Notified Reporting activities of liaison offices

CA MANEET PAL SINGH

maneet@capasricha.com

9810774806

Foreign companies or firms or an association of individuals does not file a return of income with regard to its liaison office on the ground that no business activity is allowed to be carried out in India. In order to inquire about regular information from non-resident entities in respect of the kind of activities conducted by their liaison offices in India, the Government of India in the Union Budget 2011 had introduced Section 285 to the Income Tax Act. As per this section non-resident entities having liaison offices in India are required to submit prescribed annual statement in respect of their activities to the tax authorities within 60 days from the end of the financial year.

Section 285 was made effective from 1 June 2011, but the form was not notified by the board. Recently, CBDT has notified the form by introducing Rule 114DA and Form No. 49C to the Income-tax Rules, 1962. The annual statement shall be duly verified by the Chartered Accountant or the Authorised Signatory of the non-resident entity. Further, as per the Rule, the annual statement in Form 49C shall be furnished in electronic form along with digital signature. The rules and form shall come in force from 1 April 2012. It appears that there may be increased questioning on the activities of the liaison office in India. Therefore, permanent establishment exposure, etc, should be carefully ascertained before filing such information.

Specimen of Form 49C is given below

"FORM No. 49C

[See rule 114DA]

Annual Statement under section 285 of the Income-tax Act, 1961

S No.	Particulars	Details
1	Financial Year for which the Statement is being submitted
2	Name and Principal Address of the non- resident person in India
3	Head Office Address of the non-resident person
4	Permanent Account Number (if Allotted)
5	Tax Identification No., if any, of country of Incorporation or residence
6	Liaison Office (L.O.) Registration No. granted by RBI
7	Nature of activities undertaken by L.O.
8	Date of opening of L.O. in India
9	Date of RBI approval for L.O. opening
10	Address of L.O./L.O.s in India
11	Date of submitting Annual Activity Certificate (AAC) for the Financial Year to RBI
12	Name, address and Membership No. of the Chartered Accountant signing the Annual Activity Certificate (AAC) as prescribed by RBI
13	India specific financial details for the financial year i.e., receipts, income and expenses of the non-resident person from or in India (not only of the L.O.)
14	Details of all purchases, sales of material, and services from/to Indian parties during the year by the non-resident person (not limited to transactions made by (L.O.)
15	Name & Designation of Officer In charge for each Office of the non-resident person in India
16	Details of any salary or compensation of any sort payable outside India to any employee working in India or for services rendered in India
17	Total Number of employees working in the LO/L.O.s during the year. Particulars of employees drawing salary of Rs. 50,000 or above per month specifying their Name Designation and sitting location
18	Details (with complete addresses Including PAN) of agents/representative/distributors of the non-resident person in India.
19	Names & addresses of the top five parties in India with whom the L.O. has been doing the liaisoning
20	Details of Products or services for which liaisoning activity is done by the L.O.
21	Details of any other entity (including PAN, if any) for which liaisoning activity is done by the (L.O.)
22	Details of Group entities (with addresses and PAN, if any) present in India as Branch Office/Companies/LLPs etc., incorporated in India and nature their business activities.
23	Details (with addresses) of other L.O.s of the Group entities in India
24	Other Group entities operating from the same premises as the office of the L.O.

VERIFICATION

I, ……… [full name in block letters] …………………. son/daughter of ………………………………….. holding Permanent Account Number…………………………………………..……………………….. solemnly declare that to the best of my knowledge and belief, the information given in the form is correct and complete and that the other particulars shown therein ore truly stated. I further declare that I am submitting this form in my capacity as ………………………. and I am also competent to make this submission and verify it.

Verified today the ……………. day of ……………..

Place

Signature of Authorised Signatory

Name …………………………………….."

CA MANEET PAL SINGH

maneet@capasricha.com

9810774806

New Liberalised External Commercial Borrowings

The Reserve Bank of India (RBI) has recently issued series of Circulars amending and liberalising current External Commercial Borrowings (ECB) Guidelines. The key changes introduced by these Circulars are:

For the Infrastructure Sector


(i)  As per the current Guidelines, repayment of existing Rupee loans is not a permissible end-use for ECB. Considering the specific need of the Infrastructure Sector, Indian Companies in the Infrastructure Sector, have now been permitted to utilise 25 percent of their fresh ECB raised towards refinancing of the Rupee loan/s availed by them from the domestic banking system under the Approval Route (i.e. with Prior RBI’s approval vide an application filed through the Authorised Dealer / Banker) subject to:

        (a) At least 75 percent of the fresh ECB proposed to be raised should be utilised for capital  expenditure towards a 'new infrastructure' project(s) as defined in the ECB Guidelines

        (b) The remaining 25 percent can be utilised for refinance / repayment of the Rupee loan availed for 'capital expenditure' of earlier completed infrastructure project(s) and

        (c) The above refinance to be utilised only for the Rupee loans which are outstanding in the books of the financing bank concerned.

