FEMA Structures, the Project Office, the Branch and Liaison Office, the Indian Subsidiary, the Consortium AOP Trap and the Construction Permanent Establishment
This article is Part 1 of a four-part series on EPC contracts in India.
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- Part 1: Entity Structure and Mobilisation (this article)
- Part 2: Tax Architecture
- Part 3: Customs and the Project Imports Scheme
- Part 4: Commercial Risk
In brief
A foreign EPC contractor’s Indian structure follows its operational footprint, not the reverse: a Project Office for a single project, a Branch Office for multiple concurrent projects, an Indian subsidiary for a long-term presence, and a Liaison Office pre-award only. FEMA compliance must be complete before mobilisation, because mobilising early is a contravention from day one. An unincorporated consortium is taxed as an Association of Persons at the foreign company rate. The permanent establishment analysis must begin at contract award: construction PE thresholds run per site, supervisory activity alone can cross them, and the India-UK treaty adds a value-based trigger independent of time.
This is Part 1 of a four-part analysis of EPC contracts in India, written for foreign contractors, their in-house counsel and tax teams, and Indian project owners who need to understand the counterparty’s constraints. It covers entity structure and mobilisation. Part 2 covers the tax architecture. Part 3 covers customs and the Project Imports Scheme. Part 4 covers commercial risk.
Topics You Can Jump To:
Section I — Mobilising for an EPC Project in India
Which entity structure should a foreign EPC contractor use in India?
How is a Project Office established, and what are its constraints?
Branch Office, Liaison Office, or Indian subsidiary — which is appropriate?
What goes wrong in an unincorporated consortium or JV?
Why must the PE analysis start at contract award?
Section II — Tax Architecture for the Foreign EPC Contractor
When does a foreign EPC contractor have a permanent establishment in India?
How does the offshore/onshore split work, and what destroys it?
What withholding tax applies to payments to a foreign EPC contractor?
How is Section 44BBB presumptive taxation actually used?
How is GST applied to an EPC contract in India?
Checklist — Mobilisation and Tax
Section I: Mobilising for an EPC Project in India
Which entity structure should a foreign EPC contractor use in India?
The structure follows the operational footprint, not the reverse. A Project Office suits a single project; a Branch Office suits multiple concurrent projects; an Indian subsidiary suits a long-term India strategy at 25.17% under Section 115BAA. A Liaison Office may be used pre-award only and cannot conduct any commercial activity.
The structure question is not abstract. It is answered by operational reality: how long will foreign personnel be in India, and on which sites; will there be a fixed office or storage yard; who signs contracts with Indian subcontractors; where does equipment title pass; will imported plant remain in India or be re-exported. Those answers determine permanent establishment exposure, GST registration, customs entitlements, and repatriation mechanics.
Establishing a Project Office does not create a permanent establishment risk. It concedes one that the project’s operational requirements have already created. A contractor who commits to a structure the operational reality cannot support has a problem that is expensive to correct mid-project and sometimes impossible to correct cleanly.
How is a Project Office established, and what are its constraints?
A Project Office is established under FEMA Notification No. FEMA 22(R)/2016-RB read with the RBI Master Direction on BO/LO/PO. It is tied to one specific project: RBI FAQ Q.7 confirms that a contractor with two concurrent Indian projects cannot consolidate them under a single Project Office. Separate accounts, books and Annual Activity Certificates are required for each.
The Project Office is the standard vehicle. It is governed by FEMA Notification No. FEMA 22(R)/2016-RB dated 31 March 2016 read with the RBI Master Direction on Establishment of Branch Office / Liaison Office / Project Office in India by Foreign Entities (Master Direction No. 10/2015-16).
Under the general permission route, a foreign entity may establish a Project Office without prior RBI approval where (a) it has secured a contract from an Indian company to execute a project in India, and (b) the project is funded by inward remittance from abroad, by a bilateral or multilateral international financing agency, cleared by an appropriate authority or awarded by an Indian company or entity that has been granted a term loan by a Public Financial Institution or a bank in India for the project. Where those conditions are not met, prior RBI approval through the AD Category-I bank is required, with a processing timeline of approximately four to six weeks.
