ESTABLISHMENT OF BRANCH OFFICE IN INDIA

By | August 14, 2015

 BRANCH OFFICE IN INDIA

ESTABLISHMENT OF BRANCH OR OFFICE IN INDIA

 1 Background

Provisions to prohibit, restrict and regulate establishment in India of a branch or office or other place of business by a person resident outside India are contained in Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000.

Instructions are consolidated in RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012.

Definitions of related words are as follows –

Foreign company – ‘Foreign company’ means a body corporate incorporated outside India, and includes a firm or other association of individuals.

Branch – ‘Branch’ shall have the meaning assigned to it in section 2(9) of the Companies Act, 1956. – – As per section 2(9) of Companies Act, ‘branch office’ means (a) any establishment described as a branch by the company or (b) any establishment carrying on either the same or substantially the same activities as that carried on by the head office of the company or (c) any establishment engaged in any production, processing or manufacture. However, it will not include an establishment specified as ‘not a branch’ by Central Government by issuing order u/s 8 of Companies Act.- Thus, the ‘branch’ may be a trading, processing or manufacturing unit. However, it can carry out only those activities which are permitted by RBI.

Liaison office – ‘Liaison Office’ means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

Project office – ‘Project Office’ means a place of business to represent the interests of the foreign company executing a project in India but excludes a Liaison Office.

Site office – ‘Site Office’ means a sub-office of the Project Office established at the site of a project but does not include a Liaison Office.

1.1 Branch office or liaison office in India only with approval of RBI

No person resident outside India shall, without prior approval of the Reserve Bank, establish in India a branch or a liaison office or any other place of business by whatever name called. However, no approval is be necessary for a banking company, if such company has obtained necessary approval under the provisions of the Banking Regulation Act, 1949 [regulation 3 of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000].

Setting up liaison office (also known as Representative Office) will also require RBI approval, even if it does not undertake business activity in India.

A citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau cannot establish in India a branch or a liaison office or a project office or any other place of business by whatever name called without permission of RBI [Hong Kong and Macau added w.e.f. 12-11-2013] – RBI circular No. 93 dated 15-1-2014.

A person resident outside India desiring to establish a branch or liaison office in India shall apply to the Reserve Bank, through authorised dealer, in form FNC. – Amendment made on 19-1-2011 but with retrospective effect from 1-2-2010.

The Reserve Bank may grant permission subject to such terms and conditions as may be considered necessary.

All foreign NGO and Government bodies require RBI approval to establish office in India – Permission of RBI is required to establish offices in India by foreign NGO (Non-Government Organisations), Foreign Government bodies/departments – RBI circular No. 31 dated 17-9-2012.

Intimation to police initially and also every year – LO (Liaison Office)/Branch Office (BO)/submit report giving prescribed information, to Director General of Police (DGP) Project Office within five days of becoming functional plus every year. The report should be submitted along with copy of Annual Report to be submitted by such LO/BO/PO – RBI circular No. 35 dated 25-9-2012 – para (E)e.1 of RBI Master Circular No. 7/2013-14 dated 1-7-2013.

Extension of validity period – Validity period of Liaison Office can be extended upto three years by Authorised Dealer which maintains bank account of Liaison Office and to whom Annual Activity Certificate is submitted as per terms and conditions stipulated in approval letter of RBI – – RBI circular No. 24 dated 30-12-2009.

Permission of RBI is not required for extension of validity period – Amendment made on 19-1-2011 but with retrospective effect from 1-2-2010.

However, transfer of assets of Liaison/Branch office to any other entity or subsidiary or other LO/BO will require specific approval of RBI – RBI circular No. 88 dated 1-3-2012.

Foreign law firms cannot open office in India – Foreign legal firms cannot open liaison office in India even to practice in non-litigious matters. Foreign law firms can carry on practice in non-litigious matters only on being enrolled as advocates under Advocates Act – Lawyers Collective v. Bar Council of India (2010) 186 Taxman 494 (Bom HC DB).

Foreign law firms and foreign advocates cannot practice in India. However, they can visit India for temporary period on ‘fly in and fly out’ basis for purpose of giving advice on foreign laws or diverse international legal issues – A K Balaji v. Government of India (2012) 112 SCL 304 = 18 taxmann.com 283 (Mad HC DB).

RBI shall not grant permission to foreign law firms to open liaison offices in India – Bar Council of India v. A K Balaji (2012) 114 SCL 627 = 23 taxmann.com 60 (SC).

Policy and procedure for granting permission for BO/LO – Policy and procedure for granting permission for establishment of Branch Office (BO) and Liaison Office (LO) has been given in RBI circular No. 23 dated 31-12-2010.

There are two routes of approval – (1) RBI route where 100% FDI is permitted under automatic route (2) Central Government route in other cases.

The applicant should have track record in home country and net worth of USD 1,00,000 or equivalent for branch office and USD 50,000 or equivalent Scope of permitted activities is given in para (C) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 [earlier Master Circular No. 7/2012-13 dated 2-7-2012].

