According to Indian legislation, a company created outside India but has offices or business premises in the country is termed a “foreign company”. Such companies set up operations in India either to see business opportunities in the country to cater to the local market or to manage their operations. The Indian office can be either a liaison office, branch office or project office, depending on the kind of operations undertaken. Those entities are governed under the provision of the Companies Act 2013 and are required to undergo various obligations like registration and report requirements and tax applicability related to foreign companies doing business in India. The place in India enables foreign companies to avail themselves of a dynamic market along with an internationally-focused location so that they can progress their global business strategies further.
What Is a Project Office?
A Project Office is such an office that a foreign company in India establishes solely with the aim of performing one particular project. The number of companies forming project offices across India has largely been constituted as it relates to those agreements and contracts entered into their businesses concerning the infrastructure, engineering and construction sectors. Now, such foreign companies get all their resources managed to administer their operations and be compliant with contractual obligations under the project here in India.
As stated by FEMA, RBI regulates the putting up of project offices in India. Primarily, the project offices are put up in place to have no prior approvals if such a foreign company enters into a contract with the Indian company, and the projects are financed through inward remittances or by other external funding or by the necessary approval through the relevant authorities.
It is expected that a project office exists only for a specific project, and, hence, it will be considered temporary in nature. It cannot operate beyond this specific project while, at the same time, it will be subject to Indian statutes regarding taxation, statutory filings, and labour laws. This situation presents a solution to meet the highly project-centric requirement of international businesses in India without setting up a permanent operational base in the country.
What Is a Branch Office?
A branch office is a type of business organisation that has been established by an overseas company in India to conduct on its behalf certain specific operations that have been defined and permitted for it. Such a branch office inherently has the character of being a divergent type of office, in contrast to a project office established for a specific project. A branch office may undertake acts, services, or any function that it deems fit within the purview of Indian law; thus, international businesses can legitimately have a concrete presence in India’s territory without the need to set up a subsidiary.
The Reserve Bank of India (RBI) governs the functioning of branch offices under the Foreign Exchange Management Act (FEMA), 1999. A foreign corporation needs prior approval from the RBI before opening a branch office, except for automatic routes of certain countries and sectors. Activities permitted for branch offices are exporting and importing goods, consultancy services, research, technical assistance, promotion of technological or financial collaboration, and being an agent of the parent company in India. On the other hand, branch offices cannot manufacture or do retail trade.
Branch office is an extension of foreign company. Thus liabilities are not separate from the parent organisation, and the branch office has to meet Indian regulatory requirements including income tax, GST and all such applicable legal requirements and will have to submit annual return filing to the Registrar of Companies.
With this facility, the foreign company branch office empowered to operate in India will have all control of the corporation but will miss the independent legal status, making it liable for activities conducted by the branch for which the foreign parent company, directly as a result, gets held accountable.
What Is a Liaison Office?
A Liaison Office basically means a representative setup made by a foreign company in India for the purpose of improvement in its communications and coordination with the headquarters and the stakeholders local to the country. The office should function as a channel through which responsibilities on the part of the company can be progressed: finding market opportunities or developing contacts, but with no commercial or profit-generating activities.
Liaison offices are established under the Reserve Bank of India’s regulation of the Foreign Exchange Management Act of 1999. All foreign companies are required to seek prior approval from the RBI to open a liaison office, which is granted in normal circumstances provided that the activities are within the scope allowed. Liaison offices perform such functions as representing the parent company, importing and exporting, cooperating with technical agencies or financial institutions and gathering market information.
It cannot enter into any kind of trade or manufacture or even offer any kind of service; thus, it earns no revenue in India. All the operating expenses have to be met through remittances from the parent company. The liaison office is also liable to abide by the Indian laws and also submit periodical reports to RBI, ROC and tax authorities.
Liaison office is not an independent legal entity, but acts as an arm of the foreign parent company. Many foreign companies find it attractive since it is a stepping stone to establish a presence in India for brand visibility and acclimatize itself with the market before making sizeable investments. Liaisons, however, are meant for non-commercial ventures since these do not generate revenue.
Comparative Analysis Between Branch Office, Project Office and Liaison Office
A foreign company would always aim for the nature of such activities towards achieving one or more of the objectives such that it would either set up a Project Office or a Branch Office. A Project Office is just envisaged to serve the temporary and short-term needs of projects; an authorised provision for long-term commercial operations is there in case of a Branch Office. Liaison Offices are suitable for companies planning to establish a non-commercial presence to test the market for opportunities before moving on to a higher investment level.
