Annual compliance for Foreign Companies and branch in India

Annual Compliance under companies Act, 2013

As per section 2 of Companies Act, 2013, “Foreign Company” means means any company or  body  corporate incorporated outside India which –

1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
2. conducts any business activity in India in any other manner.

As per section 381 of the Companies Act, 2013, every foreign company shall, in every calendar year, -

1. make  out  a  balance  sheet  and  profit  and  loss  account  in  such  form,  containing  such particulars and including or having attached or annexed thereto such documents as may be prescribed, and
2. deliver a copy of those documents to the Registrar.

According to the Companies (Registration of Foreign Companies) Rules, 2014,  every foreign company  shall  prepare  financial  statement  of  its  Indian  business  operations  in  accordance with Schedule III or as near thereto as possible for each financial year including:

• documents that are required to be annexed should be in accordance with Chapter IX i.e. Accounts of Companies.
• The  documents  relating  to  copies  of  latest  consolidated  financial  statements  of  the parent foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the applicable laws there.                    3  Every  foreign  company  shall  send  to  the  Registrar  along  with  the  documents required to  be  delivered  to  him,  a  copy  of  a  list  in  the  prescribed  form,  of  all  places  of  business established by the company in India as at the date with reference to which the balance sheet referred to in section 381(1) is made.

According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign company shall file with the Registrar, along with the financial statement, in Form FC.3 with such fee as provided under Companies (Registration Offices and Fees) Rules, 2014 a list of all  the  places  of  business  established  by  the  foreign  company  in  India  as  on  the  date  of balance sheet.

         4. According to the Companies (Registration of Foreign Companies) Rules, 2014, Further, every foreign company shall, along                  with the financial statement required to be filed with the Registrar, attach thereto the following documents; namely:-

1. Statement of related party transaction
2. Statement of repatriation of profits
3. Statement of transfer of funds (including dividends, if any)

The  above  statements  shall  include  such  other  particulars  as  are  prescribed  in  the Companies (Registration of Foreign Companies) Rules, 2014.

All these documents shall be delivered to the Registrar  within  a  period  of  6  months of   the   close   of   the   financial year of the foreign company to which the documents relate

Audit of accounts of foreign company: According to the Companies  (Registration  of Foreign Companies) Rules, 2014 –

1. Every  foreign  company  shall  get  its  accounts,  pertaining  to  the  Indian  business operations prepared in accordance with section 381(1) and Rules thereunder, shall be audited  by  a  practicing  Chartered  Accountant  in  India  or  a  firm  or  limited  liability partnership of practicing chartered accountants.
2. The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as far as applicable, shall apply, mutatis mutandis, to the foreign company.

Section 384: The provisions of section 92 (Preparation and filing of Annual return) shall, subject to such exceptions, modifications and adaptations as may be made therein by rules made under this Act, apply to a foreign company as they apply to a company incorporated in India.

According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign company shall  prepare  and  file  an  annual  return  in  Form  FC-4  along  with  prescribed  fees, within a period of 60 days from the last day of its financial year, to the Registrar containing the particulars as they stood on the close of the financial year.

The provisions of section 128 (Books of account, etc., to be kept by company) shall apply to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account referred to in that section, with respect to monies received and spent, sales  and  purchases  made,  and  assets  and  liabilities,  in  the  course  of  or  in  relation  to  its business in India.

Annual Compliance under Income Tax Act, 1961 – Assessment year 2019-20

As per section 139(1) of Income tax Act, 1961, Companies are mandatorily required to file income tax return, irrespective of total income.

So, Foreign Companies are required to file income tax return every year.

As per section 44AB of Income tax, assesse is required to get its accounts audited, if its gross receipts or turnover during previous year exceeds Rs 2 crore.

Assessee includes Foreign Company. So, if gross receipts or turnover of Foreign Company during previous year is more than Rs 2 Crore, then it has get its accounts audited by Chartered Accountant in practice.

Annual Compliance under FEMA

1. Foreign Liabilities and Assets return (FLA) –

Foreign Branch or Liaison office is required to file  FLA return if any foreign assets or foreign liabilities are outstanding as on reporting date.

