Foreign Companies And E-Commerce Portals Would Be Required To Register In India And Comply With Indian Laws

PRAVEEN DALAL MANAGING PARTNER OF PERRY4LAW AND CEO OF PTLBForeign companies and e-commerce players have been avoiding compliance with Indian laws for long by hiding behind the conflict of laws in cyberspace. Companies like Google are avoiding compliance with Indian laws even if they have established subsidiaries in India. This has become possible because we had lax laws and many loopholes in our existing laws. The Indian Companies Act, 2013 (PDF) was formulated to tackle this situation and most of its provisions have been brought into force recently to streamline the corporate culture of India.

These include the relevant Rules under various chapters of the Companies Act 2013 as well. As a result, the directors’ liability under the Companies Act, 2013 has significantly increased. Even the cyber law and cyber security obligations of the Directors of companies operating in India have been clearly mentioned under the Companies Act, 2013. Thus, the regulatory compliances under Indian Companies Act 2013 have been given a new meaning.

There are some speculations that India may open online retail and e-commerce sector very soon. However, we at Perry4Law believe that this liberty would not be a free ride but would come with the compliance requirements that various e-commerce stakeholders and foreign companies have been ignoring so far.

This is a significant indication as many retail outlets and entrepreneurs have to decide their policies and strategies accordingly. For instance, Carrefour is carefully analysing its Indian strategy these days.  Similarly, companies like Google, Amazon, Rakuten, Twitter, Facebook, etc are also trying their hands on e-commerce business. However, income tax liability of these companies is still not clear in India and the same must be clarified by the new government immediately.

Some media reports have claimed that online retailers such as the UK’s fashion and beauty store ASOS.com, Japanese e-commerce firm Rakuten.com and Overstock.com of the U.S. that sell in India without registering an Indian arm may soon have to, if the government decides on a literal interpretation of the Companies Act of 2013. Companies outsourcing work to Indian back-offices, information technology (IT) companies, and analytics hotshops may also have to follow suit.

According to section 2(42) of the new Companies Act of 2013, “any company or body corporate incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode or which conducts any business activity in India in any other manner, is classified as a foreign company”. Section 380 of the Companies Act 2013 provides that every such foreign company must register in India.

Further, Rule 2 (1) (c) of the Companies (Registration of Foreign Companies) Rules 2014 provides that for the purposes of clause (42) of section 2 of the Act, ”electronic mode” means carrying out electronically based, whether main server is installed in India or not, including, but not limited to -

(i) Business to business and business to consumer transactions, data interchange and other digital supply transactions;

(ii) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;

(iii) Financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;

(iv) Online services such as telemarketing, telecommuting, telemedicine, education and information research; and

(v) All related data communication services,

whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise;

These provisions have been incorporated as foreign companies, especially the technology companies, have been avoiding payment of taxes as per Indian laws. They have been making tremendous profits out of Indian transactions but still they contend that they are not regulated under Indian laws. Thus, these provisions were required to be formulated to covers such foreign technology companies and there is nothing wrong with their incorporation.

We at Perry4Law also believe that all Subsidiary/Joint Ventures Companies in India, especially those dealing in Information Technology and Online Environment, must mandatorily establish a server in India. Otherwise, such Companies and their Websites should not be allowed to operate in India. The Ministry of Home Affairs, India and Intelligence Bureau (IB) are already exploring this possibility.

A “Stringent Liability” for Indian Subsidiaries dealing in Information Technology and Online Environment must be established by Laws of India. More stringent online advertisement and e-commerce provisions must be formulated for Indian Subsidiary Companies and their Websites.