A point that is routinely missed. The eligibility conditions in Clause 4(f) of FEMA 22(R)/2016 apply to all Project Office establishment, including cases described as ‘general permission’. The automatic character of the route relates to the processing channel, AD bank rather than RBI, not to a waiver of the eligibility conditions themselves. A contractor that fails an eligibility condition is not on the general permission route at all, however the AD bank has processed the file.
What happens if a contractor mobilises before FEMA compliance is complete?
A contractor who mobilises personnel, opens any operational account, or begins site activities before completing this process is in FEMA contravention from day one. Under Section 13(1) of FEMA 1999, the penalty upon adjudication is up to three times the sum involved in the contravention where quantifiable, or up to ₹2 lakh where it is not, with a further penalty of up to ₹5,000 for every day the contravention continues.
Regularisation is available through voluntary compounding under Section 15 of FEMA 1999 read with the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024. Where the Enforcement Directorate has independently initiated adjudication, its no-objection is required before the RBI passes the compounding order.
The commercially significant point is reputational, not financial. Every compounding order passed since March 2020 is published on the RBI’s public website and is searchable by company name. A multinational contractor whose compounding order for operating in India without authorisation sits in that public database is in a materially different position on the next tender than one whose record is clean. The ₹2 lakh penalty is trivial. The searchable public record is not.
The Annual Activity Certificate and the closure landmine
The Project Office must file an Annual Activity Certificate with its designated AD Category-I bank as at 31 March each year (Clause 4 of the Master Direction). The Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025, released in October 2025 and still under consultation, propose an automated enforcement mechanism: failure to file for three consecutive years triggers an automatic closure process. The AD bank issues a closure notice; if there is no response within 30 days, it proceeds with closure and reports to the RBI, the Enforcement Directorate, and the Registrar of Companies.
The draft is not in force. It nonetheless signals the regulatory direction, and a contractor who completes a project and walks away from the Project Office without formal closure is accumulating precisely the exposure the mechanism is designed to catch.
Closure and the remittance bottleneck
Closure is governed by Clause 10 of the Master Direction. The AD bank permits remittance of winding-up proceeds on receipt of: an auditor’s certificate confirming that all Indian liabilities including employee dues have been met or provided for, and separately that no income accruing from sources outside India has remained outside India unreported and unremitted inward; confirmation that no legal proceedings are pending before any Indian court; confirmation that all Annual Activity Certificates have been filed; and, where the Project Office is registered with the Registrar of Companies under Section 380 of the Companies Act 2013, an ROC compliance report.
The bottleneck is income tax, and it is structural rather than procedural. There is no express requirement in Clause 10 for a tax clearance certificate. But the auditor cannot certify that all Indian liabilities have been met while income tax assessments remain open, because an assessment may yet crystallise a further demand. The remittance is therefore blocked not by a rule but by the impossibility of issuing the key document in the chain. On a multi-year EPC project, assessments routinely remain open for two to four years after practical completion. The surplus is trapped in India for that period.
Mitigation. Where assessments are pending, the practical routes are: an application under Section 197 (or Section 195(3)) for a nil or lower withholding certificate on the final remittance, agreed with the jurisdictional Assessing Officer in advance; and, in appropriate cases, an offer of security or an undertaking to the department to permit remittance pending final assessment. There is no statutory right to remit pending assessment. Both routes depend on the Assessing Officer’s discretion. The only reliable mitigation is to plan Project Office closure as a project milestone from bid stage and to model the assessment tail into the project return.
Branch Office, Liaison Office, or Indian subsidiary, which is appropriate?
A Branch Office operates at entity level and covers multiple projects, but requires a five-year profit track record and net worth of at least USD 100,000. A Liaison Office permits no commercial activity and is a pre-award vehicle only. An Indian subsidiary is the only fully independent Indian legal person and pays 25.17% under Section 115BAA.
Branch Office. Entity-level, not project-specific: multiple project receivables flow through a single Branch Office without the per-project fragmentation the Project Office mandates. Permitted for foreign entities whose principal business falls in sectors where 100% FDI is available under the automatic route, which construction and engineering satisfies. The AD bank approves under delegated powers, but must obtain a Unique Identification Number from the RBI CO Cell before issuing the approval letter. Eligibility is more demanding than the Project Office: a profit-making track record for the immediately preceding five financial years and net worth of not less than USD 100,000 or equivalent. Permitted activities are confined to Schedule I of FEMA 22(R)/2016, construction is within scope; manufacturing in India (except in SEZs) is not.
