Establishment of Project Office and Inter Project Transfer of Fund and Asset

Establishment of Project Office and Inter Project Transfer of Fund and Asset

14 February 2022 • Shawant Raj

When a body corporate incorporated outside India (Foreign Company) intends to establish it’s operation in India, it needs to decide on the medium through which it can step in the Indian market. The most common way is through establishing a wholly owned subsidiary (WOS) company. For more detail, you may refer to ..

• • Incorporating a Private Limited Company in India – Non-Resident Perspective

Some foreign companies just have a project or two. Rather than establishing a WOS, they consider setting up a project office and executing the allotted project within the stipulated time. A Project Office can be established in accordance with the applicable provisions of the Foreign Exchange Management Act, 1999 (“FEMA”) read with the Master Direction Establishment of Project Office (PO).

A Foreign company (FC) is permitted to establish a project office (PO) in India for the purpose of undertaking a contract provided the project is funded directly by inward remittance from abroad.

FC should have secured a contract from an Indian company to execute a project in India. In addition, the PO must have obtained the necessary approval of the Reserve Bank of India. RBI approval  for PO is validity for a period up  to the time it takes to complete the project in India.

Bank Account

Upon establishment of Project Office in India it can open Bank Account with AD Category – I Banker non-interest-bearing foreign currency account subject to the following:

(a) the PO has been established in India, with the general/specific permission of Reserve Bank of India, having the requisite approval from the concerned Project Sanctioning Authority concerned as per these Regulations.

(b) the contract governing the project specifically provides for payment in foreign currency.

(c) each PO can open two foreign currency accounts, usually one denominated in USD and the other in the home currency of the project awardee, provided both are maintained with the same AD Category–I bank.

(d) the account’s acceptable debits are project-related expenditure payments, and the account’s permissible credits are foreign currency receipts from remittances from a parent/group company

(e) the AD Category–I bank is exclusively responsible for ensuring that only approved debits and credits are permitted in the foreign currency account. The accounts will also be thoroughly examined by the Concurrent Auditor of the corresponding AD Category–I bank.

(f) the foreign currency accounts have to be closed at the completion of the project.

Annual Activity Certificate (AAC)

It is pertinent to note that the PO is required to submit its (AAC) as at the end of March 31 along with the audited financial statements including receipt and payment account on or before September 30 of that year or within six months from the due date of the Balance Sheets to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation).

PO can transfer its own assets or available fund to its other PO in India

Transfer of assets by way of sale to JV/WoS may be allowed by AD Category-I Bank only when the non-resident entity intends to close their PO operations in India. The proposal for transfer of assets may be considered by AD Category I Bank only from PO who are adhering to the operational guidelines applicable on it, such as timely submission of AAC, have obtained PAN and registered itself with Registrar of Companies, if necessary along with following conditions:

• • Submission of Statutory Auditors Certificate(SAC) furnishing details of assets to be transferred. Sale consideration should not be more than the book value in each case.
  • The assets should have been acquired by PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses should be included.
  • No revenue expenses such as leasehold improvements can be capitalized and transferred to JV/WOS.
  • AD Category-I Bank must ensure payment of all applicable taxeswhile permitting the transfer of assets.

Credits to the bank accounts on account of such transfer of assets will be treated as permissible credits.

Any transfer of assets without the necessary approval from AD Banker is liable for penal provision as applicable under the Foreign Exchange Management Act, 1999 and Regulation thereunder.

Recent compounding order pronounced by RBI in the matter of ILJIN Electric Co. Ltd

 Brief facts of the case:

• • ILJIN Electric Company Limited, a Korean company, has established Delhi Project Office on July 1, 2007, under General Permission for execution of the contract awarded to the company by Delhi Metro Rail Corporation Limited (DMRC).
  • The company had also established another two Project Officed in Hyderabad and Mumbai for executing project work allotted to it by Transmission Corporation of Andhra Pradesh Limited and by Mumbai Railway Vikas Corporation respectively. Also, it has opened two Bank Accounts with CITI Bank in India. 

• • During the period from 2011 to 2017, the transactions pertaining to Hyderabad PO and Mumbai PO were routed through the bank account opened for Delhi PO (contravention of Regulation 5(ii) of Notification No. FEMA.22/2000-RB dated May 3, 2000 and Regulation 4(f) of Notification No. FEMA.22(R)/RB-2016 dated March 31, 2016). Inter-project utilization of funds of the Delhi Project office does not relate to the contract secured by the foreign entity for which the Delhi PO was established.

• • In the AACs for the year ended March 31, 2012 to March 31, 2017, the auditor has qualified the AACs by observing that the inter-project transfers were done without permission from the Reserve Bank of India.

• • The Delhi PO has also transferred assets from one PO to another PO without the approval of AD Bank and that too at a value more than the book value. Transfer of assets is allowed by AD banks only when the foreign entity intends to close their LO / BO / PO operations in India. (Regulation 8 of Notification No. FEMA.22/2000-RB dated 3rd May 2000 read with Para H (v)(b)(c)&(e) of FED Master Circular No. 07/2015- 16 dated July 01, 2015).

• • Further, intangible assets viz. tally software having written down value of INR 1,31,827/- were also transferred by the Delhi PO without Reserve Bank permission.

ILJIN Electric Co. Ltd. has failed to comply with the provisions of the master direction prescribed by the Reserve Bank of India for inter-se transfer therefore the necessary penalty has been imposed by the department after considering the application submitted by them.

Our tangent

The inter-se transfer of funds or assets from one PO to another should be made only with the prior approval of RBI as prescribed under the master direction of Establishment of Project Office (PO) or any other place of business in India by foreign entities. If any of the entities has entered into such kind of transaction, then it will not only be considered as a contravention by the said entity but also AD Banker should be accountable for lapse or negligence in letting it pass. As the provisions of the said master direction permit remittance only after necessary authorisation of the AD Banker. If the transaction has been processed through the channel of AD Banker, they must have examined the documentation and permissibility of the said transaction. Also, it is the duty of the concurrent auditor of the AD Banker to thoroughly examine the transaction before submission of their report.

• • Branch Office/ Liaison Office