. Opening of Bank Account by BO/LO/PO

i. An LO may open an account with the designated AD category I Bank in India for receiving remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India. The permitted Credits and Debits to the account shall be:

a. Credits

1. Funds received from Head Office through normal banking channels for meeting the expenses of the office.
2. Refund of security deposits paid from LO’s account or paid directly by the Head Office through normal banking channels.
3. Refund of taxes, duties etc., paid from LO’s bank account.
4. Sale proceeds of assets of the LO.

b. Debits

Only for meeting the local expenses of the office.

ii. A BO may open a bank account with any AD Category-I Bank in India for its business operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds.

iii. An entity from Pakistan shall need prior approval of Reserve Bank of India to open a bank account for its PO in India. All other foreign entities who have been awarded a contract for a project by the Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a bank account without any prior approval of the Reserve Bank.

8. Foreign currency accounts by PO

POs can open non-interest bearing foreign currency accounts with AD Category – I banks subject to the following:

1. The PO has been established in India as per these Regulations.
2. The contract governing the project specifically provides for payment in foreign currency.
3. Each PO can open two foreign currency accounts, usually one denominated in USD and the other in home currency of the project awardee, provided both are maintained with the same AD Category–I bank.
4. The permissible debits to the account shall be payment of project related expenses and credits shall be foreign currency receipts from the Project Sanctioning Authority and remittances from parent/group company abroad or bilateral / multilateral international financing agencies.
5. The responsibility of ensuring that only the approved debits and credits are allowed in the foreign currency account shall rest solely with the AD Category–I bank.
6. The foreign currency accounts have to be closed at the completion of the project.

9. Extension of validity of the approval of LO and PO

i. Requests for extension of time for LOs may be submitted before the expiry of the validity of the approval, to the AD Category-I bank concerned under whose jurisdiction the LO/Nodal office is located. The designated AD Category – I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted, if the applicant has complied with the following conditions and the application is otherwise in order:

1. The LO should have submitted the Annual Activity Certificates for the previous years and
2. The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval letter.

Such extension has to be granted as expeditiously as possible and in any case not later than one month from the receipt of the request, under intimation to the General Manager, Reserve Bank of India, CO Cell, New Delhi quoting the reference number of the original approval letter and the UIN. Reserve Bank shall update the information on the website immediately.

ii. As provided in Regulation 4.d. of the Notification, NBFCs and entities engaged in construction and development sectors are permitted to open an LO for two years only. LOs opened by such entities (excluding infrastructure development companies) shall not be allowed any extension of time. Upon expiry of the validity period, the LOs shall have to either close down or be converted into a Joint Venture / Wholly Owned Subsidiary in conformity with the extant Foreign Direct Investment policy.

iii. Extension of validity of PO needs to be reported by the AD Category-I bank to the CO Cell, RBI, New Delhi.

10. Registration with Police authorities

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO/LO/PO in India shall have to register with the State Police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.

11. Application for additional offices and activities

i. Requests for establishing additional BOs / LOs may be submitted to the AD Category-I bank in a fresh FNC form. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.

1. If the number of offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s and it shall require prior approval of the Reserve Bank.
2. The applicant may identify one of its offices in India as the Nodal Office, which will coordinate the activities of all of its offices in India.
3. Whenever the existing BO/LO is shifting to another city in India, prior approval from the AD Category-I bank is required. However, no permission is required if the LO/BO is shifted to another place in the same city subject to the condition that the new address is intimated to the designated AD Category-I bank. Changes in the postal address may be intimated to the CO Cell, New Delhi by the AD Category-I bank at the earliest.

ii. Requests for undertaking activities in addition to what has been permitted initially by Reserve Bank of India/ AD Category-I bank may be submitted by the applicant to the Reserve Bank through the designated AD Category -I bank justifying the need.

12. Extension of fund and non-fund based facilities

As provided in Regulation 4.h. of the Notification, AD Category-I bank may, extend fund/non-fund based facilities to BOs/POs only.

13. Remittance of profit/surplus

1. BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the documents given in Regulation 4.i.I. of the Notification to the satisfaction of the AD Category-I bank through whom the remittance is effected.
2. AD Category – I bank can permit intermittent remittances by POs pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction, subject to the documentation laid down in Regulation 4.i.II. of the Notification.

