Taking foreign exchange liability of other company
This query is : Resolved
22 June 2013
We are in the business of manufacturing & marketing of artificial sweetener.In India we produced our product through a third party manufacturer, with whom we have yearly agreement. The third party manufacturer produced the product as per our formulation & procure raw material only from our approved supplier, but supplier give Invoices in the name of third party manufacturer.
As per our direction the manufacturer had imported some raw material from Europe, but in that case we have taken the responsibility to pay the exporter i.e. we pay to manufacturer & then they pay to the exporter, it is to mention that the exporter is one of our group company.
Now we are going to terminate our agreement with the manufacturer, regarding that I have few queries-
1.Can we take in our books the outstanding foreign exchange liability for the above mentioned transaction, if yes then how.
2.After transferring the liability in our books how we can pay them in Euro,as in this case Invoice in the name of manufacturer.
3.Is there any issue under FEMA Act.
As per our direction the manufacturer had imported some raw material from Europe, but in that case we have taken the responsibility to pay the exporter i.e. we pay to manufacturer & then they pay to the exporter, it is to mention that the exporter is one of our group company.
Now we are going to terminate our agreement with the manufacturer, regarding that I have few queries-
1.Can we take in our books the outstanding foreign exchange liability for the above mentioned transaction, if yes then how.
2.After transferring the liability in our books how we can pay them in Euro,as in this case Invoice in the name of manufacturer.
3.Is there any issue under FEMA Act.
23 June 2013
Such take over of Forex liability not permitted under FEMA .
23 June 2013
Kindly let me know then how we can overcome the situation, as we need to pay to the exporter after the termination of agreement with the manufacturer.
03 November 2013
Kindly let me know is there any way to overcome the situation.
06 November 2013
Can you provide further details as to where is your supplier is located? If you cancel ur agreement how the import will happen? whether you will manufacture? etc..
Elaborate the entire transaction of past and your proposed future structure.
thanks
Elaborate the entire transaction of past and your proposed future structure.
thanks
26 July 2025
This is a nuanced issue involving accounting treatment, foreign exchange, and FEMA compliance. Here's a detailed answer addressing your three queries:
---
### 1. **Can you take the foreign exchange liability in your books? If yes, how?**
* **Yes, you can record the outstanding foreign exchange liability in your books**, but the key is the **nature of the transaction and the legal responsibility**.
* Although the import invoices are in the name of the **third-party manufacturer**, your company has **taken responsibility to pay the foreign supplier** (your group company in Europe).
* So, in substance, your company has a **foreign exchange liability** towards the European supplier, **even if the invoice is not directly in your name**.
* **Accounting treatment:**
* You should record a **liability in your books** for the amount payable in foreign currency.
* The **corresponding debit** will be either:
* An expense or inventory/raw materials if you treat it as part of procurement costs.
* Or an intercompany receivable/payable if the manufacturer is reimbursed later.
* You may also record a **payable to the manufacturer** if they have to be reimbursed for the payment.
* Important: Proper agreements or documentation should exist evidencing your liability and responsibility.
---
### 2. **After transferring the liability in your books, how can you pay in Euros if the invoice is in the manufacturer's name?**
* **Paying the foreign supplier (exporter) in Euros is possible**, but:
* Since the invoice is in the manufacturer’s name, the **manufacturer is the importer of record**.
* Normally, payments are made to the party invoiced.
* In this case:
* You can **pay the manufacturer in India**, who then pays the exporter in Europe.
* Or you can enter into an agreement with the manufacturer authorizing you to pay the exporter directly on their behalf.
* Alternatively, you may make direct payment to your European group company (exporter) but should have supporting documentation proving your liability and arrangement.
* Your bank will require proper documentation and FEMA approvals (if applicable) for making payments in foreign currency.
---
### 3. **Is there any issue under FEMA Act?**
* **FEMA regulates foreign exchange transactions and cross-border payments in India.**
* **Key points to consider:**
* **Is your company the importer of record?** Since invoices are in the manufacturer's name, legally, manufacturer is importer.
* **If your company is making payments to foreign exporter directly, it can be treated as an outbound remittance.**
* You must comply with RBI/FEMA regulations on **making payments abroad**, including:
* Documentation to establish liability.
* Proper declaration in Form 15CA/15CB (income tax remittance declarations).
* Compliance with **permitted current account transactions**.
* If your company is not the importer but making payment on behalf of manufacturer, this can be considered a **remittance on behalf of third party** and needs proper documentation.
