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(Set up by an act of
Parliament)Your monthly guide to CA news, information and events
VOL 19 NO. 09 PAGES 36 FEBRUARY 2016 R50
02 February 2016 The Chartered Accountant Student
Article - Export Promotional measures through Duty Credit Schemes
Article: Entity Options for doing business in India – An Overview
Academic Update: Signiﬁ cant Notiﬁ cations and Circulars of central
excise, customs and service tax issued between 1st May, 2015 and
31st October, 2015
Knowledge Update: Accounting
Examination: Applicability of Standards/Guidance Notes/ Legislative
Amendments etc. for May, 2016 – Intermediate (IPC) Examination
Examination: Applicability of Standards/Guidance Notes/Legislative
Amendments etc. for May, 2016 – Final Examination
Examination: To Be Published In Part III Section 4 of
The Gazette of India
Case Laws: Legal Decisions – Indirect Taxes
DISCLAIMER: The ICAI is not in any way responsible for the result of any action taken on the basis of
the advertisement published in the Journal. Cover Image Courtesy: www.shutterstock.com
EDITOR: CA. V. Murali
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Accountants of India, New Delhi.
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SWACHH BHARAT - A STEP TOWARDS CLEANLINESS
President and Editor-in-chief
CA. Manoj Fadnis, Indore
CA. M. Devaraja Reddy, Hyderabad
Chairman and Editor
CA. V. Murali, Chennai
CA. Nilesh Shivji Vikamsey, Mumbai
CA. J. Venkateswarlu, Hyderabad
CA. Mukesh Singh Kushwah, Ghaziabad
CA. Prafulla Premsukh Chhajed, Mumbai
CA. Sanjiv Kumar Chaudhary, New Delhi
CA. S. Santhanakrishnan, Chennai
CA. Shyam Lal Agarwal, Jaipur
CA. Shriniwas Y. Joshi, Mumbai
CA. Sumantra Guha, Kolkata
CA. Tarun Jamnadas Ghia, Mumbai
CA. Vijay Garg, Jaipur
Shri Manoj Kumar, New Delhi
Shri R. K. Jain, New Delhi
CA. Arun Gupta
CA. Ashok Thakkar
CA. Neelkant Gargya
CA. R. Raghuraman
Addl. Secretary - Board of Studies
CA. Vandana D. Nagpal
K. Sudhakaran, Assistant Director
Dr. Ruchi Gupta, Sr. Executive Ofﬁ cer
Board of Studies
The Institute of Chartered
Accountants of India, ICAI Bhawan, A-29,
Sector-62, Noida-201 309.
Phone : 0120-3045938
The Institute of Chartered Accountants
of India, ICAI Bhawan, Indraprastha
Marg, New Delhi-110 104.
The Chartered Accountant Student February 2016 03
My Dear Students,
eartiest congratulations to the students
who passed CA examinations in the results
declared recently. I also compliment Rank
holders on their special achievements. It is
my earnest desire that the students speedily pass the
CA examinations to join CA profession. Th is year we
surpassed quarter of million mark of membership base,
but we need more Chartered Accountants. I do not have
any doubt that strong Indian economy will need more
Chartered Accountants – both practicing and working
in industry. Th e Indian economy, beating all odds, is
growing at a very high rate.
It is said that time and tide waits for none. In the month
of February, 2016, as in the past, I will be relinquishing
my position of President of this Institute to make way
for a new incumbent. While I sit down to write this
message, I am reminded of so many small and big events.
We have moved way ahead in clearing the disciplinary
cases expeditiously. However, when we were working
on our regulatory responsibilities, students never took
backseat. We have taken many decisions and actions in
the overall interest of students and future of profession.
Strong profession needs well qualiﬁ ed and competent
professionals. We can meet future challenges and
deliver our best, only when we are well equipped with
strong competencies and skillsets. In implementing new
scheme of education and training we have identiﬁ ed the
required regulatory changes and submitted them to the
Ministry of Corporate Aﬀ airs for their clearance. Th ese
are to be exposed for public comments to get wider
feedback from all stakeholders. It is likely to happen very
soon. We have also worked-out contemporary syllabus
that has been benchmarked to the best in the world.