14. Annual Activity Certificate by BO/LO/PO

i. The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the documents laid down in Regulation 4.l. of the Notification needs to be submitted by the following:

1. In case of a sole BO/ LO/PO, by the BO/LO/PO concerned;
2. In case of multiple BOs / LOs, a combined AAC in respect of all the offices in India by the nodal office of the BOs / LOs.

The LO/BO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi whereas the PO needs to submit the AAC only to the designated AD Category -I bank.

ii. The designated AD Category – I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon.

15. Closure of BO/LO/PO and remittance of winding up proceeds

1. Requests for closure of the BO / LO/ PO and for remittance of winding-up proceeds may be submitted to the designated AD Category – I bank by the BO/ LO/ PO or their nodal office, as the case may be. The application for winding up may be submitted along with the documents laid down in Regulation 4.m. of the Notification.
2. AD Category-I bank shall send a consolidated list (as per Annex) of all the BOs/LOs/ POs for which a UIN has been granted by RBI, excluding those of banks and insurance companies, closed by them during the month, by the fifth of the succeeding month, to the General Manager, Reserve Bank of India, CO Cell, New Delhi.

16. Guidance note for the AD Category-I bank

1. Once it establishes a place of business in India, a BO/LO/PO or any other place of business by whatever name called is required to register with the Registrar of Companies (ROCs) if such registration is required under the Companies Act, 2013.
2. The BOs / LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.
3. The existing PAN and bank accounts can be continued when an LO is permitted to upgrade into a BO.
4. A BO/LO/PO, even if present in multiple locations, is required to transact through the designated AD Category I bank who shall be responsible for due diligence, KYC norms etc., in respect of the BO/LO/PO concerned. POs can open bank accounts either in the place of their operations or in the place of their registration, as per their convenience.
5. BO/LO/PO can change their existing AD Category-I bank subject to both the AD banks giving consent in writing for the transfer and the transferring AD bank confirming submission of all AACs and absence of any adverse features in conducting the account by the BO/LO/PO.
6. Acquisition of property by BO/PO shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations.
7. As per section 6 (3) (h) of the Foreign Exchange Management Act, 1999, BOs/LOs/POs have general permission to carry out permitted/ incidental activities from leased property subject to lease period not exceeding five years.
8. AD Category-I bank can allow term deposit account for a period not exceeding 6 months in favour of a BO/LO/PO provided the bank is satisfied that the term deposit is out of temporary surplus funds and the BO/LO/PO furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.
9. In case a BO/LO has been established and continues to exist without approval of the Reserve Bank, it may approach its AD Category-I bank to regularise its office(s) under the extant instructions contained in the Notification and this circular even if permission of Reserve Bank was not required as per the regulations existing at the time of setting up of the office. Such cases may be brought to the notice of the Reserve Bank immediately for allotment of UIN. The foreign entities who may have established LO or BO with the permission from the Government of India in the pre-FEMA period shall also approach their AD Category–I bank with a copy of the said approval for allotment of a UIN by the Reserve Bank.
10. Change in the name of the existing LO/BO may be permitted by the AD Category-I bank only if the non-resident entity changes its name without change in ownership and if the application to this effect is received with the Board Resolution for change of name and documents/certificate from ROC India showing change of name, wherever applicable. The change in name of the BO/LO should be reported to FED, CO Cell, New Delhi. Where change in name is requested on account of acquisitions or mergers of foreign entities involving change in ownership, the acquired entity or new entity is required to apply afresh by closing the existing entity. Foreign entities should note that the approvals are given by the Reserve Bank/AD Category-I bank after detailed scrutiny as per laid down guidelines and FDI policy and hence the approvals given to one foreign entity is not transferrable to another foreign entity.
11. Change in the Top Management or CEO/MD/CMD etc. of the BO/LO does not require prior approval from the Reserve Bank/AD Category-I bank. However, AD Category-I bank should be intimated about the same.

