B TO C E-COMMERCE ALLOWED UNDER FDI *SUBJECT TO CONDITIONS

As per press note 12 of 2015 issued by DIPP, B2C e commerce is permitted in the following circumstances:

i) A manufacturer is permitted to sell its products manufactured in India through e commerce retail.

ii) A single brand retail entity is operating through brick and mortar stores, is permitted to undertake retail trade through e commerce

iii) An Indian manufacturer would be the investee company where it is the owner of the Indian brand. The rules also add that the manufacturer must create 70% of the goods in-house and 30% may be sourced from Indian manufacturers.

Now, in order to provide clarity on extant policy DIPP has released press note no. 3 of 2016 dated 29 March 2016  wherein 100% FDI under automatic route is permitted in marketplace model of e-commerce which is defined as below:

• Marketplace based model of e-commerce: means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.
• Further it also clarifies that FDI is not permitted in inventory based model of e-commerce which is defined as under:
• Inventory based model of e-commerce: means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
• Further definition of E-Commerce and E-Commerce entity is also introduce 
• E-Commerce means buying and selling of goods and services including digital products over digital & electronic network.
• E-commerce entity– E-commerce entity means a company incorporated under the Companies Act  1956 or the Companies Act 2013 or a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2 (v) (iii) of FEMA  1999, owned or controlled by a person resident outside India and conducting the e-commerce business.

Other Conditions:

i) Digital  & electronic network will include network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles etc.

ii) Marketplace e-commerce entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.

iii)  E-commerce marketplace may provide support services to sellers in respect of warehousing, logistics, order fulfillment, call centre, payment collection and other services.

iv)  E-commerce entity providing a marketplace will not exercise ownership over the inventory i.e. goods purported to be sold. Such an ownership over the inventory will render the business into inventory based model.

v) An e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor or their group companies.

vi)  In marketplace model goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller. Post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.

vii) In marketplace model, payments for sale may be facilitated by the e-commerce entity in conformity with the guidelines of the Reserve Bank of India.

viii) In marketplace model, any warrantee/ guarantee of goods and services sold will be responsibility of the seller.

ix) E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

x) Guidelines on cash and carry wholesale trading as given in para 6.2.16.1.2 of the FDI Policy will apply on B2B e-commerce.

• Subject to the conditions of FDI policy on services sector and applicable laws/regulations, security and other conditionalities, sale of services through e-commerce will be under automatic route.

• The above decision will take effect from 29 March 2016.

MCA Updates

• Ministry of Corporate Affairs (MCA) has issued Removal of Difficulties order u/s 470(1) of the Companies called as the Companies (Removal of Difficulties) First Order, 2016

Ø  The said order is effective from 10^th April, 2015

Ø  The order clarifies that till the time National Financial Reporting Authority is constituted Central government may constitute committee chaired by an officer of the rank of Joint Secretary or equivalent in the MCA and the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor-General to prescribe  class or description of companies that the auditor’s report shall also include a statement on such matters as may be specified therein.

Ø  The necessary clarification has inserted in the form of proviso u/s 143(11) which is as follows:

“Provided that until the National Financial Reporting Authority is constituted under section 132, the Central Government may hold consultation required under this sub-section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the Ministry of Corporate Affairs and the Committee shall have the representatives from the Institute of Chartered Accountants of India and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards and the office of the Comptroller and Auditor-General”.

Ø  The Removal of Difficulty order can be downloaded from the following link:

http://www.mca.gov.in/Ministry/pdf/CoOrder_30032016_III.pdf

• MCA has also issued Removal of Difficulties Second order called as the Companies (Removal of Difficulties) Second Order, 2016.

Ø  The said order is effective from 1^st April, 2015

Ø  The order clarifies that till the time National Financial Reporting Authority is constituted Central government may prescribe the accounting standards as recommended by the Institute of Chartered Accountants of India in consultation with and after the examination of the recommendations made by National Advisory Committee on accounting standards constituted u/s 210A of the Companies Act, 1956.

Ø  The necessary clarification has inserted in the form of proviso u/s 133 which is as follows:

“Provided that until the National Financial Reporting Authority is constituted under section 132of the Companies Act, 2013 (18 of 2013) the Central government may prescribe the standards of accounting or any addendum thereto,   as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949(38 of 1949), in consultation with and after the examination of the recommendations made by National Advisory Committee on accounting standards constituted u/s 210A of the Companies Act, 1956.