Th ese futuristic matters require careful consideration
and planning and should not be rushed.We have also tried to reengineer some of the processes
to improve the overall quality of our services. An
organisation of this size needs to heavily rely on tools
of technology. To manage the aﬀ airs of training we are
launching an online e-diary portal. Th e e-Diary will
help in keeping periodical records of Articled Training
undertaken by students, apart from keeping record of
leaves taken and stipend received. Th e same is ready
and being tested internally. It will be launched very
soon. Another, technology driven project that I have
undertaken is online submission of regulatory forms.
Very soon members and students will be able to submit
all regulatory forms using digital signatures.
Th e convocations held on 24
th January, 2016 were another
technological marvel. I along with the Vice-president
addressed the new members using the tools of video-
conferencing across eleven cities simultaneously. Even the
oath was administered centrally by the Chairman, Board
Th ere was also increased emphasis on online lectures.
Th is has helped the students to learn from experts in
the comfort of their homes at their own desired pace.
A series of Online Mentoring Sessions is enabling
the students to get subject wise inputs for Common
Proﬁ ciency Test, Intermediate and Final Courses.
Students are able to ask queries on complex topics and
get their doubts cleared. Th ere were many other regular
and special initiatives that were taken. Th ese included,
updation of study material, organising conferences and
conventions, conducting contests and so on.
I wish to convey my sincere thanks to CA. M. Devaraja
Reddy, Vice-president who stood with me like a pillar in
managing the organisational aﬀ airs. I also compliment
CA. V. Murali, Chairman, CA. Nilesh Vikamsey, Vice-
Chairman and other members of Board of Studies for
their untiring eﬀ orts in managing the aﬀ airs of Board of
Studies. I also put on record my heartfelt appreciation
for the Head, faculty members and other oﬃ cials of
Board of Studies.
As I pass on the baton, I look forward to profession
to grow further. Th e profession has created new
benchmarks and enjoys a lot of respect in society. It is
a privilege to be part of this profession. I am thankful
to the Almighty for giving me this opportunity to serve
the profession. I hope I was able to deliver to the best of
With best Wishes,
CA. MANOJ FADNIS
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
04 February 2016 The Chartered Accountant Student
VICE PRESIDENT’S COMMUNICATION
My Dear Students,
t gives me immense pleasure to communicate and
reconnect with all of you after a brief interregnum.
As Vice President, this will be my last interaction
with one and all. At the outset, I extend my warm
greetings to each one of you and wish you all a belated
Happy and Wonderful New Year 2016. I wish this New
Year brings all the success, joy and happiness in your
professional and personal life. I would also like to take
this opportunity to express my heartiest congratulations
to all the students who have come out with ﬂ ying colours
in their respective November 2015 examinations. Your
constant and persistent eﬀ orts have proved their worth
in bringing glory and adding one more feather in your
cap. Please remember it is just a beginning of your long
lasting and rewarding professional career.
Success and acknowledging your success builds the
momentum that you have to maintain throughout your
professional career. Nobody trips over mountains. It is
the small pebble that causes you to stumble. Pass all the
pebbles in your path, and you will ﬁ nd you have crossed
Everyone loves the feeling of securing a huge victory
but so many of us look over the fact that accomplishing
the greatest feats means we have to win the small
battles ﬁ rst.
If you examine all of the biggest characters in history,
you will realize that though they may be known for
one thing, or a few things even, in every single case of
greatness, there are many small challenges that don’t
get talked about. It is in these small victories that the
greatest people of all time became the conquerors and
winners that we still read about and talk about today.
For those who have not achieved success, it is the right
time for self introspection. “Don’t look where you fell,
Look where you slipped”. Never let the small things
in life trip you up and keep you from overcoming the
huge mountains in life. Bhagavad Gita also says, “We are kept from our goal, not by obstacles, but by a clear
path to a lesser goal.” Be great by continuing to stand in
the midst of adversity. And remember to keep moving
forward once you gather yourself from falling. Never
quit! “Crave for a thing, you will get it. Renounce
the craving, the object will follow you by itself ”. ..
As you all are aware that the chartered accountancy
profession is increasingly becoming international. It
is time to understand that the impact of privatization
and globalization will not only be conﬁ ned to business
and industry alone, but it will have its impact on the
accountancy profession as well. You, as the future
accountancy professionals, have to stand up and
compete with international professionals on our own
soil. Th is is something which is inevitable sooner or later.
