First published in July 2017
Foreign companies that want to sell imported products in the Indian market and to assemble them in-country, need to not only decide between different sales strategies, but also have to offer suitable solutions for handling assembly and installation in India on site. There are several possible ways to organise assembly and installation in India, depending on the scope of service, delivery and combination of services.
For large individual orders with strict deadlines – such as the supply of large-scale machinery and equipment – questions about installation and assembly quickly become a challenge. In India there is a problem of tax liability as foreign companies must meet the local requirements to establish a Permanent Establishment (PE).
Different scenarios are possible, depending on the type and duration of the promised service:
- short to medium term posting of parent company employees
- outsourcing to Indian companies
- establishment of your own organization
Posting of your own (technical) staff for installation in India
If this is a one-time contract to provide, assembly and install, and/or the scope of service is limited to a short and clearly defined period, then it is usually best to second staff from the parent company to handle technical activities for the Indian customers. Even for short stays in India, however, there are rigorous visa regulations – and these are liable to change at short notice. Usually for seconded staff the best choice is between Business, Employment and X Entry Visa. Information can be obtained from the competent Indian Embassy or at Indian consulates.
If the project duration is to more than half a year, or when individual employees spend at least 182 days per year in India – then seconded staff are subject to income tax and to any Double Taxation Agreement in place between India and their home country – it’s important to remember all foreign companies with a permanent establishment in India are also taxable. For control and local service delivery – India requires at least one PAN and TAN number (Permanent Account Number, Transaction Account Number) to be registered with the Income Tax Department. The amount of tax liability will depend on the taxation agreements between India and different companies and factors of the contract itself. However, since this is often a matter of interpretation, it is usually best to avoid creating a permanent establishment due to the financial and administrative expenses.
Transfer installation responsibilities in India to local partners
It is also possible to outsource sale-related assembly and installation in India and to an Indian partner. In this case, the scope of services provided by the partner needs to be very clearly documented but for foreign exchange, legal reasons must be removed from the supply contract. Payment for these services may be carried out only within India, in rupees. In addition, the Indian end customer must ensure that there is a separate contract with the customer and the Indian partner who has agreed to carry out the installation. The question of warranty should be clarified and considered separately for product, material and installation – depending on the provider and type of service delivery.
The biggest challenge is to find a suitable partner for the installation in India, for the partner must have the necessary capacity, the trained staff and the necessary know-how to perform the product-specific services. Often most partners require that there has been a previous cooperation with the producer in the past. It is impossible to guarantee with 100% certainty that the services are performed satisfactorily, but the manufacturer wants to be absolutely sure that his reputation is not damaged by the local partner.
In addition, outsourcing the installation, commissioning and installation in India is always a balancing act between disclosure and protection of one’s own knowledge and technology. First, the partners required to execute the protocols need the respective expertise, but on the other hand, there is the likelihood that this partner, once it has acquired the expertise they can suddenly become a competitor.
Establishment of a project office or subsidiary for installation in India
It may be most appropriate for individual projects transactions to be registered as a Project Office (PO) and billed for tax purposes. A PO is similar to a branch office – a branch of the parent company in India – however the PO is restricted to a clearly defined period. The allowed activities are strictly limited to a single project and any expenses incurred in connection to these activities. However a PO, where appropriate, can import additional products from different parties or obtain them locally in India, and can also hire local staff and provide services. The opening of a project office is, therefore, interesting for many companies with more complex and time-bound projects – especially where import share and local purchase are less critical components.
Although assembly operations are never long term in nature, they can sometimes become a starting point for a long-term investment in India. Many companies with an ongoing project sell an Annual Maintenance Contracts (AMC) to the customer. Such contracts are widespread in India – and secure fixed monthly income for any maintenance work on the products – particularly for imported quality products. In addition to the already recorded deliverables and services, other sales or purchasing related activities can be added under an own subsidiary.
Maier+Vidorno advises you on the possible scenarios and legal forms for carrying out assembly and installation services in India and implements these together with you. We can help you to choose the appropriate model for your distribution business in India – and to overcome the bureaucratic hurdles and get the most out of your investment. Contact our experienced India Consultants to help you work out which option is best for you.