FAQ on FLA returns -

• What will be the consequences in case we do not file the said FLA Return by 15th July, as our accounts are not audited as yet, and we do not wish to file it with unaudited figures. Will there be any imposition of penalty or prosecution initiated against the company by RBI or FEMA? Since nowhere it is mentioned either in the Circular No. 145 dated June 18, 2014 or in the Annex to AP (DIR Series) Circular No. 145 about the penalty or the prosecution, so, can we assume that we can file the same once our accounts are audited without any risk of penalty or other proceedings from the concerned authority in future?

Annual return on Foreign Liabilities and Assets has been notified under FEMA 1999 and it is required to be submitted by all the India resident companies which have received FDI and/ or made overseas investment in any of the previous year(s), including current year by July 15 every year. Non-filing of the return before due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA.

• What information should be reported in FLA return, if balance sheet of the company is not audited before the due date of submission?

If the company’s accounts are not audited before the due date of submission, i.e. July 15, then the FLA Return should be submitted based on unaudited (provisional) account. Once the accounts gets audited and there are revisions from the provisional information submitted by the company, they are supposed to submit the revised FLA return based on audited accounts by end - September.

• In case where Account Closing Period of the company is different from reference period (end-March), can we report the information as per Account Closing Period?

No. Information should be reported for all the reference period, i.e. Previous March and Latest March. If Account Closing Period of the company is different from the reference period, then information should be given for the reference period on internal assessment.

• Which companies are required to submit the FLA Return?

The annual return on Foreign Liabilities and Assets (FLA) is required to be submitted directly by all the Indian companies which have received FDI (foreign direct investment) and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year i.e. who holds foreign Assets or Liabilities in their Balance Sheets.

• If a company did not receive FDI or made overseas investment in any of the previous year(s) including the current year, do we need to submit the FLA Return?

If the Indian company does not have any outstanding investment in respect of inward and outward FDI as on end-March of reporting year, the company need not submit the FLA Return.

• If a company has only share application money, then is that company supposed to submit the FLA Return?

If a company has received only share application money and does not have any foreign direct investment or overseas direct investment outstanding as on end-March of the reporting year, then that company is not required to fill up FLA return.

• If the company has not received any inward FDI / made overseas investment in the latest year, do they need to submit the FLA Return?

If the company has not ‘received any fresh FDI and/or ODI (overseas direct investment)’ in the latest year but the company has outstanding FDI and/or ODI, then that company is required to submit the FLA Return every year by July 15.

• Whether FLA Return is required to be submitted by Registered Partnership Firms (Registered under Partnership Registration Act) or branches or trustees, who have made Overseas Direct Investment or it is mandatory only for Companies (Registered under Companies Act, 1956)?

If the Partnership firms, Branches or Trustees have any outward FDI outstanding as on end-March of the reporting year, then they are required to send a request mail to get a dummy CIN number which will enable them to file the Excel based FLA Return. If any entity has already got the dummy CIN number from the previous survey, they should use the same CIN number in the current survey also.

It is also informed that these dummy CIN numbers are provided by RBI for filling the excel based FLA return only and not for any other purpose.

• If non-resident shareholders of a company has transferred their shares to the residents during the reporting period, then whether that company is required to submit the FLA Return?

If all non-resident shareholders of a company has transferred their shares to the residents during the reporting period and the company does not have any outstanding investment in respect of inward and outward FDI as on end-March of reporting year, then the company need not submit the FLA Return.

• If company issued the shares to non-resident on Non-Repatriable basis, whether that company is required to submit the FLA Return?

Shares issued by reporting company to non-resident on Non-Repatriable basis should not be considered as foreign investment; therefore, companies which have issued the shares to non-resident only on Non-Repatriable basis, is not required to submit the FLA Return

• What is the due date of submission of the FLA return?

FLA return is mandatory under FEMA 1999 and companies are required to submit the same based on audited/ unaudited account by July 15 every year.

       2. Annual activity certificate -

Liaison Office can undertake the following activities in India:

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

Branch Office can undertake the following activities in India:

• Export/Import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in areas in which the parent company is engaged.
• Promoting technical or financial collaborations 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.

Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.

Every branch office and Liaison office should get certificate from Chartered Accountant in practice, certifying that it is engaged in the activity for which it was permitted by RBI.