Also remember, with the more challenges we conquer
more opportunity knocks on our door. As the economy
registers growth in various sectors, professional
opportunities will also grow. Th e Government is
increasingly appreciating the eﬀ orts of the Institute to
keep the profession dynamic and services of accountancy
professionals are increasingly being utilized in the newer
professional domains. Th erefore, shed all your worries
and inhibitions about your future and concentrate on
As you are aware, the Institute provides a wide range of
continued support to its students for the enhancement
of their technical knowledge and enrichment of their
professional know-how. Th e high quality study material
provided to our students is developed keeping in view
the requirements of the concerned job sectors in the
corporate and professional world. Our educational
programs set the standard for both their quality and
breadth. Th is has helped our students to blend rigorous
study with practical experience, applying what they learn
in the classroom to situations they face in their work and
lives. Th ese accomplishments were achievable because
of our commitment to the students. It is important
that we keep up this momentum in the New Year also.
Many of our initiatives will move from the idea stage to
implementation. To bring them to fruition, it will take
the eﬀ orts of many. But we have the determination and
strength to continue to innovate and grow.
Wish you all the best,
CA. M. DEVARAJA REDDYVICE PRESIDENT
ICAI, NEW DELHI
The Chartered Accountant Student February 2016 05
My Dear Students,
s I pen this missive to you, I realised that twelve months
have whizzed past like a ﬂ ash of lightning and that its time
for me to bid adieu. Th e CA ﬁ nal results are out and many
of you would have cleared the exam – Congratulations to
all the new Entrants to our great Profession. Some of you would have
cleared a group, or got some exemptions leading you nearer to your
cherished goal. For those who are not fortunate to be successful,
my comforting advice is that everything heals. Your heart heals. Th e
mind heals, wounds heal. Your happiness is always going to come
back. Bad times don’t last. Sometimes the worst times of our life put
us on a direct path to the best times.
POINTS TO PONDER Be happy always. Remember happiness is not an achievement, it
is a choice. It is your choice. Nothing on this earth can make you
happy unless you choose to be happy. Choose rainbows instead of
rain, choose pleasure instead of pain, choose to smile than to fume
and fret, choose to forgive and forget than to regret, choose to help
than to be helped. Inspire others with your positive attitude, deal
with your imperfections lightly, don’t hold grudges, vindictiveness
and anger within you. Always have faith and believe that something
wonderful will happen and is waiting to happen to you. You never
know which footstep will bring a right twist in life. So keep on
walking. Happiness comes when it is most unexpected, that is life.
Dr. Martin Luther King Jr. said “Hatred paralyzes life; love releases
it. Hatred confuses life; love harmonizes it. Hatred darkens life;
love illuminates it.” Be happy, not because everything is good, but
because you can see the good side of everything.
WORDS OF WISDOM FOR CA STUDENTS1. Study while others are sleeping; Work while others are loaﬁ ng;
Prepare while others are playing and dream while others are
2. Concentrate all your thoughts upon the work at hand. Th e sun’s
rays do not burn unless brought to a focus.
3. Learn from yesterday, live for today and hope for tomorrow. Th e
important thing is to be focused and positive.
4. Opportunity dances only with those already on the dance ﬂ oor.
5. Patience, persistence and perspiration make an unbeatable
combination for success.
6. Luck is where preparation and opportunity meet.
7. It is said some succeed because they are destined to; Most succeed
because they are determined to.
8. Th e only thing that can be achieved without eﬀ ort is failure.
9. All successful and unsuccessful people have one thing in common;
Twenty Four Hours a Day. Its how they use them that makes the
10. Our minds are the factories that manufacture our thoughts. It is
up to us to think of good thoughts, happy thoughts, think pro-
active, positive and uplifting thoughts.
11. You have inﬁ nite potential inside you. Invest in yourself – improve
yourself, your life, cherish your life, enjoy every moment and see
the positive in everything.
12. Do everything with passion, enthusiasm and joy – you are bound
13. Th ere is no elevator to success. You have to take the stairs.
14. Take every chance, drop every fear.
HOLD ON DEAR CA STUDENTSHold on to faith; it is the source of believing that all things are possible.
It is the ﬁ bre and strength of a conﬁ dent soul.
Hold on to hope; it banishes doubt and enables attitudes to be positive
Hold on to trust; it is at the core of fruitful relationships that are secure
Hold on to love; it is life’s greatest gift to all, for it shares, cares and gives
meaning to life.
