BCAS STUDY CIRCLE MEETING ON FEMA

ANSWERS TO QUESTIONS RAISED IN THE MEETING

1. Are there any restrictions on % of Royalty amount for use of technology or trademark?

No there is no restriction on % of the royalty for use of technology or trademark. First thing to check is
characterisation. Current account transaction or Capital account transaction? Payment of Royalty is
Current account transaction.

There was restriction on % of Royalty earlier, which had been removed in 2010.

Vide press note 8 of 2009 Government did away with any restriction on payment of royalty.
See the press note: http://dipp.nic.in/English/policy/changes/pn8_2009.pdf.
RBI vide A. P. (DIR Series) Circular No. 52 dated May 13, 2010 did away with restriction on
payment of Royalty.

Relevant extracts from the circular is produced below:

2. 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]. 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.

3. Accordingly, AD Category-I banks may 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.

2. Is there any restriction on payment of commission?

There is no restriction on payment of commission except in the following case

Schedule III, Rule 5 of CAT Rules, 2000 specifies that RBI approval is required to be taken in case of

Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India
exceeding USD 25,000 or five percent of the inward remittance whichever is more.

3. Can payment for ESOP be considered as Current Account Transaction (CAT)?

Payment for ESOP is Capital Account Transaction and is governed by Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, notified by the
Reserve Bank vide Notification No. FEMA. 20/2000-RB dated 3rd May 2000, as amended from time to
time.

4. Can Loan under LRS be given to third parties?

Regulation 4 of Foreign Exchange Management (Permissible Capital Account Transactions)

Regulations, 2000, Schedule 1 read with Master Direction No. 7/2015-16 para 6 clause V gives an
inference that a resident can give loan to third party in foreign currency.

||BCAS Study Circle meeting || 26th Aug 2016 ||Presentation by CA. Sudha G. Bhushan|| 09769033172 |
 Relevant extracts of Master Direction No. 7/2015-16 dated January 1 ,2016 produced below.

The permissible capital account transactions by an individual under LRS are:

i. opening of foreign currency account abroad with a bank;

ii. purchase of property abroad;
iii. making investments abroad- acquisition and holding shares of both listed and unlisted
overseas company or debt instruments; acquisition of ESOPs (the Scheme is in addition to
acquisition of ESOPs linked to ADR / GDR and acquisition of qualification shares); investment in
units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;
iv. setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013)
outside India for bonafide business subject to the terms & conditions stipulated in Notification
No FEMA.263/ RB-2013 dated March 5, 2013;
v. extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are
relatives as defined in Companies Act, 1956.

5. Is Profit on sale of property/shares by NRI is a CAT?

Notification FEMA / 21 regulates investment in immovable property by NRIs and PIO in India. Similarly,
Notification FEMA 20 regulates investment in shares of Indian company by NRIs/PIOs. As the investment
in these assets are regulated, sale of the said assets are also regulated capital account transactions.
As such, the gain on sale of these assets are capital account transactions.

6. Whether remittance abroad to a consultant for setting up a company is a Current Account Transaction
or a capital account transaction as ultimately that amount will be capitalised in the books in the books
of both the entities?

Yes, it is Current Account Transaction. A transaction may be capital account transaction for
accounting purpose but it may be treated as current account transaction still. Treatment in Books of
accounts does not determine the distinction between the Current Account Transaction or a capital
account transaction under FEMA. The distinction between Current Account Transaction or a capital
account transaction is determined from the Balance of Payment of country.

For example, import of machinery on payment of cash or on normal credit terms of the vendor will be
regarded as a current account transaction. The importer may capitalise it in his account books and
claim depreciation thereon. As far as the country is concerned, it is a trade transaction. However, if
the same machinery is imported on deferred credit basis or is funded out of ECB, etc, then the credit
beyond twelve months (as less than 12 months again would fall within the definition of Current
Account Transactions) would result in the creation of the long-term liability outside India and
therefore, be termed as a capital account transaction.

7. Whether Purchase of a residential accommodation overseas for a director of the Indian company is
permitted CAT?

Purchase of immovable property outside India is a Capital Account transaction. The acquisition of
immovable property outside India is governed by FEMA 7 Foreign Exchange Management
(Acquisition and transfer of immovable property outside India) Regulations, 2015.

