RBI permits third party payments for export & import transactions - Conditions

RBI/2013-14/364
A. P. (DIR Series) Circular No.70

November 8 , 2013

To

All Category-I Authorised Dealer Banks

Madam / Sir,

Third party payments for export / import transactions

Attention of Authorized Dealer Category – I banks is invited to various provisions of FEMA Notification No. 14 dated May 3, 2000 dealing with the manner of receipt & payment for trade transactions. Normally payment for exports has to be received from the overseas buyer named in the Export Declaration Form (EDF) by the exporter and the payment shall be received in a currency appropriate to the place of final destination as mentioned in the EDF irrespective of the country of residence of the buyer. Similarly, the payments for the import should be made to the original overseas seller of the goods and the AD should ensure that the importer furnishes evidence of import, such as, Exchange Control copy of the Bill of Entry to satisfy itself that goods equivalent to the value of remittance have been imported.

 

2. With a view to further liberalising the procedure relating to payments for exports/imports and taking into account evolving international trade practices, it has been decided as under:

 

i. EXPORT TRANSACTIONS

AD banks may allow payments for export of goods / software to be received from a third party (a party other than the buyer) subject to conditions as under:

1. Firm irrevocable order backed by a tripartite agreement should be in place;
2. Third party payment should come from a Financial Action Task Force (FATF) compliant country and through the banking channel only;
3. The exporter should declare the third party remittance in the Export Declaration Form;
4. It would be responsibility of the Exporter to realize and repatriate the export proceeds from such third party named in the EDF;
5. Reporting of outstandings, if any, in the XOS would continue to be shown against the name of the exporter. However, instead of the name of the overseas buyer from where the proceeds have to be realised, the name of the declared third party should appear in the XOS; and
6. In case of shipments being made to a country in Group II of Restricted Cover Countries, (e.g. Sudan, Somalia, etc.), payments for the same may be received from an Open Cover Country.

Note: Restricted cover Group II country is country which experiences chronic political and economic problems as well as balance of payment difficulties.

 

ii. IMPORT TRANSACTIONS

 

AD banks are allowed to make payments to a third party for import of goods, subject to conditions as under:

1. Firm irrevocable purchase order / tripartite agreement should be in place;
2. Third party payment should be made to a Financial Action Task Force (FATF) compliant country and through the banking channel only;
3. The Invoice should contain a narration that the related payment has to be made to the (named) third party;
4. Bill of Entry should mention the name of the shipper as also the narration that the related payment has to be made to the (named) third party;
5. Importer should comply with the related extant instructions relating to imports including those on advance payment being made for import of goods; and
6. The amount of an import transaction eligible for third party payment should not exceed USD 100,000. This limit will be revised as and when considered expedient.

3. These instructions will come into force with immediate effect.

 

4. AD Category – I banks may bring the contents of this Circular to the notice of their constituents concerned.

 

5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,

(C.D Srinivasan)
Chief General Manager

Foreign Direct Investment (FDI) in India – Definition of ‘group company’ as per RBI Guidelines

RBI/2013-14/356
A.P. (DIR Series) Circular No.68

November 01, 2013

To
All Category – I Authorised Dealer banks
Madam/Sir,

Foreign Direct Investment (FDI) in India –definition of ‘group company’

Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified by the Reserve Bank vide Notification No. FEMA. 20/2000-RB dated 3rd May 2000, as amended from time to time.

2. The extant FDI policy has since been reviewed and it has been decided to incorporate the definition for ‘group company’ as under;

‘Group company’ means two or more enterprises which, directly or indirectly, are in position to:

(i) exercise twenty-six per cent, or more of voting rights in other enterprise; or

(ii) appoint more than fifty per cent, of members of board of directors in the other enterprise.

3. Copy of Press Note No. 2 (2013 Series) dated June 3, 2013 issued by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India in this regard is enclosed.

4. AD Category – I banks may bring the contents of the circular to the notice of their customers/constituents concerned.

5. Reserve Bank has since amended the subject Regulations accordingly through the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Sixteenth Amendment) Regulations, 2013 which have been notified vide Notification No. FEMA.292/2013-RB dated October 4, 2013, vide G.S.R. No. 683(E) dated October 11, 2013.

6. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,

(Rudra Narayan Kar)
Chief General Manager-In-Charge

“Write-off” of unrealized export bills – Export of Goods and Services – Simplification of procedure

A P (DIR Series)

CIRCULAR NO

88/RBI., Dated: March 12, 2013

“Write-off” of unrealized export bills – Export of Goods and Services – Simplification of procedure

Attention of Authorized Dealer Category – I (AD Category –I) banks is invited to A.P. (DIR. Series) Circular No. 12 , 30 , 61 , 40 , 33 and 03 dated September 09, 2000, April 04, 2001, December 14, 2002, December 05, 2003, February 28, 2007 and July 22, 2010 respectively in terms of which the exporters were given limited powers of write-off and also AD Category – I banks have been permitted to accede to the requests for "write-off" made by the exporters, subject to the conditions, inter alia, that the exporter had to surrender proportionate export incentives, if availed of, in respect of the relative shipments.

2. With a view to further simplifying and liberalizing the procedure and for providing greater flexibility to all exporters as well as the Authorized Dealer banks, the earlier instructions have been reviewed. It has now been decided to effect, subject to the stipulations regarding surrender of incentives prior to”write-off” adduced in the A.P. (DIR Series) Circular No. 03 dated 22 July 2010 , the following liberalization in the limits of “write-offs” of unrealized export bills:

1. Self “write-off” by an exporter
(Other than Status Holder Exporter) ----------------------------------------------------- 5%*

2. Self “write-off” by Status Holder Exporters ------------------------------------------ 10%*

3.‘Write-off” by Authorized Dealer bank ------------------------------------------------ 10%*
*of the total export proceeds realized during the previous calendar year.

3. The above limits will be related to total export proceeds realized during the previous calendar year and will be cumulatively available in a year.

4. The above “write-off” will be subject to the following conditions:

(a) The relevant amount has remained outstanding for more than one year;

(b) Satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realize the dues;

(c) The case falls under any of the undernoted categories :

(i)	The overseas buyer has been declared insolvent and a certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds has been produced.

(ii)	The overseas buyer is not traceable over a reasonably long period of time.

(iii)

The goods exported have been auctioned or destroyed by the Port / Customs / Health authorities in the importing country.

(iv)	The unrealized amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization;

(v)	The unrealized amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remaining outstanding and turned out to be unrealizable despite all efforts made by the exporter;

(vi)	The cost of resorting to legal action would be disproportionate to the unrealized amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control;

(vii)

Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amount has remained unrealized consequent on dishonour of the bills by the overseas buyer and there are no prospects of realization.

(d)

The exporter has surrendered proportionate export incentives (for the cases not covered under A. P. (DIR. Series) Circular No.03 dated July 22, 2010), if any, availed of in respect of the relative shipments. The AD Category – I banks should obtain documents evidencing surrender of export incentives availed of before permitting the relevant bills to be written off.

(e)

In case of self write-off, the exporter should submit to the concerned AD bank, a Chartered Accountant's certificate, indicating the export realization in the preceding calendar year and also the amount of write-off already availed of during the year, if any, the relevant GR / SDF Nos. to be written off, Bill No., invoice value, commodity exported, country of export. The CA certificate may also indicate that the export benefits, if any, availed of by the exporter have been surrendered.

5. However, the following would not qualify for the “write off” facility :

a. Exports made to countries with externalization problem i.e. where the overseas buyer has deposited the value of export in local currency but the amount has not been allowed to be repatriated by the central banking authorities of the country.

b. GR / SDF forms which are under investigation by agencies like, Enforcement Directorate, Directorate of Revenue Intelligence, Central Bureau of Investigation, etc. as also the outstanding bills which are subject matter of civil / criminal suit.

6. The respective AD banks may forward a statement in form EBW , in the senclosed format, to the Regional Office of Reserve Bank under whose jurisdiction they are functioning, indicating details of write-offs allowed under this circular.

7. AD banks are advised to put in place a system under which their internal inspectors or auditors (including external auditors appointed by authorised dealers) should carry out random sample check / percentage check of “write-off” outstanding export bills.

8. Cases not covered by the above instructions / beyond the above limits, may be referred to the concerned Regional Office of Reserve Bank of India.

9. Authorized Dealers may bring the contents of the Circular to the notice of their constituents concerned.

10. The directions contained in this Circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

RBI/2012-13/435

(Rashmi Fauzdar)
Chief General Manager

Export of Goods and Services- Simplification and Revision of Softex Procedure

RBI/2011/12/400

A.P. (DIR Series) Circular No. 80

February 15, 2012

All Authorised Dealers in Foreign Exchange

Madam / Sir,

Export of Goods and Services- Simplification and Revision of Softex Procedure

Attention of the Authorised Dealers is invited to Regulation 6 of the Notification No.FEMA 23/2000-RB dated May 3, 2000 viz. Foreign Exchange Management (Export of Goods and Services) Regulations, 2000, as amended by the Notification No.FEMA 36/2001-RB dated February 2, 2001, in terms of which designated officials of the Ministry of Information Technology, Government of India at the Software Technology Parks of India (STPIs) or at Free Trade Zones (FTZs) or Export Processing Zones (EPZs) or Special Economic Zones(SEZs), had been authorised to certify exports declared through SOFTEX Forms.