The decisive advantage over the Project Office: operating profits are freely remittable during operations subject to applicable taxes (Clause C.1(d) of the Master Direction), whereas the Project Office’s surplus is caught in the closure documentation chain described above. The Branch Office cannot, however, open foreign currency accounts (RBI FAQ Q.18), a concession available only to the Project Office, and only where the contract specifically provides for payment in foreign currency.
Liaison Office. No commercial activity, no income in India, no project contracts. Permitted only for communication, market research and promotion. It is the correct vehicle at the pre-award stage and only at that stage. RBI FAQ Q.10 confirms a Liaison Office can be upgraded to a Branch Office with AD bank approval without closing the existing entity. A Liaison Office that begins conducting project management or supervisory work, even informally, commits a FEMA contravention and simultaneously creates permanent establishment exposure, as the Convergys line of ITAT decisions confirms. It cannot acquire immovable property and may lease only for operational purposes for up to five years.
Indian subsidiary. The only structure that is a fully independent Indian legal person: it holds assets, sues and is sued, registers for GST, banks across multiple projects, carries forward tax losses, and can access treaty benefits on dividends. The effective corporate rate is 25.17% under Section 115BAA (22% base plus 10% surcharge plus 4% cess), against 35% base plus surcharge and cess for a foreign company. Incorporation takes three to four weeks through the MCA. The cost is transfer pricing compliance on every intra-group transaction with the foreign parent, plus the annual FLA return by 15 July and Companies Act filings.
| Project Office | Branch Office | Liaison Office | Indian Subsidiary | |
|---|---|---|---|---|
| Governing law | FEMA 22(R)/2016 + Master Direction No. 10 | Same | Same | Companies Act 2013 + NDI Rules 2019 |
| Approval route | AD bank (general permission); RBI where conditions unmet | AD bank under delegated powers; UIN from RBI CO Cell | Same as BO | FDI automatic route (most sectors) |
| Timeline | 1 to 2 weeks (general); 4 to 6 weeks (RBI) | 3 to 5 weeks; 6 to 8 weeks (RBI route) | Same as BO | 3 to 4 weeks (MCA) |
| Scope | The one contracted project only | Schedule I list; multiple projects and clients | Liaison only, no commercial activity | Full commercial operations |
| Per-project constraint | Yes, separate PO, account, books, AAC per project (RBI FAQ Q.7) | No, entity level | N/A | No |
| PE consequence | Fixed-place PE under most DTAAs | Classic fixed-place PE | Low if strictly confined; PE if project work is conducted | Contained in the Indian entity if arm’s length |
| Income tax | 35% base + surcharge + cess on India-source profits | Same as PO | No taxable income | 25.17% (Section 115BAA) |
| GST | Required where taxable supplies made | Required | Not required, no taxable supply (Karnataka AAAR; Rajasthan AAR, Habufa Meubelen; Tamil Nadu AAR, Takko Holding) | Required |
| FCY account | Up to two, only where the contract provides for FCY payment (MD F.2(iii)) | Not permitted (RBI FAQ Q.18) | Not permitted | Standard banking |
| Profit remittance | Trapped until closure documentation complete | Operating profits freely remittable subject to tax (MD C.1(d)) | No income to remit | Dividend subject to DTAA withholding |
| Principal risk | Per-project fragmentation; pending assessments block surplus; AAC default | Broader compliance footprint; activity list limits scope | Any project work = FEMA breach + PE | TP compliance; ROC governance |
What goes wrong in an unincorporated consortium or JV?
An unincorporated JV is taxed as an Association of Persons at the highest rate applicable to any member. Where one member is a foreign company, the AOP’s entire income is taxed at the foreign company rate of 35% plus surcharge and cess, regardless of the Indian member’s lower rate. The fix is an incorporated SPV formed before the bid.
The AOP trap. An unincorporated JV, a consortium or agreement-based joint venture, as distinct from a company incorporated for the purpose, has no independent legal personality under Indian law. For income tax it is an Association of Persons: a separate taxable entity, taxed at the highest rate applicable to any of its members. Where one member is a foreign company, the AOP’s entire income is taxed at the foreign company rate (35% base from AY 2025-26 under the Finance (No. 2) Act 2024, plus surcharge and cess), regardless of the lower domestic rate applicable to the Indian member. On a large contract the differential is material. The problem is entirely avoidable through an incorporated SPV formed before project commencement, but once the AOP characterisation is adopted and the project is underway, restructuring triggers its own transfer pricing and GST consequences.
