Foreign Collaboration

TAXPERT PROFESSIONALS name on conflicting Collaboration 24 March 2011 0 TAXPERT Professionals Type the fellowship address denomination on remote Collaboration Foreign Collaboration An Overview To fulfill the need of freeing the Indian industry from excessive official control and for promoting conflicting enthronisations in India in needed sectors the much requisite relaxation behavior of Indian prudence was brought in by industrial Policy of 1991. From then the Indian economy is more facilitating to Foreign Direct investment in both form. Foreign investment in India is preparation by ?Foreign Exchange attention Act ? coldness Bank of India ? plane section of Policy and advance Foreign Exchange Management Act is an act to facilitate, promote and manage the contradictory flip-flop in India. Reserve Bank of India issues various regulations to give found to the various provisions of the Foreign Exchange Management Act. The Department of industrial Policy & Promotion was established in 1995 and has been reconstituted in the year 2000 with the merger of the Department of Industrial Development. There has been a consistent shift in the role and functions of this Department since 1991.From regulation and garbage disposal of the industrial sector, the role of the Department has been transformed into facilitating investment and applied science flows and monitoring industrial development in the liberalized environment. The role and functions of the Department of Industrial Policy and Promotion here in afterward referred as Department or DIPP primarily includes interalia is pursuance Formulation and implementation of industrial policy and strategies for industrial development in conformity with the development needs and national targets acilitation of FDI engineering coactions at enterprise level and formulating policy parameters for the homogeneous(p) Trademarks, Industrial Designs and Geographical Indications of Goods and administration of regulations, rules made there on a lower floor TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign Collaboration The DIPP is in charge for encouraging achievement of technological capability in various sectors of the industry where such acquisition is required to promote the economic development.Foreign technology induction is facilitated through liberal orthogonal technology coaction governing each through FDI or through Foreign Technology Collaboration (FTC) placement. There be two types of Foreign Collaboration the Financial quislingismism and the expert collaboration. 1. Financial Collaboration refers to collaboration where solo equity is involved. The financial collaboration can be by way of entering into fit guess promise with the Indian c altogetherer-up. 2. good collaboration refers to collaboration where there is transit of technology by the Foreign collaborator on due compensation.Foreign Colloboration Financi al Colloboration 1 Financial Collaboration Techinical Colloboration Financial collaboration refers to collaboration where there is equity participation. It is regulated by the sectoral caps yet and equity is permitted in almost all the sectors trough the extent as mentioned in the Foreign Direct Investment Policy. Foreign Direct Investment is permitted downstairs the willing travel guidebook in most sectors/activities excluding just nowa twenty-four hour occlusions few sectors which are prohibited like real estate etceteraand few where prior plaudit from FIPB is required. TAXPERT Professionals www. taxpertpro. om emailprotected com 09769134554 Article on Foreign Collaboration As per sign up none 3 (2005 Series) issued by DIPP prior government favorable reception for new suggestions would be required only in results where the foreign investor has an alive enounce gamble in the same playing palm refer Annexure I for tiny discussion. Same demesne as defined in th e same press none mean 4 digit NIC 1987 code. In case of Financial collaboration a new Indian accomp either referred as Joint profess Company or JVC here in after is formed, shares of which are subscribed by a foreign party and the Indian Company.When the money is received by Indian company JVC for subscription of shares by Foreign Company it has to intimate the RBI inside 30 age of the receiving of Consideration and within 180 years of the receipt of consideration the shares are required to be allotted to foreign company, within 30 days of the allotment of shares the FC GPR Form along with Certificate from Chartered Accountant as well as Company secretary is required to be filed by Indian Company JVC.As far as Financial collaboration is furbish uped in most of the cases a Joint act agreement is entered separately or all the contexts of conjunction Venture agreement are incorporated in the Article of Association of the Company. Interalia following are the clauses in Artic le of Association that will need consideration so that the interest of both the Joint Venture partners is saved 1. Shares There can be restriction on rapturering the share of a company by each Joint Venture Partner that no shareholder JV partner shall transfer the shares without the approval from other JV partner.The shares shall be offered to the other shareholder first before selling to the third party. How the fair value of the shares to be transferred shall be determined. There can be Lock in period for holding the shares. 