procedures to be followed in contract manudacturing export, FEMA

[anand vaidyanathan]

Respected Learned members,

A Indian manufacturing concern imports goods in SKD format from overseas vendor assembles it in india and exports to other countries in the name of the overseas brand itself. Kindly request you to process involved in it and critical procedures to be followed in doing this. Should the overseas OEM set up a company in India for this process?

Posts / Replies

[YAGAY andSUN]

The process you're describing is often referred to as SKD (Semi-Knocked Down) assembly, which involves importing parts of a product in a semi-assembled state, assembling them in India, and then exporting the finished products under the overseas brand name. Here are the key steps involved in this process and the critical procedures to be followed:

1. Import of SKD Components

• Customs and Import Duty: The Indian manufacturing company (or the overseas OEM if they set up an entity in India) would need to clear the SKD components through customs. Depending on the classification of the components, duties could vary. Certain components may qualify for exemptions or reduced duties under the Foreign Trade Policy or trade agreements like ASEAN or FTA.

• Import Documentation: Documents like the Bill of Entry, Commercial Invoice, Packing List, and Bill of Lading will be required for customs clearance. The HS Code for the goods and relevant certificates for product standards may also be needed.

• Customs Bonded Warehouse: It may be beneficial to import goods into a customs bonded warehouse if the goods are to be exported out of India, to defer customs duties until the goods are either cleared for domestic sale or exported.

2. Assembly of Goods in India

• Manufacturing License: Depending on the nature of the product, the manufacturer may need to obtain licenses or approvals from Indian authorities (e.g., Bureau of Indian Standards (BIS) certification for certain products like electronics).

• Factory Setup and Compliance: The manufacturing facility should comply with Indian Factory Act and other labor laws. Additionally, the facility must adhere to quality standards set by the overseas OEM.

• Assembly Process: The goods are then assembled according to the specifications provided by the overseas OEM. This often involves skilled labor and quality checks to ensure that the final product is consistent with the overseas brand standards.

3. Export Process

• Export Documentation: When the assembled goods are ready for export, the company must provide appropriate export documentation, such as the Export Invoice, Packing List, Certificate of Origin, and Bill of Lading.

• Export Duties and GST: Under the Goods and Services Tax (GST) regime in India, export of goods is generally zero-rated, meaning the manufacturer can claim back any taxes paid on inputs (input tax credit). However, some export incentives, like MEIS (Merchandise Exports from India Scheme), may also apply depending on the country and nature of goods.

• Export Compliance: The exporter must also comply with the Foreign Trade Policy and any trade agreements that India has with the destination countries. This includes regulatory requirements for product labeling, packaging, and certifications that meet international standards.

4. Intellectual Property and Branding

• Licensing Agreement: A key aspect of this business model is the licensing agreement between the overseas OEM and the Indian manufacturer, which allows the Indian entity to use the overseas brand for marketing, distribution, and exporting purposes.

• Trademark Issues: The Indian company must ensure that they have the proper rights to use the overseas brand name in India and for international export. This could involve a trademark license or a registered trademark for the brand in India.

5. Taxation and Transfer Pricing

• Transfer Pricing Compliance: If the overseas OEM is part of the same corporate group and sells SKD parts to the Indian company, there needs to be transfer pricing documentation to ensure that the pricing of the SKD parts is at arm's length and complies with Indian tax laws.

• GST Registration: The Indian manufacturer must be registered under GST if their turnover exceeds the prescribed threshold, and comply with GST regulations related to the assembly and export of goods.

6. Should the Overseas OEM Set Up a Company in India?

There are a few options for the overseas OEM when it comes to establishing a presence in India:

• Direct Foreign Investment (Wholly Owned Subsidiary or Joint Venture): The overseas OEM can establish a subsidiary or joint venture in India. This would provide more control over the manufacturing and distribution process and could result in a more direct presence in the market.

  • A wholly owned subsidiary is one of the most common options. It would be subject to Indian company laws and regulations (e.g., Companies Act 2013), and the subsidiary would need to set up a manufacturing facility and follow all necessary import-export and tax compliance procedures.

• Local Distribution/Manufacturing Partner: The overseas OEM can opt to work with an Indian manufacturing partner to handle the SKD assembly and export process under a licensing or distribution agreement without setting up a physical entity in India. This allows the OEM to enter the market with less risk and investment.

• Representation Office: The OEM can establish a representative office or a liaison office in India to facilitate business operations, market research, and coordination. However, this would not be allowed to engage in manufacturing or sales activities in India. It would only be for communication and support purposes.

7. Regulatory Compliance and Reporting

• Foreign Direct Investment (FDI): If the overseas OEM is planning to establish a subsidiary, they need to adhere to FDI regulations as per the Department for Promotion of Industry and Internal Trade (DPIIT) and the Reserve Bank of India (RBI) guidelines.

• Taxation: The Indian subsidiary or local partner must comply with Indian tax regulations, including corporate income tax, GST, and other applicable duties. If the overseas OEM establishes an entity in India, transfer pricing rules would apply to transactions between the parent and subsidiary.

Conclusion:

While setting up a company in India is not strictly necessary for an overseas OEM to assemble and export products under their brand, it may offer greater control, better tax benefits, and smoother integration into the Indian market. However, if the OEM wishes to avoid the complexities of setting up a subsidiary, they can consider partnering with a local manufacturer under a licensing or distribution agreement.

The process involves careful attention to import-export regulations, intellectual property rights, tax considerations, and compliance with Indian manufacturing laws. Proper structuring, documentation, and licensing agreements are essential to ensure smooth operations and mitigate potential legal risks.