You Can Be “Resident” and “Non-Resident” in India — At the Same Time, in the Same Year

 By CA Surekha Ahuja

The 182-day rule is only half the story. The ₹15 lakh threshold, deemed residency and FEMA’s intention-based test can give the same person two different residential statuses in the same financial year.

There is a belief many NRIs carry: 

“I live abroad. I count my days in India. I know my residential status.”

It sounds simple. It isn't.

For income-tax purposes, India determines residential status primarily through statutory tests of physical stay, with special rules for certain Indian citizens and persons of Indian origin visiting India and Indian citizens leaving India in specified circumstances.

FEMA asks a different question. It considers not only the statutory day-count framework but also the purpose and circumstances of leaving or returning to India, including whether they indicate an intention to stay outside or inside India for an uncertain period.

The result can be surprising:

You can be a Resident under the Income-tax Act and a Non-Resident under FEMA in the same year. You can also be a Non-Resident under the Income-tax Act and a Resident under FEMA.

There is no contradiction. The two laws simply ask different questions.

Run Two Separate Tests — Not One

The income-tax test asks:

• Were you in India for 182 days or more during the relevant tax year?
• If not, does the 60 days + 365 days test apply?
• Does a special rule for a visiting Indian citizen or person of Indian origin change the threshold?
• Does the ₹15 lakh income threshold become relevant?
• Could deemed residency apply?
• If resident, are you Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)?

The FEMA test asks:

• Why did you leave India?
• Why did you return?
• Did the circumstances indicate an intention to stay outside India for an uncertain period?
• Conversely, does the return indicate an intention to stay in India for an uncertain period?

The FEMA answer cannot simply be copied from the income-tax answer.

The 182-Day Rule Is a Cliff Edge — Not the Whole Story

Broadly, an individual becomes resident for income-tax purposes if either:

Test	Broad requirement
182-day test	Present in India for 182 days or more during the tax year
60 + 365 test	Present in India for 60 days or more during the year and 365 days or more during the preceding four years, subject to applicable exceptions

The second test is where many NRIs get caught. They track the current year's stay but forget the rolling four-year total.

Two Diwali visits, a wedding, a medical trip, business visits and family emergencies may individually appear insignificant. Together, they can push the preceding-four-year total beyond 365 days.

Near the threshold, every day matters. Actual arrival and departure dates should be reconciled with passport and immigration records. Borderline cases may also involve issues concerning how particular days are counted.

The ₹15 Lakh Threshold Can Change the Calculation

For an Indian citizen or person of Indian origin visiting India, the ordinary 60-day rule is modified.

Broadly, where the statutory conditions are satisfied:

• if total income other than income from foreign sources does not exceed ₹15 lakh, the relevant threshold can effectively become 182 days;
• where such income exceeds ₹15 lakh, the threshold can become 120 days, together with the preceding-four-year test.

The ₹15 lakh figure does not itself make anyone resident. It determines which statutory day-count rule applies.

Example

Suppose an Indian citizen living abroad has:

• Indian-source income: ₹18 lakh
• Foreign salary: ₹2 crore
• Stay in India: 130 days

He cannot simply say:

“I am below 182 days, so I am non-resident.”

The ₹15 lakh threshold, the 120-day rule and the preceding-four-year stay must all be examined.

Deemed Residency: When Counting Days May Not Be Enough

An Indian citizen may also be deemed resident where:

• total income, other than income from foreign sources, exceeds ₹15 lakh; and
• the individual is not liable to tax in any other country or territory by reason of domicile, residence or a similar criterion.

Thus, someone spending only 40 days in India cannot necessarily rely on the day count if the statutory conditions for deemed residency are met.

But deemed resident does not automatically mean ROR. RNOR status must still be examined, because it can materially affect the taxation of foreign income.

The analysis is therefore:

First — am I resident?
Second — if resident, am I ROR or RNOR?

FEMA — The Second Rulebook

FEMA is fundamentally different.