A company incorporated in India having overseas offices may acquire immovable property outside
India
for its business and
for residential purposes of its staff,

provided total remittances do not exceed the following limits prescribed for initial and recurring
expenses, respectively:
a. 15% of the average annual sales/ income or turnover of the Indian entity during the last
two financial years or up to 25% of the net worth, whichever is higher;

||BCAS Study Circle meeting || 26th Aug 2016 ||Presentation by CA. Sudha G. Bhushan|| 09769033172 |
 b. 10% of the average annual sales/income or turnover during the last two financial years.

8. As per Schedule III remittance for consultancy services for a project is restricted to USD 1 million. What
do we mean by Project? Are bank monitoring such remittances? Are they seeking any declaration
from the remitter?

The term Project is not defined. However, in common parlance, Project can be that of construction
of a building or a residential complex or erection of the plant and machinery etc. It is pertinent to note
that the restriction of remitting upto USD 1 million is per Project and not per consultant. The Reserve
Bank does not prescribe the documents which should be verified by the Authorised Persons while
releasing foreign exchange for current account transactions. In this connection, attention of
authorized persons is drawn to sub-section (5) of Section 10 of the FEMA, 1999 which provides that an
authorised person shall require any person desiring to transact in foreign exchange to make such a
declaration and to give such information as will reasonably satisfy him that the transaction will not
involve and is not designed for the purpose of any contravention or evasion of the provisions of the
FEMA or any rule, regulation, notification, direction or order issued there under.

9. Can Individual invest in a foreign company which buys property and leases out the same under LRS.
Can it be said to be bona fide business transaction?

An Indian Party which includes an Individual can make overseas direct investment in any bonafide
activity.

Real estate as defined in Notification No. FEMA 120/RB-2004 dated July 7, 2004 and banking business
are the prohibited sectors for overseas direct investment. Real estate business means buying and
selling of real estate or trading in Transferable Development Rights (TDRs) but does not include
development of townships, construction of residential/commercial premises, roads or bridges.

leasing of property by a foreign company amounts to real estate business and such activity is not
permissible.

10. Can Grand mother make remittance for education of Grand daughter?

Yes.

11. Will advance given to subsidiary outside India for purchases be considered as CAT?

Advance given to Subsidiary for any purpose: - Capital Account Transaction

Advance given to subsidiary for purchase of raw material/import: - Current Account
Transaction. Advance Payment is subjected to AD approval.

12. Is payment of damages based on contract for CAT also a CAT? Dispute on non payment of Shipping
Freight? If Imports are CAT whether Shipping freight also CAT?

Yes.

13. Whether Guarantee fees payable to the holding company for the guarantee extended to Indian
subsidiary is a permissible CAT?

Guarantee extended to Indian subsidiary is structured obligation as defined in ECB Regulations. RBI
approval may be required for payment of Guarantee fee.

14. Can we say all CAT not listed in any of the 3 schedules to the CAT Rules, 2000 are freely permissible?

Yes, until unless regulated by any other regulation. For eg. Interest payment is although CAT but is
regulated by ECB regulations.

||BCAS Study Circle meeting || 26th Aug 2016 ||Presentation by CA. Sudha G. Bhushan|| 09769033172 |
 15. Whether payment of franchisee acquisition is permissible CAT?

Yes.

16. Can a Resident Individual gift money to an NRI from his NRO Account?

Is the question correct? Can a resident maintain the NRO account? May be possible in case of NRI
changing the residential status to Resident.

In case of change in residential Status of a person from Non Resident to Resident: - Non-resident
(ordinary) rupee accounts may be re-designated as resident Rupee accounts on return of the
account holder to India for taking up employment, or for carrying on business or vocation or for any
other purpose indicating his intention to stay in India for an uncertain period. Where the account
holder is only on a temporary visit to India, the account should continue to be treated as non-resident
during such visit.

Once resident he can avail to remit under Liberalised Remittance Scheme (LRS). He can gift under
LRS.

Can a Resident Individual gift money to an NRI in rupees? Yes, Resident Individual can gift money to
an NRI under LRS

||BCAS Study Circle meeting || 26th Aug 2016 ||Presentation by CA. Sudha G. Bhushan|| 09769033172 |