In the instant case, the Income Tax Appellate Tribunal ('ITAT') held that interest paid by a Permanent Establishment ('PE') to its head office would not be liable to tax on the hands of the head office, despite the fact that such interest expenditure was undisputedly, an admissible expenditure in the hands of the PE. 

In the facts of the instant case, the assessee is a foreign company carrying on the business of banking in India through its branch offices. The Indian branch office paid certain interest to its head office and claimed the deduction of such expense in accordance with the specific provisions of Article 7(3) of the Double Taxation Avoidance Agreement between India and France ('DTAA'), in terms of which, interest is an admissible expenditure in case of persons engaged in the banking business.

Such, income was not offered to tax in the hands of the head office, on the premise that the head office and the PE is one single entity, and as such, was only the income of the PE. However, the revenue authorities argued that the said amount of interest received by the head office ought to have been chargeable to tax in the hands of the assessee foreign company under Article 12 of the DTAA.

The Hon’ble Tribunal held that the fiction of hypothetical independence of a PE vis-a-vis its head office is confined to the computation of profits attributable to the permanent establishment and, does not go beyond that, such as, for the purpose of computing profits of the head office.

Furthermore, the Hon’ble Tribunal did also note that such amount cannot be taxable under Article 12 but rather under Article 7, considering that a PE does exist in the hands of the assessee foreign company. Furthermore, the Tribunal held  that such interest amount cannot be said to be attributable to the PE as the profits attributable to the PE have already been taxed.

In view of the aforesaid, the Hon’ble Tribunal held that incidence of tax does not arise on the interest received by the head office, in the hands of the assessee foreign company.

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

Recently the High Court of Delhi held that consideration in respect of mobilisation/ demobilisation charges cannot be characterized as ‘Royalty’. The Hon’ble Court also held that consideration for installation of machinery cannot be characterized as Fee for Included Services ('FIS') under the DTAA between India and Singapore ('Indo-Singapore DTAA'), as the same does not fulfil the make available criteria.

The assessee, a Singapore Company, entered into a residual offshore construction contract with Indian Oil Corporation Ltd. ('IOCL'), to set up a facility to enable unloading of Crude Oil from carriers, which involved installation, mobilisation and demobilisation activities. The mobilisation and demobilisation activities did necessitate use of certain equipment, which was under the control of the assessee.

On an application by the assessee for determining the incidence of tax on such consideration, the Authority for Advance Ruling ('AAR') ruled that the mobilisation / demobilisation charges shall be regarded as royalty under Article 12 of the Indo-Singapore DTAA, as the activities of mobilization/ demobilization do involve ‘use of equipment’.

The AAR also ruled that the installation charges ought to be regarded as FTS under Article 12 of the India-Singapore DTAA, as the said activity is ancillary and subsidiary to the ‘use of equipment’, which hitherto, was characterized as ‘royalty’.

The matter travelled to the High Court of Delhi, which, inter alia, held that consideration may be characterised as one for the ‘use of the equipment’ if the said equipment is used by IOCL. The High Court observed that IOCL did not have dominion or control over the equipment and rather, at all times the course of the execution of the contract, the control over the equipment was to remain with the assessee.

Insofar as installation charges were concerned, the Hon’ble High Court held that the same cannot be regarded as FTS on two counts. Firstly, the installation services cannot be said to be incidental to the mobilisation/demobilisation activity, as the installation, erection of equipment and mobilisation/demobilisation thereof, constituted an integral part of the contract.

Moreover, considering that the payment of mobilisation/demobilisation cannot itself, be regarded as royalty, the question whether such installation activities are ancillary to such mobilization / demobilization activities, does not arise.

Secondly, in terms of the contract with IOCL, the services of construction and installation of the facility does not involve any transfer of any technology, skill, experience or know-how, to enable IOCL to undertake such activities on its own. As such, consideration thereof cannot be regarded as FIS in the hands of the assessee;

The High Court also held that the services rendered by it to IOCL did fall within the exclusion carved out in Explanation 2 to Section 9(1)(vii) of the Act, i.e. "consideration for any construction, assembly, mining or like project''. Therefore, the said services could not be characterized as FTS in terms of the provisions of the Act.