Under section 2(v) of FEMA, the residence test includes the statutory day-count framework but also specifically considers the purpose of departure from India and the purpose of coming to or staying in India.

A person leaving India:

• for employment outside India;
• to carry on business or vocation outside India; or
• for any other purpose indicating an intention to stay outside India for an uncertain period,

can be a person resident outside India.

Similarly, a person coming to or staying in India:

• for employment;
• for business or vocation; or
• for any other purpose indicating an intention to stay in India for an uncertain period,

can become a person resident in India under FEMA.

In simple terms:

Income-tax	FEMA
Primarily asks how long were you in India?	Also asks why did you leave or return, and what do the circumstances indicate?
Uses statutory tax-year tests	Uses its own statutory framework, including purpose and intention
Determines tax residence and taxation scope	Determines foreign-exchange, banking, investment and remittance consequences

One Person, Two Answers

Tax Resident + FEMA Non-Resident

An Indian citizen living abroad returns for an extended family and business visit. His stay becomes sufficient for income-tax residence, but the circumstances remain temporary and do not indicate an intention to stay in India for an uncertain period.

Income-tax: Resident
FEMA: Non-Resident

Tax Non-Resident + FEMA Resident

An individual returns to India to take up employment or otherwise settle for an uncertain period. FEMA residence may arise even though the individual has not yet spent enough days in India to satisfy the income-tax test.

Income-tax: Non-Resident
FEMA: Resident

Both positions can genuinely coexist.

The Four Combinations Every NRI Should Understand

Residential position	How it can arise	Practical consequence
Tax Resident + FEMA Non-Resident	Tax day-count test satisfied, but FEMA circumstances indicate continued residence abroad	Tax and FEMA consequences must be determined independently
Tax Non-Resident + FEMA Resident	Return indicates intention to stay in India for an uncertain period, but tax day-count test is not yet met	FEMA consequences can arise before tax residence
Tax Resident + FEMA Resident	Both frameworks produce residence	Both sets of obligations must be examined separately
Tax Non-Resident + FEMA Non-Resident	Person remains based abroad and neither framework changes status	Conventional NRI position

“Resident” is not one universal legal status. It is a conclusion reached separately under separate laws.

FEMA Status Can Change Before Income-tax Status

A common mistake is assuming that residential status changes only on 1 April.

Under FEMA, where circumstances change so that a person becomes resident, relevant consequences can arise from the date of that change, even though income-tax residence is determined after considering the complete tax year.

This matters particularly for:

• NRE accounts
• NRO accounts
• FCNR(B) deposits
• foreign-currency holdings
• overseas investments
• remittances and repatriation arrangements

An NRI returning to India should therefore review the treatment of these accounts at the time of the move, rather than waiting for the income-tax return.

Foreign Assets: Residency Also Changes the Compliance Question

A returning Indian may hold:

• foreign bank accounts;
• overseas brokerage accounts;
• foreign company shares;
• foreign immovable property;
• pension or retirement accounts; or
• interests in foreign trusts or entities.

Once tax-resident status arises, the requirements concerning foreign income and foreign-asset disclosure, including Schedule FA where applicable, must be examined.

The obligation is not identical for every resident: RNOR status and the applicable return provisions matter.

Separately, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 can create additional compliance and penalty exposure.

The correct sequence is:

Determine residence → determine ROR/RNOR → determine foreign-income and foreign-asset reporting obligations.

The NRI's Five-Point Annual Check

Before concluding “I am non-resident”, answer these five questions:

1. How many days was I actually in India? Reconcile passport and immigration records.
2. What was my stay during the preceding four years? The 365-day cumulative test can be decisive.
3. Does the ₹15 lakh threshold affect my applicable test? Being below 182 days does not necessarily settle the question.
4. Could deemed residency apply? Check this where Indian-source income exceeds ₹15 lakh and the individual is not liable to tax elsewhere by domicile, residence or a similar criterion.
5. What is my FEMA status independently? Examine why you left, why you returned and what the circumstances indicate about your intended period of stay.

