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Formation of Permanent establishment in India

DEEPIKA TYAGI (Director HR) (252 Points)

21 July 2010

Dear CA Club Forum;

I need the information regarding : Checklist and Formation procedure of permanent establishment in India.Can you help me out if so please send the mail at below mail ID:

primecfo @ hotmail.com ,

Thanks in advance ,

Deepika Tyagi

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5 Replies

Harpreet (* * * * * *) (1670 Points)
Replied 21 July 2010

I thing below mentioned information will be useful for you.

INDIA

COMPANY FORMATION
AND COMPLIANCE INFORMATION
INCORPORATING IN INDIA

ENTRY STRATEGY INTO INDIA
A business presence in India may be established by a foreign entity through:

COMPANY
A company may be incorporated, inter alia, using the following modes:

Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary;
Incorporating a Joint Venture Company (JVC) with an Indian partner and/or with the general public and operating as a listed company; or
Incorporating a JVC with an Indian partner and operating as an unlisted company.

BRANCH OFFICE
A branch would mean an establishment carrying on substantially the same activity as its Head Office. Foreign companies intending to open a Branch Office (BO) in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India. As per the guidelines laid down by the RBI, the BO in India is allowed to carry on only the following activities:

Export / Import of goods;
Rendering professional or consultancy services;
Carrying out research work, in which the parent company is engaged;
Promoting technical or financial collaboration between Indian companies and parent or overseas group company;
Representing the parent company in India and acting as buying / selling agent in India;
Rendering services in Information Technology and development of software in India;
Rendering technical support to the products supplied by parent / group companies;
Foreign airline / shipping company

LIAISON OFFICE
A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A LO is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels. The LO is permitted to undertake only the following activities:

Representing in India the parent Company / group Company;
Promoting export/ import from/ to India
Promoting technical / financial collaborations between the parent / group companies and companies in India;
Acting as a communication channel between the parent Company and Indian companies;

Any company intending to open a LO in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.

PROJECT OFFICE
Foreign companies can establish Project Offices (POs) in India specifically for the purpose of execution of specific projects. A PO is similar to a branch office opened for the limited purpose of executing a particular contract. As POs are opened for undertaking a specific activity they cannot perform any other function or undertake any other activity. Generally, companies engaged in turnkey projects or installation projects set up PO’s. All expenses of POs must be met through inward foreign currency remittances if the rupee component of the contract, if any, is not sufficient to meet the said expenses. RBI approval is required to open a PO.

INCORPORATION OF BUSINESS ENTITY IN INDIA

A foreign company planning to set up business operations in India has the following options to set up a business entity:

1 - As an incorporated entity under the Companies Act 1956 through JVs or wholly owned subsidiaries
2 - As an unincorporated entity through liaison office/representative office or project office or branch office of a foreign company. Such offices can undertake activities permitted under the Foreign Exchange Management (establishment in India of branch office of other place of business) Regulations 2000.

SETTING UP LIAISON – REPRESENTATIVE – BRANCH – PROJECT OFFICE

Liaison Office /Representative Office
A foreign company may open a liaison office in India to promote its business interest, spread awareness of its products, explore further opportunities and act as a communication channel between itself and various Indian companies. A Liaison Office could be established with the approval of Reserve Bank of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitates technical/financial collaborations. It is required to maintain itself out of inward remittances received from abroad through normal banking channels. Liaison office cannot undertake any commercial activity directly or indirectly. Permission for such offices is initially granted for a period of three years and may be extended from time to time. Applications for renewal of permission are required to be made to the concerned regional office of Reserve Bank under whose jurisdiction the office is situated.

Project Office
Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India for carrying out activities only relating to that project. RBI has now granted general permission to foreign entities to establish project offices subject to specified conditions

Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch offices in India for the purposes of export/import of goods, rendering professional or consultancies services, R&D, promoting technical or financial collaborations, representing the parent company, acting as buying/selling agents, rendering services in IT and development of software, rendering technical support to the products supplied by the parent/group companies, foreign airline/shipping companies. Branch offices could be established with the approval of RBI and may remit outside India profit of the branch, subject to RBI guidelines after payment of applicable Indian taxes.