2. Considering the spurt in the volume of software exports from India in recent times, the complexity of work contracts involved, the voluminous nature of contract agreements and the duration involved in execution of each contract as well as the time-consuming process involved in the certification of SOFTEX forms, the matter was revisited and a revised procedure, given herein below, has now been finalised in consultation with the stakeholders involved.

3. As per the revised procedure, a software exporter, whose annual turnover is at least Rs. 1000 crore or who files at least 600 SOFTEX forms annually, will be eligible to submit a statement in excel format as per Annexure A, giving all particulars alongwith quadruplicate set of SOFTEX form to the nearest STPI. STPI will then verify the details and decide on a percentage sample check of the documents in details. Software companies will submit all the documents on demand to STPI within 30 days of their advice or any reasonable/extended time at the discretion of the Director, STPI, at the request from the exporter. STPI will thus certify the statement and SOFTEX forms in bulk on the “Top Sheet” regarding the values etc. and will thereafter forward the first copy of the revised SOFTEX format to the concerned Regional Office of RBI, the duplicate copy alongwith bulk statement in excel format to Authorised Dealers for negotiation / collection / settlement, the third copy to the exporter and the last copy will be retained by STPI for its own record. Under the revised procedure, the exporters, however, will have to provide information about all the invoices including the ones lesser than US$25000, in the bulk statement in excel format. [The revised procedure for submission of the Softex form and other relevant documents are detailed in the Annex.]

4. The new procedure will be effective initially in STPI Bangalore, Hyderabad, Chennai, Pune and Mumbai with effect from April 01, 2012. Based on the success in these centers, it would be adopted by all the STPIs and SEZ/ EPZ/ 100% EOU/ EHTP/ DTA units by June 2012.

5. Authorised Dealers may bring the contents of this circular to the notice of their constituents concerned.

6. The directions contained in this circular have been issued under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,

(Rashmi Fauzdar)

Chief General Manager

ANNEX

[Annex to A.P. (DIR Series) Circular No. 80

dated February 15, 2012]

Annexure

1. Revised Procedure : Reporting of Software exports to STPI

A. Periodicity – Monthly

B. Time period – Not later than 30 days from the close of the month in which the invoice is raised

C. Applicability – Software exporters with annual turnover in excess of Rs. 1,000 crore or submitting at least 600 Softex forms annually.

D. Softex Number – Softex number shall be allocated/issued centrally by RBI once a year based on the requirements of exporter which can be about 200,000 numbers to be used by large exporters for the year for all locations. If the softex numbers are exhausted, the exporter can apply again to RBI for allotment of number. Exporters can use the allocated Softex number either for each invoice or for a group of invoices with same currency of a particular customer. Softex number would be the control number for identifying any of the export transaction.

E. Details of information – As per the template in Annexure A, which will broadly cover information as under

i. Name and Address of the Exporter

ii. Letter of permission number and date

iii. Name of authorized data com service provider

iv. Import Export Code number

v. Software Export Declaration

vi. Details of Export of Software during the period

a. Period of submission i.e. Month name

b. SOFTEX Number

c. Name of Client

d. Address of Client

e. Country of Export

f. Invoice Number

g. Invoice Date

h. Project Code or Contract or Agreement or PO & Date

i. Type of Software Exported

j. Invoice Currency

k. Offshore Invoice value

vii. Details of billings on account of Royalty on Software Packages/products exported as per Annexure B

a. Period of submission i.e., Month name

b. SOFTEX Number

c. Name of Client

d. Address of Client

e. Country of Export

f. Invoice Number

g. Invoice Date

h. Unique internal Project Code or Contract/Agreement/PO Date

i. Invoice Currency

j. Offshore Invoice value

k. Details of Software Package(s)/product(s) exported

l. Royalty agreement details

1. % age and amount of royalty

2. Period of Royalty agreement

3. Mode of realisation of Royalty value

4. Calculation of Royalty amount

viii. The Authorized dealer’s name should be given in Section A of individual bulk statement itself along with email id(Annexure A & B). If there are multiple ADs, then exporter may provide full details – i.e., Details such as bank name, address and Authorized Dealer code plus.

a. Details of Letter of Credit(L/C) facilty availed by the exporter

b. Details of Bank Guarantee taken by the exporter

c. Details of the Bank Accounts into which the transfer/remittance are received

ix. Email id of the Exporter shall be specified to which the attested Bulk Softex statement will be sent

F. Soft copy Submission – Software Exports Declaration in summary excel sheet with above details.

G. Hard copy submission – Covering letter along with summary sheet declarations and Annexure copies in quadruplicate. Copies of Softex forms, Invoices, SoW, MSA or any other document are not required to be submitted along with summary.

