Entries from December 2008 ↓

Setting up of operations in India by Overseas Company/ Non-Resident

A foreign company or a non-resident planning to set up business operations in India can do so in the following manner:

  • As a foreign company through a Liaison Office/ Representative Office, Project Office or a Branch Office; or
  • As an Indian company through a Joint Venture or a Wholly Owned Subsidiary.

A foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Co Act.

Liaison Office/ Representative Office

A liaison office is not allowed to undertake any business activity in India and earn any income in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.

The Foreign Exchange Management Act (“FEMA”) regulates the opening and operation of liaison offices. Prior approval of Reserve Bank of India (“RBI”) is required for opening of such offices. Permission for such offices is typically granted for a period of three years initially and may be extended from time to time. These offices have to ensure compliance with the following conditions:

  • Expenses are met entirely through inward remittances of foreign exchange from Head Office abroad.
  • These offices do not undertake any trading or commercial activities. Activities should be limited to collecting and transmitting information between overseas Head Office and potential Indian customers.
  • Such offices should not charge any commission or receive other income from Indian customers for provision of liaison services.

A person resident outside India permitted by RBI to establish a liaison office in India may carry out the following activities:

  • Represent in India the parent company/ group companies.
  • Promote export import from/ to India.
  • Promote technical/ financial collaborations between parent/ group companies and companies in India.
  • Act as a communication channel between the parent company and the Indian companies.

Further, liaison/ representative offices are required to furnish an annual compliance certificate, from their auditors, with the RBI.

Project Office

Foreign companies planning to execute specific projects in India can set up temporary project/ site offices in India. Under the earlier provisions of FEMA, specific approval was required to be obtained from RBI for establishment of a Project Office. Recently, the RBI has accorded general permission to foreign companies for establishment of Project Offices in India subject to following conditions:

  • It has secured from an Indian company a contract to execute a project in India;
  • The project is funded by inward remittance from abroad or bilateral/ multilateral International Finance Agency or the project has been cleared by an appropriate authority or the contracting entity has been granted term loan by a Public Financial Institution or a bank in India for the project; and
  • Intimation is required to be filed with the regional office of RBI in the prescribed manner.

Further, until recently an approval from the RBI was required for:

  • opening of foreign currency accounts by Project Offices in India; and/ or
  • Intermittent remittances to be made by such Project Offices.

In order to further liberalize the procedure for Project Offices, the Authorized Dealers (bankers) have been empowered to open foreign currency accounts for the Project Offices as well as permit intermittent remittances by Project Offices without an approval from the RBI, subject to fulfillment of certain conditions.

Branch Office

Foreign companies may set up Branch Offices in India, with prior permission of RBI, for the following purposes:

  • To represent parent company/ other foreign companies in various matters in India e.g. acting as buying/ selling agents in India.
  • To conduct research work in the area in which parent company is engaged.
  • To undertake export and import.
  • To promote possible technical and financial collaborations between Indian companies and parent/ overseas group companies.
  • To render professional or consultancy services.
  • To render services in Information Technology and development of software in India.
  • To render technical support to products supplied by the parent/ overseas group companies.

A Branch Office is not permitted to carry out manufacturing activities on its own. A Branch Office is required to file an annual compliance letter, from their auditors, with the RBI. Remittance of profits of the Branch Office is permissible by furnishing requisite documents with an authorized dealer.

Further, RBI has granted general permission to foreign companies to establish Branch Offices/ units in SEZs to undertake manufacturing/ service activities subject to the following conditions:

  • such units function in those sectors where 100 percent FDI is permitted;
  • such units comply with prescribed requirements of the Co Act;
  • such units function on a stand-alone basis; and
  • in the event of winding-up of business and for remittance of winding-up proceeds the branch/ unit shall approach an Authorized Dealer with the prescribed documents.

As an Indian Company

A foreign company can commence operations in India through incorporation of a company under the provisions of Co Act. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing foreign investment policies of the Government and receipt of requisite approvals.

Joint Venture with an Indian Partner

Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through Joint Venture may entail the following advantages to a foreign investor:

  • Already established distribution/ marketing set up of the Indian partner.
  • Available financial resources of the Indian partner.
  • Already established contacts of the Indian partner that help smoothen the process of setting up operations.

Foreign investments are approved through two routes as under:

  • Automatic Route: Approvals for foreign equity up to 26 percent, 50 percent, 51 percent, 74 percent and 100 percent are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases.
  • Government Approval: Approval in all other cases where the proposed foreign equity exceeds 26 percent, 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list, it requires prior specific approval from Foreign Investment Promotion Board (“FIPB”).