Only then should the consequences for tax returns, foreign assets, NRE/NRO/FCNR accounts, remittances and repatriation be determined.

The Closing Perspective

For an NRI, “Am I resident?” is the wrong question to start with.

The better questions are:

• Resident under which law?
• From what date?
• Under which statutory test?
• ROR or RNOR for income-tax purposes?
• What compliance follows?

The Income-tax Act and FEMA are two separate legal frameworks with different purposes, tests and consequences. That is why the same individual can be Tax Resident + FEMA Non-Resident, or Tax Non-Resident + FEMA Resident, in the same year.

The professional approach is simple:

Track the days. Check the ₹15 lakh threshold. Test deemed residency. Determine ROR/RNOR. Then independently establish FEMA status.

Do this before a long visit, before returning to India, before changing employment, and before changing the treatment of NRE, NRO or FCNR(B) accounts.

Residential status is not merely a box to be ticked once a year. For an NRI, it is a legal conclusion that may have to be tested separately under more than one law.

TDS and Financial Treatment of Club Membership Fees: The Complete Guide for Indian Companies

By CA Surekha Ahuja

Every year, thousands of Indian companies pay for corporate club memberships — business chambers, hotel lounges, golf clubs, industry associations — to strengthen client relationships and give their leadership team a place to meet, network, and entertain. And every year, the same invoice lands on the same finance desk with the same two unanswered questions: should we deduct TDS before paying this, and is this an expense or an asset on our books?

There's no single section of law that answers either question directly — "club membership" doesn't get its own line in the Income-tax Act. Instead, the right answer comes from testing the payment against the general framework. This guide walks through that framework end-to-end, backed by the governing law and case precedent.

First, a common confusion: doesn't every business expense attract TDS?

No.

Deductibility and TDS applicability are two completely separate legal questions, governed by different parts of the Act.

Is the expense deductible while computing taxable income? — governed by Section 37(1), or a specific section under Sections 30–36. The basic test is whether the expenditure is revenue in nature and incurred wholly and exclusively for business.

Was there an obligation to withhold tax before paying it? — governed by Chapter XVII-B, now consolidated under Section 393 of the Income-tax Act, 2025. TDS applies only where the payment falls within a specified statutory category such as salary, interest, contractor payments, professional or technical fees, rent, commission and certain other payments.

The two questions do not automatically track each other. A genuine business expense can be fully deductible without attracting TDS simply because it does not fall within any specified withholding provision.

The only important bridge is Section 40(a)(ia). It can disallow an expenditure where TDS was applicable but the payer failed to comply. Where no TDS provision applies in the first place, there is no withholding default for Section 40(a)(ia) to operate on.

With that distinction clear, here's the actual section-by-section test.

Part 1: Is TDS Applicable?

The first step is jurisdictional: is the club or entity you're paying a resident or non-resident? Payments to non-residents fall under Section 195, with its own DTAA and permanent-establishment analysis. This guide covers the far more common domestic scenario — a resident Indian company paying a resident Indian club or hospitality group.

For domestic payments, TDS obligations sit under what were historically the "194-series" sections of the Income-tax Act, 1961 — now consolidated into a single Section 393 under the Income-tax Act, 2025 (effective 1 April 2026). The obligation doesn't change; only the section number does.

Here's how a membership fee tests against the relevant provisions:

Section 194C — payments to contractors for "work"

A membership fee isn't consideration for a defined piece of work being carried out for you, so this generally doesn't apply.

Section 194J — fees for professional, technical, or consultancy services

This is where most of the genuine ambiguity lives.

If the membership is purely an access privilege — use of a lounge, dining space, or meeting rooms — there's no managerial, technical, or consultancy service being rendered, and 194J doesn't apply.

But if the membership package bundles in identifiable consultancy, training, professional or technical advisory services, that component needs to be examined under Section 194J.