17. Transfer of assets of BO/LO/PO

Proposals for transfer of assets may be considered by the AD Category-I bank only from BOs/LOs/POs who are adhering to the operational guidelines such as submission of AACs (up to the current financial year) at regular annual intervals; have obtained PAN from IT Authorities and have got registered with ROC under the Companies Act 2013, if necessary. Also,

1. Transfer of assets by way of sale to the JV/WoS shall be allowed by AD Category-I bank only when the non-resident entity intends to close their BO/LO/PO operations in India.
2. A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or written down value (WDV) and sale consideration to be obtained. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. The sale consideration should not be more than the book value in each case.
3. The assets should have been acquired by the BO/LO/PO from inward remittances or profit/surplus generated in case of BO/PO and no intangible assets such as good will, pre-operative expenses should be included. No revenue expenses such as lease hold improvements incurred by the BO/LO can be capitalised and transferred to JV/WOS.
4. AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets.
5. Credits to the bank accounts of BO/LO/PO on account of such transfer of assets will be treated as permissible credits.
6. Donation by BO/LO/PO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organisations may be permitted by the AD Category-I banks after satisfying themselves about the bonafides of the transaction.

18. The new regulations have been notified vide Notification No. FEMA 22(R)/2016-RB dated March 31, 2016 c.f. G.S.R. No. 384(E) dated March 31, 2016 and have come into force with effect from March 31, 2016. The Master Direction No. 10 of 2015-16 (Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities) and Master Direction No.18 of 2015-16 (Reporting under Foreign Exchange Management Act, 1999) are being updated accordingly to incorporate the above changes.

19. AD Category – I banks may bring the contents of this circular to the notice of their constituents/customers concerned.

20.The directions contained in this circular have been issued under Section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully

(Shekhar Bhatnagar)
Chief General Manager-in- charge

Annex

Name of the AD bank: ________________________________

RBI/FED/2015-16/6
FED Master Direction No.10/2015-16

January 1, 2016

To,

All Category – I Authorised Dealer banks and Authorised Banks

Madam / Dear Sir,

Master Direction – Establishment of Liaison/ Branch/ Project Offices in India by foreign entities

Establishment of Branch/ Liaison/ Project Offices in India is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 22/2000-RB dated May 3, 2000. These Regulations are amended from time to time to incorporate the changes in the regulatory framework and published through amendment notifications.

2. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed.

3. This Master Direction consolidates the existing instructions on the subject of “Establishment of Branch/ Liaison/ Project Offices in India by foreign entities” at one place. The list of underlying circulars/ notifications which form the basis of this Master Direction is furnished in the Appendix. Reporting instructions can be found in Master Direction on reporting (Master Direction No. 18 dated January 16, 2016)

4. It may be noted that, whenever necessary, Reserve Bank shall issue directions to Authorised Persons through A.P. (DIR Series) Circulars in regard to any change in the Regulations or the manner in which relative transactions are to be conducted by the Authorised Persons with their customers/ constituents. TheMaster Direction issued herewith shall be amended suitably simultaneously.

Yours faithfully,

(A.K. Pandey)
Chief General Manager

Master Direction – Establishment of Branch/Liaison/Project Offices in India by foreign entities

(A) General criteria – Liaison Office / Branch Office

A.1 A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a Liaison Office (LO) / Branch Office (BO) in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999. The applications from such entities in Form FNC (Annex-1) will be considered by Reserve Bank under two routes:

1. Reserve Bank Route — Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
2. Government Route — Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non – Government Organisations / Non – Profit Organisations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

A.2 The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities:

a. Track Record

• For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
• For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.

b. Net Worth

Net worth [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].

• For Branch Office — not less than USD 100,000 or its equivalent.
• For Liaison Office — not less than USD 50,000 or its equivalent

A.3 The application for establishing BO / LO in India should be forwarded by the foreign entity through a designated AD Category – I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, along with the prescribed documents including

1. English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration.
2. Latest Audited Balance Sheet of the applicant entity.

Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company as perAnnex-2, subject to the condition that the parent company satisfies the eligibility criteria as prescribed above.

The designated AD Category – I bank should exercise due diligence in respect of the applicant’s background, antecedents of the promoter, nature and location of activity, sources of funds, etc. and also ensure compliance with the KYC norms before forwarding the application together with their comments/ recommendations to the Reserve Bank.

The Branch / Liaison offices established with the Reserve Bank’s approval will be allotted a Unique Identification Number (UIN). The BOs / LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India and report the same in the Annual Activity Certificate (Annex 3).

The Reserve Bank or the Government of India, as the case may be, reserves the right to reject an application for non-fulfilment of any other condition/s not specifically referred above, fulfilment of which, in the opinion of the Reserve Bank / the Government of India, is necessary for grant of such permission or in the public interest. The Reserve Bank or the Government of India, as the case may be, also reserves the right to verify / examine the activities of the BO / LO of the foreign entities established in India and to withdraw the permission already granted, after due notice, if the circumstances so warrant or due to changes in the policy.