In view of the aforesaid, the Hon’ble High Court concluded that the incidence of tax does not arise in respect of consideration for mobilization/ demobilization activities as well as installation activities.  

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

In a recent decision, the Hon’ble Tribunal, Delhi Bench held that in a case of a foreign company engaged in the supply of telecom equipment and mobile handsets, wherein, the Indian subsidiary carried almost entire sales, marketing and after sale functions in India, an amount of 35% of the profits shall be attributable to such dependent agent PE (Indian subsidiary) in India.

The assessee company is a tax resident of China and is engaged in the business of providing telecom equipment. The assessee supplied such telecom equipments and mobile handsets, including software component, to Indian Telecom Operators and its customers in India.

The assessee, inter alia, raised a ground that incidence of PE in India does not arise and thus, business profits earned from the supply of equipment shall not be eligible to taxes in India. However, the revenue authorities argued that in the facts of the instant case, incidence of a fixed place, installation and dependent PE does arise in India.

Also, based on the level of activities for different assessment years, the revenue arrived at a rate of attribution of 20% of the profits for the AY 2005-06 {which was enhanced to 2.5% of the sales by the CIT(A)} and 45% of the profits for the AY 2009-10.

During the course of the appellate proceedings before the Hon’ble Tribunal, the assessee decided not to press the ground on the aspect of incidence of PE in India. Hence, the Tribunal proceeded to ascertain the amount of profits attributable to the PE in India.

The Hon’ble Tribunal, while noting the findings of the Assessing Officer (‘AO’), observed that the Indian subsidiary was engaged in preparatory work, negotiation of the contract and pricing as well as answering specific queries of the customers. Therefore, it was held that the level of operations carried out by the tax payer through its PE in India was considerable enough to conclude that almost entire sales function including marketing, banking and after sales were carried out by the PE in India.

The Hon’ble Tribunal, while relying on the decision of the Apex Court in the case of CIT vs. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472, held that income attributable to sales activities should be less than manufacturing activities. Considering that the manufacturing activities were undertaken by the assessee in China, the Tribunal held that the attribution rate of 2.5% of the sales, as arrived by the CIT(A) for the AY 2005-06 was excessive. 

Thereafter, the Hon’ble Bench held that an attribution rate of 35% of net global profits (as per published accounts) out of transactions of the assessee with India, shall meet the ends of justice in light of the facts of the instant case. While arriving at such attribution rate, the Hon’ble Tribunal placed reliance on the decisions of Rolls Royce PLC vs. DIT [2011] 339 ITR 147 (Del) and Nortel Networks India International Inc. vs. DIT [2014] 65 SOT 158 (Del-Trib).

 (Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

In the instant case, the assessee, a joint venture company, paid 4 percent to its parent company as service charges for the management and administration services, including high level strategic planning and day to day operations, rendered by the latter. The assessee, however, was unable to file evidence with regard to such services rendered by the parent company. Accordingly, the Transfer Pricing Officer ('TPO') disallowed payment for such services. The Dispute Resolution Panel ('DRP') upheld the disallowance made by the TPO and further observed that even as per the OECD guidelines shareholders activities do not require any compensation from the assessee/ subsidiary company. The Tribunal agreed with the reasoning of DRP and upheld the disallowance of services charges in the absence of any material to indicate that services were actually rendered by the parent company.

(Contributed by: Ms. Shweta Kapoor)

In the instant case, the assessee, primarily engaged in the business of providing telecom services and related support services to its group companies, obtained External Commercial Borrowing ('ECB') from its overseas associated enterprise ('AE') in Indian currency. As per the agreement between the assessee and its AE, interest on ECB was payable at the rate of INR LIBOR (calculated at the closing 6 months GPB LIBOR rate plus the market premium to the INR) plus 50 basis points per annum, which for the period under consideration was computed at 9.724%. Such interest rate was benchmarked against the prevailing Prime Lending Rate ('PLR') of RBI, India, which ranged between 12.75% and 13.25%.