Procedure for establishing Liaison Office/Project Office/Branch Office
Application for setting up these offices may be submitted to Chief General Manger, Exchange Control Department (Foreign Investment Division), RBI, Central Office, Mumbai in Form FNC-I.

TIME FRAME TO INCORPORATE

Nature of Activity	Time Schedule
Allotment of DIN	3 days
Acquiring Digital Signature	2 days
Name approval	3- 4 days
Drafting of MOA & AOA, stamping, digitally signing and filing the documents on MCA portal	3 days
Grant of Certificate of Incorporation	4 days

COMPANY FORMATION OVERVIEW

Companies Act
Any company either incorporated or registered in India are governed by the Companies Act 1956.

Shareholders and Directors
To appoint local director is not required while incorporating a company in India.
Foreign nationals may also incorporate company in India and may hold foreign equity up to 100%. This of course depends upon the sector in which the company will operate and is subject to the approval from either the Reserve Bank of India (RBI) or the Foreign Investment Promotion Board (FIPB).

Memorandum & Articles of Association
The Memorandum of Association (MOA) states the main, ancillary or subsidiary along with other objects of the proposed company. The Article of Association (AOA) covers the rules and procedures for the routine conduct of the proposed company, the authorized share capital of the proposed company and also the names of its first or permanent directors. Thereafter, both MOA and AOA are required to be stamped.
A stamp duty, depending on the authorized share capital, is to be paid on both.

Share Capital
Shares should be expressed in fixed amount. Shares like "No par value" or "bearer" are not permitted and the shares to be subscribed should be expressed in Indian rupees.

Accounts & Auditors
Each company is supposed to appoint an auditor annually at its AGM. The auditor must be qualified by virtue of the Institute of Chartered Accountants of India Act 1949 and should be completely independent of the concerned company. The audited accounts of the concerned company serve as a tool for various stakeholders like creditors, investors, bankers and revenue authorities.

Public Filings
The names and all the required personal details of the directors and secretary, share capital, register of charges, registered office address, and other such particulars should be filed with the Companies Registry for any public inspection upon incorporation and if there is any change thereafter.

Annual Meetings
An Annual General Meeting (AGM) is mandatory to be held once in every financial year and not more than 6 months after the end of the financial year. For a new company it is not required until 18 months of its incorporation.

FAQ's

What is a Private Limited Company?
A Private Limited Company is limited by shares with a maximum of 50 shareholders and no invitation can be made to the public for the subscripttion of either its shares or debentures, with restriction to make or accept deposits from Public, and transfer of shares through public offer.
In a Private Limited Company, the shareholders liability is limited to the extent of the unpaid amount of the face value of the shares and the premium thereon in respect of shares held by a shareholder.

What is a Public Limited Company?
A Public Limited Company is limited by shares with no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The shareholders liability is limited to the extent of the unpaid amount of the face value of shares and the premium thereon in respect to shares held by a shareholder. The minimum number of shareholders required for a Public Limited Company is seven.

What is the minimum paid-up capital of a Private Limited Company?
At the time of incorporation of a Private Limited Company, the minimum paid up capital has to be Rupees 1,00,000 in Indian currency. There is no sealing on maximum limit of authorized capital or paid up capital. Any time during the lifetime of the company the capital can be raised by the payment of additional stamp duty and registration fee.

What is the difference between authorized capital and paid up capital?
Authorized capital is share capital of such kind where the capital limit is authorized by the Registrar of Companies up to which the shares can be issued to the members or public, whereas paid up share capital is share capital of such kind where the paid portion of the capital is subscribed by the shareholders.

What is the procedure in obtaining a name approval for the proposed Company?
For obtaining a name approval of the proposed company, first an application in Form No.1A needs to be filed, properly filled, with the Registrar of Companies (ROC) online through Digital Signature of any one of the proposed director. Details to be furnished are as given below:

Alternative names of the proposed company in priority sequence. The names can be the coined name from the objects of the proposed company or even the name of the directors, and of such kind. Whatever be the case, it should be indicative of the main object of the proposed company. The name justification is required to be specified along with the application.
Names and addresses of the promoters are to be mentioned. (for Public Company it is minimum 7 and for Private Company it is 2).
Authorized Capital and main objects of the proposed company are to be mentioned.
Names of other group companies in which directors hold directorship has also to be given.