(B) Liaison Office

B.1 Permissible Activities for a Liaison Office

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. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank.

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.

B.2 Liaison Office of foreign insurance companies / banks

Foreign insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

Foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Regulation (DBR), RBI.

B.3 Extension of validity of the approval of Liaison Offices

The designated AD Category – I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank, if the applicant has complied with the following conditions and the application is otherwise in order.

• The LO should have submitted the Annual Activity Certificates for the previous years and
• The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval.

Such extension has to be granted, as expeditiously as possible, within a period of one month from the receipt of the request under intimation to the Regional Office concerned of the Reserve Bank and to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, quoting the reference number of the original approval letter and the UIN. AD banks shall also endorse a copy of each such renewal to the office of the DGIT (International Taxation).

The application for extension of the validity period of the LOs of banks and entities engaged in insurance business has to be directly submitted to the Department of Banking Regulation, Reserve Bank of India and Insurance Regulatory and Development Authority (IRDA), respectively as stipulated by them, as hitherto. Further, no extension would be considered for LOs of entities which are NBFCs and those engaged in construction and development sectors (excluding infrastructure development companies). Upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV) / Wholly Owned Subsidiary (WOS), in conformity with the extant Foreign Direct Investment policy.

The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and September 14, 2015, passed in the case of the Bar Council of India vs A.K. Balaji & Ors., has directed RBI not to grant any permission to any foreign law firm, on or after the date of the said interim order, for opening of LO in India. Hence, no foreign law firm shall be permitted to open any LO in India till further orders/notification in this regard. However, foreign law firms which have been granted permission prior to the date of interim order for opening LOs in India may be allowed to continue provided such permission is still in force. No fresh permissions/ renewal of permission shall be granted by RBI/AD banks respectively till the policy is reviewed based on, among others, final disposal of the matter by the Hon’ble Supreme Court.

(C) Branch Offices

C.1 Permissible Activities

a). Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India:

1. Export / Import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
5. Representing the parent company in India and acting as buying / selling agent in India.
6. Rendering services in information technology and development of software in India.
7. Rendering technical support to the products supplied by parent/group companies.
8. Foreign airline / shipping company.

Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.

b) Retail trading activities of any nature is not allowed for a Branch Office in India.

c) A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.

d) Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.

C.2 Branch Office in Special Economic Zones (SEZs)

(i) Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:

a. such units are functioning in those sectors where 100 per cent FDI is permitted;

b. such units comply with part XI of the Companies Act,1956 (Section 592 to 602);

c. such units function on a stand-alone basis.

(ii) In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the documents as mentioned under “Closure of Liaison / Branch Office” except the copy of the letter granting approval by the Reserve Bank.

C.3 Branches of foreign banks

Foreign banks do not require separate approval under FEMA, for opening branch office in India. Such banks are, however, required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Regulation, Reserve Bank.

(D) Application for undertaking additional activities or additional Branch / Liaison Offices

D.1 Requests for undertaking activities in addition to what has been permitted initially by the Reserve Bank may be submitted through the designated AD Category -I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, justifying the need with comments of the designated AD Category – I bank.

D.2 Requests for establishing additional BO / LOs may be submitted through fresh FNC form (Annex 1), duly signed by the authorized signatory of the foreign entity in the home country to the Reserve Bank of India as explained above. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.

• If the number of Offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s.
• The applicant may identify one of its Offices in India as the Nodal Office, which will coordinate the activities of all Offices in India.

(E) Closure of Branch/Liaison Offices

E.1 At the time of winding up of Branch/Liaison offices the company has to approach the designated AD Category – I bank with the following documents:

(a) Copy of the Reserve Bank’s permission/ approval from the sectoral regulator(s) for establishing the BO / LO.

(b) Auditor’s certificate- i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.

(c) Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

(d) A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the Office in India.

(e) Any other document/s, specified by the Reserve Bank while granting approval. The designated AD Category – I banks has to ensure that the BO / LOs had filed their respective Annual Activity Certificates with the Reserve Bank for the previous years, in respect of the existing Branch/Liaison Offices. Confirmation about the same can be obtained from the Central Office of the Reserve Bank in the case of BOs and from the Regional Office concerned in the case of LOs.

