Pacts With Foreign Firms To Be Okayed By Centre

Section 10(6A) of the Income Tax Act provides that where a foreign company derives income by way of royalty or fees for technical services from the government or an Indian concern, if the tax on such income is payable, under the terms of the agreement, by the government or the Indian concern, the tax so paid shall not form part of the taxable income of the foreign company.

For this purpose, where the agreement relates to a matter included in the industrial policy of the Government of India, such agreement should be in accordance with that policy. And in any other case, the agreement should be approved by the central government.

In the above context, it is to be examined as to what is the industrial policy of the Government of India. Unfortunately, the industrial policy is not a codified document.

The government announces the policy from time to time. The current policy, which is being followed by the government, takes its roots in the Statement of Industrial Policy, 1991 announced by the central government.

The said policy statement traces the history of the industrial policy since the Industrial Policy Resolution of 1956, and contains matters like the licensing policy, foreign investments, foreign technology agreements and public sector policy.

As far as foreign investment is concerned, the investment in various industries is divided into four categories where foreign equity is allowed up to 50 per cent, 51 per cent, 74 per cent and 100 per cent, as the case may be.

However, the aforesaid policy including investment limits have been undergoing a substantial change in the last 10 years. The current industrial policy is primarily contained in Press Note No. 2 (F. No. 7(4)/2000-IP) dated 11th February, 2000 issued by the ministry of commerce and industry, department of industrial policy and promotion, Government of India.

The said press note ratifies the delegation of powers for granting automatic approval for foreign tie-ups to the Reserve Bank of India.

Accordingly, the Reserve Bank of India has also issued a circular containing the further liberalised policy of the government vide its Circular No. 3 dated 31st March, 2000. The policy has also been clarified by the Reserve Bank vide its Notifications No. 215/2000-RB, dated 22nd March, 2000.

The automatic route of approval is not available to all types of foreign tie-ups and for all foreign investments. Wherever the automatic route of approval is not available, a clearance for foreign investment will be required from the Government of India. The Foreign Investment Promotion Board (FIPB) grants approval for the government.

It may also be noted that the application for approval by FIPB, is to be made to the Secretariat for Industrial Assistance (SIA). The SIA, in turn, shall put up the application for approval before the FIPB.

SIA shall also obtain comments of the concerned administrative ministries, which shall also be placed before the FIPB.

It is quite clear that the requirement of Section 10(6A) that the agreement should be in accordance with the industrial policy of the Government of India refers to the policy as announced by the department of industrial policy and promotion, ministry of commerce and industry, Government of India.

Wherever the ministry has delegated powers of approval to the Reserve Bank of India, the Reserve Bank of India shall lay down the policy and the procedure for approval of the foreign collaboration agreements.

HP Agrawal is a leading consultant to foreign enterprises in India e-mail: agar@nda.vsnl.net.in