Hold on to your dreams; achieve them diligently and honestly. Do not
surrender to deceit. Remember others on your way and take time to
care for their needs.
Hold on to all that you are and all that you have learnt, for these things
are what make you unique. Don’t ignore what you feel and what you
believe is right and important; your heart has a way of speaking louder
than your mind.
Enjoy the beauty around you. Have the courage to see things diﬀ erently
and clearly. Make the world a better place one day at a time, and don’t
let go of the important things that give meaning to your life. Trust the
timing of your life. All will come to you at the perfect time.
WRAP UP POINTSA positive attitude is contagious but, don’t wait to catch it from others.
Be a carrier. Always give without remembering and always receive
without forgetting. Learn to love without condition; Talk without bad
intention; Give without any reason; And most of all, care for people
without any expectation. Motivation is already lying in you like sticks
in a matchbox. Ignite it and you can enlighten the entire Universe. Just
do it. Chase down your passion as if it were the last bus of the night.
Jack London’s words have inspired and motivated me always “I would
rather be ashes than dust, I would rather that my spark should burn
out in a brilliant blaze, than it should be stifl ed by dry rot. I would
rather be a superb meteor every atom of me in magnifi cent glow,
than a sleepy and permanent planet. Th e proper function of man is
to live and not to exist.” Always face life head on, tackle obstacles with
conﬁ dence, never let your resolve get shaken. Have Faith in God. Have
faith in prayer. Don’t think of the things you did not get after praying.
Th ink instead of the countless blessings God gave you without asking.
When you are going through diﬃ culties and wonder where God is,
remember the teacher is always quiet during the test. Keep your head
up. God gives His hardest battles to His strongest soldiers. God works
in mysterious ways, just like an anti-virus software, He enters your life,
scans your problems, edits your tensions, downloads solutions and
deletes your worries and protects you.
Wishing you a bright, prosperous and wonderful future. All the
Good bye and Good Luck!
With Warm Professional Regards,
Forever, yours in service,
(CA. V. MURALI)
CHAIRMAN, BOARD OF STUDIES, ICAI, NEW DELHI
06 February 2016 The Chartered Accountant Student
xports are given top priority in India, in view of need
of foreign exchange and growth of national GDP by
increasing production. In fact, practice of giving
encouragement to exports is followed by almost all
nations. ‘Make in India’ is also a step in the same direction.
WTO stipulations in respect of export promotion
India is a member of World Trade Organisation (WTO).
Hence, our export policies and schemes are required to be
compliant with WTO norms.
Th e four main WTO guidelines are – (i) Trade without
discrimination (ii) Predictable and growing market access
(iii) Promoting fair competition and (iv) Encouraging
development and economic reforms.
As per stipulation of World Trade Organisation
(WTO), any country cannot give ‘export incentives’ or
‘export subsidies’ as such. Th e reason is that WTO intends
to encourage free competition among nations and provide
‘level playing ﬁ eld’ to all. If export incentives or subsidies are
permitted, then there will not be free and fair competition
among manufacturers of diﬀ erent countries.
Various schemes designed by Government of India
to promote exports ensure that these comply with WTO
norms. Most of the schemes are designed to make inputs
used to manufacture exported goods, tax free. Th is is
permissible under WTO.
Since cash incentives for exports are not permissible
under WTO regime, a via media has been found in the
form of ‘duty credit schemes’.
Two export promotional measures have been speciﬁ ed
in Foreign Trade Policy [FTP] 2015-2020. Th ese are termed
as ‘Export from India schemes’.
Under these schemes, Exporter gets Duty Free Credit
Entitlement Certiﬁ cate.
Th e Duty Credit Scrip can be used for importing inputs
and capital goods which are freely importable. Th e scrips
can also be used for payment of excise duty on indigenous
goods procured and service tax on services received.
Export from India Schemes
Th e purpose of schemes is to provide rewards to exporters
to oﬀ set infrastructural ineﬃ ciencies and associated costs
involved and to provide exporters a level playing ﬁ eld.
Export Promotional measures through Duty
Th e two schemes are – (a) Merchandise Exports from
India Scheme (MEIS) (b) Service Exports from India Scheme
Merchandise Exports from India Scheme (MEIS)
Th e scheme is eﬀ ective from 1-4-2015 i.e. when the Foreign
Trade Policy 2015-20 came into eﬀ ect.