E.2 With reference to the application made by a BO/LO for making remittance of its winding up proceeds, the designated AD Category – I bank may permit the remittance subject to the directions issued by the Reserve Bank in this regard from time to time and payment of applicable taxes in India, if any.

E.3 Closure of such BO / LO has to be reported by the designated AD Category – I bank to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD Category – I bank may forward the application to the Reserve Bank, with their observations, for necessary action. All the documents relating to the BO / LO operations may be retained by the AD Category – I bank for verification by the internal auditors of the AD / inspecting officers of the Reserve Bank.

(F) Project Office

F.1 General permission

Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and

i. the project is funded directly by inward remittance from abroad; or

ii. the project is funded by a bilateral or multilateral International Financing Agency; or

iii. the project has been cleared by an appropriate authority; or

iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.

Setting up of Project Offices by foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether Project Office or otherwise.

F.2 Opening of Foreign Currency Account

AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

i. The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority concerned.

ii. The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.

iii. Each Project Office can open two Foreign Currency Accounts, usually one denominated in USD and other in home currency, provided both are maintained with the same AD category–I bank.

iv. The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/group company abroad or bilateral / multilateral international financing agency.

v. The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.

vi. The Foreign Currency accounts have to be closed at the completion of the Project.

F.3 Intermittent remittances by Project Offices in India

(i) AD Category – I bank can permit intermittent remittances by Project Offices pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction, subject to the following:

1. The Project Office submits an Auditors’ / Chartered Accountants’ Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.
2. An undertaking from the Project Office that the remittance will not, in any way, affect the completion of the Project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.

(ii) Inter-Project transfer of funds requires prior permission of the Regional Office concerned of the Reserve Bank under whose jurisdiction the Project Office is situated.

(G) Other general conditions applicable to Branch / Liaison / Project Offices of foreign entities in India

(i) Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.

(ii) All new entities setting up LO/BO/PO in India shall submit a report containing information, as per format provided in Annex-4 within five working days of the LO/BO/PO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO/PO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India.

(iii) Branch/Project Offices of a foreign entity are permitted to acquire immovable property by way of purchase for their own use and to carry out permitted/incidental activities. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Hong Kong, Macau, Nepal, Bhutan or China are not allowed to acquire immovable property in India for a Branch / Project Office without prior RBI approval.

(iv) All Branch / Project Offices including Liaison Offices, have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.

(v) Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.

(vi) Powers relating to transfer of assets of Liaison / Branch Office/Project Office have been delegated to AD Category-1 Banks subject to compliance with the following stipulations:

1. Such proposals will be considered only from LO/BOs who are adhering to the operational guidelines stipulated in AP DIR Circular No.23 & 24 of December 30, 2009 such as (i) submission of AACs (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation) and (ii) obtained PAN from IT Authorities and have got registered with ROC under Companies Act 1956, if necessary. Similarly, proposals from POs should conform to the guidelines issued in AP DIR Cir.No.44 dated May 17, 2005 with regard to initial reporting requirements (para.2.3) and submission of CA certified annual report indicating project status (para.2.4).
2. A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV value and sale consideration to be obtained. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. The sale consideration should not be more than the book value in each case.
3. The assets should have been acquired by the LO/BO/PO from inward remittances and no intangible assets such as good will, pre-operative expenses should be included. No revenue expenses such as lease hold improvements incurred by LO/BOs can be capitalised and transferred to JV/WOS.
4. AD bank to ensure payment of all applicable taxes while permitting transfer of assets.
5. Transfer of assets to be allowed by AD banks only when the foreign entity intends to close their LO/BO/PO operations in India.
6. Credits to the bank accounts of LO/BO/PO on account of such transfer of assets will be treated as permissible credits.

(vi) Branch Offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the Authorised Dealer through whom the remittance is effected

a. A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year

b. A Chartered Accountant’s certificate certifying

1. the manner of arriving at the remittable profit
2. that the entire remittable profit has been earned by undertaking the permitted activities
3. that the profit does not include any profit on revaluation of the assets of the branch.

(vii) Authorised Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.