1. Purpose and Functions:
- Project Office: A Project Office in India, much like a temporary setup within the country meant for executing particular projects and is usually owned by construction, engineering and other project-oriented industries. Such offices are permitted to carry out activities restricted to a particular project and are suitable for temporary and specific needs of only that project.
- Branch Office: A Branch Office facilitates a foreign entity to perform various activities, such as export/import, consultancy, technical support, research and financial or technical collaboration. It may also represent the parent company but is not allowed to manufacture or trade in the retail business.
- Liaison Office: The Liaison Office acts as an intermediary between the parent organisation and those in India. In fact, it undertakes functions of promoting the parent’s business programs, establishing alliances, market research and gathering market information, but it may not engage in any sort of commercial or revenue-related ventures. A Liaison Office is more suitable for those entities that wish to create a non-commercial presence and make efforts to evaluate the market for opportunities for a more substantial investment.
2. Legal Status and Liability:
- The Project Office acts as an arm of the global parent company and has absolute liability for any action that takes place there.
- The Branch Office acts as an arm of a foreign parent company and has absolute liability for any action taken there.
- The Liaison Office is a representation of the parent company but does not have any independent legal status.
3. Reporting and Compliance:
- The Project Office will have to comply with Indian laws such as income tax, Goods and Services Tax (GST) and the annual filing with the Registrar of Companies (ROC).
- The rules for the Branch Office were a bit strict because, apart from submitting normal tax returns, it also needed to submit for the annual audit and periodic reports to the RBI and the ROC.
- The Liaison Office too has to inform, at times, the RBI and ROC, among which would include submission of annual activity certificates. Generally, compliance by a Liaison Office is relatively straightforward because the office itself does not undertake any business activities.
4. Duration:
- The Project Office will work from the initiation of the project through its entire life cycle and will cease to operate once it is completed.
- The Branch Office will continue as long as the foreign entity is required to be present in India for current operations.
- It normally opens as a liaison office for three years, which is extendable while approved to explore business prospects and build contacts.
5. Revenue Generation and Funding:
- It would be the only project office for generating revenue on behalf of a specific project undertaken.
- This branch office would be engaged in generating revenue through permitted activities like consultancy or other services.
- This office cannot earn any revenues; all the operational costs will be covered by remittances from the head office.
6. Setting Up Procedure:
- Establishment of a project office requires a NOC from the Reserve Bank of India, unless it falls in the category of either direct inward remittance financing the project or where international financial institutions have granted the permission or approvals from relevant authorities have been obtained.
- The establishment of a branch office is subject to approval from RBI as required under the Foreign Exchange Management Act guidelines. However, where a foreign entity falls under the automatic route assigned by the government for any country or industry, permission from RBI may not be required.
- The establishment of a liaison office requires clearance from RBI, as per the FEMA guidelines, depending on the proposed activities and the soundness of the parent company.
7. The Advantages and Limitations:
- One important merit of a project office is that it completely adheres to individual project specific needs, and then is completely temporary in nature but the limitation is that it is mainly project-centred, hence not very suitable to a big organisation.
- The advantages of a branch office include a number of diverse activities, returns generated and long term sustainability. And limitations are that the company office is highly restricted by compliance laws and may also have some kind of checks on its retailing as well as manufacturing activities.
- Benefits of a liaison office include that it can be probably the easiest as well as the most straightforward government compliance way to view it while the limitations are that the office is not allowed to generate earnings and it also does not have space for conducting trade activities.
Conclusion
The choice of setting up a Project Office or Liaison Office or Branch Office depends on what objectives are to be met in India by the foreign company.
Most suitable for such activities as carrying out time-bound specialised project works, for example under the India-specific project for infrastructure, construction, engineering works, a project office will temporarily set up its working for the sole purpose of finishing the assigned specific project.
As against this, the Branch Office would let a foreign entity have more operating capabilities to engage in revenue-generating activities such as consulting, import/export and technical support to make it absolutely apt for businesses interested in staying long eventually. However, manufacturing and retail trading were not allowed under it.
A Liaison Office would function as a representative establishment for activities of a non-business nature, such as market research, promotional activities and coordination. This type of office is also justified mainly for companies that want to establish whether market opportunities exist in India without doing business or even generating revenues.
Each office type has specific functions but is subject to the generalised regulatory frameworks established by the RBI as well as FEMA. Such an evaluation of the needs to be met through the selected arrangement is thus necessary for such comprehensive consideration regarding operational goals and compliance with legal obligations as well as compliance requirements about the country in question.