The TPO, however, opined that the interest rate charged for ECB should have been benchmarked against rate in the market where the loan has been extended/ given. Accordingly, TPO computed the comparable interest rate at 8.044%, by considering GPB LIBOR rate plus mark of 200 basis points adjustment, and made additions to the income of the assessee. The order of TPO was upheld by DRP.   

The ITAT relied on the decision of Hon’ble Delhi High Court in the case of Cotton Naturals (I) Pvt. Ltd. (2015) 55 Taxmann.com 523, wherein it was held that the interest rate should be the market determined interest rate applicable to the currency in which the loan has to be repaid. Accordingly, the transfer pricing adjustment made by the TPO was deleted and it was held that for benchmarking the interest rate paid by assessee for Indian currency loan, prevailing PLR in India was to be applied as comparable.

(Contributed by: Ms. Shweta Kapoor)

In the instant case, amongst other issues, issue regarding adjustment for "market driven factors" under Transaction Net Margin Method ('TNMM') came before the Tribunal. On the facts, the assessee benchmarked its licence manufacturing segment by using TNMM. The TPO rejected one of the comparable chosen by the assessee and as a consequence the margin earned under this segment was considered to be not at arm's length. Apart from arguing in favour of the comparable so rejected, the assessee also argued that the reason for earning low margin in the year under consideration was mainly on account of "market driven factors" which in this case was the severe competition faced in the sale of its premium products as against its generic substitute in the market. The TPO, however, rejected the plea of the assessee stating that under TNMM the operating profit margins of comparable companies are compared, wherein market driven factors are included, and a separate adjustment cannot be considered on its account. The DRP confirmed the order of TPO. 

Before the ITAT, the assessee submitted that it had earned huge margins in this segment in the preceding as well as subsequent years. It was only in this year that the margin of the assessee was low, because of reduction in prices of its premium product. The ITAT observed that due to unanticipated competition, the assessee had to reduce the price of its premium product in order to sustain its market share. The ITAT relied on the OECD guidelines and held that business strategies, market penetration, increasing or saving market share are relevant and material factors determining profit. As such, reasonable and accurate adjustment for such factors should be made to the profit. Accordingly, the ITAT held that in this case adjustment for price reduction should be made to the profit of the assessee subject to the verification of facts submitted by the assessee.

(Contributed by: Ms. Shweta Kapoor)

In the instant case, the assessee, one of the leading producers of animation visual effects, game art and entertainment content, sold Intellectual Property Right ('IPR') at development stage of the Jungle Book Animation to its AE in Ireland. The sale price of IPR was determined as per the valuation conducted by two independent valuers and gain from such sale was offered to capital gain tax. The TPO replaced the projections in the valuation report with the actual revenues earned by the AE, thereby making an adjustment to the sale price of IPR. The ITAT held that valuation method adopted for determining the future years' value cannot be replaced with actual revenues. Accordingly, the addition made by the TPO was deleted.

Apart from the above, the TPO has also applied Profit Split method to attribute 80% profits earned by the AE from use of aforesaid IPR and made upward adjustment to the income of the assessee. The ITAT held that once the TPO has accepted the transaction of sale of IPR, there ends the international transactions and the international transactions with the third parties entered by the AE after completion of sale process are not international transactions as per section 92B of the Act. Accordingly, the ITAT deleted the aforesaid adjustment.

(Contributed by: Ms. Shweta Kapoor)

The Central Board of Direct Taxes (CBDT) had issued draft Foreign Tax Credit ('FTC') Rules seeking comments of stakeholders and general public, for granting relief or deduction of Income-tax under section 90, 90A and 91 in respect of FTC. Based on the comments as received, final rule has been notified vide Notification No. 54/2016 dated June 27, 2016.