Ø  The Removal of Difficulty order can be downloaded from the following link:

http://www.mca.gov.in/Ministry/pdf/CoOrder_30032016_II.pdf

• MCA in supersession of the Companies (Auditor’s Report) Order, 2015, the central government after consultation with the committee constituted under proviso to section 143(11) has issued Companies (Auditor’s Report) Order, 2016.

Ø  The said order is effective from the financial year 2015-16

Ø  The Order is applicable to every Company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 except                                                        

• a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
• an insurance company under the Insurance Act,1938 (4 of 1938);
• a company licensed to operate under section 8 of the Companies Act;
• a One Person Company as defined under clause (62) of section 2 of the Companies Act and a small company as defined under clause (85) of section 2 of the Companies Act; and
• a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than rupees one crore as on the balance sheet date and which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding rupees ten crore during the financial year as per the financial statements.

Ø  The Companies (Auditor’s Report) Order, 2016 can be downloaded from following link:

http://www.mca.gov.in/Ministry/pdf/CoOrder_30032016.pdf 

• MCA has issued notification as Companies (Accounting Standards) Amendment Rules, 2016 and vide this following Accounting Standards have been amended and substituted:

Ø  The notification is effective from the date of its publication in official gazette

1.      Accounting Standards (AS) 2 Valuation of Inventories

2.    Accounting Standards (AS) 4 Contingencies and events Occurring after Balance Sheet Date

3.    Accounting Standards (AS) 10 Property, Plant and Equipment

4.    Accounting Standards (AS) 13 Accounting for Investments

5.   Accounting Standards (AS) 14 Accounting for Amalgamation

6.   Accounting Standards (AS) 21 Consolidated Financial Statements

7.  Accounting Standards (AS) 29 Provisions, Contingent Liabilities and Contingent Assets

Ø  Accounting Standard 6 on Depreciation Accounting is omitted.

Ø  The Notification can be downloaded from the following link:

http://www.mca.gov.in/Ministry/pdf/Notification_30032016.pdf 

• MCA has issued notification amending the Companies (Share Capital and Debentures) Rules, 2014

Ø  The notification is effective from the date it is published in Official Gazette

Ø  The said amendment allows the offer period for buyback to be less than 15 (Fifteen) days if the all the members of the company agree.

Ø  The amendment has been inserted in the form of proviso under rule 17(5) which is as follows:

“Provided that where all the members of the Company agree, the offer for buy back may remain open for a period less than fifteen days.”    

Ø  The Notification can be downloaded from the following link:

http://www.mca.gov.in/Ministry/pdf/AmendmentRules_30032016.pdf

• 
  

Highlights of the Companies (Amendment) Act, 2016

With reference to our earlier blog dated 19.03.2016 regarding the Companies (Amendment) Act, 2016, please find below the highlights of same:

1. In case of the members of the company falls below the minimum required members and business is carried on for more than six months liability of members shall be severally liable for the payment of the whole debts of the company
2. The Companies have liberty w.r.t to the object clause in Memorandum. The company can engage in any lawful act or activity or business, or any act or activity or business to pursue any specific object or objects, as per the law for the time being in force.
3. Affidavit from first subscribers and directors shall be replaced with declarations at the time incorporation of company.
4. Contents of the prospectus with respect to information and reports on financial information shall be specified by SEBI in consultation with Central Government. The clause also provides for applicability of existing requirements on such matters specified by SEBI.
5. Procedure for private placement is simplified. However, provided restrictions on utilization of moneys raised through private placement unless allotment is made and return of allotment is filed with the registrar within 15 days.
6. Requirement relating to deposit insurance is omitted and provide that deposit repayment reserve shall not be less than twenty percent of the amount of deposits maturing during the following financial year.
7. Deposit accepted under the Companies Act 1956 are to be repaid within 3 years from 1^st April, 2014 or due for repayment whichever is earlier. 
8. Timelines for filing the form for satisfaction of charge shall be on the same lines of as  provided for registration of charge i.e,  300 days
9. Significant beneficial owner concept is introduced and necessary declaration required to be given
10. Extract of Annual return and indebtedness details in Board report are omitted with some modification in the details of Foreign Institutional Investors.  Further Abridged form of Annual Return for one person companies and small companies is proposed.
11. Return required to be filed respect to change in promoters’ and top 10 shareholders’ stake omitted.
12. Unlisted companies allowed to convene Annual General Meeting at any place in India with the approval of all shareholders taken in advance.
13. Wholly owned subsidiary of a company incorporated outside India can hold its extra ordinary general meeting outside India
14. Shorter notice consent of 95% of the members entitled to vote is required in case of Annual General Meeting.
15. Company may transact an item, which is mandatorily required to be transacted through postal ballot, at a general meeting also where the facility of electronic voting is provided by the company.
16. Interim dividend can be declared from the profits of the said year or from brought forward surplus in the profit and loss account or the profit generated upto quarter prior to declaration of dividend
17. Chief executive officer required to sign financial statements irrespective of whether he is a director or not. The disclosure requirements with respect to annual return and polices in respect of remuneration and CSR modified.
18. Rationalization of the requirements with respect to financial statements of foreign subsidiaries of a listed company subject to conditions and unaudited financial statements of foreign subsidiaries which is not required to get its accounts audited.
19. Ratification of auditor by members with respect to appointment of auditors omitted.
20. Restricts the liability of auditor for damages to the shareholders or creditors of the company instead of any other person. Also, concerned partners shall be liable in case of criminal liability of any audit firm.
21. Requirements with respect to appointment of resident director eased out. The Scope of Pecuniary relationship of a director and relative with respect to eligibility of a director to be appointed as an independent director specified.
22. Deposit of rupees one lakh with respect to nomination of directors shall not be applicable in case of appointment of independent directors or directors nominated by nomination and remuneration committee.
23. Alternate director cannot be appointed if he is holding directorship in the same company. Causal vacancy of the director can be filed by the board in case of private company as well subject to approval of shareholders in next general meeting
24. Directorship in dormant companies to be excluded for reckoning the limit of directorships of twenty companies
25. In case a director incurs any of disqualifications due to non filing of return or repayment of deposits, he shall vacate office in companies other than the company which is in default. New Director shall not incur disqualification upto 6 months in the defaulting company.
26. Requirement for forwarding of copy of resignation by director to the Registrar shall be optional.
27. In case of Audit and Nomination and Remuneration committee, applicable to Listed Public Companies instead of listed Companies 
28. Participation of directors on certain items at Board meetings through video conferencing or other audio visual means shall be allowed if there is quorum through physical presence of directors
29. Borrowing limits revision on upper side i.e,  Paid Up capital + Free Reserves + Securities Premium 
30. Body corporate excluded for the purpose of section - 184
31. Company allowed giving loan or guaranteeing or providing security to any person in whom any of the directors is interested subject to passing of special resolution by the company and utilization of loans by the borrowing company for its principal business activities.
32. Layers of subsidiaries omitted. Also Loan to employee excluded for the purpose of calculating the limits of loans and investments
33. Prohibition on forward dealings in securities of company and on insider trading of securities by director or key managerial personnel is removed.
34. Approval of central government has been dispensed with for certain items in case of managerial remuneration 

Do you know there is no prior permission required from the authority for transferring the CENVAT Credit pursuant to amalgamation/merger?

Rule 10 of the CENVAT Credit Rules, 2004 provides for the transfer of CENVAT credit which is read as follows:-

Rule10.  Transfer of CENVAT credit. -

1. If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.
2. If a provider of output service shifts or transfers his business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a joint venture with the specific provision for transfer of liabilities of such business, then, the provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated business
3. The transfer of the CENVAT credit under sub-rules (1) and (2) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central Excise or, as the case may be, the Assistant Commissioner of Central Excise. 

  

Now, the question arises whether there is any permission required to be taken from the CENVAT Department for utilization of the CENVAT credit by the amalgamated company???

Facts of the Case:-

The appellant herein, M/s. S.C. Johnson Products Pvt. Ltd., (formerly known as M/s. Karamchand Appliances Pvt. Ltd.) is a manufacturer of insecticides & Electrothermic Appliances falling under Chapters 38 & 35 respectively of the First Schedule to the Central Excise Tariff Act, 1985.

The appellant acquired first 50% of the equity shares of M/s. Karamchand Appliances Pvt. Ltd. (Unit _ II) Baddi on 21^st March 2003 and remaining 50% on 12^th May 2005.

The Company had entered into the Scheme of Amalgamation which was approved by Hon’ble Delhi High Court via order dated 9^th October 2006, stating that the effective date of transfer would be 1^st June 2005.

The Appellant had received the Certificate from Registrar of Companies making the amalgamation effective on 23^rd November 2006 and the appellant had also registered itself with the Central Excise Department.