2. Meetings-The Quorum for the General meeting shall be at least one Shareholder? s representative institute by both parties respectively. 3. Directors The marginal number of directors representing interest of each party can be placed in Article of Association.The quorum of the scorecard Meeting can be framed to consist at least one Director appointed by each of the parties. The clauses can be put to safeguard interest of each party as to items where con sent shall be given by way of affirmative voting by each party director. 2 Foreign technology agreements and collaborations For promoting technological capability and competitiveness of Indian Industry, acquisition of foreign technology is promoted through foreign technology collaborations.Foreign technology agreements and collaborations are permitted either through the automatic route under delegated powers exercised by the Reserve Bank of India, or by the organization. The items of foreign technology collaboration, which are eligible for approval through the automatic route and by the disposal, are A. Technical know-how pays, B. Payments for designs and drawings, C. Payments for engineering services and D. Royalty TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign CollaborationFor entering into technology collaboration an agreement is entered into between the foreign entity and an Indian entity. The following should be taken into accou nt while drafting the technology agreement that the licensed product/technical information is defined elaborately, period for which such a technology/knowhow is transferred, what is transferred and what is not transferred and what are pocket and non exclusive rights transferred, manner of calculation of hire and schedule of payment, cost of foreign Technicians, which party will bear the taxes if etc. Please note that no permission is necessary for hiring of foreign technicians and no operation need be made to political science for this purpose irrespective of whether the hiring of foreign technician is under an approved collaboration agreement or not. As verbalise earlier the collaboration can be through automatic route or government route.Below is the brief discussion regarding the same- 2. 1 Automatic Route for Foreign Technology Agreements The Reserve Bank of India, through its regional offices, accords automatic approval to all industries for foreign technology collaboration agreements font to The lump warmheartedness payments not exceeding US $2 million Where there s technology Transfer - Royalty payment being limited to 5 per cent for internal sales and 8 per cent for exports, keep down to a total payment of 8 per cent in sales without any restriction on the duration of the payments and Where there is no technology Transfer The Government of India overly permits payment of royalties of up to 2 per cent on exports and 1 per cent for domestic sales under automatic route on use of trademarks and brand names of the foreign collaborator without technology transfer. ? ? ?Also, Clarification was brought in by department via press note dated 23-12-2005 that as FDI upto 100% is permitted under the automatic route in most sectors/activities automatic route is also allowed for foreign technology collaboration where the payments are within 5% for domestic sales and 8% for exports. 2. 2 Government encomium for Foreign Technology Agreements As per press no te 1(2005 series) Prior approval of the Government would be required only in cases where the foreign investor has an vivacious common peril or technology transfer/trademark agreement in the same? ield. The onus to provide requisite apology and also proof to the rapture of the Government that the new proposal would or would not in any way jeopardize the interests of the quick joint venture or technology/trademark partner or other stakeholders would lie equally on the foreign investor/technology supplier and the Indian partner. TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign CollaborationIn cases where the foreign investor has a joint venture or technology transfer/trademark agreement in the same? field prior approval of the Government will not be required in the following cases i. Investments to be made by Venture Capital Funds registered with the Security and Exchange carte du jour of India (SEBI) ii. where in the live joint-ve nture investment by either of the parties is less than 3 per cent iii. Where the vivacious venture/collaboration is defunct or sick.Remittance of Royalty/Technical Fee General permission has been given permission to authorised dealers by Reserve bank of India vide (DIR Series) rotary No. 76 dated 24th Feb 2004 to allow remittances for royalty and payment of Lump