H. Additional Information – At the request of STPI, software exporter need to submit additional details about selected sample invoices within 30 days of the request or any reasonable extended time at the discretion of the Director , STPI at the request from the exporter.

I. Time Period for additional Information – STPI would do sample audit periodically but not during the period beyond six months, to make the records concurrent with the filing of the Softex. This however, doesn’t stop the regulator from asking old records as per FEMA.

J. STPI will send the attested Bulk Softex statement in hardcopy to software exporter and soft copy to RBI, Regional Office, Authorized Dealer and Exporter with password protection (to be provided by STPI)

K. Authorized Dealer will upload this information in their systems for further processing

L. Authorized Dealer will settle the Softex using AD internal control number based on details provided by Exporter on collections as per Annexure C.

2. Reporting of Software export Realizations to Authorized Dealer (AD)

Software Exporters can have collection account overseas or get credit directly in the bank accounts maintained in India, where individual invoices raised on customers are collected. After meeting “onsite” branch expenses, as permitted by FEMA, net amount will be remitted to India. This would also include 100% realization of offsite exports.

A. Periodicity – Quarterly

B. Applicability – Software exporters with annual turnover in excess of Rs. 1,000 crore or submitting in excess of 600 Softex forms annually.

C. Details of information – As per Annexure C, which will cover information as under

i. Name and Address of the Exporter

ii. Import Export Code number

iii. Details of invoice wise collections (Attachment A)

a. SOFTEX Number

b. Name of Customer

c. Invoice Number

d. Invoice Date

e. Invoice Currency

f. Offshore Invoice value

g. Offshore Invoice value realized

h. Date of Realization of exports proceeds

i. Name of the Bank

j. Country of the Bank

iv. Details of Foreign Currency Inward Remittance in India(Attachment B). Authorized Dealers will give a control number for this Attachment B, which shall be used by them to settle all the softex forms in Attachment A.

a. Inward remittance in India from overseas bank accounts

1. Name and address of the Authorized Dealer at which the amount has been received

2. Inward remittance details like FIRC number, date, amount and foreign currency

3. Name and address of the Overseas bank from which remittance has been effected

b. Direct Inward remittance in India from customers against exports of software

1. Name and address of the Authorized Dealer at which the amount has been received

2. Inward remittance details like FIRC number, date, amount and foreign currency

3. Name and address of the Customer from which remittance has been received

v. Documentation: FIRCs to be given to AD for endorsement along with above details

vi. Software exporters will furnish the credit notes to AD for invoices which have already been certified by STPI and settle the respective Softex forms.

3. Online Submission of Periodic Software Exports Declaration

STPI is in the process of computerizing the submission of Softex form. STPI would be required to ensure that the computerisation of the Softex forms and the populating of the data must be compatible to ‘Softex Card Design’ as detailed inAnnexure E and be able to generate a report in ‘ENC file format’ as detailed in Annexure D.

N.B. In the event of full computerisation at the STPIs, the exporters will upload their bulk statement to the STPI system which will be verified and certified by the STPI and the certified information will flow to RBI, Regional Office, Exporter as well as AD online. The data will eventually flow to DSIM, RBI for record with a copy retained at STPI.

Set-off” of export receivable​s against import payables-L​iberalizat​ion of Procedure

RBI/2011-12/264



A.P. (DIR Series) Circular No. 47


November 17, 2011


To


All Category – I Authorized Dealer Banks


Madam/Sir,


“Set-off” of export receivables against import payables-Liberalization of Procedure

Attention of Authorized Dealer Category – I (AD Category – I) banks is invited to the fact that the requests received from the exporters through their AD branches for set-off of export receivables against import payables are considered by the Reserve Bank of India. As a measure of further liberalization, it has been decided to delegate power to AD Category – I banks to deal with the cases of “set-off” of export receivables against import payables, subject to following terms and conditions:

a.The import is as per the Foreign Trade Policy in force.

b.Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

c.Payment for the import is still outstanding in the books of the importer.

d.Both the transactions of sale and purchase may be reported separately in ‘R’ Returns.

e.The relative GR forms will be released by the AD bank only after the entire export proceeds are adjusted / received.

f.The ” set-off” of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for ”set-off” has been obtained from him.

g.The export / import transactions with ACU countries should be kept outside the arrangement.

h.All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.

2. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

3. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.






Yours faithfully,






(Dr. Sujatha Elizabeth Prasad)


Chief General Manager

Applicability of indirect taxes on packaged software - regarding

Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs
(Tax Research Unit)


Dated: November 4, 2009

Subject: Applicability of indirect taxes on packaged software - regarding -

The undersigned is directed to state that ‘Packaged Software’ is a type of IT software which caters to the needs of a variety of users and is capable of being used for variety of hardwares. IT software is fully exempt from basic customs duty being covered under Information Technology Agreement. So far as excise duty/CVD is concerned, while customised software is fully exempt, the packaged software attracts duty @ 8%.

2. Shrink wrap software is a type of packaged software which consists of a box containing software or software upgrade on media (i.e. CD/DVD), users manual and end-user licence agreements, which is shrink wrapped in plastic cover and is always sold as a set (without removing the plastic cover).

3. Normally, cost of a software supplied in a media consists of two cost components, namely,-

a. the cost of the actual software, i.e. set of information which is placed on a media; and

b. the cost of the intellectual property right (IPR) relating thereto.

4. In 2008 budget, the IPR portion of the cost of software was brought under the service tax net under a new taxable service ‘IT Software Service’ (ITSS). As per the definition, a service provided in relation to IT software for use in the course, or furtherance, of business or commerce was covered under this taxable service. In specifics, the taxable service included,-


…………………………………………….
(v) providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products,

(vi) providing the right to use information technology software supplied electronically and the term ‘service provider’ shall be construed accordingly.

5. In their pre-budget representations for the 2009 budget, the IT companies and their associations represented that if such IT software is imported, it is likely to be subjected to double taxation. While for calculating additional duty, the value of ‘right to use’ supplied alongwith the software would be included (as per the provisions of the Customs Valuation Rules) by the Customs authorities, the service tax authorities would charge service tax on the same value (i.e. on right to use) considering it to be import of ITSS.

6. Accepting their plea, in Budget 2009, two parallel notifications were issued on the excise and customs side. Vide notification no.22/2009-CE dated 07.07. 2009, partial exemption from excise duty was provided to packaged or canned software on that portion of the value which represents the consideration for the transfer of the right to use for commercial exploitation, as on this portion, service tax would be leviable under the ITSS. Similar exemption from CVD was provided vide notification No. 80/2009-Customs dated 07.07.2009 on such software. These exemptions were notified to ensure that while importing or manufacturing packaged software, the importer/manufacturer is spared from paying customs duty/excise duty on the value attributable to transfer of ‘right to use’.

7. It has been brought to the notice of the Board that some of the importers of shrink wrapped software have faced certain difficulties in availing of Notification No.80/2009-Customs dated 7.07.2009. It has been reported that their live consignments are held up, especially at Mumbai and Chennai cargo complexes. From the documents submitted by them it appears that two major objections have been raised at Mumbai and Chennai respectively.

8. It may be recalled that the first proviso of the said notification states that the exemption would be limited to that much of value which is towards right to use such software for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use software components for creation of and inclusion in other information technology software products. In Mumbai, a view has been taken that the benefit of the notification is available only if all the activities, viz., right to reproduce, right to distribute, right to sell and right to use the software component for creation of and inclusion in other IT software products are fulfilled. Thus a conjunctive meaning of the term ‘and’ has been taken and it has been held that since the importer did not fulfill all the conditions, they should be denied the benefit of the notification.

9. In another case in Chennai, where fully packed product (FPP) was imported by a company which produced split value (i.e., one value for media CVD and other for right to use software) in a single invoice shown separately, the jurisdictional authorities have refused to accept such split value for the purpose of claiming notification No.80/2009-Customs and taken the view that CVD should be charged on entire amount.

10. The above instances show that the field formations have failed to appreciate the scope of the said notification. In the first case, the view taken by officers is legally untenable because the phrase used in notification No.80/2009-Cus is inclusive in nature and it is a well-known principle that in an inclusive expression, the word ‘and’ is to be understood as ‘or’ and that even if one of the activities (such as right to reproduce, right to distribute, right to sell etc.) mentioned in the said inclusive portion is carried out, it would satisfy the condition of commercial exploitation, thus making the import eligible for notification No.80/2009-Customs. As for the second case, the notification No.80/2009-Cus itself envisages splitting of the value of the imported goods into that pertaining to software on media and the one pertaining to right to use. In such cases, there is no rationale for the department to deny splitting of value unless there are reasons to believe that such a splitting has been done in order to evade payment of duty.