Application should be submitted in form FNC with letter of comfort to authorised dealer, who will forward the same to RBI with his comments.

Regularisation of LO/BO of foreign entities established earlier without RBI permission – Many foreign Non-Government Organisations (NGOs)/Non-Profit Organisations (NPOs)/Government bodies/Departments have established Branch/Liaison Office without RBI permission. Some had obtained permission of Government of India. All such organisations should apply to RBI for regularization within 90 days and obtain UIN (Unique Identification Number) – RBI Circular No. 02 dated 15-7-2011.

1.2 Liaison offices in India by foreign insurance companies

Foreign Insurance Companies can establish liaison offices in India if they have obtained prior approval for IDRA. The general permission is subject to conditions prescribed – RBI circular No. 39 dated 25-4-2005 [para (B).b.2 of RBI Master Circular No. 7/2013-14 dated 1-7-2013] [earlier Master Circular No. 7/2012-13 dated 2-7-2012].

1.3 Project office in India without permission of RBI in certain cases

A foreign company may open a project office/s in India without permission of RBI, if it has secured from an Indian company a contract to execute a project in India, and (a) the project is funded directly by inward remittance from abroad or (b) the project is funded by a bilateral or multilateral International Financing Agency, or (c) the project has been cleared by an appropriate authority; or (d) 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 [regulation 5 of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000] [para (G) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

The general permission is subject to adherence of provisions of Regulation 4 of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 – RBI Circular No. 76 dated 9-2-2012.

The Foreign Company shall furnish a report to concerned Regional Office of RBI under whose jurisdiction the project office is set up, informing prescribed details. – – The project office shall not undertake or carry on any activity other than activity relating and incidental to execution of project. The project office may approach Regional Offices of RBI for granting permission to open Foreign Currency Account, if required. Surplus can be remitted through authorised dealers on winding up/completion of projects. Temporary surplus can also be remitted with approval of Regional Office of RBI – RBI circular No. 37 dated 15-11-2003.

Foreign Currency Accounts by Project Offices – Project Office of foreign company in India can open one or more foreign currency accounts for project offices in India without permission of RBI, if contract provides for payment in foreign currency. Intermittent remittances are permissible. Reporting requirement and other conditions are specified in RBI Circular No. 44 dated 17-5-2005. Foreign companies can open two foreign currency accounts for each project in two different foreign currencies (one usually in their home currency and other in US dollars). Both accounts should be in same Bank – RBI Circular No. 2 dated 31-7-2008 – RBI circular No. 2 dated 31-7-2008 [para (G) g.2 of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

2 Branch office in SEZ

Branch office can be established in SEZ to undertake manufacturing and service activities, without permission of RBI in those sectors where 100% FDI is permitted. Such unit shall function on stand alone basis i.e. it should be isolated and restricted to SEZ and it should not carry on business outside SEZ. – RBI Notification No. FEMA/102/2003-RB dated 3-10-2003 and circular No. 58 dated 16-1-2004 [para (C)c.2 of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

3.1 Account by branch/project office of person resident out of India

Person resident out of India opening a branch/project/liaison office can open a Rupee bank account in India in non-interest bearing account. If there are temporary surplus funds, these can be kept as deposits for a period not exceeding 6 months. However, this facility is not available to shipping/airline companies – RBI circular No. 3 dated 6-7-2002.

3.2 Remittance of profit or surplus by branches

A person resident outside India permitted by the Reserve Bank to establish a branch or Project Office in India may remit outside India the profit of the branch or surplus of the Project on its completion, net of applicable Indian taxes, on production of the prescribed documents, and establishing the net profit or surplus.

3.3 Submission of Annual Activity Certificate to AD and Income Tax authorities

Branch Office/Liaison office shall submit Annual Activity Certificate (AAC) from auditors to Authorised Dealer with copy to Directorate General of Income Tax (International Taxation), Drum Shaped Building, IP Estate, New Delhi 110 002, before 30th September. The AAC should be accompanied by audited financial statements including receipt and payment account. Copy of renewal of permission of LO should also be submitted to DGIT (International Taxation). If the annual accounts of Liaison Office (LO)/Branch Office (BO) are finalised on a date other that 31st March, then AAC should be submitted within six months from due date of Balance Sheet – amended by RBI circular No. 55 dated 26-11-2012 [para (E) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

3.4 Closure of liaison office or branch

At the time of winding up/closure of liaison office or branch office, the company should approach RBI with prescribed set of documents [para (F) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

Remittance of winding up proceeds of a branch/office (other than project office) in India of a person resident outside India can be made with permission, as per conditions specified in regulation 6(1)(iii) of Foreign Exchange Management (Remittance of Assets) Regulations, 2000.

Permission of RBI is not required if project office is not being wound up.