At the time of verification of the records the Central Excise Department detected that the appellant had an CENVAT credit balance amounting to Rs.31,12,929/- which is lying unutilised in its CENVAT account in relation to input/input service, which were utilised for payment of duty on goods manufactured/cleared on or after 12th May 2005.The department was of the view that such credit is required to be transferred only after being allowed by the concerned Central Excise Officer as per sub-rule (3) of Rule 10 of the CENVAT Credit Rules, 2004. The show cause proceedings initiated by the Department culminated in the adjudication order dated 30^th August 2011, wherein CENVAT credit of Rs. 31,12,929/- was disallowed and equal amount of penalty was imposed on the appellant under Rule 15 of the CENVAT credit Rules, 2004 read with section 11AC of the Central Excise Act, 1944. Besides, penalty of Rs.10,000/- was also imposed on the appellant under Rule 25 of the Central Excise Rules, 2002.

Advocate appearing for the appellant submitted that merger of M/s. Karamchand Appliances Pvt. Ltd. with the appellants company was effective from 01.06.2005 in terms of the Hon’ble Delhi High Court Order dated 09.10.2006. Thus, both the companies prior to such effective date i.e. 01.06.2005 were separate entities and as such, there was no scope for transfer of disputed CENVAT credit of Rs. 31,12,209/- lying in the CENVAT credit account of M/s.Karamchand Appliances Pvt. Ltd. to the appellant, prior to such effective date. Hence, the submission that since disputed credit has not been utilised by the appellant, the question of its recovery through the impugned proceedings does not hold good.

Ruling of the Hon’ble Tribunal:-

Tribunal held that since the effective date of the transfer is 1^st June 2005, which has been specifically mentioned in the order dated 9^th October 2006 of the Hon’ble Delhi High Court, there is no scope of transfer of any CENVAT credit balance lying in the CENVAT credit account of M/s. M/s.Karamchand Appliances Pvt. Ltd. to the appellant prior to such date.

     

Further, it was held that that there is no specific stipulation contained therein that prior permission is required from the statutory authorities for transferring the CENVAT credit as a result of amalgamation/merger as per Rule 10 of the CENVAT Credit Rules, 2004.

Hence, the ground on which the case was presented by the department was not legally sustainable and the appeal was allowed in favour of the appellant.     

Thus, it makes it very much clear that that law provides for transfer of unutilized CENVAT credit, in the event of an amalgamation under Rule 10 of CENVAT Credit Rules and that there is no permission to be taken by the department in such event. 

Companies (Amendment) Act, 2016

Hon'ble Union Minister Shri Arun Jaitley, have introduced in Lok Sabha a bill to amend the Companies Act, 2013 on 16th March, 2016

The Companies Act bill can be downloaded from following link:

 https://www.icsi.edu/docs/website/Companies_Amendment_Bill2016.pdf

Proposed changes in Dividend Taxability as per Union Budget 2016-17

Dividend:

Dividend is a sum of money paid regularly by a company to its shareholders out of its profits.  In commercial world it is  a share of the after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them.

Taxability of Dividend:

As per section 10(34) read with section 115 -O of the Income Tax Act, 1961, any income by way of dividend from Indian company is exempt from tax in the hands of shareholders  The Indian company is required to pay additional income tax on any amount declared, distributed or paid by way of dividend. The additional tax is referred as Dividend Distribution Tax (DDT).   DDT is required to be @ 15 % + surcharge @ 12 % and Education Cess and SHEC @ 3 % which comes to 17.30 %

Illustration:

Profit after Tax (Tax Rate: 34.61%)                                                   1000.00 

Dividend                                                                                               100.00

Tax on dividend (Tax Rate: 17.30%)                                                     17.30         

Amount distributed as dividend                                                             82.70

Proposed changes in Taxability as per Union Budget 2016-17

Section 10(34) is amended to provide that in case of Individuals, HUF and Firms, where dividend income exceeds Rs 10 Lakhs in any year, tax at the rate of 10% of gross amount of dividend in addition to applicable DDT will be levied .i.e, apart from Corporate Tax and DDT, further 10 % of tax on dividend will be charged. (i.e, 10 % tax + 15% surcharge + 3% Cess = 11.85% ).

The amendment proposed is effective form 1^st April, 2016.  Any dividend declared before 31^st March, 2016 will not be taxable at the hand of the recipient. If the Companies declare dividend after 31^st March, 2016, additional 10% tax will be charged in the hands of recipient if the dividend income exceeds 10 Lakhs.  