Objective of MEIS scheme is to oﬀ set infrastructural
ineﬃ ciencies and associated costs involved in export
of goods/products, which are produced/manufactured
in India, especially those having high export intensity,
employment potential and thereby enhancing India’s export
Th us, basic purpose of scheme is to oﬀ set the extra costs
incurred by exporters due to (a) poor infrastructure in India
(b) extra transport costs incurred if countries are located far
away from India.
It may be noted that the scheme is not applicable to all
products and exports to all countries. Th e scheme is limited
to speciﬁ ed products and countries. Even, the value of scrip
is not uniform to all speciﬁ ed countries. Th e countries have
been classiﬁ ed in three groups A, B and C. Th e value of scrip
depends upon the product exported and country to which
the goods are exported. Th e value of MEIS scrip normally
varies between 2% to 5% of FOB value of exports. In majority
of cases, the duty scrip available is 5% of FOB value of exports.
Th e rates of rewards of various products ITC(HS) code
wise are also given. Th e basis of calculations of reward would
be on realized FOB value of exports in free foreign exchange,
or on FOB value of exports as given in shipping bills in
free foreign exchange, whichever is less, unless otherwise
Application for MEIS shall be made electronically with
digital signature in form ANF 3A. Application should be
made within 12 months from let export order or 3 months
from uploading of shipping bill, whichever is later.
Where reward is available for export to speciﬁ ed countries
only, proof of landing shall be submitted.
Export through e-commerce -
Export of goods through
commerce through courier of foreign post oﬃ ce, upto
`25,000 per consignment would be entitled for rewards
under MEIS. Th e post oﬃ ces eligible and ports eligible for
such export are speciﬁ ed in para 3.05 of FTP 2015-2020.
List of eligible category of goods under MEIS if exported
through e-commerce platform are given in Handbook of
Procedures. Th ese cover handicrafts, handloom products,
books/periodicals, leather footwear, toys, customized fashion
Ineligible categories under MEIS – Ineligible categories
are under MEIS includes:
V. S. Datey
The author is a noted writer and
Consultant on Indirect Tax
The Chartered Accountant Student February 2016 07
(a) EOU/EHTP/BTP/STP availing direct tax beneﬁ ts/
(b) Supplies from DTA to SEZ
(c) Deemed exports
(d) Diamonds, gold silver in any form
(f ) Items restricted for imports or exports
(g) Sugar (unless notiﬁ ed)
(h) Milk & milk products and meat & meat products.
Service Exports from India Scheme (SEIS)
Objective of SEIS is to encourage exports of notiﬁ ed
services from India.
WTO stipulations about export of services are not
very rigid. Hence, the scheme applies to speciﬁ ed services
provided to any country and not restricted to services
provided in speciﬁ ed countries only.
Th e scheme applies to export of services made after
1-4-2015. It is valid for export of services upto 31-3-2016
(unless the scheme is extended).
Services to EOU and services by EOU are not eligible
for SEIS .
Services provided by SEZ unit are eligible for SEIS.
Supply of service by DTA unit to SEZ are not eligible.
Only those service providers having minimum net
free foreign exchange (NFE) earnings of USD 15,000 in
preceding ﬁ nancial year are eligible for SEIS. For individual
service providers and sole proprietorship, minimum NFE
should be USD 10,000.
‘Services’ include all tradable services covered under
General Agreement on Trade in Services (GATS) and
earning foreign exchange.
‘Service Provider’ means a person providing
(i) Supply of a ‘service’ from India to any other country
(mode 1 – Cross border trade)
(ii) Supply of a ‘service’ from India to service consumer(s)
of any other country in India (mode 2 – Consumption
(iii)Supply of a ‘service’ from India through commercial
presence in any other country (mode 3 – Commercial
(iv) Supply of a ‘service’ from India through the presence
of natural persons in any other country (Mode 4 –
Presence of natural persons).
Only export of services falling under clauses (i) and
(ii) above are eligible for SEIS scrip. Provision of services
through mode 3 and 4 are not eligible.
Following services are eligible for SEIS
(1) Business services – consisting of professional services,
Research and Development Services, Rental/leasing
services without operators and Other business services
(2) Communication Services
(3) Construction and related Engineering Services
(4) Educational services
(5) Environmental services
(6) Health related and social services
(7) Tourism and travel related services
(8) Recreational cultural and sporting services
(9) Transport services – consisting of marine transport,
air transport, road transport services and services
auxiliary to all modes of transport.