Section 194-I — rent

Doesn't apply in most cases. Rent requires a lease-like right to identifiable land, building or furniture. A non-exclusive privilege to use shared facilities across multiple locations is a different legal character from a tenancy.

Section 194R — benefits or perquisites arising from a business relationship

This provision is narrower in application — relevant mainly where a company provides a membership-type benefit to a non-employee, rather than paying for its own corporate access.

The test that actually matters here isn't the invoice's title — it's what the fee buys.

Read the membership agreement, not just the bill.

Language such as "privilege of using the facilities" or "benefits of membership" generally points towards a pure access right. Language describing a defined service deliverable requires examination under the relevant TDS provision.

If 194J does apply, the applicable rate depends on whether the payment is for professional or technical services, along with the applicable threshold and PAN provisions. TDS should generally be computed excluding GST where GST is separately shown on the invoice.

Part 2: Expense or Capital Asset?

This is where tax treatment and accounting treatment converge.

Under Ind AS 38, an intangible asset can only be capitalised if it satisfies the relevant recognition criteria, including identifiability and control, with expected future economic benefits.

Club memberships typically fail this test — they are often non-transferable, non-saleable and subject to the club's rules and termination provisions. There's no separable asset the company owns; there's a privilege it enjoys.

That points to expensing, not capitalising.

• The initiation/entrance fee should generally be treated as revenue expenditure where it merely secures membership privileges. For accounting purposes, appropriate prepaid expense treatment may be considered where the contractual benefit relates to a future period.
• The annual/renewal fee is a straightforward recurring revenue expense for the period it covers.
• Classify both under Business Promotion, Sales & Marketing, or Staff Welfare, as appropriate — not under Fixed or Intangible Assets.

This isn't just an accounting convention — it is supported by judicial precedent.

The Supreme Court, in CIT v. United Glass Mfg. Co. Ltd. [2012] 28 taxmann.com 429, held that club membership fees incurred for employees and to entertain customers are business expenses deductible under Section 37(1).

The consistent judicial reasoning is that a membership may create a benefit lasting more than a year, but that benefit does not automatically become a capital asset. The real question is whether the company has acquired a capital asset or capital advantage, rather than merely a business facility or privilege.

Part 3: Company's Name vs. a Director's Personal Name — Why It Changes Everything

This is the single most consequential structuring decision, and it's often overlooked.

When the membership is held in the company's name

Where the membership is held in the company's name, with an employee or director merely nominated as the user, the position is substantially cleaner.

The company incurs the expenditure and the membership privilege is available for business purposes. Generally, there is no perquisite merely because an employee or director is nominated as the user, and therefore no salary TDS exposure merely on that account.

The caveat is important: if the membership includes personal-use benefits — a spouse's card, for example — or facilities used for clearly non-business purposes, that specific benefit requires separate examination as a possible perquisite under Section 192.

When the membership is held personally by a director

When the membership is held personally by a director and the company simply funds or reimburses it, the calculus shifts.

The company's deduction is at real risk of disallowance under Section 37(1), since this can look like the company discharging a personal obligation rather than incurring a business cost.

If the director is an employee, the value may become a taxable perquisite under Section 17(2), with salary TDS implications.

If the director is non-executive and not on the payroll, the benefit may require examination under the provisions relating to benefits or perquisites, including Section 194R where applicable.

For significant shareholder-directors, there may also be a deemed-dividend risk under Section 2(22)(e), depending on the facts.

Separately, the arrangement may have related-party transaction, approval and disclosure implications under the Companies Act.

The practical rule is simple:

If the membership is genuinely for corporate use, it is safer to structure it as corporate membership rather than a personal membership paid for by the company.

 

A Note on GST Input Tax Credit

GST treatment runs on its own track, entirely separate from the income-tax conclusion.

Section 17(5)(b) of the CGST Act restricts input tax credit on club memberships, subject to the statutory provisions and exceptions.

Therefore, companies should not assume that ITC is available merely because the membership is used for business purposes. The precise nature of the membership and the applicability of any statutory exception should be examined before claiming credit.