11. The assessment of the shrink wrapped packaged software may be done keeping in view the above directions.

112. This issues with the approval of the Member (Budget & ST).

F.No.354/189/2009-TRU

Govt clears doubts on downstream investment by Indian Companies

Government of India
Ministry of Commerce & Industry
Department of Industrial Policy & Promotion(FC Section)

Press Note No. 4 (2009 Series)

Subject: Clarificatory guidelines on downstream investment by Indian Companies.
The Policy for downstream investment by Indian companies seeks to lay down and clarify about compliance with the Foreign investment norms on entry route, conditionalities and sectoral caps. The ‘guiding principle’ is that downstream investment by companies ‘owned’ or ‘controlled’ by non resident entities would require to follow the same norms as a direct foreign investment i.e. only as much can be done by way of indirect foreign investment through downstream investment in terms of Press Note 2 (2009 series) as can be done through direct foreign investment and what can be done directly can be done indirectly under same norms.

2.0 The Guidelines for calculation of total foreign investment, both direct and indirect in an Indian company, at every stage of investment, including downstream investment, have been detailed in Press Note 2 of 2009 which enables determination of total foreign investment in any/all Indian Companies.

3.0 Definitions:

3.1 The term ‘Indian Company’ means a company registered or incorporated in India as per the Indian Companies Act, 1956

3.2 ‘Operating Company’ is an Indian company which is undertaking operations in various economic activities and sectors.

3.3 ‘Downstream investment’ means indirect foreign investment by one Indian company into another Indian company by way of subscription or acquisition in terms of Press Note 2 of 2009. Para 5.2 of the said Press Note provides the guidelines for calculation of indirect foreign investment with conditions specified in para 5.5.

3.4 ‘Investing Company’ means an Indian Company holding only investments in another Indian company, directly or indirectly, other than for trading of such holdings/securities.

3.5 ‘Foreign Investment’ would have the same meaning as in Press Note 2 (2009 series).

4.0 Guidelines for downstream investment by Investing Indian Companies ‘owned or controlled by non resident entities’ as per Press Note 2 of 2009: Recognizing the need to bring in clarity into the Policy for downstream investment by investing Indian companies, the Government of India now proposes to clarify the policy in this regard.

4.1 The Policy on downstream investment comprises policy for (a) only operating companies (b) operating-cum-investing companies (c) only investing companies.

4.2 The Policy in this regard will be as below:

4.2.1 Only operating companies: Foreign investment in such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating.

4.2.2 Operating-cum-investing companies: Foreign investment into such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating. Further, the subject Indian companies into which downstream investments are made by such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps in regard of the sector in which the subject Indian companies are operating.

4.2.3 Investing companies: Foreign Investment in Investing Companies will require the prior Government/FIPB approval, regardless of the amount or extent of foreign investment. The Indian companies into which downstream investments are made by such investing companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps in regard of the sector in which the subject Indian companies are operating.

5.0 For companies which do not have any operations and also do not have any downstream investments, for infusion of foreign investment into such companies, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such company commences business(s) or makes downstream investment it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.

6.0 For Operating-cum- investing companies and investing companies (Para 4.2.2, 4.2.3) and for companies as per para 5.0 above, downstream investments can be made subject to the following conditions:

(a) Such company is to notify SIA, DIPP and FIPB of its downstream investment within 30 days of such investment even if equity shares/CCPS/CCD have not been allotted along with the modality of investment in new/existing ventures (with/without expansion programme);

(b) downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a shareholders Agreement if any;

(c) issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;

(d) Investing companies would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream operating companies to raise debt in the domestic market.

5.0 Para 11 of Press Note 3 of 1997 and Press Note 9 of 1999 stand deleted. These guidelines will be effective from the date of issue of this Press Note. FDI Policy announced vide Annex to Press Note 7 (2008) dated June 16, 2008 stands amplified to the above extent.

GOPAL KRISHNA
Joint Secretary to the Government of India
D/o. IPP File No. 12(22)/2007-FC
Dated 25th February, 2009

Liability Partnership Act, 2008

Limited Liability Partnership Bill has received the accent of Honourable President of India and has now become a legislation and is to be called as 'Limited Liability Partnership Act, 2008'

Click here to download: http://mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdf

Provident Fund on "International Workers"

The government of India had made certain fundamental changes vide a notification dated 1 October 2008 in the Employee Provident Fund Scheme, 1952 and the Employee Pension Scheme, 1995 (collectively referred to as Indian social security schemes). This has significant impact on the expatriates and the employers with whom they work in India .

