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    FDI into Food Processing Products – various forms of business – FEMA Regulations


    Food Processing Sector has been on average growing at a faster rate than agricultural sector since last three years. During the last three years ending 2014-15, it is growing at Average Annual Growth Rate (AAGR) of around 2.26% as against 1.69% in the Agriculture and 6.23% in manufacturing at 2011-12 Prices1 .


    Food Processing has emerged as an important segment of the Indian Economy in terms of its contribution to GDP, employment and investment. The sector constitutes as much as 9.0% and 11.0% respectively of GDP in Manufacturing and Agricultural sector2 .


    Food Processing can be viewed as different levels of processing – Primary, Secondary, and tertiary. Primary processing relates to conversion of raw agricultural produce, milk, meat and fish into a commodity that is fit for human consumption. It involves steps such as cleaning, grading, sorting, packing etc., and subsequent processes are involved for making the processed inputs into finished goods and ultimate retail trading through sales distribution channels.


    Traditionally India was allowing Foreign Direct Investment (FDI) into the business of dealing with Food Products either by a manufacturer under automatic route for the products manufactured by them (Subject to MSMED regulations) or Trading of such goods via B2B e-commerce, Single Brand Retail Trading and Multi Brand Retail Trading etc., under automatic/approval route subject to various conditions


    Later the concept of e-commerce has been introduced for FDI purposes and detailed regulations have been made from time to time.


    Over the last two decades, rising internet and mobile phone penetration has changed the way we communicate and do business. E-commerce is relatively a novel concept. It is, at present, heavily leaning on the internet and mobile phone revolution to fundamentally alter the way businesses reach their customers.


    Now India is getting ready for introduction of Goods and Service Tax law (GST), it can further fuel the growth of e-commerce


    With the above background the author has made an attempt to bring the extantFEMA - Foreign Direct Investment Regulations for Food Processing Industries and/or trading in Food Products (including e-commerce)






    1Source: Annual Report 2015-16 of Ministry of Food Processing Industries, GOI


    2Source: Annual Report 2015-16 of Ministry of Food Processing Industries, GOI


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    Brief Background:



    Before 2006

    FDI was prohibited into Retail Business

    10th February, 2006

    FDI in cash-and-carry (wholesale) brought under automatic route.


    Earlier, it was allowed under approval route. 51% FDI was permitted under


    Government approval into SBRT

    April, 2010

    Cash and Carry Whole Sale Trade is permitted subject to 25% intra group


    entities sales restriction

    July, 2010

    DIPP has issued second Discussion Paper FDI into MBRT

    7th December, 2011

    Union Cabinet Proposes 51% FDI in Multi-Brand Retail Trade

    10th January, 2012

    FDI into Single Brand Retail increased to 100% under Government route


    subject to stipulated Conditions

    14th September, 2012

    The Government opens FDI into Multi-Brand Retail Trade (MBRT) upto 51%


    subject to stipulated conditions

    20th September, 2012

    The Government clarifies the position that company having FDI cannot enter


    into e-commerce in both SBRT and MBRT

    January, 2014

    DIPP Releases a discussion paper on “E-Commerce in India, highlighting pros


    and cons of allowing FDI in the Sector”

    29th March, 2016

    DIPP has issued Press Note No. 3/2016, whereby the definition of E-


    Commerce has been divided into Inventory based Model and Market based



    24th June, 2016

    DIPP has issued Press Note No. 5/2016 for 100% FDI into Food Processing


    Industries and also relaxing local sourcing norms for SBRT


    Extant FDI Regulations for FDI into Food Processing Industries:


    1. Relevant Definitions:


    • E-commerce- E-commerce means buying and selling of goods and services including digital products over digital & electronic network.


    • E-commerce entity- E-commerce entity means a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 or a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.


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    FDI into Food Processing Industry




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    • Inventory based model of e-commerce- Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.


    • Marketplace based model of e-commerce- Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.






