The procedure and guidelines in respect of manner of granting such relief/credit for taxes paid in foreign country as stated in Rule 128 as notified, are majorly in accordance with the draft rules. The important highlights of the notified rule (vis-à-vis draft rule) is as below:

1. FTC shall be allowed in the year in which the income corresponding to such foreign tax has been offered to tax or assessed to tax in India.  However, the  present rule also adds that if such income is offered to tax in more than one year, FTC shall be allowed across those years in the same proportion in which the income is offered to tax;

2. FTC shall be computed separately for each source of income arising from a particular country or specified territory;

3. FTC shall be available only against the amount of tax, surcharge and cess payable under the Act but not in respect of interest, fee or penalty;

4. FTC shall be lower of tax payable under the Act and the foreign tax paid.  However, the present rule states that where foreign tax paid exceeds the amount of tax payable under the provisions of the DTAA, such excess shall be ignored;

5. Where the tax is payable under the provisions of Section 115JB or 115JC i.e. MAT, the FTC shall be allowed against such tax also.  However, the credit exceeding the amount of tax payable under the normal provisions shall be ignored for the purpose of computing MAT credit;

6. Credit shall not be available in respect of the foreign tax which is disputed in any manner by the assessee.  However, the notified rule provides that such credit shall be allowed within 6 months from the end of the month in which the dispute is finally settled, subject to furnishing of evidence to this regard alongwith an undertaking that no refund in respect of such tax paid has been claimed;

7. FTC shall be allowed on furnishing of the following documents;-

a)  Statement of income giving detail of each source of income arising from a particular country or specified territory in Form 67;

b)  Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee from the foreign tax authorities; or from the person responsible for deduction of such tax; or signed by the assessee.

Where the statement signed by the assessee is furnished, it shall be valid only if it is accompanied by:

a) acknowledgment of payment of tax (bank counter foil, challan etc.

b) proof of deduction where the tax has been deducted.

Therefore, the requirement as proposed in the draft rule for obtaining Certificate from the foreign tax authorities (specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee) has been done away with.

The Central Board of Direct Taxes ('CBDT') has recently introduced 'Rule 37BC' under the Income-tax Rules, 1962 ('Rules') vide its notification no. 53/2016 dated 24 June, 2016. The said Rule has been framed in pursuance to the amendment under Section 206AA of the Act, enacted by the Finance Act, 2016.

In terms of the erstwhile provisions of Section 206AA, a higher rate of 20% was stipulated for tax deduction at source, in cases of non-availability of PAN of the payee. Section 206AA has been amended by the Finance Act, 2016 to provide that the higher withholding tax rate shall not be applicable if prescribed details of the payee are available at the time of tax deduction, despite the non-availability of PAN.
 
The requisite details have now been prescribed under the newly inserted Rule 37BC of the Rules. The same have been highlighted hereunder:

• Name of the deductee;
• E-mail ID and Contact Number of the deductee;
• Address in India or in the country of residence of the deductee;
• Tax Residency Certificate;
• Tax Identification Number or any other Unique Identification Number issued by the Government of the country of residence of the deductee.

It may be mentioned that the aforesaid relaxation is applicable only in case the payment to the non-resident is of the nature of interest, royalties, fee for technical services or transfer of capital asset(s).
 
The aforesaid rationalized provisions shall bring relief to certain foreign tax payers and shall facilitate in reducing the burden of compliance upon such tax payers. Also, in terms of the aforesaid notification, Rule 37BC shall be effective from June 24, 2016.

 (Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

The Central Board of Direct Taxes has notified the Rule 11UB, 11UC and 114DB of the Income-tax Rules, 1962 ('Rules'), for the purpose of determination of Fair Market Value ('FMV') and computation of attributable income, in relation to the indirect transfer provisions envisaged under Section 9(1)(i) of the Act.

The provisions of Section 9(1)(i) were earlier amended by the Finance Act, 2015, wherein, it was, inter alia, clarified that a foreign company or entity derives its value substantially from assets located in India, if the following conditions are fulfilled:

(a) Value of Indian assets exceeds INR100 million; and
(b) At least 50% of the ‘FMV’ of the total assets of the foreign entity comprise of assets located in India.

The above-mentioned Rules have been notified in furtherance of the draft rules, which were earlier issued by the CBDT for public consultation.