The Additional Central Provident Fund Commissioner (ACPFC) has issued certain clarifications with respect to these amendments vide his letter dated 7 January 2009 (No. Acturial/7(9)2008/ 75683) to all Regional Provident Fund Commissioners. Also, the ministry of labour has posted certain FAQs on their website (www.epfindia.com) clarifying the position relating to the International Worker (IW)

FAQ on International Workers:

1) Who is an International worker?
An International worker may be an Indian worker or a foreign national.
This means an Indian worker who has divided his/her career between India and another country with whom India has entered into a bilateral Social Security agreement or a foreign national working in India. (Para 2 ff)



2) Who is an ‘excluded employee’ under these provisions?
A ‘detached worker’ posted in an establishment in India but contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India shall be an ‘excluded employee’ under these provisions. (Para 2 f)



3) Who is a ‘detached worker’?
An International worker, being not an Indian employee, contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India and exempt from making any contribution to the Indian system for the period and terms as set out in such an agreement is a ‘detached worker’ for the purpose of compliance under the Indian system. (Para 2 f)



4) What does the term ‘Indian employee’ mean?
An employee, holding or entitled to hold an Indian passport and employed by an establishment covered under the EPF and MP Act, 1952 is an Indian employee under the Special provisions in respect of International workers. [Para 2 ff (a) ]



5) Who all shall become the members of the fund?
a) Every International worker, other than an ‘excluded employee’ – from 1st Nov.2008.
b) Every excluded employee, on ceasing the status, - from the beginning of the month following that in which he/she losses the status. (Para 26)



6) Which category of establishments shall take cognizance of these provisions?
All such establishments covered/coverable under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 that employ ‘International workers’ either in India or abroad shall take cognizance of these provisions. (Para 26)



7) Whether PF rules will apply to an employee if his salary is paid outside India?
Yes, the provisions will apply irrespective of where the salary is paid. (Para 30)



8) Whether PF will be payable only on the part of salary paid in India in case of split payroll?
In case of split payroll the contribution shall be paid on the total salary earned by the employee. (Para 29)



9) ‘Monthly Pay’ for calculating contributions to be paid under the Act?
The monthly pay shall be the pay as specified under Para 29 of the EPF Scheme, 1952, which covers:
• Basic wages (all emoluments paid or payable in cash while on duty or on leave / holiday except Dearness allowance, House rent allowance, overtime allowance, bonus, commission or any other similar allowance payable in respect of employment and any presents made by the employer)
• Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living)
• Retaining allowance
• Cash value of any food concession



10) What portion of salary on which PF would be payable in case an individual has multiple country responsibilities and spends some part of his time outside India?
Contribution is payable on the total salary payable on account of the employment of the employee employed for wages by establishment covered in India even for responsibility outside India also.[Section 2 (b)]



11) Is there a minimum period of days of stay in India which the employee can work in India without triggering PF compliance?
No, there is no any minimum period of employment in India is required to be eligible for membership. Every eligible International worker has to be enrolled from the first date of his employment in India.



12) What constitutes the Pensionable service?
The service for which contributions are received and/or receivable as also the period of service rendered and considered as eligible under a Social Security Agreement that may cover an International worker. (Para 10 of EPS)



13) How is Pensionable service determined?
While the period of service for which contributions are received under the EPS will decide the quantum of pension admissible, the period of service rendered under a relevant social security agreement shall be taken into account only for the purpose mentioned under such agreement. (Para 10 of EPS)



14) Is there a cap on the salary up to which the contribution has to be made by both the employer as well as an employee?
No, there is no cap on the salary up to which the contribution has to be made by both the employer as well as an employee.



15) Is there a cap on the salary up to which the employer’s share of contribution has to be diverted to EPS?

Yes, the cap on the salary up to which the employer’s share of contribution has to be diverted to EPS remains at Rs.6500. (Para 3 of EPS)



16) What is a social security agreement (SSA)?

A social security agreement is a bi-lateral instrument to protect the interests of the workers in the host country. It being a reciprocal arrangement generally provides for avoidance of no coverage or double coverage and equality of treatment with the host country workers



17) What are the provisions covered in a social security agreement?
Generally a social security agreement covers 3 provisions. They are:

a) Detachment
Applies to employees sent on posting in the host country, provided he/she is complying under the social security system of the home country.

b) Exportability of Pension
Provision for payment of pension benefits to the beneficiary choosing to reside in the territory of the home country directly with out any reduction as also to a beneficiary choosing to reside in the territory of a third country.

c) Provision for totalisation of Benefits
The period of service rendered by an employee in the host country to be counted for the “eligibility” purpose and the payment may be restricted to the length of service, on pro-rata basis.