Th e general rate of duty scrip is 3% to 5% of Net Foreign
Exchange (NFE) earnings. Application for SEIS shall be
made in form ANF 3B with digital signature. Application
for SEIS shall be submitted within 12 months from end of
relevant ﬁ nancial year of claim period.
General provisions applicable to both MEIS and
Th e following provisions apply to both MEIS and SEIS
Use of duty credit scrips – Th e duty credit scrips can be
used for following – (a) Payment of customs duties for
import of inputs as well as capital goods, (b) Payment of
excise duty on domestic procurement of inputs or goods,
including capital goods (c) Payment of service tax on
procurement of services (d) Payment of customs duty in
case of export obligation defaults and application fees.
Th us, wide ﬂ exibility is available for utilization of the
duty credit scrips. However, duty credit scrip cannot be
sold in market. Th e scrip cannot be encashed.
Payment through duty credit scrip is as good as
payment by cash - Payment of customs duty, excise
duty or service tax through duty credit scrip is as good
as payment by cash. Hence, if CVD/special CVD/ excise
duty on input goods or service tax on input services is
paid by utilising duty credit scrip, the CENVAT credit of
CVD/special CVD/excise duty/service tax is available.
If customs duty is paid on imports by utilizing duty
credit scrip, duty drawback of customs duty is allowed.
Validity of duty credit scrip – Th e duty credit scrip will
be valid for 18 months from date of issue.
Declaration on shipping bill – Declaration of intent on
shipping bill for claiming beneﬁ t under MEIS is required.
Payment of ‘amount’ under rule 6 of CENVAT Credit
rules not required if DTA unit supplies goods under
Duty Credit Scrip – It has been clariﬁ ed that the duty
is debited to the scrip. Th e scrip holder is also permitted
to avail CENVAT credit of duties debited in the scrip.
Hence, such debit of duty in these scrips shall be treated as
payment of duty for purpose of rule 6 of CENVAT Credit
Rules. Hence, any reversal of CENVAT credit under rule
6(3) of CENVAT Credit Rules is not required.
Th e scheme is surely useful in promoting exports of goods
to far oﬀ countries where India’s exports are not much.
Th e scheme is also useful in promoting export of new
categories of goods and services, which are not much
08 February 2016 The Chartered Accountant Student
Entity Options for doing business in India –
foreign company desirous of venturing into
the Indian markets can evaluate several
entity options available under law. It can opt
to operate either as an incorporated or an
unincorporated entity. Th e key options being:
(a) Company (both Private Limited and Public
(b) Limited Liability Partnership (LLP)
(c) Joint Ventures
(d) Liaison Oﬃ ce
(e) Branch Oﬃ ce
(f ) Project Oﬃ ce
Typically, the key factors which inﬂ uence the
choice are the nature of work proposed in India,
duration of work, compliance costs (both in terms
of time and money), ease of setting up and closure
and tax considerations. Th e foreign exchange regulations,
speciﬁ cally, the regulations governing Foreign Direct
Investment (FDI) also play an important role. In India,
most aspects of foreign currency transactions are
governed by Foreign Exchange Management Act, 1999
(FEMA ) and the delegated legislations thereunder.
In this write-up, we would look at the options of
setting up a place of doing business in India, as an
unincorporated entity, provided under FEMA i.e.
Liaison Oﬃ ce, Branch Oﬃ ce and Project Oﬃ ce.
A. Liaison Offi ce (LO)
LO also known as representative oﬃ ce, is often a
preferred choice of foreign companies who wish to
initially understand business opportunities or study the
Indian markets before making major investment. Th e
role of such oﬃ ces is, therefore, limited to collecting
information about possible market opportunities and
providing information about the foreign company and
its products to the prospective Indian customers. A LO is permitted to undertake the following activities in
Representing in India the parent company / group
Promoting export / import from / to India.
Promoting technical/ﬁ nancial collaborations
between parent/group companies and companies in
Acting as a communication channel between the
parent company and Indian companies
LO is not allowed to undertake any business activity
in India and cannot earn any income in India. Expenses
of the LO are met entirely through inward remittances
from the head oﬃ ce outside India.