The key provisions of the aforesaid Rules have been highlighted hereunder:

• Rule 11UB prescribes the method for determination of FMV of the Indian assets in different scenarios, i.e. where such asset is a share of a listed Indian Company, share of an unlisted Indian Company or an interest in a partnership firm (including a Limited Liability Company).
• The Rules do also prescribe the valuation methodology for determining the FMV of the assets of the foreign company, whose shares are transferred;
• Rule 11UC primarily deals with computation of income attributable to assets located in India, for the purpose of ascertaining the amounts taxable under the aforesaid provisions. Such computation of income must be certified by an accountant in Form 3CT.
• Furthermore, to facilitate compliance with the aforesaid Rules, the new Rule 114DB prescribes certain reporting and documentation requirements, which ought to be furnished in Form 49D electronically, within ninety days from the end of the financial year in which, the transfer took place.

The noteworthy modifications made in the final rules vis-à-vis the draft rules have been highlighted below:

• Determination of FMV of an interest in a Partnership Firm, Limited Liability Partnership and Association of Persons;
• Inclusion of assets/ business operations located outside India for the purpose of FMV;
• Consideration of interim balance sheet in case the final balance sheet is not available on the specified date.

The aforesaid rules shall be effective from the date of their publication in the Official Gazette, i.e. June 28, 2016.

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

Rule 10U of the Rules, dealing with the applicability of the provisions of General Anti Avoidance Rule ('GAAR') has recently been amended vide notification No. 49/2016 dated June 22, 2016, with a view to rationalise grandfathering provisions related to GAAR.

In terms of the amended Rule 10U(2)(d), income in respect of transfer of investments, which are made prior to April 1, 2017, shall be excluded from the ambit of GAAR. The erstwhile clause (d) had earlier prescribed August 30, 2010 as the cut-off date in this regard.

Furthermore, in terms of the erstwhile sub-rule (2) of Rule 10U, GAAR provisions were applicable to tax benefits obtained on or after April 1, 2015 from ‘any arrangement’, irrespective of the date on which, such arrangement had been entered into. The aforesaid cut-off date has now been postponed to April 1, 2017 by virtue of this amendment.

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

Section 14A deals with disallowability of expenditure incurred in relation to income which does not form part of the total taxable income computed as per the Income-tax Act, 1961 ('the Act').

Rule 8D of the Income-tax Rules, 1962 ('Rules'), provides for the mechanism to determine the quantum of disallowance in cases where Assessing Officer is not satisfied with the claim of the tax payer regarding such disallowance. This Rule has been subject matter of dispute in many cases.

The Finance Minister in his budget speech of 2016 had proposed to rationalize the formula in rule 8D to diminish the disputes with respect to computation of such disallowance.

Central Board of Direct Taxes ('CBDT') has now amended rule 8D vide notification no. 43/2016 dated 2nd June, 2016 and the same will come into effect from the date of its publication in official gazette.

The existing sub rule (2) and (3) of rule 8D have been replaced by new sub rule (2).

A brief comparison of the existing rule 8D and the newly notified rule 8D is as under:

(Contributed by: Ms. Ritu Gyamlani/ Ms. Sakshi Lakhotia)

Prior to 1st April, 1989, it was the responsibility of the assessee to establish that the debt advanced by it has become irrecoverable, in order to claim deduction of bad debts.

However, with effect from 1st April, 1989, the provisions were amended to provide that bad debts shall be allowed as deduction in the year in which such debt was written off as irrecoverable in the books of accounts of the assessee, subject to conditions prescribed in section 36(2) of the Act.

Despite the amendment as well as the fact that the issue is well settled by Supreme Court’s decision in the case of TRF Ltd (CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.02.2010), wherein it was clearly stated that for allowability of bad debt it was sufficient condition if the bad debt was written off as irrecoverable in the books of the assessee, the issue regarding establishing the recoverability of bad debts has been disputed by the Tax Authorities time and again.

Thus, with a view to put an end to the litigation on the above issue, CBDT has issued a Circular No 12/ 2016, clarifying that the legislative intention behind the amendment made in section 36(1)(vii) of the Act was to remove the requirement for the assessee to establish that the debt has in fact become irrecoverable.

Therefore, claims for bad debts shall be admissible if the same are written off as irrecoverable in books of accounts subject to conditions satisfied u/s 36(2) of the Act.