The GST problem on intra-JV flows. CBIC Circular No. 35/9/2018-GST addresses this through two illustrations, and the distinction between them is the whole point. Illustration A: where the JV is awarded a contract and engages its own members to perform the works, the members are supplying services to the JV, taxable. Illustration B: where money is distributed out of the JV pool to members as a share of profit or loss, not as payment for services, GST does not apply. In practice, construction JVs commonly structure cost reimbursements that look like Illustration A while the parties believe they are in Illustration B. Each member requires its own GST registration; the AOP may require a separate one. Where a member is non-resident, place of supply, reverse charge and import-of-services questions arise on top.
The dispute resolution gap. An unincorporated JV cannot sue or be sued as a legal person. Liability apportionment between members turns on the JV agreement, which almost always receives less drafting attention than the EPC contract. Where the JV agreement names a different arbitral forum from the EPC contract, the applicable forum becomes a preliminary dispute that must be resolved before the substantive claim can be heard. This is a recurring source of preliminary proceedings in Indian infrastructure arbitration.
Why must the PE analysis start at contract award?
Construction PE thresholds run per project site, not aggregated across a contractor’s Indian projects. Supervisory activity counts even where all physical construction is subcontracted. Under the India-UK DTAA, supervisory charges exceeding 10% of the equipment sale price trigger a construction PE regardless of how long the project lasts.
Mobilisation on a large EPC project, contract award to first personnel on site, is typically six to twelve weeks. Within that window the contractor manages procurement, logistics, visas, site establishment and FEMA compliance simultaneously. FEMA is routinely deferred because its consequences are not immediately visible. The sequence under the general permission route is: notify the AD bank and apply for a Unique Identification Number; obtain PAN; open the INR account in the Project Office’s name; and ensure the first inward remittance from the parent flows through the designated account. Each step depends on the one before it. Efficiently managed, it takes three to four weeks. Mobilising before it is complete, using parent funds through a third-party account, expatriate employees’ personal accounts, or a local associate’s foreign currency account, is a contravention from day one.
The tax analysis runs in parallel, not afterwards. A Project Office is a fixed place of business at the contractor’s disposal and constitutes a fixed-place permanent establishment under Article 5(1) of most Indian double taxation avoidance agreements. That is expected and priced. What must be managed is the scope of the permanent establishment, specifically, that offshore supply does not become attributable to it. The construction PE threshold under Article 5(3) applies per project site, not aggregated across all of the contractor’s Indian projects: three short concurrent contracts do not together constitute a construction PE if none individually exceeds the threshold and they are not inextricably interconnected (ITAT, Mauritius marine contractor case, reported in the Bombay Chartered Accountants’ Journal).
| Treaty | Construction PE threshold | Service PE threshold |
|---|---|---|
| India-UK | 6 months | 90 days (unrelated parties) |
| India-UAE | 9 months | 9 months |
| India-Singapore | 183 days | 90 days |
| India-USA | 120 days | 90 days |
| India-Netherlands | 12 months | 9 months |
| No treaty | Domestic law Section 9, broader than any treaty | Not applicable |
Thresholds are indicative and must be confirmed against the text of the applicable treaty and any modification under the Multilateral Instrument for the specific project.
Two triggers are routinely missed. First, supervisory activity counts towards the construction PE threshold even where every element of physical construction has been subcontracted to Indian firms. A contractor with only supervisory engineers on site is not outside the threshold. Second, under the India-UK treaty and several others, a value-based trigger operates independently of duration: where supervisory charges exceed 10% of the sale price of the equipment supplied, a construction permanent establishment arises regardless of how long anyone was on site. This is not a time test with a value gloss. It is a separate, freestanding trigger, and it is the one that catches contractors who have carefully managed their day counts.
Checklist: Setting Up and Mobilisation
A project-use reference for the material in Part 1. It is not a substitute for project-specific legal and tax advice.