LO is set up with speciﬁ c approval of the Reserve
Bank of India (RBI). Th e application is considered by
RBI, under two routes:
a. RBI Route - Where principal business of the foreign
company falls under sectors where 100 per cent
FDI is permissible under the automatic route; the
approval is granted by RBI itself.
b. Government Route - Where principal business of
the foreign company falls under the sectors where
100 per cent FDI is not permissible under the
automatic route; concurrence of the government is
also obtained while granting approval.
Th e signiﬁ cant aspects considered by RBI while granting
Proﬁ t making track record of the foreign company
during the immediately preceding three ﬁ nancial
years, in the home country.
Net Worth [total of paid-up capital and free reserves,
less intangible assets as per the latest Audited
Balance Sheet] should not be less than USD 50,000
or its equivalent.
Foreign companies, who do not satisfy these eligibility
criteria and are subsidiaries of other companies, can Richa Sawhney
The contributor is a member of ICAI
(Membership No: 094560)
The Chartered Accountant Student February 2016 09
submit a “letter of comfort” from their parent company,
subject to the condition that the parent company
satisﬁ es these eligibility criteria. Th e application is ﬁ led
though any designated AD Category - I bank (AD). Th e
AD carries out necessary due diligence in respect of the
applicant’s background, antecedents of the promoter,
nature and location of activity, sources of funds, etc. and
also ensures compliance with the KYC norms before
forwarding the application together with its comments
and recommendations to the RBI. Permission to set up
such oﬃ ces is initially granted for a period of three years;
however, this may be extended from time to time.
Th e LO is required to intimate the Director
General of Police (DGP) of the relevant State within 5
working days of becoming operational. Registration
under Companies Act 2013 is also required. Th ere are
annual compliances with RBI, Income-tax department,
Registrar of Companies (ROC) and DGP.
LOs are not allowed to buy property in India.
However, they have a general permission to carry out
permitted or incidental activities from leased property,
subject to lease period not exceeding ﬁ ve years. LO
is allowed to open non-interest bearing INR current
account in India. Th ere are only certain permitted
debits and credits possible in such account. LOs are not
permitted to undertake any business activity in India,
as such; there may not be any repatriation from LO.
However, in the event of closure of LO, any surplus cash
may be repatriated with RBI’s approval.
Generally, LOs should not constitute PE of the
foreign company under the Double Taxation Avoidance
Agreements (DTAAs) if they restrict themselves to
work covered by auxiliary and preparatory activities. A
PE is a ﬁ xed place from which the business of a foreign
company is carried out. DTAAs generally contain carve
out for auxiliary and preparatory activities, which if
carried out by a ﬁ xed place of business in India, do not
create PE exposure.
In case a PE is established due to the nature of
activities being more than just preparatory and auxiliary,
income attributable to the PE would be taxed @ 40%
(plus applicable surcharge and cess). It is important to
note that what constitutes preparatory and auxiliary
activity is a subjective issue and is prone to litigation.
B. Branch Offi ce (BO)
BO is set up as an extension of foreign company in India,
with speciﬁ c approval of RBI to undertake permitted
commercial activities and earn proﬁ ts in India. Normally,
the BO should be engaged in the activity of the foreign
Just as in case of LO, the application for setting up
BO is ﬁ led with the AD and approval is given by RBI. Th e
approval could be under the RBI route or Government
route, as the case may be. A BO can undertake the
following activities in India:
Export or Import of goods.
Rendering professional or consultancy services.
Carrying out research work, in areas in which the
parent company is engaged.
Promoting technical or ﬁ nancial collaborations
between Indian companies and parent or overseas
Representing the parent company in India and acting
as buying or selling agent in India.
Rendering services in information technology and
development of software in India.
Rendering technical support to the products supplied
by parent or group companies.
Foreign airline or shipping company.
Th e signiﬁ cant aspects examined by RBI while
granting approval are:
A proﬁ t making track record during the immediately
preceding ﬁ ve ﬁ nancial years in the home country.
Net worth of more than USD 100,000 or its
In case these parameters are not met, a comfort letter
from foreign parent is required. Manufacturing and
processing activities (except in SEZs) is not permitted
for BOs. It can also not undertake any retail trading
activity in India. Th e BO cannot expand its activities or
undertake any new trading, commercial or industrial
activity other than what is expressly approved by the
RBI. As in case of LOs, permission to set up such oﬃ ces
is initially granted for a period of three years, however
extension is possible.