    Trader                                                                      2





















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    FDI into Food Processing Industry




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    1. Manufacturer selling directly to Customer via Single Brand Retail Trade or Whole Sale Trade


    1. Manufacturer selling directly to the customer via E-Commerce
    2. Manufacturer selling to Trader (B2B Commerce/ Cash and Carry whole-sale trade)
    3. In turn, Trader selling to Customer through either Single Brand Retail Trade or Multi Brand Retail Trade or through E-commerce


    1. Flow of the FDI into Manufacturing Activity
    2. Flow of the FDI into Trading Activity (including e-commerce), where the trader is not having any manufacturing activity


    1. Guidelines for Foreign Direct Investment in Food Processing sector:


    • 100% FDI under Automatic route is permitted in Manufacturing of Food Products in India


    • 100% FDI under Automatic route is permitted in trading by the manufacturer of its own products– Wholesale and/or retail (including through e-commerce) in respect of Food Products manufactured and/or produced in India.


    • 100% FDI under Government approval route is permitted in trading (including through e-commerce) in respect of Food Products manufactured and/or produced in India.


    vBasedon the above one can understand the FDI into manufacturing activity related to Food Processing Activities is freely permitted upto 100% under automatic route; and

    vFDIinto MBRT/SBRT of own manufactured Food products is also under automatic route; and vFDIinto Trading of goods by the Traders (including e-commerce) is subject to approval of Central


    Government and permitted upto 100%


    Background of Safe Harbour: Tax payers often need to carry out complex transfer pricing analysis of their related party cross border transactions. Compelled to allocate resources for preparing detailed documentation, companies are thus burdened with significant costs associated with undertaking such an exercise. Moreover, transfer pricing analysis being a subjective exercise, may be viewed in different ways. The factual nature of transfer pricing determinations can be an extremely complex subject that frequently vexes both taxpayers and tax administrations alike. In the understandable desire to find bright line rules that do not require the exercise of judgment and analysis, it is often proposed that "safe harbors" be provided.


    Even OECD recognizes that applying the arm's length principle can be a fact-intensive process and uncertainty associated with it may impose a heavy administrative burden on taxpayers and tax administrations that can be aggravated by both legislative and compliance complexity. These facts have led a number of countries to consider whether transfer pricing safe harbors rules would be appropriate in the transfer pricing arena. The theory of a safe harbor is that the burdens imposed in applying the arm's length principle may be ameliorated by providing circumstances in which taxpayers could follow a simple set of rules under which a national tax administration would automatically accept transfer prices. In taxation contexts, the safe harbor concept typically refers to a statutory provision that applies to a given category of taxpayers and by substituting exceptional, usually simpler obligations, relieves eligible taxpayers from certain obligations that the tax code otherwise imposes. In effect, a safe harbor is a defined parameter. If the transfer pricing result falls within that parameter, tax administrations would not be allowed to make an adjustment. Hence, transfer pricing safe harbour rules would need to be designed to achieve the following objectives:


    • Compliance relief:


    • Certainty
    • Administrative simplicity


    The Finance (No 2) Act (FA), 2009 introduced provisions in the Indian Income-tax Law (ITL) that empowered the Central Board of Direct Taxes (CBDT), the apex Indian Tax Administration, to issue transfer pricing “safe harbor” rules. A “safe harbor” is defined in the ITL as circumstances in which the Tax Authority shall accept the transfer price declared by the taxpayer. The CBDT on 14 August 2013 released draft safe harbor rules for public comments. After considering comments of various stake holders, on 18 September 2013, the CBDT issued the final safe harbor rules.


    The rules provide minimum operating profit margins in relation to operating expenses a taxpayer is expected to earn for certain categories of international transactions, such as provision of software development services, information technology enabled services, (ITES), knowledge process outsourcing (KPO) services, contract research and development (R&D) services, manufacture and export of automotive components etc. that will be acceptable to the Tax Authority. The rules also provide acceptable norms for certain categories of financial transactions such as intra-group loans made or guarantees provided to nonresident affiliates of an Indian taxpayer.

    The transfer price contained in the safe harbor rules shall be applicable for five years beginning from financial year (FY) 2012-13. The safe harbor rules, optional for a taxpayer, contain the conditions and circumstances under which the norms/marginswould be accepted by the Tax Authority and the related compliance obligations. The taxpayer has flexibility in electing the years to be governed by the safe harbor rules within the five year period. Where a taxpayer’s transfer price is accepted by the Tax


    Authority under the safe harbor rules, the taxpayer shall not be entitled to invoke the mutual agreement procedure (MAP) under an applicable tax treaty.




