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Foreign Company Conundrum under the Companies Act, 2013

By February 3, 2016 December 20th, 2019 No Comments
The Companies Act, 2013 (“Act”)
received the President’s assent on August 29, 2013 and it was notified in the
Official Gazette on 30 August 2013. The Central Government (through the
Ministry of Corporate Affairs) has issued two commencement notifications dated
September 12, 2013 and  March 26, 2014 by
virtue of which a number of provisions of the Act have come into force.

A chapter of the Act is dedicated to the Foreign companies and how and
when a company incorporated outside India may be deemed to have a place of
business in India and compliances related to the same. The definition of
‘Foreign Company’ has been expanded to include such foreign companies which are
doing business in India through electronic mode, through an agent or in any
other manner. The term ‘electronic mode’, as per the Act read with the C
ompanies (Registration of
Foreign Companies) Rules, 2014,
is far reaching to include
the transactions carried vide,
inter-alia,
 e-mail, mobile devices,
social media, cloud computing, document management, voice or data transmission
or otherwise.

The implication of wide definition and coverage vis-à-vis other laws is
a concern at present and the same has not been addressed so far. This becomes
even more important in case of companies outside India who are into
distribution of digital product and services into India or even if an
organization provides its otherwise conventional services through electronic
mode. The definition and the parameters of making a company subject to the
provisions of the Act are so wide that even a foreign company undertaking
electronic communication to someone in India will be deemed to have a place of
business in India and hence required to register under the Act. Such provision
exposes the organization to the rigours of other laws, specifically the
exchange control laws and income tax laws.

Following is a brief analysis
of the provisions and its implications under other laws.
 
Provisions
Issues/Comments
 What is a foreign company?
Following
types of companies which are not incorporated in India are covered:
a.    those who have a formal place
of business in India such as a branch office or a project/liaison office;
b.    companies having a place of
business in India through an agent (Agent POB);
c.    companies having a place of
business in India through electronic mode (Electronic POB);
AND
d.    conducts any business
activity in India in any other manner (Business POB).
e.    companies incorporated
outside India whose more than 50% of equity is held by citizen of India or
company incorporated in India or both will be both a foreign company and will
have to comply with certain provisions of the Act as if it is an Indian
company (Sub POB).
Understandable
and same as previous law.
           
Every
foreign entity appointing an agent in India for whatever reason will end up
having a Agent POB.
Detailed
under Rules – analysed separately
Every
foreign entity doing any business in India in any manner will end up having a
Business POB.
Subsidiary
of an Indian company based abroad or company outside India in which Indian
citizens are majority shareholders will be both a foreign company and an
Indian company (to the extent it is required to comply with provisions
applicable to Indian companies). As a foreign company, such an entity will be
treated to have a place of business in India also.
Further
a Sub POB entity will be required to comply with Indian laws in addition to
the laws of the country where it is situated.
What
forms an Electronic POB
Carrying out business
electronically, including:
· 
whether main server is installed in India or
not;
· 
business to business and business to consumer
transactions, data interchange and other digital supply transactions;
· 
offering to accept deposits or inviting deposits
or accepting deposits or subscriptions in securities, in India or from
citizens of India;
· financial settlements, web based marketing,
advisory and transactional services, database services and products, supply
chain management;
· 
online services such as telemarketing,
telecommuting, telemedicine, education and information research; and
· 
all related data communication services, whether
conducted by e-mail, mobile devices, social media, cloud computing, document
management, voice or data transmission or otherwise.
Web based businesses having servers outside
India shall be deemed to be a foreign company;
Any online transaction of goods of services
between a foreign entity and an Indian person will amount to creating an Electronic
POB for the foreign entity;
Subscription based service companies covered.
Companies accepting funding from Indians as part
of say crowd funding covered.
Any online transaction, communication, service
or business will create an Electronic POB.
What
is a foreign company expected to do?
a.    Register with Registrar
within 30 days of establishment of the POB;
b.    File documents about the
foreign company, their office details in India, details of office bearers in
India and abroad etc.[1]
c.    File financial accounts in
India in prescribed format;
d.    Financial disclosures and
disclosure of related parties in India;
e.    Details of funds
transferred/repatriated into or from India;
f.     Audit of Indian accounts by
an Indian CA/CA Firm;
g.    Following provisions will
apply to Foreign companies as they apply to Indian companies:
·        
Issue
of debentures;
·        
Filing
of annual return;
·        
Keeping
of books of accounts;
·        
Filing
of charges;
· Inspection,
inquiry and investigation;
·        
Issue
of prospectus etc.
Keeping
in mind the application of the provisions to almost all virtual or electronic
presence of foreign companies or businesses in India, the compliance of these
provisions seems to be impractical. Also considering that even a single
online transaction, communication message or services can kick off the
provisions, it is not clear as to how the foreign companies are supposed to
comply with such comprehensive compliances.
IMPLICATIONS
UNDER OTHER LAWS