18) What is the status of the SSAs?
As of today, Social security agreements have been signed with Belgium, France and Germany. But the date of entry into force is yet to be notified. Negotiations are at various stages with The Netherlands, Czech Republic, Hungary, Norway, Switzerland, Sweden, Luxembourg, USA and Australia. Government level talks are on with many other countries where sizable numbers of Indian workers are employed. Although not a formal agreement, there is a reciprocal arrangement between India and Korea to settle the claims of the employees on completion of employment in the host country



19) Should the eligible employees from Belgium, France and Germany contribute under the Special provisions till such time the ‘date of effect’ is notified?
Yes, the International workers from Belgium, France and Germany shall be enrolled as members of EPF till such time the ‘date of effect’ is notified by the Government of India and after such workers obtaining a ‘detachment certificate’ from the appropriate authority in their countries, respectively. Till the ‘date of effect’ is notified no Indian employee posted to these countries and none of the employees from these countries working in India shall be eligible for detachment status.



20) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India has social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
As of today the date of effect of the SSAs is yet to be notified. Therefore, a posted employee, whose name is retained in the pay bill maintained by the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.



21) Could the term "Indian employee" mean any foreign national who is directly employed by an Indian establishment i.e. a person who is in India not under a secondment arrangement or any deputation from a foreign employer but hired directly by the Indian establishment under local terms and service conditions?
The term Indian employee shall mean only such of those employees as explained under Q.No 4. No foreign national can be termed an Indian employee.



22) Whether a Third Country(C) National domiciled in a country (B) with which India (A) has a social security agreement is eligible for benefit under the social security agreement between India and that country?
Normally social security agreements are signed to cover the ‘Nationals’ of the respective countries. Therefore, the above employee may be eligible for the benefit provided that the Third country (C) has signed an enabling agreement with both India (A) as well as the Second country (B).



23) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India DOES NOT have social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
A posted employee, who is drawing wages from the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.



24) Foreign nationals who are employed in India and being paid in foreign currency, whether to be covered or not?

Yes, International workers drawing salary in any currency and in any manner are to be covered. (Section 2 f).



25) Foreigners who are employed directly as an employee by an Indian establishment abroad to be covered or not?

The local employees of an Indian establishment engaged abroad shall be covered by the local legislations

26) Considering that in most countries issuance of work permit to an individual is a trigger for social security compliance, whether the purpose and type of visa i.e. business/ employment will be a determinant for a person to be considered as an International Worker?

The purpose of the visit of an individual is the main determinant for social security compliance. The type of visa may help in determining the purpose of visit. For example – a foreign national coming in to India under an employment visa is working in India.

27) Whether benefit of reciprocity can be extended to an International Worker if his home country provides for exemption from social security to Indian nationals going to work in that country under its domestic law even though there is no social security agreement with India?

In the absence of a formal agreement the benefit of reciprocity is available at the time of withdrawal of the pension claim and not at the time of coverage. (Para 14 of EPS)

28) Where will the survivor benefits be delivered in case of a covered employee holding a passport, being other than an Indian passport, issued by a country with which India is not having a SSA?

In the absence of a SSA, the survivor benefits such as widow/widower pension, children /orphan pension, nominee/parent pension, etc. as the case may be, shall be payable to a bank account of the eligible beneficiary in India. (Para 14 of EPS)

29) What is the criterion for receiving the withdrawal benefit for the services of less than 10 years under EPS, 1995?

In respect of employees hailing from the countries with which India has signed a SSA, the withdrawal benefit shall be paid or accounted for as per the provisions of the SSA. In all other cases, it shall be guided by the principle of reciprocity with reference to the entitlement available to Indian employees in the other country. (Para 14 of EPS)

30) How long an Indian employee retains the status of “International worker”?

An Indian employee attains the status of “International worker” only on account of his employment in a country with which India has signed a SSA. He shall remain in that status till the time he avails the benefits under a social security programme covered under that SSA. (Para 2 f)

31) Under what condition the contributions received in the PF account are payable along with interest?

The full amount standing to the credit of a member’s account is payable if any one of the circumstances mentioned under Para 69 of the EPF Scheme, 1952 is fulfilled


32) Is there a cap on the salary up to which the contribution has to be made to EDLI Scheme by both the employer?

Yes, the cap on the salary up to which contribution has to be made to EDLI Scheme remains unchanged at Rs.6500.