sum fee provided the payment provided the royalty does not exceeds 5% of the domestic sales and 8% on exports and Lump sum fees does not exceeds USD 2 Million. Prior approval from Ministry of Industry and transaction, Government of India in case exceeds the above said payments.In terms of Rule 4 of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump -sum payment exceeds USD 2 million item 8 of Schedule II to the Foreign Exchange Management (Current Account Transactions) Rules, 2000. However as per RBI/2009-10/465 A. P. (DIR Series) round No. 2 dated 13 May 2010 the Government of India has reviewed the extant policy with regard to liberalization of foreign technology agreement and it was decided to omit item number 8 of Schedule II to the Foreign Exchange Management (Current Account Transaction) Rules, 2000, and the entry relating thereto. Accordingly, AD Category-I banks whitethorn permit drawal of foreign exchange by persons for payment of royalty and lump-sum payment under technical collaboration agreements without the approval of Ministry of Commerce and Industry, Government of India w. . f 16 Dec 2009. Source http//rbidocs. rbi. org. in/rdocs/content/PDFs/AFE130510RC. pdf To sum up, success of any collaboration is dependent on the synergies that are driven from it by both parties. Therefore to achieve the desired objective of collaboration it is necessary that the matters like proper due diligence, tax structuring, drafting of joint venture agreement etc are very well taken care of. For further details get in taking into custody at emailprotected com TAXPERT Professionals www. taxpertpro. om emailprotected com 09769134554 Article on Foreign Collaboration Annexure I Source http//dipp. nic. in/ DISCUSSION topic SUBJECT APPROVAL OF FOREIGN/ TECHNICAL COLLABORATIONS IN CASE OF EXISTING VENTURES/ TIE-UPS IN INDIA 1. The Department of Industrial Policy and Promotion has decided to release Discussion Papers on various aspects related to FDI. In the series of these Discussion Papers, this is the third paper on Approval of foreign/ technical collaborations in case of existing ventures/ railroad ties in India?.Views and suggestions are invited on the observations made in the enclosed discussion paper, as also on the entire gamut of issues related to the subject, by October 15, 2010. 2. The views expressed i n this discussion paper should not be construed as the views of the Government. The Department hopes to generate informed discussion on the subject, so as to enable the Government to take an appropriate policy decision at an appropriate conviction. TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign CollaborationDISCUSSION wallpaper APPROVAL OF FOREIGN/ TECHNICAL COLLABORATIONS IN CASE OF EXISTING VENTURES/ TIE-UPS IN INDIA 1. 0 give way SCENARIO 1. 1 Paragraph 4. 2. 2 of Circular 1 of 2010 (Consolidated FDI Policy), specifies that investment would be subject to the Existing Venture/ rack condition?. As per this condition, where a foreign investor had, prior to January 12, 2005, entered into an existing joint venture/ technology transfer/ trademark agreement in the same field, any new proposal for investment/ technology transfer/trademark agreement, requires Government approval.The proposal has to be routed through either the Foreign Inv estment Promotion Board (FIPB) in the Department of Economic Affairs, if fresh foreign investment is involved or the Project Approval Board (PAB) in the DIPP, if no foreign investment is involved. The 4 digit National Industrial salmagundi (NIC), 1987 Code, would be the basis for determining if the field was the same . 1. 2 The onus to demonstrate that the proposed new tie-up would not jeopardize the xisting joint venture or technology transfer/ trademark partner, lies equally on the foreign investor/ technology supplier and the Indian partner. 1. 3 The policy aims at protecting the interests of joint venture partners of agreements entered into, prior to January 12, 2005. Foreign collaboration agreements, both financial and technical, entered into after January 12, 2005, have been exempted from this stipulation. This is because such joint venture agreements are expected to include a conflict of interest? lause, so as to safeguard the interests of joint venture partners, in the eve ntidet of one of the partners desiring to position up another joint venture or a wholly owned subsidiary in the same field of economic activity. 1. 4 fivesome categories of investments have, however, been exempted from the requirement of Government approval, even though the foreign investor may be having a joint venture/ technology transfer/ trademark agreement in the same field.These are a) Investments to be made by Venture Capital Funds registered with the Securities and Exchange Board of India (SEBI ), b)Investments by Multinational Financial Institutions like the Asiatic Development Bank (ADB), planetary Finance Corporation(IFC), Commonwealth Finance Corporation (CDC), Deutsche Entwicklungs Gescelschaft (DEG), c) Where, in the existing joint venture, investment by either of the parties is less than 3 per cent d)Where the existing joint venture / collaboration is defunct or sick and e) Investments in the Information Technology or mining sectors. 