Registration
of Place of Business with Reserve Bank of India

Where a foreign entity or
association of individuals desire to or establish or have a place of business
in India, they need to first seek permission from Reserve Bank of India (RBI)
for establishment of such place of business under
Foreign Exchange Management
(Establishment in India of Branch or Office or other Place of Business)
Regulations, 2000

(‘POB Regulations‘). The POB
Regulations provide for detailed procedure and conditions subject to which such
permissions are available. In the event, as a result of application of the
provisions under the Act related to foreign companies, a company ends up having
a place of business in India without registration of such place of business
with RBI under the POB Regulations, it shall be in violation of the POB
Regulations and inter alia the exchange control laws of India.

Keeping in mind the stringent
exchange control laws and requirement of prior permission under the POB
Regulations, it is not clear as to what will be the fate of the companies who
fall fowl of the provisions of Act related to foreign companies under the POB
Regulations.

Permanent
Establishment
Whether or not a foreign entity has a place of
business in India becomes extremely relevant for income tax purposes. In the
event a foreign entity is deemed to have a permanent establishment in India, it
becomes subject to Indian taxes in as much as the profits of an enterprise of
one Contracting State are taxable in the other state, only if the enterprise
maintains a PE in the later state and only to the extent that profits are
attributable to the PE.
The governing principles of whether or not a
foreign entity has a permanent establishment in India are contained in the
Double Taxation Avoidance Agreements executed by the Government of India with
various countries. In general, the term permanent establishment includes the
following:
·        
a place
of management; a branch; an office; a factory; a workshop; a sales outlet; a
warehouse in relation to a person providing storage facilities for others; a
farm, plantation or other place where agricultural, forestry, plantation or
related activities are carried on; and a mine, an oil or gas well, a quarry or
any other place of exploration or extraction of natural resources.
·        
A
building site or construction, installation or assembly project or supervisory
activities – if such site, project or activities last more than 270 days.
·        
Where a
person is acting on behalf of a the foreign enterprise, that foreign enterprise
shall be deemed to have a permanent establishment in India in respect of any
activities which that person undertakes for the enterprise, if such a person
signs contracts or stocks goods or secures orders on its behalf.
·        
A broker
or agent acting in the ordinary course of their business shall not form a
permanent establishment unless the agent works almost exclusively for such
foreign entity.
·        
Control
of an entity or a permanent establishment merely does not make a permanent
establishment for a foreign entity.
As it can be clearly seen, the
factum whether or not a foreign entity may be considered to have a
permanent establishment in India is based on sound
principles and the bar of determining a permanent establishment is quite high.
However, in the light of the provisions of the Act if a foreign entity is
deemed to have a place of business in India because it may have fulfilled the
Agent POB, Electronic POB, Business POB or Sub POB conditions, it exposes the
foreign entity to taxation in India which may be a grave concern. There is
however less clarity at the moment as to what will be the view of the
authorities.
 

[1]
The filing requirement is extremely comprehensive and requires detailed
information on all counts. For example, the details required to be provided of
office bearers include the following:
(a)                 
personal
name and surname in full;
(b)                
any
former name or names and surname or surnames in full;
(c)                 
father’s
name or mother’s name and spouse’s name;
(d)                
date
of birth;
(e)                 
residential
address;
(f)                 
nationality;
(g)                 
if
the present nationality is not the nationality of origin, his nationality of
origin; 4
(h)                
passport Number, date of issue and country of issue; (if a
person holds more than one passport then details of all passports to be given)
(i)                  
income-tax permanent account number (PAN) , if applicable;
(j)                  
occupation, if any ;
(k)                
whether directorship in any other Indian company, (Director
Identification Number (DIN), Name and Corporate Identity Number (CIN) of the
company in case of holding directorship);
(l)                  
other directorship or directorships held by him;
(m)               
Membership Number (for Secretary only); and
(n)                
e-mail
ID.

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