    • If safe harbour opted, taxpayer not entitled to make any comparability adjustments nor avail benefit of the prescribed variation.
    • Taxpayer required to comply with TP documentation & Form 3CEB filing requirements even if they opt for the safe harbour rules.


    • Form 3CEFA to be furnished for the initial year to exercise safe harbour option. Option exercised to remain in force for lesser of the period specified in Form 3CEFA or 5 years, unless option held to be invalid or taxpayer opts out.


    • Relatively simplified audit process prescribed for taxpayers opting for safe harbour in respect of eligible transactions


    • Ineligible to invoke MAP if taxpayer’s safe harbour option is accepted


    APA vs Safe harbour rules:


    Concluding Remarks:


    The safe harbour program was intended to reduce the transfer pricing litigation and related compliances. However, the objective was not achieved because of the high margins prescribed for the various industries. Further, the APA program has been successful and the margins agreed in the APA programs have been much conducive and attractive to the taxpayers and thus the results followed. There are expectations from the government that they would shortly revisit the safe harbour and come out with a much better and tax friendly margins on par with the APA and the litigation results.



    Introduction about Compounding

    Contravention is a breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued there under. Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking for remedy. The Reserve Bank is empowered to compound any contraventions as defined under section 13of FEMA, 1999 except the contravention under section 3(a), for a specified sum after offering an opportunity of personal hearing to the contravener. It is a voluntary process in which an individual or a corporate seeks compounding of an admitted contravention. 

    Persons eligible for compounding 

    Any person who contravenes any provision of the FEMA, 1999 [except section 3(a)] or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act or contravenes any condition subject to which an authorization is issued by the Reserve Bank, can apply for compounding to the RBI.


    Rule 5 of CENVAT Credit Rules, 2004 (for brevity ‘Rule 5 of CCR’) provides for refund of accumulated CENVAT credit of inputs and input services used in relation to the goods/services exported, to a manufacturer/service provider subject to certain safeguards and conditions as prescribed in Notification No.27/2012 – CE (N.T.) as amended. The notification provides for time limit for filing of refund claims. 

    This article aims to through light on the confusion/misinterpretation by certain authorities surrounding the time limit issue that was put to end through recent amendment in the notification. 

    Position prior to 1st March 2016 (i.e. before amendment of Notification 27/2012-CE(NT)): 

    Notification no 27/2012—CE (NT) specifies that the refund claims under rule 5 should be made before period of expiry specified in section 11B of the Central Excise Act, 1944(for brevity ‘Sec 11B’ of CX). 

    Sec 11B deals with period of limitation with respect to refund claim of excise duty and interest. It states that the refund claim should be made before the expiry of one year from the relevant date. The relevant date has been defined in the explanation to the rule which is as follows: 

    "relevant date" means, - 

    • in the case of goods exported out of India where a refund of excise duty paid is available in respect of the goods themselves or, as the case may be, the excisable materials used in the manufacture of such goods, - 
    • if the goods are exported by sea or air, the date on which the ship or the aircraft in which such goods are loaded, leaves India, or
    • if the goods are exported by land, the date on which such goods pass the frontier, or

    (iii) if the goods are exported by post, the date of despatch of goods by the Post Office concerned to a place outside India;




    (f) in any other case, the date of payment of duty 

    Thus, there is no relevant clause in the definition of relevant date which provides for relevant date in case of accumulated CENVAT credit. 

    This lead to various doubts in the trade and department resulting in the following standpoints: 

    1st School of thought: 

    Sec 11B deals with time limit for filing refund claim of excise duty (and service tax by virtue of Sec 83 of Finance Act 1994) and interest thereof. Accumulated CENVAT Credit due to exports loses the character of tax. It is a cash amount due by Government to exporter.


    Sec 11B does not provide for the relevant date from which the one year time limit is to be counted, for refund claim of accumulated CENVAT credit. Thus, time limit specified in Sec 11B does not apply to refund claim under rule 5. 

    Allahabad High Court opined that said time limit is not applicable (Elcomponics Sales Pvt Ltd case) 

    nd School of Thought: 

    Since the notification 27/2012 specifically provides for applicability of time limit as per Sec 11B, it cannot be said that time limit as per Sec 11B does not apply to refund claims under rule 5. 

