indian foreign exchange management act (fema) and transfer pricing regulations - ca. anil sharma

FEMA vis-a-vis TPR

Presentation by

CA Anil Sharma

FEMA vis-a-vis TPR

• Cross border transactions .• TPR applicable only when entered into with

‘Associated enterprises’.• Main objective of TPR to determine of

income from international transactions.• Main objective of FEMA is to facilitate

external trade and payments.• Non- compliance of FEMA considered as

economic offence and results into penalty.

Transactions under FEMA

• Current Account Transactions– Section 5 read with Section 2(j) of FEMA.– FEM( Current Account Transactions) Rules, 2000.

• Capital Account Transactions– Section 6 read with Section 2(e) of FEMA.– FEM (Permissible Capital Account Transactions)

Regulations, 2000

Current Account Transactions• Definition: – Section 2(j) of FEMA– Any transaction which is not a capital account

transaction and includes:• Payment due in connection with current business, trade,

services, short term borrowings & credit facilities in normal course of business.• Payment of interest on loans.• Income on investment.• Expenses in connection with foreign travel etc.

FEM( Current Account Transactions) Rules, 2000

• Transactions for which foreign exchange withdrawal is prohibited (schedule I)

• Transactions require approval of the Central Government ( Schedule II)

• Transactions require approval of Reserve Bank of India (Schedule III)


• Schedule I: Prohibited transactions• Remittance out of lottery winning or income from racing• Remittance for purchase of lottery tickets, football pools,

banned magazines• Payment of commission on exports made towards equity

investment in JV/WOS• Payment of commission on exports under Rupee State

Credit route• Payment related to “call back services” of telephones


Schedule II: Transactions with Central Govt. approval

• Cultural tours -Ministry of HRD• Advertisement in foreign print media by PSU -Ministry of Finance• Remittance of freight of vessel by a PSU -Ministry of Surface Transport• Payment of import on CIF basis by a PSU -Ministry of Surface Transport• Remittance of hiring of transponder by TV channels/internet service provider-Ministry of I&B• Remittance of prize money/ sponsor ship of sports activity abroad exceeding USD 100,000 -Ministry of HRD


Schedule III: Transactions with RBI approval• Private visits per financial year - exceeding USD 10,000• Gift per remitter or donor per financial year - exceeding USD 5,000• Donation per remitter or donor per financial yr. - exceeding USD 5,000• Donation by corporate, -exceeding 1% of their foreign exchange earnings

during the last 3 yrs. or USD 5,000,000,which ever is

less• Business visits - exceeding USD 25,000• Medical treatment - exceeding estimates by

doctors in India or abroad• Studies abroad - exceeding the estimate form the

institution or USD 100,000 per academic yr., whichever is higher

• Consultancy services procured outside - exceeding USD 10,000,000/1,000,000 per infra or

other project respectively• For immigration/employment abroad - exceeding USD 100,000

Export of Goods and Services

• Section 7 of FEMA, 1999.• FEM (Current Account Transactions) Rules, 2000.• Regulated by DGFT, Dept. of Commerce.• FEM (Export of Goods and Services) Regulations,

2000 (Export Regulations).• FEM (Manner of Receipt and Payment)

Regulations, 2000.• Master Circular- Export of Goods and Services.

Export of Goods and Services

• Declaration of goods and services (GR/Softex procedure)• Realisation and repatriation of export proceeds• Manner of receipt• Advance payments for export• Consignment export• Trade fair/exhibition abroad• Counter trade arrangement• Project exports and services exports • Overdue bills, extensions and write offs• Agency commission• EEFC account• Setting up office abroad and remittances for maintenance.

Import of Goods and Services

• Section 5 of FEMA, 1999.• FEM (Current Account Transactions) Rules, 2000.• Regulated by DGFT, Dept. of Commerce.• FEM (Manner of Receipt and Payment)

Regulations, 2000.• R & D Cess Act, 1986.• Income Tax Act, 1961.• Master Circular- Import of Goods and Services.

Import of Goods and Services

• Opening of L/C and advance remittances• Receipt of Import Bills/Documents• Time limit for settlement of import payments• Evidence of import, non-physical import.• Issue of Bank guarantee• Merchanting trade

Capital Account Transactions• Definition: – Section 2(e) of FEMA.– Any transaction: • which alters the assets or liabilities outside India of

person Residents in India or

• Which alters assets or liabilities in India of persons resident outside India

FEM (Permissible Capital Account Transactions) Regulations, 2000

Permissible (Para 3 of the Regulations)• Transactions by persons “Resident in India”

given in Schedule I.• Transactions by persons “Residents outside

India” given in Schedule II.Prohibited:• Para 4 of the Regulations.

Capital Account Transactions-Transactions by “Resident in India”

• Transfer or issue of any foreign security.• Transfer of immovable property outside India.• Borrowing & lending in foreign currency.• Giving of a guarantee or surety in respect of any

debt, obligation or other liability incurred owed to a person resident outside India

Capital Account Transactions-Transactions by “Persons resident outside India”

• Establishment in India of a branch, office or other place of business.

• Transfer or issue of security by branch, office or agency .

• Acquisition and transfer of immovable property in India.

• Transfer or issue of securities in India• Borrowing & lending in Rupees.• Deposits. • Guarantees.