Closure formalities of branch/liaison office shall be handled by Authorised Dealers as per regulations. Documents as prescribed in RBI circular dated 30-12-2009. Closure should be reported by Authorised Dealer to RBI – RBI circular No. 24 dated 30-12-2009.

However, transfer of assets of Liaison/Branch office to subsidiaries or other LO/BO will require approval of RBI – RBI Circular No. 88 dated 1-3-2012.

 4.1 Permitted activities by branch in India

Following activities can be carried out by branch/project/liaison office in India.

Activities which may be undertaken by the branch or office in India – A person resident outside India permitted by the Reserve Bank to establish a branch or a liaison office in India may undertake or carry on any acti-vity specified in regulations, but shall not undertake or carry on other activity unless otherwise specifically permitted by the Reserve Bank.

Permitted activities for branch in India are given in Schedule I of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000. These include export/import of goods, consultancy service, research, representing parent company, IT services, foreign airline/shipping company [para (C) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

Permitted activities for liaison office in India are given in Schedule II of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000. These include representing parent company in India, promoting export/import from/to India, promoting technical/financial collaboration and acting as channel of communication between parent company and Indian companies [para (D) of RBI Master Circular No. 7/2013-14 dated 1-7-2013 – earlier Master Circular No. 7/2012-13 dated 2-7-2012].

A person resident outside India permitted by the Reserve Bank to establish a Project or Site Office in India shall not undertake or carry on any activity other than the activity relating and incidental to execution of the project [regulation 6(ii) of Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000].

Permitted activities for a branch in India of a person resident outside India – (i) Export/Import of goods (ii) Rendering professional or consultancy services. (iii) Carrying out research work, in which the parent company is engaged. (iv) Promoting technical or financial collaborations between Indian companies and parent or overseas group company. (v) Representing the parent company in India and acting as buying/selling agent in India. (vi) Rendering services in Information Technology and development of software in India. (vii) Rendering technical support to the products supplied by parent/group companies. (viii) Foreign airline/shipping company.

Permitted activities for a Liaison office in India of a person resident outside India – (i) Representing in India the parent company/group companies. (ii) Promoting export import from/to India. (iii) Promoting technical/financial collaborations between parent/group companies and companies in India. (iv) Acting as a communication channel between the parent company and Indian companies.

5  Compliances under Company Law on branches of foreign companies

“Foreign company” means any company or body corporate incorporated outside India which,— (a) has a place of business in India whether by themselves or through an agent, physically or through electronic mode, or (b) conducts any business activity in India in any other manner [section 2(42) of the Companies Act, 2013].

This definition has been notified and made effective on 12-9-2013.

Share transfer or share registration office will be treated as a ‘place of business’ – section 386(c) of the Companies Act, 2013.

Note that a company registered in India is not a ‘foreign company’ even if some or all its shares are held by foreign company or foreign institutions or foreign body corporate.

A company can have place of business in India through electronic mode. See definition below.

Business Activity – Every company including foreign company which carries out its business through electronic mode, whether its main server is installed in India or outside India, which- (i) undertakes business to business and business to consumer transactions, data interchange or other digital supply transactions (ii) offers to accept deposits or invites deposits or accepts deposits or subscriptions in securities, in India or from citizens of India (iii) undertakes financial settlements, web based marketing, advisory and transactional services, database services or products, supply chain management (iv) offers online services such as telemarketing, telecommuting, telemedicine, education and information research; or (v) undertakes any other related data communication services, – – whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise, shall be deemed to have carried out business in India – Rule 3 of Companies (Registration Offices and Fees) Rules, 2014.

Delivery of documents to ROC – A foreign company establishing a place of business in India should submit following documents to Registrar of Companies for registration, within 30 days – section 380(1) of the Companies Act, 2013.

Copy of annual accounts of the foreign company i.e. balance sheet and P&L account should be filed with ROC along with English translation and list of places of business established by the foreign company in India – section 381(1) of the Companies Act, 2013.

The financial statement of its Indian Business operations shall be prepared in accordance with Schedule III. These should be submitted along with consolidated financial statement of foreign company. In addition, statement of related party transactions, repatriation of profits and statement of transfer of funds shall be submitted as specified in Rule 4 of Companies (Registration of Foreign Companies) Rules, 2014, within 6 months of close of financial year of the foreign company to which the documents relate.

Audit of accounts of foreign company shall be conducted by practicing CA or firm of CA – Rule 5 of Companies (Registration of Foreign Companies) Rules, 2014.

Liaison office in India – Companies having only liaison office in India but no trading or commercial or manufacturing activity should only submit the following in triplicate—

(a) Copy of RBI letter giving permission to open office in India.

(b) Receipt & Payment Account of Indian operations duly certified and audited.

(c) Assets & liabilities in India duly audited and certified.

(d) Certificate that company did not carry out any trading, manufacturing or business activity in India.

Those should be certified by company’s authorised representative in India, as well as auditors. (GSR 580(E), dated 6-10-1997).

[It is not clear whether these instructions are still valid].

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