(ii) Towards the above, an application needs to be filed by the eligible Applicant to the RBI through the Authorised Dealer (AD) / Bank along with prescribed details and documents. The AD is obliged to monitor the end-use of funds. Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement. Bridge Finance for Infrastructure Sector

(i) The Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) have now been permitted to import capital goods by availing short term credit (including buyers’ / suppliers’ credit) in the nature of ‘bridge finance’ with prior RBI’s approval (i.e. under the Approval Route) subject to the following terms and conditions:

(a) The bridge finance to be replaced with a long term ECB;
(b) The long term ECB to comply with all the extant ECB norms; and
(c) Prior RBI approval to be sought for (a) above.

(ii) The AD / Bank needs to monitor the end-use of the funds and is also obliged to verify the evidences for import of capital goods (i.e. Bill of Entry, etc). Further, Banks in India have been prohibited to provide any form of guarantee(s) for such arrangement.

ECB - Rationalisation and Liberalisation (i) The enhanced limits for ECB under the Automatic Route are as under:

Eligible Borrowers	Current Limit	Enhanced Limit
Real Sector- Industrial Sector-Infrastructure Sector	USD 500 million or equivalent per financial year	USD 750 million or equivalent per financial year
Corporate(s) in specified Service Sectors viz. Hotel, Hospital and Software	USD 100 million or equivalent per financial year (as stipulated)	USD 200 million or equivalent per financial year (as stipulated)

(ii) The ECBs can now be designated in INR as under:

(a) All Eligible Borrowers can now avail ECBs in INR from Foreign Equity Holders under the Automatic or the Approval Route as per the extant ECB Guidelines.
(b) NGOs engaged in micro finance activities can avail ECBs designated in INR as hitherto under the Automatic Route from Overseas Organisations and Individuals as per extant ECB Guidelines.

(iii)The Interest during Construction (IDC) is now considered as a permissible end-use for Indian Companies in the Infrastructure Sector (as defined in ECB Guidelines) under the Automatic/Approval Route, as the case may be, subject to the conditions that (a) the IDC is capitalised; and (b) is part of the project cost.

Infrastructure Sector

(i) The Policy relating to Structured Obligations has been liberalised to permit direct foreign equity holder(s) as per extant ECB guidelines (i.e. minimum holding of 25 percent of the paid up capital) and indirect foreign equity holder (atleast 51 percent of the paid-up capital) to provide credit enhancement to Indian companies engaged exclusively in the development of Infrastructure Sector (as defined in the RBI’s ECB Guidelines and Guidelines for the Infrastructure Finance Companies, which have been classified as such by the RBI).

(ii) The credit enhancement by all eligible non-resident entities is now permitted under the Automatic Route (without any prior RBI approval) subject to applicable guidelines and conditions.

Foreign equity holders

(i) Currently, for availing ECBs under the Automatic Route, a ‘foreign equity holder’ is considered as ‘recognised lender’ subject to the following:

(a) For ECB up to USD 5 million: minimum paid-up equity of 25 percent held directly by the lender; and
(b) For ECB more than USD 5 million: minimum paid-up equity of 25 percent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB does not exceeds four times the direct foreign equity holding).

(ii) The above norms have been liberalised as under:
(a) The term 'debt' in the debt-equity ratio has been replaced with 'ECB liability' and the ratio will be known as 'ECB liability'-equity ratio to make the term signify the true position as other borrowings/debt are not to be considered in working out this ratio.
(b) Further, besides the paid-up capital, free reserves (including the share premium received in foreign currency from the lender(s) concerned) as per the latest audited balance sheet will be reckoned for the purpose of calculating the equity of the foreign equity holder. If there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned will be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB.
(c) For calculating the ECB liability, besides the proposed ECB, any outstanding ECB from the same foreign equity holder lender should also be reckoned

(iii)The ECB proposals by Eligible Borrowers from their Foreign Equity Holders (both Direct and Indirect) and Group Companies will now be considered by RBI under the Approval Route as under:-

(a) Service sector units, in addition to those in Hotels, Hospitals and Software, would also be considered as Eligible Borrowers if the ECB is obtained from Foreign Equity Holders. This amendment is intended to facilitate overseas borrowings by Training Institutions, R &D, Miscellaneous Service Companies, etc;
(b) The ECB from Indirect Equity Holders to be considered provided the Indirect Equity Holding by the lender in the Indian company is at least 51 percent; and
(c) The ECB from a group company to also be permitted provided both the Borrower and the Foreign Lender are subsidiaries of the same parent.
(d) The total outstanding ECB, including the proposed ECB from a foreign equity lender, cannot exceed 7 times the equity holding, either directly or indirectly of the Lender (in case of lending by a Group Company, equity holdings by the common parent would be reckoned).
 