Capital Account Transactions• Prohibited transactions:• For person resident outside India investment in India, in

any form ,in any company, firm or proprietory concern or any other entity which is or proposed to be engaged in :

– Chit fund– Nidhi co.– Agricultural and plantation activities– Real estate business or construction of farm houses– Trading in TDRs.

• For person resident in India investment outside India in the business of:

– Banking– Real estate

Transfer Pricing Regulations (TPR)

• Scope of transfer pricing provisions (section 92)

• Associated enterprise (Section 92A)• International transaction (Section 92B)• Computation of arms length price (ALP)

(Section 92C)

Associated Enterprise (Sec. 92A)

Nature of transactions under TPR• Transactions in tangible property.• Transactions in intangible property.• Transactions in respect of services.• Transactions in respect of lending or

borrowing money.• Transactions in respect of mutual

agreement or arrangement.• Any other transaction not specifically

referred above.

Nature of transactions under TPR

• Transactions in tangible property– Purchase/sale of raw material, consumables or other

supplies for assembly/processing/manufacturing of goods/ articles

– Purchase/sale of traded/finished goods– Purchase/sale of any other tangible

movable/immovable property or lease of such property

• Transactions in intangible property– Purchase/sale/use of intangible property such as

know-how, patents, copy rights, licenses etc.

Nature of transactions under TPR• Transactions in respect of services– Services such as financial, administrative,

technical, commercial services etc.

• Transactions in respect of lending or borrowing money– Granting and /or receiving loans/advances

Nature of transactions under TPR• Transactions in respect of mutual

agreement or arrangement– For allocation or apportionment of or any

contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided.

• Any other transaction not specifically referred above.

Sale/purchase of goods

• Notification 23 dated 3.5.2000- Export of Goods and Services.

• Notification 9 dated 3.5.2000 – Realisation, Repatriation and surrender of Foreign Exchange.

Sale/purchase of immovable property

Notification 7 dated 3.5.2000- Acquisition and Transfer of Immovable Property outside India.

Notification 21 dated 3.5. 2000 -Acquisition and Transfer of Immovable Property in India.

Sale/purchase of intangibles



Sale/ purchase of services



Payment/receipt of royalty or fee for technical services

Under FEMA- similar to sale and purchase of services.

Trademark/logo is also one of the marketing intangible. (Maruti suzuki India Ltd Vs. ACIT TPO (2010) 192 Taxman 317 Delhi HC)

loan given/taken and interest thereon

• Notification 3 dated 3.5.2000- Borrowing and Lending in Foreign Exchange

• Notification 4 dated 3.5.2000- Borrowing and Lending in Rupees

• Notification 5 dated 3.5.2000 – Deposit• Not charging interest- subject to APL (Perot Systems

TSI (India) Ltd vs. DCIT (2010) 130TTJ 685 (Delhi Tribunal). SA Builders Case could not help.

• Interest free credit facility can not be equated with interest on loan. (Nimbus Communication Ltd. ACIT 2010) 132TTJ 351 Mumbai Tribunal)

Sharing of expenses

• Current account transaction under FEMA.• Section 92 is applicable in a case where the

international transaction comprises only an outgoing for the Indian assessee.

• Section 92B - Allocation or apportionment of expenses under a mutual agreement or arrangement shall be at ALP.

• Advertisement benefit to foreign patent company (Nestle India Ltd V. Dy. CIT (2007) 111 TTJ (Delhi) 498)

Reimbursement of expenses

• Current account transaction under FEMA.• Centralised purchase by overseas office but for

specific use of the individual entities.• Expenses incurred on behalf of the resident entity.• Incurred cost on behalf of its associate enterprise

and got reimbursement without any mark up. If directly in the course of any services rendered then subject to ALP (British Gas India P Ltd vs. DCIT (2011) 11 Taxmann.com 304 Delhi ITAT).

Acquisition/disposal of Investments

• Notification 20 dated 3.5.2000- Transfer or Issue of Security by a Person Resident Outside India.

• Notification 120 dated 7.7.2004 – Transfer or Issue of any Foreign Security.

• If the payment is held to be capital, it is not allowable as deduction and therefore, question of determination of ALP may not be necessary to be decided by the TPO. – Delhi Tribunal Honda Siel Cars India Ltd Vs CIT 2010 1ITR (Trib)497.

• Contribution of capital in kind- would not result in profit in any circumstances – CIT v. Kusum Products Ltd. (1973) 71 Taxmann 611(Cal.).

Guarantees to banks /financial institutions

• Notification 8 dated 3.5.2000 – Guarantees

• Guarantee commission.

• Cost of arranging guarantee.

Transactions without consideration

• Guarantee provided without claiming any commission or reimbursement of any related expense.

Govt. approvals Vs. Arms length price

• Payment of royalty as approved by Govt. of India

• Payment of interest on loan as approved by Govt. of India

• Payments within limits provided by the Govt. under ‘Automatic Route’.

Additions/ disallowance under TPR and their impact under FEMA

• Remittance of royalty or interest under FEMA but disallowance under TPR- whether shall be non-compliance of FEMA?

• Sale of goods/services and receipt of proceeds but addition made under TPR- whether shall be non- compliance of FEMA?

Thank you.

Contact me at :[email protected]

indian foreign exchange management act (fema) and transfer pricing regulations - ca. anil sharma

Economy & Finance