Pre-award
Operational footprint and permanent establishment
- Map aggregate foreign personnel days per project site
- Identify whether a fixed site office or storage yard will be maintained
- Confirm who signs Indian subcontracts, foreign entity, Project Office, or Indian associate
- Fix the point at which equipment title passes: FOB / ex-works / CIF outside Indian territorial waters
- Estimate the offshore / onshore value split
- Apply the treaty construction PE threshold per site, do not aggregate across projects
- Apply the treaty service PE threshold, aggregate all personnel days on the same site
- Check the India-UK 10% supervisory value trigger separately from the time threshold
Structure selection
- Single project → Project Office (three to four weeks; requires a specific awarded contract)
- Multiple concurrent projects → Branch Office (five-year profit record + USD 100,000 net worth)
- Long-term India strategy → Indian subsidiary (25.17% under Section 115BAA; transfer pricing compliance required)
- Pre-award only → Liaison Office (no commercial activity; must be upgraded on award)
- Verify the FEMA 22(R)/2016 Clause 4(f) eligibility conditions apply even on the general permission route
- If Branch Office: confirm the activity falls within Schedule I of FEMA 22(R)/2016
Consortium / JV
- Unincorporated JV → Association of Persons taxed at the highest member rate (35%+ where a foreign company is a member). Confirm this is acceptable before bid submission
- Incorporated SPV → eliminates the AOP trap. Check MCA incorporation timeline against the bid deadline
- Align the JV agreement and the EPC contract on the arbitral forum
- Classify intra-JV flows against CBIC Circular 35/9/2018-GST Illustrations A and B
- Fix liability apportionment expressly in the JV agreement
Mobilisation
- Apply to the AD bank for Project Office establishment and Unique Identification Number, start three to four weeks before mobilisation
- Do not mobilise, open any operational account, or begin site work before FEMA compliance is complete
- Obtain PAN (Form No. 96 for foreign companies)
- Open the designated INR account; route the first inward remittance through it
Completion and closure
- Assemble Project Office closure documentation: auditor’s certificate, no pending proceedings, all Annual Activity Certificates filed, ROC compliance report where registered under Section 380
- Do not abandon the Project Office. Unfiled Annual Activity Certificates accumulate; the draft 2025 RBI Regulations propose automatic closure after three consecutive defaults
Frequently Asked Questions
- Does establishing a Project Office in India create a permanent establishment?
A Project Office is a fixed place of business at the foreign contractor’s disposal and constitutes a fixed-place permanent establishment under Article 5(1) of most Indian double taxation avoidance agreements. But the Project Office does not create the exposure; it concedes an exposure the project’s operational requirements have already created. What must be managed is the scope of the permanent establishment, in particular ensuring that offshore equipment supply is not attributed to it.
- Can a foreign EPC contractor use one Project Office for two Indian projects?
No. RBI FAQ Q.7 confirms that a Project Office is tied to a specific project. A foreign contractor awarded two concurrent Indian projects must maintain a separate Project Office, a separate bank account, separate books of account and a separate Annual Activity Certificate for each, with separate closure procedures. Entity-level compliance is not permitted. A Branch Office, by contrast, operates at entity level across multiple projects.
- What is the difference between a Project Office and a Branch Office in India?
A Project Office is tied to one specific contracted project and its surplus is trapped until formal closure, which requires all income tax assessments to be complete. A Branch Office operates at entity level across multiple projects and its operating profits are freely remittable during operations subject to tax. But a Branch Office requires a five-year profit-making track record and net worth of at least USD 100,000, and it cannot open foreign currency accounts.
About the Author
Ravish is a dual-qualified lawyer and Solicitor admitted to practice in India and on the roll of the Solicitors Regulation Authority (England and Wales). He specialises in international arbitration and international taxation, and holds the Advanced Diploma in International Taxation (ADIT) from the Chartered Institute of Taxation (CIOT). His practice focuses on cross-border disputes, enforcement strategy, and complex tax-driven structuring.
Further details are available on his LinkedIn Profile: https://www.linkedin.com/in/adit-ravishbhatt/
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Disclaimer
This article provides general information only and is not legal, tax, or financial advice. India inbound structuring requires coordinated input from advisers in all relevant jurisdictions, and outcomes depend heavily on facts, residency, substance, and evolving laws. This Part 1 covers entity structure and mobilisation; Part 2 covers the tax architecture, Part 3 customs and the Project Imports Scheme, and Part 4 commercial risk. Readers should seek professional advice before acting on any material herein. R & D Law Chambers LLP assumes no responsibility for any reliance placed on this summary.