The position becomes particularly difficult where the membership sits in an individual's personal name rather than the company's name.

The Working Checklist

1. Confirm whether the payee is resident (domestic TDS) or non-resident (Section 195).
2. Read the membership agreement to see exactly what's being purchased — access, or a bundled service.
3. Test against Sections 194C, 194J, 194-I and 194R, and document the conclusion.
4. If TDS applies, confirm the applicable rate, threshold and PAN requirements.
5. Compute TDS on the value excluding GST where GST is separately shown on the invoice.
6. Book the fee as a revenue expense — Business Promotion or Staff Welfare, as appropriate — rather than as a capital asset.
7. Confirm whether the membership is in the company's name or an individual's; this changes deductibility, TDS and GST outcomes materially.
8. Assess GST input tax credit separately under Section 17(5).
9. For high-value memberships, document the business purpose and tax position before payment.

The Bottom Line

A club membership that is purely a privilege of access — held in the company's name and used for genuine business purposes — is generally free of TDS and deductible as revenue expenditure.

The moment a genuine professional or technical service gets bundled into the fee, or the membership is structured in a director's personal name instead of the company's, the tax and withholding analysis can change substantially.

The invoice title never settles the question. What the agreement actually provides, whose name the membership is held in, and how the benefit is actually used — those are what determine the tax treatment.

9 Things Professionals Still Get Wrong About Financial Statements of Non-Corporate Entities

 By CA Surekha Ahuja

The real challenge is not preparing the financial statements. It is determining what actually applies.

Non-corporate financial statements are often assumed to be simpler than corporate financial statements.

That assumption can be misleading.

The ICAI Guidance Note on Financial Statements of Non-Corporate Entities is not merely a set of formats. It involves questions of applicability, classification, Accounting Standards, exemptions, transition provisions, presentation and disclosures.

The issue is particularly relevant for FY 2026-27, since ICAI has provided that the Guidance Note applies to all non-corporate entities for accounting periods beginning on or after 1 April 2026.

Here are nine areas where professionals still commonly get it wrong.

LLPs are not covered by this Guidance Note

“Non-corporate” does not simply mean anything that is not a company.

An LLP is covered separately under the Guidance Note on Financial Statements of Limited Liability Partnerships.

Therefore, the first question should always be: What is the legal form of the entity?

Not merely: “Is it a company?”  The legal form determines which ICAI framework needs to be considered.

 Non-corporate entities cover much more than partnership firms

The framework can cover:

Proprietorships	HUFs	Partnership firms
AOPs	BOIs	Trusts
Societies	RWAs	Statutory and autonomous bodies

But the ICAI Guidance Note does not operate in isolation.

The statute, regulator or other legal framework governing the entity may impose additional requirements.

So the professional question is not simply:  “Which format should we use?”

It is: “What legal and regulatory reporting framework applies to this entity?”

A small commercial activity can affect the entire entity

This is particularly relevant for trusts, societies and entities with mixed activities.

A common assumption is:

“The entity is primarily charitable or non-commercial, so Accounting Standards do not apply.”

That may be wrong.

Where an entity carries on commercial, industrial or business activity, the Accounting Standards apply. Even where only part of the activities is commercial, industrial or business in nature, the Standards apply to all activities of the entity.

The size of the commercial activity is therefore not, by itself, the deciding factor.

A small business activity can have an entity-wide accounting consequence.

Classification is not merely a turnover test

Before deciding which exemptions are available, the entity must be classified into Level I, II, III or IV.

Level	Broad criteria
I	Listed/in process of listing; bank, financial institution or insurer; turnover above ₹250 crore; borrowings above ₹50 crore; or qualifying holding/subsidiary relationship
II	Turnover above ₹50 crore up to ₹250 crore; or borrowings above ₹10 crore up to ₹50 crore; or qualifying holding/subsidiary relationship
III	Turnover above ₹10 crore up to ₹50 crore; or borrowings above ₹2 crore up to ₹10 crore; or qualifying holding/subsidiary relationship
IV	Not covered by Levels I, II or III

The turnover test excludes other income, while borrowings include public deposits. The prescribed criteria are determined with reference to the relevant preceding accounting year.