 (Contributed by Ms. Ritu Gyamlani/ Ms. Sakshi Lakhotia)

In terms of Notifications No.9/2016-ST and No.18/2016-ST both dated 1st March, 2016, services rendered by Senior Advocates to an individual advocates or a firm of advocates become taxable with effect from 1st April, 2016, and the Senior Advocates were liable to pay the service tax under forward charge basis. In other words, they had to be registered and comply with service tax regulations and pay the service tax, even though they may collect the same from service receivers.

The above provision led to agitation from Senior Advocates on grounds of discrimination. The matter was carried to various High Courts. High Courts of Delhi, Gujarat and Bombay stayed the above levy, as an interim measure.

At this stage, the Govt. Has announced certain amendments relating to the levy of service tax on the services rendered by Senior Advocates. These are contained in Notification No. 32/2016-ST, 33/2016-ST and 34/2016-ST all dated 6th June, 2016. All these notifications are applicable from 6th June, 2016.

In terms of the above Notifications, the following position emerges in respect of levy of service on the services rendered by Senior Advocates from 6th June, 2016 onwards:

(1) Services rendered by Senior Advocates to any person other than a business entity are exempted;

(2) a business entity with a turnover up to Rupees Ten Lakhs in the preceding financial year are also exempted;

(3) a business entity with turnover of Rupees Ten Lakhs or more in the preceding financial year shall be taxable. However, out of this, representational services shall be taxable under reverse charge mechanism and tax shall be payable by the recipient of services. In respect of other services, the service tax shall be payable by the Senior Advocates under forward charge, though they may collect the same from recipient of services.

Krishi Kalyan Cess ('KKC') was brought into force with effect from 1st June, 2016.

 A doubt has been raised whether KKC will be applicable in respect of services in respect of which invoices were issued on or before 31st May, 2016 but payment has not been received on or before 31st May, 2016.

Recently, the Govt. Of India, has issued a Notification clarifying that in respect of such cases as referred to above, KKC shall not be leviable, provided provision of service has been completed on or before 31st May, 2016.

The above clarification has set at rest the doubts which arose earlier in regard to incidence of KKC in such cases.

A. (1) In a recent decision the Hon'ble High Court of Delhi held that no Service Tax under Section 65(105)(zzzh) of the Finance Act can be levied on Composite Contract as there is no machinery provision for ascertaining the service element involved in the composite contract.

In the other words, where a buyer enters into a Composite Contract with a builder/ developer, no service tax is payable, pursuant to above judgement of the Delhi High Court.

(2) In terms of the above judgment, the Explanation under Clause 65(105) (zzzh) has also been set aside.

      Writ Petition (C) 2235/2011 & 2971/2011-
      [Suresh Kumar Bansal
      vs.
      Union of India & Anuj Goel & Ors
      vs.
      Union of India
      decided on 3rd June, 2016]

B. Rule 5A(2) of the Service Tax Rules, 1994:

The Rule which was in force prior to 5.12.2014 was struck down by the Delhi High Court, as it was over-reached the statutory provisions, in respect of the demand for production of documents from an assessee made by service tax authorities or the Controller and Auditor General of India.

The above decision was stayed by the Supreme Court on a Special Leave Petition filed by the Govt. against the said decision of the Delhi High Court.

In the meantime, the Govt. amended Section 94 of the Finance Act, 1994, by incorporating the following provision:

The Central Govt. may make rules, which may, inter alia, provide for imposition, on person liable to pay service tax and the manner in which such records shall be verified.

On the strength of the above amendment, the Govt. issued a Circular dated 10th December, 2014 clarifying that in view of the above amendment, Service Tax Department could proceed with conducting audit as before. It was stated that the expression "verified" used in Section 94(2)(k) was of wide import and would include in its scope, such audits.

The amended Rule 5A(2) was again challenged in a Writ Petition in Delhi High Court.

The Court declared even this amended Rule 5A(2) as ultra vires the Finance Act, 1994 and has, therefore, the amended Rule 5A(2) has been struck down.

While reaching the decision, the High Court observed as under:

"There is a distinction between auditing the accounts of an Assessee and verifying the records of an Assessee. Audit is a special function which has to be carried out by duly qualified persons like a Cost Accountant or a CA. It cannot possibly be undertaken by any officer of the Service Tax Department".

