schedule III of the fema provisions related to current account transaction

[Common Issues]

Schedule III of the fema provisions related to current account transaction.

This provisions talks on the remittances exceeding 5 % of investment brought in India or USD 100000 whichever is higher , by an entity in india by way of reimbursement of pre incorporation expenses.

There is an Indian company X being formed with a 100% holding in Mauritius Y.

When payments are made by Y overseas parent or related company to third party consultants to carryon feasibility study, or conducting surveys, or drafting legal documents and consulting before the X company is actually incorporated, can these type of expenses also be claimed under these provisions ? As these are before incorporation of the company X .

Also when overseas parent. Y paid without deducting TDS on these invoices as per their provisions - do we pay tds in India if we can claim these under  FEMA by company X

If yes then from which date do we pay TDS - invoice date or Indian company’s formation date X.

Is there any clear guidelines on what constitutes these expenses which can be claimed?

[sunil jain]

Based n facts given in the query, my opinion is as under

 pre incorporation expenses have not been defined any where. But thses should mean expenses incurred directly relating to incorporation of company. Feasibility study is not for incorporating the company. It is expense incurred by the investor for his purposes of analysing the project.

Second the question of permissible remittances and withholding tax are under two different acts. Whether the parent company has made TDS is not relevant. You need to see whether in terms of section 195 any liability arises.

Thanks

CA Sunil Jain

9810140664

 

AI Summary

FEMA Schedule III: Pre-Incorporation Expenses Over USD 100K Not Covered; TDS Under Section 195 Must Be Assessed Schedule III of FEMA provisions addresses remittances exceeding 5% of investment or USD 100,000, whichever is higher, for pre-incorporation expenses by an entity in India. An Indian company, fully owned by a Mauritius-based parent, queried whether expenses for feasibility studies, surveys, and legal consulting conducted before incorporation can be claimed under these provisions. Additionally, they asked about tax deduction at source (TDS) obligations. The response clarified that pre-incorporation expenses are not clearly defined but should relate directly to incorporation. Feasibility studies are not considered incorporation expenses, and TDS obligations under Section 195 should be independently assessed.