    Upon harmonious reading of the notification and the section, it can be said that the relevant date in case of refund under rule 5 is date of export. This view has been taken by the Madras High Court in the case of Commissioner of Central Excise, Coimbatore v. GTN Engineering (I) Ltd.

    Now, coming to what exactly is date of export in case of export of service has been interpreted differently. 

    They are:

    Viewpoint 1: Services to be considered as exported, the proceeds need to be realised in foreign currency as per rule 6A of Service Tax Rules, 1994. Also, Notification 27/2012 requires the claim to be filed with relevant BRCs so as to establish the realisation of proceeds in foreign currency. Thus, the export of services is complete only on realisation of proceeds and hence, is the date of export from which the one year time period applies. 

    Viewpoint 2: Services are exported as soon as the invoice is raised and condition of receipt of proceeds is only a condition to ensure realisation of foreign currency. Thus, date of export invoice is the date of export from which the time limit applies. 

    These diverged viewpoints lead to confusion with respect of time limit for refund claim under rule 5 

    Amendment of Notification 27/2012-CE(NT) w.e.f. 1.03.2016: 

    To clear up the confusion and to speed up the processing of claims, the notification has been amended vide notification no. 14/2016-CE (NT) which can be summarised as follows: 

    The refund claim has to be filed:

    • In case of manufacturer-before expiry of period as specified in Sec 11B of Central Excise. 
    • In case of Service provider, before the expiry of one year from the date of – 

    Receiptof payment in convertible foreign exchange, where service has been provided prior to such receipt of payment;

    Issueofinvoice, where payment has been received in advance prior to issue of invoice. 

    Thus, the misinterpretation by authorities of the above provision of time limit has been put to an end. 


    ØComing to the point that whether time limit as per Sec 11B is actually applicable to refund claim, before the amendment to the notification, Section 11B is applicable for claim of duty/tax. But refund filed on account of balance accumulated CENVAT Credit due to exports is a cash incentive extended by Central Government losses the character of tax. It is a cash amount due by Government to exporter. 

    Thus, Sec 11B has no relevance with respect to refund claim of accumulated CENVAT credit. As Rule 5 is intended to achieve zero rating of exports, one may explore the possible application of general limitation under Limitation Act if not the limitation specified under section 11B. 

    ØEveniftime limitation is applicable prior to amendment, it can be said that there was no ambiguity with respect to the export point of time from which the limitation period is to be calculated i.e. whether date of invoice or date of realisation of proceeds constitute the date of export. It can be only mis- interpretation by authorities but not ambiguity in the law 

    A service is said to be exported only when the proceeds are realised in foreign currency, non-receipt of the same would make the services being treated as unexported. This can also be established through the method specified for calculation of export turnover as per rule 5 of CCR, whereby turnover is nothing but the payments received pertaining to the relevant period of refund claim. 

    Also, in the case of foreign currency being received in advance and invoices are raised setting off the against advance received, there could not be any confusion as – Export cannot be materialised just because foreign exchange is received, but only when the actual service is provided and the export invoice being raised. 

    Concluding words: 

    It is the policy of the country that exports should be zero rated. No taxes should be exported. This is for the larger interest of the country for boosting the economy. Compared to this time limit should be of less importance. Many practical constraints have led to belated filing of refund claims like FIRCs/BRCs/STPI certifications etc. 

    Further to add; an exporter who is having domestic and export turnover, may use his accumulated CENVAT Credit at any point of time for set-off against his output liability. When there is no time restriction on utilization of credit relating to exports, how far it is prudent to impose such restriction for claiming refund of such credit in case of exporters who do not have domestic turnover and are forced to file refund claim in order to get their exports zero-rated. 

    Thus, in order to protect the greater objective of not to export taxes, the technical issues like time limit should be given less/no consideration in genuine cases where eligibility of refund claim is established beyond doubt. 

    "If everyone is moving forward together, then success takes care of itself” - Heny Ford



    1. This Standard on Auditing(SA) deals with auditor’s responsibility to plan an audit of financial statements
    2. It is framed in the context of recurring audits
    3. Additional considerations in initial audit engagements are separately identified 

    Objective: The objective of the auditor is to plan the audit so that it will be performed in an effective manner. 

    Effective Date: This SA is effective for audits of financial statements for periods beginning on or after 1st April 2008. 

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