Levels II, III and IV are collectively treated as MSMEs for Accounting Standards purposes and receive specified exemptions and relaxations.

So: Do not determine the applicable exemptions by looking at turnover alone.

MSME status does not mean “no Accounting Standards”

This is one of the biggest misconceptions.

The exemptions are standard-specific, not a blanket exemption from Accounting Standards.

For example:

Accounting Standard	Level II	Level III	Level IV
AS 3 – Cash Flow Statements	Not applicable	Not applicable	Not applicable
AS 17 – Segment Reporting	Not applicable	Not applicable	Not applicable
AS 20 – Earnings Per Share	Not applicable	Not applicable	Not applicable
AS 22 – Income Taxes	Applicable	Applicable	Current tax provisions only

Other Accounting Standards continue to apply, subject to the specific exemptions and relaxations applicable to the relevant level.

The practical sequence is therefore: Level first → Accounting Standard next → Exemption thereafter.  Not the reverse.

Moving to a higher level does not automatically rewrite the previous year

An entity may enjoy an exemption in one year and cease to qualify for it in the next.

That does not automatically mean that the previous year's financial statements or corresponding figures have to be rewritten.

The relevant requirements apply from the current period, with the prescribed disclosures explaining the previous classification, exemption previously availed and the treatment of corresponding figures.

The principle is simple: A change in applicability is not, by itself, a reason to restate history.

Moving down a level does not immediately unlock the lower-level exemptions

The reverse transition is more restrictive.

An entity moving from Level I to a lower level does not immediately become entitled to the exemptions applicable to that lower level. It must remain outside Level I for two consecutive years.

A similar principle applies when moving from Level II or III to a lower level.

Therefore: Current-year turnover alone may not determine the exemptions available in the current year.  Classification history matters.

This is an easy point to miss when the accounts team looks only at the current year's numbers.

AS 15 has a separate 50-employee test

Employee benefits create another important trap.

For Level II and Level III entities, specified AS 15 relaxations depend on whether the average number of persons employed during the year is 50 or more or less than 50.

Average employees	Broad consequence
50 or more	Specified defined-benefit obligations continue to require actuarial determination using the Projected Unit Credit Method
Less than 50	Wider relaxation; another rational method may be used for specified liabilities
Level IV	Specified AS 15 relaxations apply irrespective of employee strength

Thus, an MSME classification does not end the analysis.

The employee-count test has to be examined separately.

Level IV has a specific deferred-tax transition consequence

This is one of the less obvious provisions.

Level IV entities apply AS 22 – Accounting for Taxes on Income only to the extent specified, including the current-tax provisions.

More importantly, when an entity becomes Level IV for the first time, the accumulated deferred tax asset or liability appearing in the immediately preceding period is adjusted against opening revenue reserves.

So the question is not merely: “Is deferred tax applicable this year?”

It is also: “Has the entity become Level IV for the first time?”

That distinction can directly affect the opening balance sheet.

The Guidance Note is more than a format

The Guidance Note also contains requirements relating to presentation and disclosures, in addition to the applicable Accounting Standards.

For example, partnership financial statements require specific information regarding partners' capital and current accounts, while various balance-sheet items have prescribed presentation and disclosure requirements.

And where another law, regulator or governing statute prescribes a specific requirement, that requirement must also be considered.

The Guidance Note does not override a specific statutory or regulatory framework.

A practical professional checklist

Before finalising or signing the financial statements, document these eight questions:

Step	Question
1	What is the legal form?
2	What is the nature of activities?
3	Which Level I / II / III / IV applies?
4	Which Accounting Standards apply?
5	Which exemptions and relaxations are available?
6	Are any transition provisions triggered?
7	Have presentation and disclosures been checked?
8	Are there additional statutory or regulatory requirements?