GUIDELINES FOR PRACTICE IN CORPORATE FORM

Guidelines

Definition.

(i)      Managing Director, Whole-time Director and Manager -

The term “Managing Director”, “Whole-time Director” and “Manager” shall have the same meaning as defined/understood in the Companies Act, 1956.  For this purpose, the member in practice who is a Managing Director, Whole-time Director or Manager shall be full-time practitioner/proprietor/partner in a Chartered Accountants firm.

(ii)        Act – Act means The Chartered Accountants Act, 1949.

(iii)       Regulations – Regulations means the Chartered Accountants Regulations, 1988.

(iv)       Code of Ethics – Code of Ethics means the Code of Ethics issued by the Institute and decisions of the Council in this regard.

(v)         Institute – Institute means the Institute of Chartered Accountants of India.

(vi)       Council – Council means the Central Council of the Institute.

(vii)     Member – Member means a Member in Practice.  Member in Practice means a `Member in Practice’ as defined in the Chartered Accountants Act, 1949 and its Regulations.

(viii)    Management Consultancy & Other Services – Management Consultancy & Other Services or MCS means `Management Consultancy & Other Services’ permitted by the Council in pursuance to Section 2(2)(iv) of the Chartered Accountants Act, 1949. The definition of the expression “Management Consultancy and other Services” as appears at pages 8-10 of the Code of Ethics, 2005 edition is as under:

The expression “Management Consultancy and other Services” shall not include the function of statutory or periodical audit, tax (both direct taxes and indirect taxes) representation or advice concerning tax matters or acting as liquidator, trustee, executor, administrator, arbitrator or receiver, but shall include the following:

(i)       Financial management planning and financial policy determination.

(ii)      Capital structure planning and advice regarding raising finance.

(iii)     Working capital management.

(iv)     Preparing project reports and feasibility studies.

(v)      Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds etc.

(vi)     Budgeting including capital budgets and revenue budgets.

(vii)    Inventory management, material handling and storage.

(viii)    Market research and demand studies.

(ix)     Price-fixation and other management decision making.

(x)      Management accounting systems, cost control and value analysis.

(xi)     Control methods and management information and reporting.

(xii)     Personnel recruitment and selection.

(xiii)    Setting up executive incentive plans, wage incentive plans etc.

(xiv)    Management and operational audits.

(xv)    Valuation of shares and business and advice regarding amalgamation, merger and acquisition.

(xvi)    Business Policy, corporate planning, organisation development, growth and diversification.

(xvii)   Organisation structure and behaviour, development of human resources including design and conduct of training programmes, work study, job-description, job evaluation and evaluation of work loads.

(xviii)  Systems analysis and design, and computer related services including selection of hardware and development of software in all areas of services which can otherwise be rendered by a Chartered Accountant in practice and also to carry out any other professional services relating to EDP.

(xix)    Acting as advisor or consultant to an issue, including such matters as: -

 (a)     Drafting of prospectus and memorandum containing salient features of prospectus. Drafting and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of Companies and SEBI.

 (b)    Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the underwriting arrangement, distribution of publicity and issue material including application form, prospectus and brochure and deciding on the quantum of issue material (In doing so, the relevant provisions of the Code of Ethics must be kept in mind).

(c) Advice regarding selection of various agencies connected with issue, namely Registrars to Issue, printers and advertising agencies.

(d) Advice on the post issue activities, e.g., follow up steps which include listing of instruments and despatch of certificates and refunds, with the various agencies connected with the work.

Explanation: For removal of doubts, it is hereby clarified that the activities of broking, underwriting and portfolio management are not permitted.

(xx)    Investment counseling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of Ethics must be kept in mind).

(xxi)    Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the relevant provisions of the Code of Ethics must be kept in mind).

(xxii)   Quality Audit.

(xxiii)   Environment Audit.

(xxiv)  Energy Audit.

(xxv)   Acting as Recovery Consultant in the Banking Sector.

