Paying for asset in India from UK

We deal with a company in India that produces bottle caps. 

The machines they use to make the caps are built in their factory and we pay for them - so they are our asset - not owned by the company in India

It seems that as the 'machines' do not leave the country - it causes the Indian company a problem with their bank/government authority when the money is received - as there is not an associated 'export' of goods.

This must affect other companies - so there must be a way for the company in India to resolve this - but they say they have been to the bank/local authorities unsuccessfully?
Asked 8 months ago in Corporate Tax from United Kingdom
Though your query is brief, there are number of issues that need to be addressed:
1) Are you paying for the services or for goods? As the machines are yours, are you paying your Indian party for the goods supplied or for the processing charges. Even in respect of processing charges, the machinery belongs to you. So are you paying them for operating the machinery? 
2) Is it that the Indian party operating only on your machinery and no other machines are used? Is the Indian party exclusive for you or they also export products to others using your machinery? 

Probably one solution is that the Indian party may treat your machinery as leased equipment, paying lease charges separately. However, a meaningful solution in the overall context can be suggested if all the facts are known properly and specific issues raised by the regulatory authorities.
B Vijaya Kumar
CA, Hyderabad
630 Answers
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Let me summarise the facts and issues as I understand from your statements:

FACTS

The Indian company builds machines with the parts, for which the payments are made by you and these machines produce specific bottle caps exclusively for your customers. These bottle caps are exported to you.

The Indian company faces problem with its banks/local authorities, when the money is received from you, as the machines do not leave the country and hence, they are not treated as "export" of goods. 

ISSUES

Why is that there is problem when the money is received from you with the bank/local authorities? Is there no "export" of goods when the machines do not leave the country?

I restated the facts and issues to bring out clarity in respect of statements made by you. I hope the restated facts and issues are properly representing your statements and problems.

Now my views on the issues:

There are two kinds of payments from you to the Indian party, the first  one is for the payment towards "parts" for building the machines in their factory.  The machines and the caps are specific to your requirements.  In this case the ownership of the machines depends upon your agreement specifically.  However, when the payments are made by you for the "parts", which seems to be sourced by the Indian party with its own efforts, there is no acquisition of the machines by you. Hence I do not think the ownership of the machines vest with you, though they are specifically used for your products. There is no element of export of goods or services, when you are making payment for "parts", unless such payment is treated as advance for purchase of caps.

The second payment by you is towards export of bottle caps.  Here, I don't think there should be any problem in treating this as "export" and it is nothing to do with the machines but I presume that there is movement of bottle caps from India to your country.
B Vijaya Kumar
CA, Hyderabad
630 Answers
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Hello Sir,

Please let me know If I have understood your case correctly :

What you do is, you pay an Indian Company to manufacture a machinery on your behalf, the Indian company manufactures the same and keeps it with itself, then the Indian Company manufactures caps with the machinery which are then exported to you.

So If I have got it correct you have paid for the machinery parts as well as the caps right ?

Rohit R Sharma
CA, Mumbai
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You may need to structure your transaction addressing the issues related to ownership and export benefits

B Vijaya Kumar
CA, Hyderabad
630 Answers
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Dear Sir,

With respect to your quarries since the machines do not leave Indian territory payment received by the party is not treated as export of the goods since no physical stock movement takes place of the machines out of Indian boundaries.

Now the problem faced by you is at the time of making payment for this machines the indian counerpart can not receive the money from foreign counter part since no export is taken place.

In order to resolve this issue i would suggest following :

- Let Indian Counterpart make the export invoice in your name.
- Once export invoice is raised you make the further debit note to send the machine to indian counter part for the use of machine by indian counterpart for the purpose of production.
- You have to enter an agreement with indian counterpart that this machine shall be exclusively use by indian counter part for the purpose of export made for bottle cap and not for any other purpose. 
- you have to intimate the said transaction to the custom authority and take approval letter from them each time you have said transaction including machinery. They issue one pager form for allowing the said transaction without effect of any duty.
- Submit all this documents to your AD Code Bank for clearance and do not claim any export benefit on the said machines export.

The above procedure will serve your purpose. 
Vishrut Rajesh Shah
CA, Ahmedabad
564 Answers
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Hello Sir,

In such a case you can enter into an agreement with them mentioning that the machinery will be prepared as per your instructions and will be used in India wholly and solely for manufacturing of your product on your instructions and will be exported to your home country or as per your order.

It is better to involve an excise expert to help you sort it out.

Trust this clarifies your query. 

Feel free to call / get back in case of further clarifications. 

Thanking You. 

Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP
Rohit R Sharma
CA, Mumbai
1641 Answers
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Dear Sir,

This is a common problem faced by many Assessess As far as i know, on specific request to custom authorities, they allow you for these kind of transaction and you can submit that letter to bank for payment processing.

Please involve some custom expert.

Please feel free to call/revert in case of any doubts

Thanks and Regards 
Abhishek Dugar 
CA CS B.Com 
Abhishek Dugar
CA, Mumbai
1830 Answers
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