* **Potential FEMA issues:**
* Payment without proper underlying documentation can be questioned.
* Possible requirement for prior RBI approval if transaction falls outside permissible current account limits.
* Must maintain proper audit trail to avoid violation.
---
### **Summary & Recommendations:**
| Query | Answer |
| ----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| Can liability be recorded in your books? | Yes, if you have accepted liability and have proper agreements/documentation. |
| How to pay in Euro if invoice in manufacturer’s name? | Pay manufacturer in India who pays exporter OR pay exporter directly with authorization and documentation. |
| FEMA issues? | Ensure compliance with RBI/FEMA on foreign remittance, proper documentation (Form 15CA/15CB), and that transactions fall under permissible current account transactions. |
---
### **Additional Advice:**
* Draft a **tripartite agreement or acknowledgement** between your company, manufacturer, and exporter clarifying payment responsibilities.
* Consult your **bank and FEMA consultant** before making foreign payments.
* Maintain full documentation for audit and compliance.
---
If you want, I can help draft a sample agreement or accounting entries for this transaction. Would you like that?
---
### 1. **Can you take the foreign exchange liability in your books? If yes, how?**
* **Yes, you can record the outstanding foreign exchange liability in your books**, but the key is the **nature of the transaction and the legal responsibility**.
* Although the import invoices are in the name of the **third-party manufacturer**, your company has **taken responsibility to pay the foreign supplier** (your group company in Europe).
* So, in substance, your company has a **foreign exchange liability** towards the European supplier, **even if the invoice is not directly in your name**.
* **Accounting treatment:**
* You should record a **liability in your books** for the amount payable in foreign currency.
* The **corresponding debit** will be either:
* An expense or inventory/raw materials if you treat it as part of procurement costs.
* Or an intercompany receivable/payable if the manufacturer is reimbursed later.
* You may also record a **payable to the manufacturer** if they have to be reimbursed for the payment.
* Important: Proper agreements or documentation should exist evidencing your liability and responsibility.
---
### 2. **After transferring the liability in your books, how can you pay in Euros if the invoice is in the manufacturer's name?**
* **Paying the foreign supplier (exporter) in Euros is possible**, but:
* Since the invoice is in the manufacturer’s name, the **manufacturer is the importer of record**.
* Normally, payments are made to the party invoiced.
* In this case:
* You can **pay the manufacturer in India**, who then pays the exporter in Europe.
* Or you can enter into an agreement with the manufacturer authorizing you to pay the exporter directly on their behalf.
* Alternatively, you may make direct payment to your European group company (exporter) but should have supporting documentation proving your liability and arrangement.
* Your bank will require proper documentation and FEMA approvals (if applicable) for making payments in foreign currency.
---
### 3. **Is there any issue under FEMA Act?**
* **FEMA regulates foreign exchange transactions and cross-border payments in India.**
* **Key points to consider:**
* **Is your company the importer of record?** Since invoices are in the manufacturer's name, legally, manufacturer is importer.
* **If your company is making payments to foreign exporter directly, it can be treated as an outbound remittance.**
* You must comply with RBI/FEMA regulations on **making payments abroad**, including:
* Documentation to establish liability.
* Proper declaration in Form 15CA/15CB (income tax remittance declarations).
* Compliance with **permitted current account transactions**.
* If your company is not the importer but making payment on behalf of manufacturer, this can be considered a **remittance on behalf of third party** and needs proper documentation.
* **Potential FEMA issues:**
* Payment without proper underlying documentation can be questioned.
* Possible requirement for prior RBI approval if transaction falls outside permissible current account limits.
* Must maintain proper audit trail to avoid violation.
---
### **Summary & Recommendations:**
| Query | Answer |
| ----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| Can liability be recorded in your books? | Yes, if you have accepted liability and have proper agreements/documentation. |
| How to pay in Euro if invoice in manufacturer’s name? | Pay manufacturer in India who pays exporter OR pay exporter directly with authorization and documentation. |
| FEMA issues? | Ensure compliance with RBI/FEMA on foreign remittance, proper documentation (Form 15CA/15CB), and that transactions fall under permissible current account transactions. |
---
### **Additional Advice:**
* Draft a **tripartite agreement or acknowledgement** between your company, manufacturer, and exporter clarifying payment responsibilities.
* Consult your **bank and FEMA consultant** before making foreign payments.
* Maintain full documentation for audit and compliance.
---
If you want, I can help draft a sample agreement or accounting entries for this transaction. Would you like that?
26 July 2025
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