The ROC scrutinizes the application after receiving and within 3 to 4 days sends the approval or objections to the applicant through e-mail.

What is the Memorandum of Association (MOA) and the Articles of Association (AOA) of a company and what is the procedure in this regard?
After the approval of name from ROC, there is requirement to draft MOA and AOA. MOA states the main, ancillary or subsidiary and any other objects of the proposed company whereas the AOA contains the rules and procedures for the routine conduct of such proposed company, and also the authorized share capital and names of its first or permanent directors. Both the MOA and the AOA is thereafter stamped from Collector of Stamps. The stamp duty paid depends on authorized share capital.

What are the documents required to be executed for incorporation?
The under mentioned documents are required to be filed with ROC for incorporation of company:

MOA and AOA - Should be signed by the promoters in handwriting in the presence of a witness. It should state details like full name, father's name, residential address, occupation and number of shares subscribed for.
Form No. 1 - This form is a declaration executed on a non-judicial stamp paper by one of the directors of the proposed company. If not by director then by any other specified persons like Attorneys or Chartered Accountant and states that all the requirements of the incorporation have been complied with.
Form No. 18 - This form is to be filed by one of the directors of the proposed company and informs the ROC about the registered office of the proposed company.
Form No. 32 - This form states the fact of appointment of the proposed directors on the board of directors from the date the proposed company is incorporated and it is digitally signed by proposed director.
Power of Attorney is to be signed by all the subscribers of MOA, authorizing either one of the subscribers or any other person to act on their behalf for the purpose of incorporation as well as accepting the certificate of incorporation.
The filing fees as may be applicable.

How is the certificate of incorporation issued?
With the filing of documents the ROC calls the attorney of the proposed company for scrutiny and making the corrections in the MOA and AOA that has been filed. After all these formalities the certificate of incorporation is sent by post to registered office of the company.

When can the newly formed company start its business operations?
The public company is supposed to complete certain other legal formalities after receiving the certificate of incorporation. These include a statutory meeting (within 6 months) and statutory report. On completion of such formalities and on filing of the statutory report with the ROC, the ROC then issues the certificate of commencement of business to the company. After this the Public Company can start its business operations. In case of Private Company, it can start the business immediately on incorporation.

How do we comply with the legal formalities when we are not stationed in India?
By giving Power of Attorney to a person who appears before the ROC to complete the necessary formalities after getting the MOA, AOA, Power of attorney and other allied documents. Documents are e-mailed to client and after taking the printout they are signed by respective directors and promoters of the company. Signatures of promoters and directors are attested by notary public and Indian Embassy/Consulate located in their base country. Attestation from Indian embassy/consulate is not required if promoters and directors are based in Common Wealth country.

What other approvals are required for foreign investor in India?
After the company has been incorporated in India, the foreign investor has to either intimate the Reserve Bank of India (RBI) about the foreign equity or take approval of the Foreign Investment Promotion Board (FIPB). The intimation or approval depends upon the sector in which the foreign investor intends to do business.

How does a foreign company invest in India?
1.By Automatic Approval by the Reserve Bank of India (RBI). This is available for all items or activities except a few as given in the Press Note No.4 (2006series)
No prior approval required. The company is required to report only to the RBI within 30 days of the receiving of foreign equity/allotment of shares.
2. By Foreign Investment Promotion Board's (FIPB) approval for all other proposals that are not eligible for Automatic Approval.

PROCEDURES TO INCORPORATE

Applicable law
The Indian Companies Act, 1956, this act sets down rules for the establishment of public companies as well as private companies.

Allotment of Director Identification Number (DIN)
Application in Form Director Identification Number (DIN-1) shall be made online and provisional Director Identification Number (DIN) of the person intending to become director of the Company would be generated. After allotment of provisional DIN number, prescribed documents along with form DIN -1 are sent to DIN cell of ROC and regular DIN is allotted.

