Ensuring Compliance in Cross-Border Vendor Agreements in India: A Legal Guide

A cross-border vendor agreement is a binding contract that captures the terms of a business transaction involving entities of different jurisdictions. With the advent of globalization, facilitation of export promotion schemes by the Government of India and increased access to global resources, more and more entities in India are engaging into international trade in the form of buying or selling goods and services beyond borders. While participation in cross-border trade bestows the parties with numerous benefits like access to global resources and global markets, however it is indispensable for the parties to ensure that they reduce to writing their business terms in a definitive agreement to avoid conflict at a later stage and also comply with all the regulatory and statutory requirements in each jurisdiction in which they do business. Through this article, we aim to provide a detailed overview of the compliance considerations that must be adhered to by the entities while entering into cross-border vendor agreements in India

Compliance Requirements in India

Entities entering into cross-border trade and commerce arrangements shall take into consideration the following essential compliance requirements while drafting their vendor agreements:

Contract Law Requirements

Any cross-border vendor contracts should meet the requirements provided in the Indian Contract Act of 1872. To ensure that the agreement can be enforced in India, it must incorporate basic elements of a contract such as offer, acceptance, consideration, legal purpose, and mutual consent. The parties to cross-border contracts should include clauses that define the scope of work, payment method, mechanisms for resolving disputes, and provisions on termination of the contract, so as to avoid invalidity of the contract. The quintessential clauses which require attention in case of cross-border agreement includes governing laws, arbitration, dispute resolution, etc.

Compliance with Foreign Exchange Control Regulations

Cross-border transactions are primarily subject to the regulatory framework provided under the Foreign Exchange Management Act, 1999 (“FEMA”) and the directions, circulars and guidelines issued by the Reserve Bank of India (“RBI”) from time to time. While facilitating cross-border arrangements, Indian companies must ensure that the compliance with respect to import and export of goods and services along with payments thereof comply with FEMA and RBI’s statutory requirements.

Further, the RBI issues master directions governing all aspects pertaining to import and export of goods and services and revises the same from time to time.  The compliances that are to be undertaken by the exporters and importers of goods and services are specified in detail under theses master directions.

Customs and Import – Export Compliance

If the transaction involves the import or export of goods, compliance with Indian Customs Act, 1962, and the import-export policies and the foreign trade policy framed under the Foreign Trade (Development and Regulation) Act, 1992 is mandatory. Indian parties must ensure that the agreement includes provisions for:

• Proper classification of goods under the Harmonized System of Nomenclature (HSN);
• payment of applicable customs duties; and
• adherence to licensing requirements, particularly for restricted or prohibited goods.

 Direct Tax Implications:

A cross-border vendor agreement is subjugated to the domestic tax laws of both the jurisdictions along with the international tax treaties. The taxability of the parties involved in the cross- border trading shall be determined by the tax residency of the parties. Further, the Income Tax Act, 1961, mandates the deduction of tax at source (“TDS”) on payments to foreign vendors if the income is taxable in India. Therefore, Indian businesses must evaluate whether payments to the foreign entity constitute royalties or fees for technical services, as they attract a higher rate of TDS and verify the applicability of Double Taxation Avoidance Agreements (“DTAAs”) to reduce withholding tax rates. Other essential direct tax implication on a cross-border goods and service arrangement between related entities is Transfer Pricing Regulations (“TPR”).  The TPR stipulates that the transactions between related parties situated at different jurisdictions be conducted at arm’s length prices and the justification of the same shall be documented adequately to ensure compliance.

Indirect Tax Implications

The Indian entities must identify and ensure that the applicable Goods and Services Tax (“GST”) on cross-border transactions is appropriately accounted for, as the payments under such arrangements might qualify as import or export of goods and services under the GST regime in India.

If the cross-border transaction is categorized as import of goods and services in India, then the ‘Reverse Charge Mechanism’ shall become applicable under which the importer of goods and services i.e., the Indian entity, will have to pay the GST as the recipient of goods and services. However, in the event the transaction is categorized as export of goods and services from India under the GST regime, then such supply being ‘zero rated supply’ is exempt from tax and input tax credit can be claimed by the exporter on the export of goods and services from India.

Sector-Specific Compliances:

Additionally, sector-specific compliance requirements also form a vital part of cross-border transactions. While certain industries, such as pharmaceutical, petroleum, chemicals and mining, and media and communication, are highly regulated by the Government of India and require additional permissions and compliances, there are many industries which are not that strongly regulated and are not compliance heavy. Therefore, the parties must be mindful of the industry in which they are engaging in and should secure the appropriate licenses and permissions that are required for cross-border trading under the sector-specific legislations.

Cross - Border Concerns

Apart from the statutory requirements under Indian laws, businesses participating in international trade must also be attentive of the cross-border compliance concerns. Businesses usually encounter the following cross-border concerns:

International Regulatory Framework

Each country has its own regulatory framework and statutory requirements that shall be complied by all the entities doing business in their jurisdiction. Navigating foreign regulatory frameworks is crucial in cross-border arrangements.  

Governing Law Clause

A governing law clause determines the jurisdiction under which the agreement shall be construed to give effect to the same.  In a cross-border vendor agreement, generally one of the two parties may dictate the governing law, however the agreement shall be vetted by lawyers from each jurisdiction to ensure effective enforceability.

Cultural Differences:

Cross-border business involves cultural differences and language obstacles. Accurately interpreting legal and compliance documents, comprehending local customs, and adjusting compliance requirements to local cultural norms of the target country can be demanding, but are critical to ensuring effective compliance.  

Data Protection and Privacy:

Data protection and privacy regulations vary from jurisdiction to jurisdiction. Companies must comply with various requirements related to collection, storage, transmission of data and privacy rights.

Supply-Chain Issues:

Cross-border operations often involve complicated international supply chain arrangements. Ensuring compliance throughout the supply chain, including vetting suppliers, managing third-party risks and monitoring compliance at each stage, can be challenging, especially when dealing with different legal and regulatory frameworks.

How to Ensure Compliances in Cross-Border Vendor Agreement

Cross-border compliance issues can be addressed by taking some additional steps, which ensures the viability of the trade in all involved jurisdictions. Participating entities must consult with local legal counsels and compliance professionals familiar with the laws and regulations of each target jurisdiction to ensure cross-border compliances and successfully deal with risks and mitigate potential breaches.

It is important for businesses to realize the importance of staying compliant with regulatory framework as non-compliance might result in penalties, loss of business prospects, legal disputes, disruption of business operations, revocation or cancellation of licenses and certifications, and increased compliance costs arising from remedial initiatives and activities, depending on the kind and gravity of the non-compliance.

Conclusion

Cross-border vendor agreements present Indian entities with significant opportunities for growth and collaboration in the global market, but they also require thorough attention to legal and regulatory compliance requirements. Businesses can mitigate risks by ensuring adherence to statutory requirements in both Indian and international frameworks and addressing challenges such as enforceability of the agreement in different jurisdiction, data protection and supply chain complexities and by taking proactive measures such as conducting risk evaluations, due diligence, and consultation with legal counsels. A well-structured approach to legal compliance does not only protects entities from potential liabilities but also enhances their reliability and prospects in the international trade landscape.