This is a small exercise, but it can prevent errors that otherwise surface only at the review or audit stage.

The takeaway

The biggest mistake is to treat the ICAI Guidance Note as a formatting exercise.

It is an applicability exercise first and a presentation exercise thereafter.

An LLP is covered separately.

A small commercial activity can affect the entire entity.

MSME status does not eliminate Accounting Standards.

Moving to a higher level does not automatically rewrite the previous year.

Moving down a level may involve a two-year waiting period.

AS 15 can turn on the 50-employee threshold.

Level IV can have a specific deferred-tax transition consequence.

And from FY 2026-27, the Guidance Note applies to all non-corporate entities covered by it.

So the professional question should never be: “Which format did we use last year?”

It should be: “What framework and what requirements apply to this entity for this year — and have we documented the basis?”

That is the difference between merely preparing financial statements and properly applying the ICAI framework.

Payment in USD to an Indian Company or Foreign Entity: When Does TDS Actually Apply

By CA Surekha S Ahuja

A Practical Decision Framework — Updated for the Income-tax Act, 2025

The one sentence to remember: TDS follows the legal recipient, the nature of the payment, and its taxability — not the currency symbol on the invoice.

A USD Invoice Often Creates the Wrong TDS Question

An Indian company may invoice in USD. It may be wholly owned by a US, UK, or Singapore parent. It may even receive payment through an overseas bank account.

None of these facts, by themselves, make the payment a payment to a non-resident.

The correct starting point is:

1. Who is legally entitled to the payment?
2. What is the payment for?
3. Is it chargeable to tax in India?

The Quick Answer

Situation	Correct TDS Approach
Invoice is in USD	Currency is irrelevant
Indian company has a foreign parent	Foreign ownership does not make it non-resident
Payment goes to a foreign bank account	Examine the legal recipient
Payee has PAN/GSTIN	Registrations do not by themselves establish legal identity or residence
Payment is directly to foreign parent	Examine Indian taxability and DTAA
Payment is to a branch/project office	Identify the foreign legal entity and tax position
Payment is called "reimbursement"	Test whether it contains any income/service element
Indian subsidiary later pays foreign parent	Analyse the second payment separately

The Four-Step Rule

Every foreign-linked payment should pass through four questions:

Step	Question
1. Recipient	Who is legally entitled to receive the payment?
2. Nature	What is the payment actually for?
3. Chargeability	Is that income chargeable to tax in India?
4. Provision	Which TDS provision, rate, and compliance requirement follows?

The mistake is to start with Step 4:

"It is in USD, so Section 195-type withholding must apply."

That is not the correct analysis.

Indian Subsidiary of a Foreign Parent

Suppose: Foreign Parent → ABC India Pvt Ltd → Customer

ABC India is:

• incorporated in India;
• the contracting party;
• the invoicing party; and
• legally entitled to the consideration.

The fact that its parent is foreign does not make ABC India a non-resident.

An Indian-incorporated company is resident in India under the company residence rules. A foreign company's POEM can separately affect its residence — not the residence of its Indian subsidiary.

Therefore: USD invoice + foreign parent ≠ non-resident recipient

The payment to ABC India should first be examined under the domestic TDS provisions applicable to the nature of the payment.

Direct Payment to the Foreign Parent

The analysis changes where the customer contracts directly with the foreign company:

Indian Customer → Foreign Company

Now determine:

• Nature of income
• Whether it is chargeable in India
• Business connection or PE, where relevant
• Domestic law
• Applicable DTAA
• Withholding and remittance compliance

The Supreme Court's decision in GE India Technology Centre Pvt. Ltd. v. CIT establishes the fundamental principle that withholding on payments to non-residents is linked to chargeability to tax in India.