Acquiring Digital Signature certificate (DSC)
DSC is acquired after submitting the application along with the prescribed fee to one of the several vendors like TCS and Satyam. It is usually allotted in 1 or 2 days.

Name Approval of the company
An application in Form No. 1A is required to be filed, properly filled, with the Registrar of Companies (ROC) online with Digital Signature of one of the proposed directors. After submitting this application, the ROC scrutinizes it and sends either approval or objections in 3 or 4 days to the applicant through e-mail.

Procedure after name approval of the company
An application for registration along with the following documents are to be submitted to the Registrar of Companies:

Memorandum of Association;
Articles of Association;
A declaration in Form 1 is to be submitted by a person named in the articles of such proposed company as a director, manager, or secretary of the company, or by an advocate of the Supreme Court or High Court, or by an attorney who is entitled to appear before the High Court, or by a Chartered Accountant practicing in India who states that all the requirements of the Companies Act 1956 and the applicable rules with respect to the registration and other matters have been complied with;
The consent of each person who are prepared to act as directors;
All the information about the directors, the managing directors, managers and secretary must be submitted in a prescribed Form 32;
All the information about the registered office in prescribed Form 18;
The power of attorney in favor of either one of the promoters or any other person, authorizing him or her to make corrections in the documents that have been submitted to the Registrar of Companies;
The applicable registration fee to be payable to the Registrar of Companies;

CHECK LIST FOR SETTING UP A PRIVATE LIMITED COMPANY

Applicable law

Details of proposed company to be incorporated
Proposed names of the company according to preference.
Main objects of the proposed company.
Authorized share capital of the proposed company.

Details of Directors (2 in case of private company and 3 in case of public company).
Complete Name of the directors.
Residential address of the directors including city, state, pin code and country.
Father's Name
Date of Birth
Nationality
Occupation
3 passport size photographs of every proposed Directors (can give scanned photographs).
Copy of passport of the directors as a proof of identity and copy of proof of address like electricity bill, telephone bill, bank statement or driving license. (Scanned Copy will serve the purpose)

Details of Shareholders (At least details of 2 shareholders in case of private company and 7 shareholders in case of public company)

Individual
Complete Name of the shareholders.
Residential address of shareholders including city, state, pin code and country.
Father's Name
Date of Birth
Nationality
Occupation
3 passport size photographs of every proposed shareholders (can give scanned photographs).
Copy of passport of the shareholders as a proof of identity and copy of proof of address like electricity bill, telephone bill, bank statement or driving license.

Corporate Shareholders
Copy of the Certificate of incorporation of the company.
Copy of the Memorandum of Association (MOA) and Articles of Association (AOA).
Board resolution of existing company that authorizes for shareholding in the proposed company

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vivek (CS) (751 Points)
Replied 21 July 2010

Permanent Establishment is having very wide definition by any way you can become Permanent Establishment in India, for your reference i am reproducing definition given by Our Honourable Supereme Court in Re: M/s DIT (International Taxation), Mumbai Vs. M/s Morgan Stanley & Co. Inc. (2007)

PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(a) a place of management;

(b) a branch;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) a warehouse, in relation to a person providing storage facilities for others;

(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;

(i) a store or premises used as a sales outlet;

(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve month period;

(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve month period;

(l) the furnishing of services other than included services as defined in Article 12 (Royalties and Fees for Included Services), within Contracting State by an enterprise through employees or other personnel, but only if;

(i) activities of that nature continue within that State for a period or periods aggregating more than 90 within any twelve-month period; or

(ii) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated Enterprise).

3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include any one or more of the following:

(a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery;

(c) the maintenance of a stock of goods, or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;

(e) the maintenance of a fixed base of business solely for the purpose of advertising, for the supply of information, for scientific research, or for other activities which have preparatory or auxiliary character, for the enterprise.

4. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 5 applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State other Contracting State, that enterprise shall be deemed to have permanent establishment in the first-mentioned State if:

(a) he has an habitually exercises in that first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;

(d) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the order Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that order State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

Regards,