Further, this may also result in shareholding. And change in shareholding will attract the applicable provisions under various Act such FEMA, Takeover, Income Tax- Capital Gains, Inter – se transfers etc depending on the category of shareholder.     

SEBI Board meeting held on 12th March 2016

The Securities and Exchange Board of India (SEBI) had its Board meeting on Friday, 12^th March 2016. The gist of key decisions taken by SEBI and its impact are summarized below:-

1.       Restrictions on willful defaulters –

a.     If any Company or its promoters or directors is categorized as a willful defaulter, then such Company cannot make a public issue of equity securities / debt securities / non-convertible redeemable preference shares.

b.   Any Company or its promoters or directors categorized as a willful defaulter or its promoter or its director is categorized as willful defaulter may not be allowed to take control over other listed company. However, if a listed company or its promoter or its director is categorized as a willful defaulter, and there is a take-over offer in respect of the listed company, they may be allowed to make competing offer for the said listed company in accordance with SEBI (SAST) Regulations, 2011

c.   The criteria for determining a ‘fit and proper person’ in SEBI Regulations will be amended to include that no fresh registration shall be granted to any entity if the entity or its promoters or its directors or key managerial personnel, as defined under SEBI (ICDR) Regulations, 2009, are included in the list of willful defaulters.

2.       Review of manner of dealing with Audit Reports containing Qualifications

SEBI has revised its mechanism to review the audit qualifications in audit reports of listed companies, which was incorporated in the SEBI (Listing and Other Disclosure Requirements) Regulations, 2015, and the revised mechanism will be applicable from the financial year ending March 2016, as well as for earlier cases.

Accordingly, SEBI has also revised the manner of disclosure of audit qualifications in the Audit report which shall be as follows:

a.    The listed entities shall be required to disclose the cumulative impact of all the audit qualifications on relevant financial items in a separate form called "Statement on Impact of Audit Qualifications" instead of present Form B. Such disclosure would be in a tabular form along with the Annual Audited Financial results filed in terms of Listing Regulations.

b.     In cases where there are no audit qualifications, the existing requirement of filing Form A signed by top officials / directors of the company and auditors shall not be necessary.

c.      The management shall have the right to give its views on the audit qualifications in the new form.

d.    The existing requirement of adjustment in the books of accounts of the subsequent year shall not be necessary.

3.       Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations

Under SEBI (SAST) Regulations, 2011, any acquisition of ‘control’ shall be subject to a public announcement for Open offer. However, assessment of ‘control’ as defined under the SEBI (SAST) Regulations, 2011 requires consideration of facts and circumstances of each case. This results in a multitude of opinions. Further, multiple regulators apply the test of control from different perspectives and may arrive at differing results which may lead to ambiguity.

Hence in view of the need to identify bright lines for ‘Control’ as defined under the SEBI (SAST) Regulations, 2011, the following proposals may be considered:

a.       Framework for protective rights - An illustrative list of protective rights which would not amount to acquisition of control may be issued. Grant of such protective rights to an investor may be subject to obtaining the public shareholders’ approval (majority of minority).

b.      Adopting a numerical threshold - Considering the international practices and the current regulatory environment in India, the definition of control may be amended such that control is defined as

o   the right or entitlement to exercise at least 25% of voting rights of a company irrespective of whether such holding gives de facto control and/or

o   the right to appoint majority of the non-independent directors of a company.

c.       Or, any other option as may be decided after consultation.

The discussion paper inviting comments will be placed on SEBI website for seeking public comments.

Importance of Intellectual Property in Startups

According to the Global Innovation Index (GII) 2015, India ranks 81 out of 141 countries. Globally, Switzerland, followed by the United Kingdom, Sweden, Netherlands and the US are ranked as the most innovative countries in the world. To boost up entrepreneurship and innovation in India, Hon’ PM Shri. Narendra Modi provided a prime spotlight on Startup in India.

