Monday, February 2, 2009

Indian Govt to allow foreign MNCs to impose annual service fee

27/01/2009

The government is considering a proposal to allow foreign multinationals to impose an 'annual service fee' on their Indian subsidiary for providing management services. The foreign direct investment (FDI) policy, while allowing payment of royalty, licence fee and technical know how-how fee, does not provide for payment of annual service fee by Indian subsidiaries.

If allowed, this may become another important source of income for foreign multinational companies from their Indian arms. The issue came up in the last meeting of foreign investment promotion board (FIPB), when it took up the proposal of Canada-based potato and French fry major McCain Foods for removal of restriction on payment of service fees by McCain India, a major supplier of cut-potatoes to fast food giants like McDonalds and KFC in India.

The board deferred its decision on the proposal and referred it to the Reserve Bank of India (RBI) as it has foreign exchange implications. Mc Cain Canada has a management fee arrangement with group companies/ subsidiaries in order to facilitate the operations of its group companies and to cover the cost of providing general management services.

McCain India has not made any payment so far in respect of services provided to it by McCain Canada in view of restriction imposed by the government in 1995 in their original approval. "The approval was subject to the condition that no service fee shall be paid by the Indian subsidiary company,"an official in the department of industrial policy and promotion said.

The board's decision on the company's request for allowing payment of service fee to parent company is being watched closely by the industry since it will set a precedent for other multinational companies that charge such fees from subsidiaries in other countries. Arguing its case, the foreign food processing firm has pointed out that the condition was imposed in 1995 when there were strict foreign exchange control regulations.

A senior official in the DIPP said that the RBI will have to take a final view on whether an annual service charge could be allowed under regulations of Foreign Exchange Management Act (Fema). "If the fee is in the form of royalty or technical know-how fee, then it can be allowed. Because, in the present environment, there are no restrictions under the FEMA for companies intending to make payments towards constancy or services.

Fema also permits payments towards service fee/ consultancy fees of up to $1 million per project without apex bank's prior approval," the DIPP official said. He also said that introduction of annual service fee in Fema may require the RBI to increase the limit of remittances payable to foreign companies. The various forms of management services provided by international parent companies to their subsidiaries in various countries include corporate secretarial services, insurance services, legal advice, pension plan management, engineering services and other corporate information services. McCain Canada calculates the quantum of service fee chargeable to the subsidiary based on actual expenses incurred by it on managing its international operations.