Setting up of operations in India by an Indian Citizen/ Company

An Indian citizen can set up IT software and services operations in India in the following manner:

  • as an Individual/ Proprietor; or
  • as a Partnership Firm/ Trust; or
  • as a Company registered under the Companies Act, 1956 (“Co Act”).

No prior permission of Government of India is required to set up IT/ software units in India.

Moreover, to encourage units in this sector, Government of India has announced many schemes ie:

  • Export Promotion Capital Goods (“EPCG”) Scheme: This scheme allows import of capital goods at a concessional customs duty rate, where the importer as a condition is required to achieve a specified export obligation. The export obligation and the period within which the same is required to be achieved vary based on the nature of the unit and value of imported capital goods.
  • Special Economic Zones (“SEZs”): SEZs are designated areas dedicated towards growth of exports, having full flexibility of operations that are permitted to import duty free capital goods and raw material. The movement of goods to and fro between ports and SEZ are unrestricted. The units in SEZ have to export the entire production subject to permitted sales in the DTA. Currently, there are 11 operational SEZs in India which include the Santacruz Electronic Export Promotion Zone, Kandla Export Promotion Zone, Vizag Export Promotion Zone and Cochin Export Promotion Zones which have been converted to SEZs. Fiscal incentives available to SEZ units have been discussed ahead in detail.
  • 100 Percent Export Oriented Unit (“EOU”): In terms of the benefits available, the EOU scheme, on a general basis, is similar to SEZ scheme. But in this scheme, there is no need to be physically located in the designated area (as in the case of SEZs). This scheme offers zero import duty on import of all capital goods, special 10 years income tax rebate (however, such rebate will not be available for Assessment Year 2010-2011 and onwards). The incentives provided to EOUs are generally similar to those provided to SEZ units, except the exemption from central sales tax on purchases.
  • Software Technology Park (“STP”): This is a special scheme under the Ministry of Information Technology, similar to EOU scheme, which is specific for the software industry. STPs are located at Noida, Navi Mumbai, Pune, Gandhinagar, Hyderabad, Bangalore, Chennai, Bhubaneshwar, Jaipur, Mohali and Thiruvanathapuram. This scheme offers zero import duty on import of all capital goods, special 10 years income tax rebate (however, such rebate will not be available for Assessment Year 2010-2011 and onwards), availability of infrastructure facilities like high-speed data communication links, etc. The incentives provided to EOUs are generally similar to those provided to SEZ units, except the exemption from central sales tax on purchases.


Filing of claim for refund of service tax paid by Exporers

Circular No. 106 /9 /2008-ST


Government of India

Ministry of Finance

Department of Revenue

(Central Board of Excise & Customs)


New Delhi, dated the 11th December, 08

            Sub:-  Filing of claim for refund of service tax paid under notification No. 41/2007-ST dated 6/10/2007 – reg.

          Notification No. 41/2007-ST, dated 6/10/2007 allows refund of service tax paid on specified services used for export of goods. The Board has from time to time examined the procedural difficulties arising in implementation of this refund scheme. In this context, a circular (No. 101/4/2008-ST, dated 12.5.2008) was issued earlier whereby the procedural difficulties that were being faced by the merchant exporters and the exporters having multi location offices were resolved. Subsequently, notification No. 32/2008-ST, dated 18.11.2008 has also been issued to (i) extend the period of filing of refund claim by the exporter from 60 days to six month and from the end of the quarter to which such refund claim pertains; and (ii) allow refund on testing service, without any copy of agreement with the buyer of goods, if such testing and analysis is statutorily stipulated by domestic rules and regulations.

2. The Board has received further references from field formations and trade seeking clarification on other procedural issues. Trade has also reported delays in sanction of refund claims. These issues and the clarification for streamlining of procedures are discussed below.

3. ISSUE No. I : The procedure for availing refund, under the aforesaid notification, by a manufacturer exporter not registered with central excise is as under:

(i)   He shall file the claim with the central excise authority having jurisdiction the over factory of manufacture [para 2 (b)(i) of the notification];

(ii)  He shall file a declaration in the format given in the annexure to the notification. The CX authority would issue a STC No.  (Service Tax Code) to him [para 2 (c) and 2(d) of the notification].

The issue raised by some of the exclusive Central Excise Commissionerates is that they do not have access to the System for Allotment of Service Tax Payer Code (SAPS). Hence, exclusive Central Excise Commissionerates in places like Delhi and Bangalore have not been able to process the refund claims filed by the manufacturer exporter not registered with central excise.