Startup India is a flagship initiative of the Government of India which aims to empower Startups to grow through innovation and design. In the Startup Action Plan announced on January 16, 2016, a major focus was given on scheme for Startup Intellectual Property Protection (SIPP) which shall facilitate filing of Patents, Trademarks and Designs by innovative Startups. Startups with limited resources and manpower, can sustain in this highly competitive world only through continuous growth and development oriented innovations and for this, it is equally crucial that they protect their IPRs.Various measures taken in this regard are as under:

• IPR procedure to be made transparent

• Faster patent registration and protection for Intellectual Property rights

• Recommendation by incubator recognized/funded by RBI not required

• Patent applications of the startups shall be fast tracked for examination and disposal

• Government shall appoint facilitators who shall provide assistance for startups in filing and disposal of patent applications related to patents, trademarks and design under relevant Acts

• Government to bear facilitation cost

• 80 per cent rebate in filing patents vis-à-vis other Companies

Proposed Amendment to Foreign Contribution Regulation Act, 2010

In our newsletter with subject as Contribution/Donation/Corporate Social Responsibility (CSR) Contribution by Subsidiary of Foreign Company is treated as Foreign Contribution we had discussed about “Corporate Social Responsibility (CSR)”,  “Foreign Source”, “Foreign Contribution” and the applicability of Foreign Contribution Regulation Act, 2010 to the subsidiary of Foreign Company.

 

In furtherance to the same, the Government of India has proposed an amendment in the Finance Bill of 2016 in the definition of Foreign Source namely:
 

“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made thereunder, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source”

 
If the proposed amendment is passed in the parliament, there will be relaxations for companies for whom CSR is mandatory and also various other entities that do not have FCRA Registration.

 
The Subsidiary of Foreign Companies which now have limited scope to expend or donate the amount under CSR only to entities that have FCRA Registration will be able to freely donate or expend the money without checking for FCRA Registrations.

 
Also the entities that accept donations or receive any aid from subsidiary of Foreign Companies are currently required to obtain prior registration under FCRA or prior permission from Central Government (Ministry of Home Affairs), which will be done away with.

 
The earlier newsletter can be viewed on the following link:

http://mmjcadvisoryblog.blogspot.in/2016/03/contributiondonationcorporate-social.htm

Contribution/Donation/Corporate Social Responsibility (CSR) Contribution by Subsidiary of Foreign Company is treated as Foreign Contribution:

Section 135 of Companies Act 2013 and rules made thereunder requires every Indian Company and Foreign Company incorporated under Companies Act 1956 or Companies Act, 2013 to contribute towards CSR if crosses threshold limit as specified under Section 135 (1) of Companies Act, 2013 viz:

Every company having:

-          net worth of rupees five hundred crore or more,

-          or turnover of rupees one thousand crore or more or

-          a net profit of rupees five crore or more

during any financial year shall constitute a CSR Committee of the Board.

Now the question is whether the contribution/ donation/ CSR contribution made by Indian subsidiary of foreign company is treated as foreign contribution and the entity accepting same needs to have The Foreign Contribution (Regulation) Act, 2010 (FCRA) registration?

Any Contribution/Donation/Corporate Social Responsibility (CSR) Contribution received in the form of an article or currency or security by any person requires compliances of FCRA if it’s from foreign source and foreign company. Let’s review the definitions of terms.

Foreign Source is defined u/s 2 (j) of FCRA as

 “foreign source” includes, —

(i) the Government of any foreign country or territory and any agency of such Government;

(ii) any international agency, not being the United Nations or any of its specialised agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;

(iii) a foreign company;

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;

(v) a multi-national corporation referred to in sub-clause (iv) of clause (g);

(vi) a company within the meaning of the Companies Act, 1956, and more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely:—

(A) the Government of a foreign country or territory;

(B) the citizens of a foreign country or territory;

(C) corporations incorporated in a foreign country or territory;

(D) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;

(E) foreign company;

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

(viii) a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;

(ix) a society, club or other association of individuals formed or registered outside India;

(x) a citizen of a foreign country;

Foreign Company is defined u/s 2(g) of FCRA as:

(g) “foreign company” means any company or association or body of individuals incorporated outside India and includes—

(i) a foreign company within the meaning of section 591 of the Companies Act, 1956;

(ii) a company which is a subsidiary of a foreign company;

(iii) the registered office or principal place of business of a foreign company referred to in sub-clause (i) or company referred to in sub-clause (ii);

(iv) a multi-national corporation.

If both the definitions are read together, it is conferred that subsidiary of foreign company is treated as foreign company under FCRA and the amount received from the subsidiary company is treated as foreign contribution.

Conclusion:

We can derive from above that any contribution made by foreign company or subsidiary of foreign company will be treated as foreign contribution.

Thus, in case if subsidiary of foreign company wants to make foreign contribution then it has to ensure that entity accepting the said contribution is registered under FCRA.

At the same time entity accepting foreign contribution has to ensure that it has registration under FCRA for accepting it not only from foreign company but also subsidiary of foreign company even though said Company is registered under Companies Act 1956/Companies Act 2013.