07 May 2009
WOS of a US company has incurred share transfer expenses on behalf of Parent Company. The expense does not relate to Indian company. It has to be definitely debited to the US parent company. But, how could we do it? Is it by way of raising a Debit Note or is there any other mode? If invoice is to be raised for the same, is margin to be included as per Transfer Pricing?
The issue is pending since long. Could you please give us the best recourse .
08 May 2009
I sometime back, read that there can not be credit/debit notes between WOS and overseas Parent Company as per FEMA. Could you please give further research on this and give me final reply?
24 July 2024
When an Indian subsidiary (WOS - Wholly Owned Subsidiary) incurs expenses on behalf of its overseas parent company, there are specific considerations regarding how to appropriately record and reimburse these expenses:
### Mode of Recording Expenses:
1. **Documentation**: Proper documentation of the expenses incurred is crucial. This includes invoices, receipts, and any agreements or authorizations from the parent company acknowledging the expense.
2. **Debit Note or Invoice**: - **Debit Note**: A debit note can be issued by the Indian subsidiary to the parent company to formally record the expenses incurred on their behalf. This document acts as a record of the expense and facilitates the reimbursement process. - **Invoice**: Alternatively, the Indian subsidiary can issue an invoice to the parent company for the reimbursement of expenses. This would typically include the actual cost incurred without any markup or margin.
3. **Transfer Pricing Implications**: Since the expense does not relate to the Indian operations and is incurred solely on behalf of the parent company, transfer pricing rules generally do not apply. Transfer pricing rules typically govern transactions between related entities to ensure they are conducted at arm’s length and fair market value. However, in this case, the expense is not generating any revenue or profit for the Indian subsidiary, so no margin or profit markup is necessary.
4. **FEMA Regulations**: As per Foreign Exchange Management Act (FEMA) regulations, there are restrictions on direct financial transactions (like loans, advances, etc.) between an Indian entity and its overseas parent or group companies. However, reimbursement of actual expenses incurred on behalf of the parent company is generally allowed under FEMA regulations, provided proper documentation and compliance with tax laws are maintained.
### Steps to Take:
- **Document the Expense**: Gather all supporting documents such as invoices, receipts, and any communication with the parent company regarding the expense. - **Raise a Debit Note or Invoice**: Issue a debit note or invoice to the parent company for the reimbursement of the expenses incurred on their behalf. - **Ensure Compliance**: Ensure compliance with Indian tax laws and FEMA regulations while processing the reimbursement. - **Consult with Experts**: Given the complexity of international financial transactions, it’s advisable to consult with tax advisors or legal experts who specialize in international taxation and FEMA compliance.
### Conclusion:
You can proceed with recording the expenses by issuing a debit note or invoice to the overseas parent company. Ensure that all documentation is in order to support the reimbursement of these expenses. For detailed and specific guidance tailored to your situation, it’s recommended to seek professional advice to navigate through the legal and regulatory requirements effectively.
CAclubindia