CLARIFICATION : The Directorate of Systems has reported that there is no restriction for exclusive Central Excise Commissionerates in having access to SAPS.  Therefore, exclusive Central Excise Commissionerates, not having access to SAPS at the moment, may approach the Directorate of Systems to get the access to the centralized software.

4. ISSUE NO. II : One of the conditions of the notification is that the exporter claiming exemption has actually paid the service tax on the specified services [para 1(c) of the notification].The other condition is that the refund claim shall be accompanied by document evidencing payment of service tax [para 2(f) (ii) of the notification]. In this regard the following issues have been raised.

(i)  Whether the invoices/bills/challan issued by the service provider, showing service tax amount could be treated as evidence that the exporter has paid the service tax.

(ii)  The invoices produced by the exporters are at times not complete (i.e. does not have STC code of service provider)

(iii)  One to one correlation between payment of ST and invoice is difficult in many cases.

CLARIFICATION : The invoices/challans/bills issued by supplier of taxable service, in conformity with rule 4A of the Service Tax Rules, 1994, are reasonable evidence that the services on which refund is being sought are taxable service.  The compliance of condition that exporter has actually paid the service tax rests with the exporter claiming refund. Therefore, in so far as this condition is concerned, the refund claim should be processed based on furnishing of appropriate invoices/ bills/ challan by the person claiming refund and undertaking to the effect of payment of service tax by him. For the purposes of compliance verification, random checks should be carried out independently and where the refund amount is significant, post refund audit may also be carried out.

          As regards incomplete invoices/bills etc., rule 4A of the Service Tax Rules, 1994 prescribes the statutory requirement. Compliance of this rule requires that the invoices/challan/bills should be complete in all respect.   Therefore, the exporter claiming refund of service tax under notification No. 41/2007-ST should ensure in their own interest that invoices/bills/challan should contain requisite details (name, address and registration No. of service provider, S. No. and date of invoice, name and address of service receiver, description, classification and value of taxable service and the service tax payable thereon). Refund claim cannot be allowed on the basis of invoices not having complete details as required verification cannot be carried out by the department on the basis of incomplete invoices.

5. ISSUE NO. III: Vide instruction F. No. 341/15/2007-TRU, dated 17.4.2008, direction has been issued that refund claim be disposed of within thirty days. Commissioners have stated that it is not practically feasible in all cases to dispose of the refund claim within this time frame in view of procedural and other issues involved in processing of claim.

CLARIFICATION: The difficulties arising in processing of claims may be brought to the notice of the Board. The procedural difficulties brought so far to the notice of the Board have been clarified earlier vide circular No. 101/4/2008-ST, dated 12.5.2008 and vide this circular. This should enable the field formations to dispose of the pending refund claims expeditiously.  Therefore, every effort should be made by field formations to adhere to the prescribed timelines. 

        The Board has further decided that simplified procedure for refund, as prescribed by the Board vide circular No. 828/5/2006-CX dated 20.4.2006 for sanction of refund/rebate of unutilized CENVAT credit under rule 5 of the CENVAT Credit Rules, 2004/rebate would mutatis mutandis apply to refund claims under notification No. 41/2007-ST. Under this simplified procedure, 80% of the due refund amount is sanctioned as adhoc interim refund to specified category of exporters having good track record, within 15 days of filing of a refund claim, subject to the condition that refund claim is complete and contains the requisite documents. For this purpose, the specified category of exporters would be (i) all exporters having export turnover of more than Rs 5 crore in the current or preceding financial year;     (ii) PSUs including PSUs of State Governments; (iii)    Star Export Houses as specified under Chapter 3.5 of the Foreign Trade Policy, 2004-2009; (iv) manufacturer-exporters registered with Central Excise who have been exporting during the previous two financial years and have minimum export of Rs. 1 crore or more during the preceding financial year. (v)    exporters registered with service tax or central excise who have paid central excise duty and/or service tax amounting to Rs. 1 crore or more during the preceding financial year; (vi)   All Export Oriented Units.

6. Wide publicity may be given (in the form of trade notices, advertisements) to make the stakeholders aware of the above clarification and compliance should be monitored.  Any difficulty faced in processing of refund claims under aforesaid notification may be immediately brought to the notice of the undersigned.