2. 0 2. 1EVOLUTION OF THE PRE SENT REGIME PRESS argument 18 (1998 SERIES) In iron out handbill 18 (1998 series), Government tidy sum out the following guidelines for approval of foreign / technical collaborations, under the automatic route, in cases where previous ventures/ tie-ups existed within India. a) Automatic route for bringing in FDI and/or technology collaboration agreements (including trade-mark agreements), would not be procurable to those who have or had any previous joint-venture or technology transfer/trade-mark agreement, in the same? or allied? field, in India. TAXPERT Professionals www. taxpertpro. com emailprotected om 09769134554 Article on Foreign Collaboration b) Government approval route was, necessary in such cases. Detailed circumstances under which it was found necessary to set-up a new joint venture/enter into new technology transfer (including trade-mark) were required to be furnished at the time of seeking approval. c) The onus was clearly on such investors/technology suppliers, to provide the requisite justification /proof, to the satisfaction of the Government, that the new proposal would not, in any manner, jeopardize the interests of the existing joint-venture or technology/trade-mark partner or other stakeholders.It was at the sole discretion of the FIPB/ PAB, to either approve the application with or without conditions or to stand firm it in toto, duly recording the reasons for doing so. 2. 2 PRESS NOTE 10 (1999 SERIES) oppose label 10 (1999 series) defined the meaning of the terms same field and allied field as under o o same field four-digit NIC 1987code allied field three-digit NIC 1987codeThe Press refer further clarified that, only proposals for foreign collaboration, falling under same four-digit or three-digit classifications, in terms of their past or existing joint ventures in India, would attract the provisions of Press mark 18 (1998 series). 2. 3 PRESS NOTE 2 (2000 SERIES) With a view to further liberalize the FDI regime, the Govern ment issued Press get down 2 (2000 series), wherein all activities were placed under the automatic route for FDI, except for a specified negative list. Sector-specific guidelines were attached to this Press production line.In respect of the mining sector, it was mentioned that the provisions of Press Note 18 (1998 series) would not be applicable for circumstance up 100% owned subsidiaries, subject to a declaration from the applicant that he had no existing joint-venture for the same area and/ or the particular mineral. 2. 4 PRESS NOTE 8 (2000 SERIES) Press Note 8 (2000 series), recognized the special nature and needs of the IT sector. With a view to further simplify approval procedures and facilitate greater investment inflows into the IT sector in the country, FDI proposals elating to the IT sector were exempted from the provisions of Press Note 18 (1998 series). 2. 5 PRESS NOTE 1 (2001 SERIES) This Press Note provided for exemptions from the provisions of Press Note 18 for inve stments made in domestic companies by International Financial Institutions, such as the Asian Development Bank (ADB), International Finance Corporation (IFC), Commonwealth Development Corporation (CDC), Deutsche Entwicklungs Gescelschaft (DEG) etc.Accordingly, such International Financial Institutions were permitted to invest in domestic companies, through the automatic route, subject to SEBI/ RBI regulations and sector-specific caps on FDI. TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign Collaboration 2. 6 PRESS NOTE 1 (2005 SERIES) 1. Following the introduction of Press Note 18 (1998 series), certain representations were made by foreign investors. They pointed out that a) The Press Note had the effect of overriding the contractual terms agreed to with the Indian partners. ) Domestic investors were using the provisions of the Press Note as a means of extracting unreasonable prices / commercial advantage. The Press Note was, thus, becomi ng a stumbling stop over for further FDI coming into the country. c) The term allied field was very widely defined, as it included even those products which would not have caused peril to the manufacture of existing products. d) Foreign investors were being singled out to present their defence, without the Indian partner being asked to justify the cosmea of jeopardy. . Press Note 1 (2005 series), issued on 12 January, 2005, address these issues by amending the earlier guidelines. New proposals for foreign investment/technical collaboration were allowed under the automatic route, subject to sectoral policies and the following revised guidelines a) Prior approval of the Government would be required only in cases where the foreign investor had a joint venture or technology transfer/trademark agreement in the same field, existing as on the date of the Press Note i. . 