[W.P (C) 5192/2015-Megal  Cabs Pvt. Ltd vs. Union of India-decided by Delhi High Court on 3rd June, 2016]

(Contributed by: Mr. N.V. Raman/ Mr. Shekhar Bhardwaj)

(A) Foreign Currency Accounts for Indian Startups:

1. Reserve Bank of India, vide its notification no. FEMA 10(R)/2015-RB dated January 21, 2016, has notified the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015 in supersession to the  earlier notified Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2000. These Regulations contain more or less the same substantive provisions as in the 2000 Regulations.
2. Further RBI, vide its AP (DIR Series) Circular No. 51 dated February 11, 2016 has issued certain clarifications with regard to start ups accepting payment on behalf of overseas subsidiaries.
3. Accordingly, in line with the Government of India’s start up initiative, the Indian Startups, having an overseas subsidiary are now permitted to open a foreign currency account with a bank outside India for the purpose of crediting to that account the foreign exchange earnings out of exports/sales made by the said startup and/or the receivables, arising out of exports/sales of its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, are required to be repatriated to India within the period prescribed for realization of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12,2016 as amended from time to time.
4. In addition, payments received in foreign exchange by an Indian startup arising out of sales/export made by the startup or its overseas subsidiaries will be a permissible credit to the Exchange Earners Foreign Currency (EEFC) account maintained in India by the startup.
5. In our view, how such a common account both in India and abroad as is referred to in Paras 1.3 and 1.4 above, will be operated by one entity has to be seen.

(B) Foreign Currency Accounts for Insurance Companies registered with the Insurance Regulatory and Develpment Authority of India ('IRDA'):

1. The existing facility of opening foreign currency account outside India, available to the Life Insurance Corporation of India or the General Insurance Corporation of India and their subsidiaries for the purpose of meeting the expenditure incidental to the insurance business carried on by them has now been liberalized and extended to any insurance company registered with IRDA. Accordingly, any insurance/ reinsurance company registered with IRDA may now open a foreign currency account with a bank outside India to carry out insurance/ reinsurance business.

[Source: Notification No. FEMA 10 (R)/ (1)/2016-RB dated June 1, 2016]

In terms of the existing provisions for Non-Banking Finance Companies, all NBFCs are required to submit a certificate from their Statutory Auditors every year to the effect that they continue to engage in the business of NBFI requiring it to hold a Certificate of Registration ('CoR') under Section 45-IA of the RBI Act.  With a view to ensure consistency in the manner in which the information is received from the Auditors, a uniform format has now been introduced for obtaining the Statutory Auditor Certificate ('SAC').

The above position has come into effect from June 23, 2016.

[Source: DNBS (PPD) CC. No./04/66.14.001/2015-16 dated June 23, 2016]

(Contributed by: Ms. Ruchi Sanghi)

The Union Government radically liberalized the FDI regime on June 20, 2016, with the objective of providing major impetus to employment and job creation in India. This was the second major set of reforms after the changes were announced in November 2015.  Post these changes, most sectors shall be able to receive Foreign Direct Investment under the automatic approval route, except a few sectors on a negative list. As a result, India is now the most open economy in the world for FDI and has been rated as Number 1 FDI Investment Destination by several International Agencies. 

Recent changes introduced seek to further simplify the regulations governing FDI in the country and make India an even more attractive destination for foreign investors. The amendments include increase in sectoral caps, bringing more activities under automatic route and easing of conditionalities for foreign investment. The details of the amendments along with their implications are highlighted below:

Further, for establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, it has been decided that approval of Reserve Bank of India or separate security clearance would no longer be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.

As on date, FDI continues to be prohibited in atomic energy, lottery, gambling, real estate and Real Estate Investments Trusts ('REIT') and Railway operations.

This liberalization and simplification of the FDI policy is expected to facilitate the ease of doing business in the country is expected to seal India’s position as the most attractive FDI destination in the world &  lead to even higher levels of FDI inflows into the country.

(Contributed by: Mr. N.V. Raman/ Mr. Dipankar Vig)