(xxvi) Insurance Financial Advisory Services under the Insurance Regulatory & Development Authority Act, 1999, including Insurance Brokerage.

(ix)       Management Consultancy Company - Management Consultancy Company means a Company which complies with the Guidelines for Practice in Corporate Form issued by the Institute.

(x)         Relative – Relative means “Relative” as defined in Appendix (9) of the Chartered Accountants Regulations, 1988, 2002 edition.

3.        Name of the Management Consultancy Company:

(i)           The Management Consultancy Company shall have a distinct name which shall be approved by the Institute. The prescribed format of application for approval of name for Management Consultancy Company is at Form `G’ (enclosed).

(ii)          Standards prescribed in Regulations 190 of the Chartered Accountants Regulations, 1988 shall be applicable to the name of the Management Consultancy Company.  However, even if a name is provided and subsequently it is found that the same is undesirable then, the said name can be withdrawn at any time by the Institute.  The provisions in respect of name of companies as prescribed in the Companies Act, 1956 shall be applicable in letter and spirit.

(iii)         The name of Management Consultancy Company may indicate the area of ‘Management Consultancy & Other Services’ permitted by the Council from time to time.

(iv)         The Management Consultancy Company shall neither be permitted to advertise nor to use logo.

4.        Registration:

After approval of the name under Guideline 3 and incorporation under the Companies Act, 1956, the Management Consultancy Company is required to be registered with the Institute in a prescribed Form ‘H’ (enclosed).

5.        Ethical Compliance:

(i)           Once the Management Consultancy Company is Registered with the Institute as per the Guidelines, it will be necessary for such a Company to comply with the following requirements: -

a)    If the individual practitioner/sole-proprietorship firm/partnership firm is the statutory auditor of an entity then the Management Consultancy Company should not accept the internal audit or book-keeping or such other professional assignments which are prohibited for the statutory auditor firm.

b)   The Notification No. 1-CA(7)/60/2002 dated 8^th March, 2002 (enclosed) in respect of ceiling on Non-audit fees is applicable in relation to a Management Consultancy Company. 

c)    The Management Consultancy Company shall comply with clauses (6) & (7) of Part-I of the First Schedule to the Chartered Accountants Act, 1949 and such other directives as may be issued by the Institute from time to time.

(ii)          The Management Consultancy Company shall give an undertaking that it shall comply with clauses (6) & (7) of Part-I of the First Schedule to the Chartered Accountants Act, 1949 and such other directives as may be issued by the Institute from time to time.

6.        Object of Management Consultancy Company:

The Management Consultancy Company shall engage itself only in Management Consultancy & Other Services. The Management Consultancy Company shall give an undertaking that it shall render only Management Consultancy & Other Services prescribed by the Council pursuant to powers under section 2 (2)(iv) of the Chartered Accountants Act, 1949.

The Object Clause should restrict itself only to the Management Consultancy & Other Services permitted by the Council in pursuance to Section 2(2)(iv) of the Chartered Accountants Act, 1949.

7.        Violation of Act:

                   In case of alleged violation of the provisions of the Act, Regulations framed thereunder, guidelines/directions laid down by the Council from time to time and Code of Ethics issued by the Council, the individual practitioner/sole-proprietorship firm/partnership firm in general and the Managing Director/Whole-time Director/Manager of such company in particular, would be answerable.

8.        Applicability of Companies Act, 1956 and other laws:

All the provisions of the Companies Act, 1956 and other laws that are applicable to a Company formed under the Companies Act, 1956 shall be applicable to the Management Consultancy Company. The Guidelines are in addition to the provisions contained in the Companies Act, 1956.

9.        Benefits available to members if the Guidelines framed are complied with:

i)        The member can retain full time Certificate of Practice besides being the Managing Director/Whole-time Director/Manager of Management Consultancy Company.

ii)       The member will be entitled to train articled/audit assistant(s). 

iii)       There will be no restrictions on the quantum of the equity holding of the member, either individually and/or along with his relatives, in such a company.

10.      Transitory Provisions:

i)             Any member who wishes to become Managing Director/Whole-time Director/Manager of an existing Company, which is rendering Management Consultancy & Other Services, and wishes to take other benefit contained in the Guidelines, shall comply with the Guidelines for Practice in Corporate Form.

ii)            The Company is required to take approval of name and then apply for registration with the Institute.

iii)           If the Institute has reservation over the name of an existing Company that wishes to come under the provisions of this Guidelines, the Company shall be required to apply for change in name.

iv)           The Company is also required to change its object clause, if the same contains objects other than those provided in the Guidelines.