12 January, 2005. b) The onus to provide requisite justification and proof, to the satisfaction of the Government, tha t the new proposal would or would not, in any way, jeopardize the interests of the existing joint-venture or technology/ trademark partner or other stakeholders, would lie equally on the foreign investor/ technology supplier and the Indian partner. ) Even in cases where the foreign investor had a joint-venture or technology transfer/ trademark agreement in the same field, prior approval of the Government would not be required in the following cases Investments to be made by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI) or ii) where in the existing joint-venture investment by either of the parties was less than 3% or iii) where the existing venture/ collaboration was defunct or sick i) d) In so far as joint ventures to be entered into after the date of the Press Note were concerned, the joint venture agreements could embody a conflict of interest clause, to safeguard the interests of joint-venture partners, in the event of one of the partners d esiring to set up another joint-venture or a wholly-owned-subsidiary, in the same field of economic activity. 2. 7 PRESS NOTE 3 (2005 SERIES) TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign Collaboration Subsequently, Press Note 3 (2005 series), issued on 15 March, 2005, clarified that a) For the purposes of Press Note 1 (2005 Series), the definition of same? field would continue to be 4-digit NIC 1987 Code. ) Proposals in the Information Technology sector, and the mining sector, continued to remain exempt from the application of Press Note 1 (2005 Series). c) For the purpose of avoiding any ambiguity, it was further reiterated that, jointventures/technology transfer/trademark agreements, existing on the date of issue of the said Press Note (i. e. 12. 1. 2005), would be treated as existing jointventures/technology transfer/trademark agreements, for the purposes of that Press Note. 3. 0 APPLICATION OF THE PROVISIONS IN PRACTICE 3. 1 FIPB considered 566 proposals during the calendar year 2009, out of which 16% related to matters linked with Press Notes 1 and 3 of 2005, wherein the applicants had a joint-venture / technology transfer agreement, with an Indian partner, as on 12 January, 2005. 3. Some of the principles emerging from the cases discussed in the FIPB 1 are set out below a) In case the existing joint-venture has become defunct, there may not be any jeopardy to the Indian partner, in case the foreign collaborator wishes to set up a new venture. b) Jeopardy? should not be invoked as a measure to asphyxiate legitimate business activity and prevent competition. The issue of jeopardy? has to be examined in light of the extant business agreements/arrangements between the parties. c) Jeopardy? may not be established in cases where technology demonstrate agreements have expired, as per terms mutually agreed by the joint-venture partners. d) In location specific projects/ activities, the ideal of jeopardy? canno t be extended beyond the area originally envisaged in the agreement. In such cases, jeopardy? eeds to be viewed in a location-specific context. 3. 3 The FIPB Review, 2009 has observed that While critics may feel that Press Note 1 has outlived its utility, the high pitched debate on the issue of jeopardy and Indian JV partners alleging foul play by the foreign collaborator cannot make us oblivious to its continuing relevance. 4. 0 PRACTICES IN OTHER EMERGING MARKETS (CHINA AND BRAZIL) 1 FIPB Review, 2009 TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554 Article on Foreign Collaboration Emerging economies, such as Brazil and China, do not have any such corresponding requirements, under their foreign investment regimes. 5. CONCERNS RELATED TO LIBERALISING THE EXISTING VENTURE/ TIE-UP CONDITION 5. 1 In 1998, the main policy concern was to protect the interests of domestic jointventure partners/ technology collaborators, who may have been less advantageously pla ced, in comparison to their foreign counterparts, insofar as their ability to influence the terms of future business engagement were concerned. It was felt that an piece of Government oversight was necessary, so that future collaborations were subjected to the test of jeopardy? and existing domestic joint-venture partners/ technology collaborators were not placed in a position wherein their extract was threatened. 5. This policy framework was relaxed in 2005, while maintaining a balance between the need to promise healthy foreign investment inflows and the need to ensure that survival of the domestic industry was not threatened. The main elements of the existing venture/ tie-up condition? were retained, underlining Government? s concerns most ensuring the continued sustenance and growth of the domestic joint-venture partners/ technology collaborators, in collaboration with their foreign partners. 6. 0 THE CASE FOR REVIEW OF THE EXTANT REGIME 6. 