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The Institute of Chartered Accountants of India (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 CONTENTS EDITORIAL BOARD President’s Communication Vice-President’s Communication Chairman’s Communication 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 Announcements Poem 03 04 05 06 08 11 19 21 23 27 30 32 34 INSIDE 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 Printed and published by Shri Vijay Kapur, on behalf of The Institute of Chartered Accountants of India, New Delhi. PUBLISHED at the Institute’s Offi ce at Indraprastha Marg, New Delhi and printed at Spenta Multimedia Pvt. Ltd., Plot 15,16 & 21/1, Village Chikhloli, Morivali, MIDC, Ambernath (West), Dist. Thane The views and opinions expressed or implied in THE CHARTERED ACCOUNTANT STUDENT are those of the authors and do not necessarily refl ect those of ICAI. Unsolicited articles and transparencies are sent at the owner’s risk and the publisher accepts no liability for loss or damage. Material in this publication may not be reproduced, whether in part or in whole, without the consent of ICAI. Check your Address: All students should check their mailing address printed on back cover. In case, there is any change or the PIN Code (Postal Index Code) is either missing or is incorrect, kindly inform immediately the concerned Regional Offi ce, giving full particulars of your address alongwith correct PIN Code. This would enable us to ensure regular and prompt delivery of the Journal. ANNUAL SUBSCRIPTION RATES CA Students Members and Others Overseas ` 200 ` 500 US $ 100 Total Circulation: 4,47,221 Correspondence with regard to subscription, advertising and writing articles Email: writesj@icai.in Non-receipt of Students’ Journal Email: nosj@icai.in SWACHH BHARAT - A STEP TOWARDS CLEANLINESS President and Editor-in-chief CA. Manoj Fadnis, Indore Vice President CA. M. Devaraja Reddy, Hyderabad Chairman and Editor CA. V. Murali, Chennai Vice Chairman CA. Nilesh Shivji Vikamsey, Mumbai Members 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 Co-opted Members CA. Arun Gupta CA. Ashok Thakkar CA. Neelkant Gargya CA. R. Raghuraman Addl. Secretary - Board of Studies CA. Vandana D. Nagpal Editorial Support K. Sudhakaran, Assistant Director Dr. Ruchi Gupta, Sr. Executive Offi cer Offi ce Board of Studies The Institute of Chartered Accountants of India, ICAI Bhawan, A-29, Sector-62, Noida-201 309. Phone : 0120-3045938 HEAD OFFICE The Institute of Chartered Accountants of India, ICAI Bhawan, Indraprastha Marg, New Delhi-110 104. The Chartered Accountant Student February 2016 03 PRESIDENT’S COMMUNICATION My Dear Students, H 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 of Studies. 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 my abilities. With best Wishes, CA. MANOJ FADNIS PRESIDENT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 04 February 2016 The Chartered Accountant Student VICE PRESIDENT’S COMMUNICATION My Dear Students, I 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 the mountain. 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 ”. .. Swami Sivananda. 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 your studies. 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, Yours sincerely CA. M. DEVARAJA REDDYVICE PRESIDENT ICAI, NEW DELHI The Chartered Accountant Student February 2016 05 My Dear Students, A 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 wishing. 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 diff erence. 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 to succeed. 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 and cheerful. Hold on to trust; it is at the core of fruitful relationships that are secure and content. 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 very best. Good bye and Good Luck! With Warm Professional Regards, Forever, yours in service, (CA. V. MURALI) CHAIRMAN, BOARD OF STUDIES, ICAI, NEW DELHI CHAIRMAN’S COMMUNICATION ARTICLE 06 February 2016 The Chartered Accountant Student E 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 schemes 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 Credit Schemes Th e two schemes are – (a) Merchandise Exports from India Scheme (MEIS) (b) Service Exports from India Scheme (SEIS). 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 competitiveness. 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 specifi ed. 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 garments. Ineligible categories under MEIS – Ineligible categories are under MEIS includes: V. S. Datey The author is a noted writer and Consultant on Indirect Tax ARTICLE The Chartered Accountant Student February 2016 07 (a) EOU/EHTP/BTP/STP availing direct tax benefi ts/ exemption (b) Supplies from DTA to SEZ (c) Deemed exports (d) Diamonds, gold silver in any form (e) Cereals (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 abroad) (iii)Supply of a ‘service’ from India through commercial presence in any other country (mode 3 – Commercial presence) (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 SEIS scrips Th e following provisions apply to both MEIS and SEIS scrips. 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. Conclusion 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 exported presently. 08 February 2016 The Chartered Accountant Student ARTICLE Entity Options for doing business in India – An Overview A 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:  Incorporated Entity (a) Company (both Private Limited and Public Limited) (b) Limited Liability Partnership (LLP) (c) Joint Ventures  Unincorporated Entity (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 India:  Representing in India the parent company / group companies.  Promoting export / import from / to India.  Promoting technical/fi nancial collaborations between parent/group companies and companies in India.  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 approval are:  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 ARTICLE 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 parent company. 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 group company.  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 equivalent. 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 ARTICLE 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; 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. 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 foreign parent. 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 burden . References:  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 ANNOUNCEMENT ACADEMIC UPDATE The Chartered Accountant Student February 2016 11 Signi



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