Payment by foreign holding company - Asset and ITC on Computers

This query is : Resolved

Sagar Kumar` Rajura

Sagar Kumar` Rajura (Querist)
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19 January 2024 Hello Experts,

I would need your advise on below query.

-ABC co. has no working capital and unable to buy computers / Other Fixed Assets in India.

-XYZ co. being foreign holding company of ABC co. desires to pay the amount directly out of foreign country.

Can ABC Co. recognize as assets?

Pl advise if that is possible or if there are any legal/tax implications.

Note: ABC Startup company and holding company is paid amount directly to vendor for computers

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 If ABC Co., a startup with no working capital, receives funds directly from its foreign holding company XYZ Co. to purchase computers or other fixed assets in India, here are the considerations:

1. **Recognition as Assets:**
- Yes, ABC Co. can recognize the computers or fixed assets purchased with the funds from XYZ Co. as assets on its balance sheet. These assets would be recognized at their cost value, which includes the purchase price paid by XYZ Co. plus any incidental costs directly attributable to bringing the asset into its present location and condition for its intended use.

2. **Legal and Tax Implications:**
- **Foreign Direct Investment (FDI) Regulations:** If XYZ Co. is a foreign entity, the transaction needs to comply with India's Foreign Exchange Management Act (FEMA) regulations. Generally, for purchasing fixed assets in India, there are specific procedures and reporting requirements for inbound foreign investments. ABC Co. may need to report the receipt of funds and issuance of shares or any other instruments as per applicable regulations.
- **Tax Implications:** From a tax perspective, the purchase of assets by ABC Co. will be treated based on Indian tax laws. The cost of assets acquired will form part of the depreciable base for tax depreciation purposes. The tax treatment will also consider any applicable withholding taxes or other tax obligations arising from the transaction.

3. **Documentation and Compliance:**
- Ensure proper documentation of the transaction between ABC Co. and XYZ Co. This includes invoices, purchase agreements, proof of payment, and any other relevant documents.
- Comply with any reporting requirements to regulatory authorities, such as the Reserve Bank of India (RBI) for foreign remittances and the Ministry of Corporate Affairs for reporting on foreign investments.

4. **Accounting Treatment:**
- Follow Indian Accounting Standards (Ind AS) or Generally Accepted Accounting Principles (GAAP) for the proper recognition, measurement, and disclosure of the assets acquired. This includes determining the fair value or cost of the assets, recognizing them as fixed assets on the balance sheet, and depreciating them over their useful lives.

It is advisable to engage with a professional advisor, such as a Chartered Accountant or legal counsel specializing in corporate and foreign investment matters, to ensure compliance with all regulatory requirements and to optimize tax and legal structuring for such transactions.