1 The existing venture/ tie-up con dition? has now been in existence, as a formal measure under the FDI policy, for nearly twelve years. It was last reviewed in 2005.There is a need to examine whether such a conditionality continues to be relevant in the present day context. 6. 2 The existing venture/ tie-up condition? topically applies only to those joint-ventures which have been in existence as on or prior to 12 January, 2005. With more than five years having elapsed, it can be argued that the issue of jeopardy? is, no longer relevant, as the Indian partners could have re scotched their investments substantially during this period of time. 6. 3 The Indian industry today is in a much stronger position than it was in the 1990s, when the condition was first introduced. It, therefore, needs to be seen whether there is a need to continue with the elements of such a regime even today. 6. Further, industry has to increasingly become more competitive. This is particularly relevant in an era of globalization, where a numbe r of Free Trade Agreements (FTAs) and Comprehensive Economic Cooperation/ Partnership Agreements (CEPAs/CEPAs) are in place . In such a scenario, if an industry is discouraged from being set up in India, it could be set up in a neighbouring country, with whom a trade agreement exists or is being negotiated. Competition today, is not only between domestic players inter se but also between transnational and domestic players. cast out of goods from some of countries has posed serious threats to the survival of domestic industries.Between 1992 and 2010 (May), the Directorate General for anti Dumping (DGAD) has initiated anti-dumping investigations into 253 cases involving 38 countries/territories (considering 27 EC countries as a single territory). The major product categories on which anti-dumping calling has been levied are chemicals & petrochemicals, pharmaceuticals, fibres /yarns, steel and other metal products and consumer goods. TAXPERT Professionals www. taxpertpro. com email protected com 09769134554 Article on Foreign Collaboration Limiting global technology agreements through measures described above may constrain the growth of strong and competitive domestic industries. 6. It is also a moot point whether Government policy should intervene in the commercial subject and override contractual terms agreed to between the parties, given the need to promote healthy competition, and ensure sustained long-term economic growth. It can be argued that Government should not be concerned about commercial issues between two business partners. 6. 6 The measure discriminates between the foreign investors who had shown confidence in India, by investing in the country prior to 2005 and those who invested later. 6. 7 The condition may be constraining a number of investors, who may not be able to reach agreement with their Indian partners on their future investment plans, thereby restricting the inflow of foreign capital and technology into the country. 6. 8 A related issue is the concept of same field?.Press Note 1 of 2005 significantly limited the image of the provisions of Press Note 18 (1998 series), as the latter applied only to the same field and not the much wider allied field. However, in the present day context, even the concept of same field may not be an accurate indicator for determining whether the new venture would jeopardize the interest of the existing joint-venture partner. This is because , the NIC four digit Codes, even after revision , may still not fully reflect the complexities related to the concept of the same? industry and may often tend to cover a wide range of industrial activities under the same head. As an example, the activity of manufacturing of seat belts? may not jeopardize the activity of manufacturing of car steering?.However, both fall under the same field? under the NIC Code of 1987. Further, the NIC Codes of 1987 may not accurately represent many of the business situations in the current complex and diversi fied industrial environment, leading to difficulties in interpretation. 7. 0 POLICY OPTIONS FOR CONSIDERATION 7. 1 For the reasons mentioned in Paras 6. 1 to 6. 8, should the existing venture/ tie-up conditions? last amended in Press Notes 1 and 3 of 2005 and now included as paragraph 4. 2. 2 of Circular 1 of 2010 be totally abolished? 7. 2 Alternatively, if it is felt that such a condition should continue for some more time, should calibrated relaxations be introduced ?These could include exemptions from the application of the condition in cases where a) The existing venture/tie up is more than say 10 years old b) If the activity of the new venture is demonstrably different from the activity of the existing venture/tie up, even though it has the same NIC field. Are there any other contingencies where such exemptions should be considered? The article is contributed by CA. Sudha G. Bhushan, She is a Chartered Accountant and a company secretary. She is advisor to many international c ompanies on international tax matters and FEMA Advisory services. She can be reached at emailprotected com. TAXPERT Professionals www. taxpertpro. com emailprotected com 09769134554