FEMA QUARY

[Ritu Kashyap]

Good Afternoon

all

Kindly resolve my under-mentioned query on an urgent basis.

A US based Client has a few contractors based in India.

The Admin of this client manages the entire HR and payroll information on Asanify.

He currently pays all the contractors directly one by one every month directly.

Instead he wants to pay us the lump sum amount and then we shall pay his contractors who reside in India on his behalf. 

This will be a pass through expense in that we will not want to show this either as revenue or costs. We will take the total amount in our account and then pay individually all his contractors whose details will be there on Indian company.

Kindly let me know whether there's any RBI reporting special needs on this and what purpose code should the Client state when he transfers the money using SWIFT on International Bank Transfer.

Thank you

Best Regards

Ritu Kashyap

[Ritu Kashyap]

Kindly reply to this...consider this as very urgent.

Thank you

Best Regards

Ritu Kashyap

[CA.Chandrasekaran Ramadurai]

I write with the rider that I am not an expert on FEMA but have tried to get answers from various perspectives:

1. From Receipt of US Dollars under FEMA and if yes, which form and code to be submitted while submitting any return to RBI?
   1. Under Section  2.2 of FEMA, the transaction is a Current Account Transaction which means all transactions,  which are not capital account transactions. Specifically it includes: - Business transactions between residents and non-residents
   2.   Primarily there are no restrictions on current account transactions
   3. under Section 3.1  3.1 All dealings in foreign exchange or foreign security can be done only through an authorized person if permitted by FEMA, rules & regulations framed thereunder, or by general or special permission of the RBI. Further no payments can be made by a resident to a non-resident unless permitted under FEMA (section 3).  
      
   4. As per NEW PURPOSE CODES FOR REPORTING FOREX TRANSACTIONS -B. RECEIPT PURPOSES, your office must use P1011 -   Inward remittance for maintenance of offices in India
2. Whether the recipient shall be considered as a PE under IT Act 1961?
   1.  the answer is NO. Your office shall not be treated as a PE in India of the US client. (SC ruled that no PE of a foreign company can be formed in India where its Indian subsidiary is performing support services, which enables such foreign company to render services to its client abroad)
   2.   The takeaways 
      1. The SC decision brings out certain guidelines for determination of existence or otherwise of the PE of a foreign company in India, which are as under: 
      2.  The principal test, to ascertain whether an establishment has a fixed place of business or not, is that such physically located premises have to be “at the disposal” of the foreign company.  
      3. No fixed place PE can be established if the main business and revenue earning activity of the foreign company are not carried on through a fixed place in India, which has been at the disposal of the foreign company. 
      4. Based on the facts of a case, a FAR analysis may not be the appropriate test to determine location PE.  
      5. The mere fact that a 100% subsidiary may be carrying on business in India does not mean that the holding company would have a PE in India.  
      6. If any customer were rendered services in India, whether resident or non-resident, a service PE would be established.   
      7.   If arm’s-length conditions were satisfied, no further profit would be attributable, even if there exists a PE of a foreign company in India.  
      8. The MAP resolution arrived for a year cannot be considered as a precedent for subsequent years.  
         
      9. Thus, your office being a Tax assessee in India over which the US client having no control, you shall not be treated as a PE of the US client in India and you will be taxed only on your income and not the income of the US client (which would have been the case had you been considered as a PE)
3. Whether the recipient is going to do the service on a no profit/no loss basis or at a margin?
   1. Trust it will be at a minimal service charge to prove the ALP concept.
4. Whether GST shall be applicable when the services are rendered by the Indian contractor to the US client and when payments are made in INR by the Intermediary (your office) to the Indian Contractors?
   1.   Q3. What is the GST applicability on overseas transactions? The category of transactions that falls under the scope of overseas transaction under the GST regime are: Category 1: Export of goods by payment of IGST or under LUT/Bond Category 2: Export of services
   2. Section 2(6), CGST Act, 2017: Export of Services - The term “export of services” means the supply of any service, when: 
      1. 1. the supplier of service is located in India. 
      2. 2. the recipient of service is located outside India. the place of supply (POS) of service is outside India. 
      3. the payment for such services has been received by the supplier of service in convertible foreign exchange or in Indian Rupees wherever permitted by Reserve Bank of India (RBI). 
      4. the supplier of service and the recipient of service are not merely an establishment of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act. 
      5. Note: Explanation 1 in Section 8 of the IGST Act: An establishment of a person in India and another establishment of the said person outside India are considered as establishments of a distinct person.    
      6. Now the Indian Contractors provide services to the US client. So it is an export of service. There is no business relationship between Indian Contractors and your office and hence they do not provide any service to your office. You are making payment services on behalf of the US client. So your service is also to the US client. 
      7.  Is GST payable on export of goods/services outside India? 
         1. Under GST law, export of goods or services are treated as: Inter-state supply and covered under the IGST Act, 2017.  
         2. Zero-rated supply, that is, the goods and services exported outside India shall be relieved of GST levied upon them – either at the input stage or at the final product stage. 
         3. This computation is intended to make Indian exports more competitive in the international market. Moreover, under the GST regime, the procedures relating to export have been simplified to remove paperwork and intervention of the tax department at various stages of export. The salient features of the GST regime as it applies to exports are as follows: 
         4. The goods and services can be exported either on payment of IGST, which can be claimed as refund after the goods have been exported, or under bond or Letter of Undertaking (LUT) – that is, without payment of IGST.
         5.  In case of goods and services exported under bond or LUT, the exporter can claim refund of accumulated input tax credit (ITC) on account of export.   
         6. The above applies to services by Indian Contractors to US clients and they will raise an invoice on overseas US client ( and not on your office)
         7. Same way for the payment services, your office also shall raise an invoice on overseas client and submit an LUT without any GST compoent
5. Whether there will be TDS when your office makes payment to the Indian contractors and if yes whether under 194 C under contract services or 194 J under professional services
   1. Since there are no privity of contract between your office and the Indian contractors, you need not deduct TDS from the payment you will make against the invoices they have raised on US client
   2. You are not making any payment to US client but only receiving funds. so if that is with margin, you will offer that to tax in India

List of documents covering above is attached. please document the above and take a second opinion

[CA.Chandrasekaran Ramadurai]

On an after thought, I fear that the Indian contractors may not agree to this arrangement as their services to the US client may lose the export of services character if they receive payment in Indian Rupees from your office instead of in convertible foreign currency directly from the US client. because, they may fear continuous GST litigation.

Please keep this in mind 

[CA.Chandrasekaran Ramadurai]

is the issue resolved? i don't see any comments on my response. 

[CA.Chandrasekaran Ramadurai]

I checked with some of my senior professional colleagues too. their stock advise is that allowing the bank account of an Indian resident for making payments of the liabilities of an overseas entity is NOT permitted under FEMA.  Please check with RBI before embarking on anything

[Ritu Kashyap]

Thank you so much sir

It was very helpful for me.🙏

Thank you

Best Regards

Ritu Kashyap

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