Th e BO needs to intimate the jurisdictional DGP
within 5 working days of becoming operational.
Registration under Companies Act 2013 is also required.
Th ere are annual compliances with RBI, Income-tax
department, ROC and DGP.
BOs are permitted to acquire immovable property
by way of purchase, for their own use and to carry
out permitted or incidental activities. BOs also have a
general permission to carry out permitted or incidental
activities from leased property, subject to lease period
not exceeding ﬁ ve years. BO is allowed to open non-
interest bearing INR current account in India. Th e entire
expenses in India can be met either out of the funds
received from head oﬃ ce through normal banking
channels or through income generated in India.
BO constitutes PE of the parent and has taxable
presence under DTAAs. Income attributable to the
PE is taxed @ 40% (plus applicable surcharge and
education cess). BO is also required to comply with
the Indian transfer pricing (TP) regulations. Minimum
Alternate Tax (MAT) is also applicable in case of BO.
BO is permitted to remit surplus revenues to its foreign
parent. Th ere is no further tax on repatriation of proﬁ ts
to the parent.
C. Project Offi ce (PO)
PO is often a suitable entity choice for foreign companies
10 February 2016 The Chartered Accountant Student
1 15/85 of amount distributed who have to execute speciﬁ c projects in India e.g.
projects related to oil exploration, construction, dams
etc. POs operate for a speciﬁ c period of time and shut
down after completion of the project.
Th e RBI has granted general permission to foreign
companies to establish POs in India, provided they have
secured a contract from an Indian company 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;
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.
However, if the above criteria are not met, the foreign
company has to approach the RBI, for approval through
its AD. Just like a BO or LO, a PO must also get itself
registered with the ROC and its details must be reported to
the jurisdictional DGP. Th ere are annual compliances with
RBI, Income-tax department, ROC and DGP.
Like a BO, a PO of a foreign entity is also permitted
to acquire immovable property by way of purchase for its
own use and to carry out permitted or incidental activities.
All POs have general permission to carry out permitted or
incidental activities from lease property subject to lease
period not exceeding ﬁ ve years. PO is allowed to open non-
interest bearing INR current account in India. ADs can also
open non-interest bearing Foreign Currency Account for
POs in India, subject to certain conditions. Th e permissible
debits to the account are payment of project related expenses
and credits could be foreign currency receipts from the
Project Sanctioning Authority, and remittances from
parent/group company abroad or bilateral / multilateral international ﬁ nancing agency. Th e Foreign Currency
accounts have to be closed at the completion of the project.
AD can permit intermittent remittances by PO pending
winding up or completion of the project provided they are
satisﬁ ed with the bonaﬁ des of the transaction subject to
completion of certain documentation requirement.
From taxation perspective PO is also considered as PE
of the foreign company and income attributable to the PE
is taxed @ 40% (plus applicable surcharge and education
cess). MAT is also applicable in case of PO. PO is required
to comply with the Indian TP regulations. Th ere is no
further taxation on remittance of tax paid surplus to the
One may note that a private or a public limited
company incorporated in Indian is liable to tax on global
income @ 30% (plus applicable surcharge and education
cess). Further, Dividend Distribution Tax @ 17.647% (plus
applicable surcharge and cess) is payable on distribution
of dividend. Dividend, however, is exempt in the hands of
the shareholders. It may also be worthwhile to note that
compliances are relatively less in case of a LO, BO or PO
as compared to a private or a public limited company
incorporated in India.
To conclude, a foreign company must carefully consider
the pros and cons of each entity type in terms of the tax
and regulatory considerations, before deciding how it attain
its business objectives in India with minimal compliance
RBIs Master Circular on Establishment of Liaison /
Branch / Project Oﬃ ces in India by Foreign Entities
Companies Act 2013
(Disclaimer: Th e above refl ects the views of author and not
necessarily the views of the Institute).
Conferences conducted recently by Board of Studies, ICAI
S.No. Name of Branch Name of Programme Dates
1 Patna National Conclave 16th & 17th January, 2016
2 Karnal Sub-Regional Students Conference 24th & 25th January, 2016
3 Bhilai National Conclave 28th & 29th January, 2016
4 Pune National Convention 30th & 31st January, 2016
The Chartered Accountant Student February 2016 11