Yours faithfully,

(Gautam Bhattachraya)

Commissioner (ST)




Documents Required for Service Tax Registration

To get the Service tax Registration followings documents are required:

For Local/Single Registration

  1. Copy of PAN Card of the assessee.
  2. Proof of address of the premises to be registered. Copy of Telephone bill/Electricity bill/Rent agreement in the name of the company/firm/partner/proprietor
  3. Partnership deed (In case of Partnership Firm)
  4. Copy of Memorendum of Association. (In case of Private Limited and Limited company only)

For Centralized Registration 

For Centralize registration in addition to the above documents, the proof of address in respect of each of the premises/branch for which centralized registration sought for.


Stamp duty paid for purchase of residential house allowed u/s 80C

If the house property is a residential house property, then stamp duty paid at the time of purchase of the property is eligible for deduction under section 80C (Section for investment of LIC/PPF/NSC etc) upto Rs.100,000/-.


v     PPF offer the best result from tax point of view and is most popular in the middle class taxpayers especially the employees. Public Provident Fund(PPF) benefit is available not only to contribution made in the name of the assessee but also made in the name of children including married daughter and spouse of the assessee in the case where other investments like ULIP, Life Insurance etc. under section 80C of the Income Tax Act. With 15 year investment time frame and tax free return (Interest Income is exempt), the scheme merits inclusion in most portfolio but in the right allocation.


v     An Individual can open a PPF Account. A Salaried employee can also open a PPF account though he may be a contributor to a recognised provident fund set up by the employer. Only one account can be opened by a subscriber. Another account even at another place is not allowed. Account in joint name is not allowed.

An individual, in addition to opening an account in his own name, can also open an account in the name of his minor child, subject to aggregate limit of deposit in his own account and in the name of the minor.



v     An account may be opened in any branch of the State Bank of India or its subsidiaries at Head Post Offices, specified sub-post offices and branch of nationalised banks which are so nominated for the purpose.



v     The minimum annual subscription is Rs.500 while maximum amount is Rs.70,000/-. The subscription can be made in instalment not exceeding twelve in a year.


v     The interest earned is compounded. Interest rate may be varied and it is 8% w.e.f. 01.03.2003. Interest which is credited to the PPF account is completely exempts from tax upto any extent.


v     An HUF cannot open a PPF account with effect from 13.5.2005, but existing account can be continued for remaining period of eligibility.


v     The accountholder can nominate one or more person to receive the balance in the event of his death.


v     Sometimes it is felt that it is a long term investment, where moneys are tied up for a long period since the entire balance can be withdrawn only after 15 years. The point, however to be noted is that withdrawal are possible after six year upto 50% of the balance to the credit at the end of the forth year immediately preceding the year in which the amount is withdrawn or the end of the preceding year, whichever is lower. In the event of death, the entire amount can be withdrawn before expiry on demand from the legal heirs.


v     It is also possible to take a loan in case of need, such loan amount being restricted to 25% of the balance at the end of 2nd preceding financial year and can be repaid in 36 month or less. A second loan can be taken if the first loan is fully repaid. Loan from PPF is at 2% more than the interest to which he is entitled.


v     PPF account can be discontinued but even such discontinuance would not disentitle the credit of interest through all other facilities like loan or withdrawn will not be allowed. Even non payment in particular year of minimum amount of Rs.500 can be regularised by depositing the same in the subsequent year with interest.


v     One advantage of PPF as in the case of other provident funds is that the amount cannot be attached under degree or order of a court of law apart from income tax arrears. This has been conceded by C.B.D.T. as well in ministry of finance (DEA) Lettor No.7/21/88-2/90-SB dated 10/08/1990 as circulated by the Director General of Post’s letter No.38-2/90-SB dated 07/11/1990. Hence income-tax authorities cannot also attach PPF account



v     The amount standing to the credit of PPF account is exempt from wealth – tax  , but this is of little significance now since wealth –tax is not even otherwise leviable on any deposit as it is now limited only to selected items like residential house property (more than one), jewellery, motor cars and urban land apart from other sundry items.


What are the additional requirements to incorporate a 100% subsidiary of a foreign Company?

Apart from the requirement of a private limited company followings are the additional requirement to incorporate a 100% subsidiary of a foreign company in India:


a)      A resolution of foreign holding company to the effect that the Indian company shall be a wholly owned subsidiary company of the foreign company.

b)      Since there have to be two subscribers in the company, any other person shall hold some shares as nominee of the foreign company.

c)      The person who will write the particulars of the foreign company in MOA and second subscriber must be two different people.

d)      The resolution must be notarized and also attested by the Indian Embassy consulate.

e)      The power o attorney to authorize any person to make the necessary correction in MOA and AOA should be attested by the notary and consulate by the Indian Embassy and adjudicated in India.