(viii) Regularisation of LO / BO of foreign entities established during pre-FEMA period

Under the provisions of FEMA 1999 foreign entities are permitted to establish a branch or liaison office in India with permission of the Reserve Bank of India. Liaison / Branch Offices established in pre FEMA period without approval of Reserve Bank of India may approach the Reserve Bank through their ADs to regularise their offices under FEMA 1999. The foreign entities who may have established LO or BO with the permission from the GoI shall also approach RBI with a copy of the said approval for allotment of a Unique Identification Number by RBI. All such applications should be submitted to the General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office Cell, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001 in Form FNC and should be routed through the AD Category-I bank where the account of such LO/BO is maintained.

(H) Reporting by AD banks:

AD Category-I banks may refer to our separate Master Direction of Reporting (Master Direction No. 18 dated January 16, 2016) available in RBI websitewww.rbi.org.in for all the reporting requirements with reference to Liaison offices/ Branch offices/ Project offices in India.

Annex 1

Form FNC

Application for establishment of Branch/Liaison Office in India

A. General instructions to applicants:

The application form shall be completed and submitted to the AD Category – I bank designated by the applicant for onward transmission to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India along with the documents mentioned in item (viii) of the Declaration.

DECLARATION

We hereby declare that:

i) The particulars given above are true and correct to the best of our knowledge and belief.

ii) Our activities in India would be confined to the activities indicated in column 4(iii) (a) above.

iii) If we shift the office to another place within the city, we shall intimate the designated AD Category – I bank and the Reserve Bank. In the event of shifting the Office to any other city in India, prior approval of the Reserve Bank will be obtained.

iv) We will abide by the terms and conditions that may be stipulated by the Government of India / Reserve Bank / designated AD Category – I bank from time to time.

v) We, hereby commit that we are agreeable to a report / opinion sought from our bankers abroad by the Government of India /Reserve Bank.

vi) We understand that the approval, if granted, is from FEMA angle only. Any other approvals / clearances, statutory or otherwise, required from any other Government Authority/ Department/ Ministry will be obtained before commencement of operations in India.

vii) We have no objection to the Reserve Bank placing the details of approval in public domain.

viii) We enclose the following documents:

1. Copy of the Certificate of Incorporation / Registration attested by the Notary Public in the country of registration
[If the original Certificate is in a language other than in English, the same may be translated into English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in the home country].

2. Latest Audited Balance sheet of the applicant company.
[If the applicants’ home country laws/regulations do not insist on auditing of accounts, an Account Statement certified by a Certified Public Accountant (CPA) or any Registered Accounts Practitioner by any name, clearly showing the net worth may be submitted]

3. Bankers’ Report from the applicant’s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank.

(Signature of Authorised Official
of the Applicant Company)

Name:
Designation:

Place:
Date:

Annex 2

FORMAT OF THE LETTER OF COMFORT

The General Manager,
Foreign Exchange Department
Central Office Cell
Reserve Bank of India
New Delhi Regional Office
6, Parliament Street
New Delhi- 110 001.

Dear Sir,

Sub: Application for establishment of Branch / Liaison Office in India by our subsidiary / group company, M/s_________________________

You may kindly refer to the application made by our subsidiary / group company, M/s_____________________________to your office for establishing Branch / Liaison Office in India.

2. In this connection, we, ______________________(the parent company) undertake to provide the necessary financial support for our subsidiary / group company’s operations as a Branch / Liaison Office in India. Any liability that may arise due to the functioning of the Branch/Liaison Office in India will be met by us (the parent company), in case of inability on part of the Branch/Liaison Office to do so.

3. We are also enclosing the financial background of our company in the form of our latest Audited Balance Sheet / Account Statement certified by a Certified Public Accountant.

Yours faithfully,

(                                  )
Authorised Representative of the parent company

Annex 3

Annual Activity Certificate

(To be submitted as on March 31,…….on or before April 30,………).

To whomsoever it May Concern

This is to certify and confirm that during the period from __________________ to ________________, the Branch/Liaison Office/s with PAN No. ———————- of M/s__________________ (UIN- ) has/ have undertaken only those activities that have been specifically permitted by the Reserve Bank vide its approval letter/s No/s. ______________________________dated ______________and has/have complied with the terms and conditions specified in the above mentioned letter/s.

_______________________________
(Signature of the Auditor/s)

(Name of the Chartered Accountant)
ICAI Membership No.:
Address:

Place:
Date

Appendix

LIST OF NOTIFICATIONS/CIRCULARS CONSOLIDATED IN THIS MASTER DIRECTION

http://www.rbi.org.in/scripts/Fema.aspx