Therefore, the correct chain is:  Foreign recipient → Nature → Chargeability → Domestic law/DTAA → TDS

not simply: Foreign recipient → TDS

Indian Subsidiary vs. Branch vs. Project Office

Recipient	Broad Position
Indian subsidiary	Separate Indian-incorporated legal entity
Branch office	Generally an extension of the foreign company
Project office	Generally an extension of the foreign company
Liaison office	Restricted presence, subject to applicable conditions

A branch or project office may have an Indian:

• PAN
• GSTIN
• Bank account
• Address
• Employees

But these registrations do not necessarily make it a separate Indian company.

The decisive question remains: Which legal entity is the recipient, and what is its tax status?

The Two-Leg Trap

Consider: Customer → Indian Subsidiary → Foreign Parent

Suppose the customer pays ₹10 crore to the Indian subsidiary, and the subsidiary subsequently pays ₹8 crore to its foreign parent.

These are two separate payment legs.

Leg 1 — Customer → Indian Subsidiary Analyse the payment under the applicable domestic TDS provision.

Leg 2 — Indian Subsidiary → Foreign Parent Separately examine:

• Nature of payment
• Chargeability
• DTAA
• Withholding
• Transfer pricing
• PE implications

The second payment does not automatically convert the first payment into a payment to a non-resident.

However, if the Indian entity is merely a conduit, nominee, collection agent, or intermediary — and the foreign parent is substantively entitled to the consideration — the analysis may change.

Reimbursement: The Label Is Not the Answer

Calling something a "reimbursement" does not automatically take it outside withholding.

Ask:

• Was the cost genuinely incurred on behalf of the payer?
• Is it recovered exactly at cost?
• Is there any markup?
• Is there an embedded service or profit element?

A genuine cost-to-cost reimbursement with no income element may have a different withholding treatment.

The file should support the position through:

Agreement + underlying invoices + cost calculation + allocation + proof of payment + no-markup analysis

POEM: The Foreign Company Exception

A foreign-incorporated company can potentially become resident in India if its Place of Effective Management (POEM) is in India.

This is a factual determination and should not be inferred merely from the existence of:

• an Indian subsidiary;
• Indian employees; or
• Indian operations.

But where substantive strategic and commercial management is effectively exercised from India, POEM requires careful consideration.

The Practical Decision Matrix

Recipient / Transaction	Key Question	Broad Outcome
Indian company	What is the nature of payment?	Apply relevant domestic TDS provision
Indian company	Genuine reimbursement?	Examine income/service element
Foreign company	Is income chargeable in India?	Withholding if chargeable, subject to DTAA
Foreign company	Business income	Examine business connection / PE
Foreign company	Royalty / FTS / interest	Domestic law + DTAA analysis
Branch / project office	Who is the legal entity?	Foreign-entity analysis
Liaison office	Genuine expense reimbursement?	Fact-specific
Foreign company with POEM concern	Where is effective management?	Specific residence analysis
Indian subsidiary → foreign parent	What is the second payment for?	Independently analyse
Conduit / agency arrangement	Who is substantively entitled?	Substance and legal entitlement must be reconciled

The Decision Tree

START
  │
  ▼
Who is legally entitled to the payment?
  │
  ├── Indian incorporated company
  │       │
  │       ▼
  │   Identify nature of payment
  │       │
  │       ▼
  │   Apply relevant domestic TDS provision
  │
  └── Foreign company / non-resident
          │
          ▼
      Identify nature of income
          │
          ▼
      Is it chargeable in India?
          │
          ├── NO
          │    │
          │    ▼
          │  No withholding on that basis
          │  + complete applicable documentation
          │
          └── YES
               │
               ▼
          Domestic law + DTAA
               │
               ▼
          Determine withholding
               │
               ▼
          Complete remittance compliance

Special caution: branch/project office, reimbursement, conduit arrangements, PE, POEM, and back-to-back structures require additional factual analysis.

Case Study: USD 1.2 Million Invoice

ABC India Pvt Ltd is an Indian subsidiary of a US company. The Indian customer contracts with ABC India. ABC India raises an invoice for USD 1.2 million.

The customer asks:

"Since the invoice is in USD and ABC India belongs to a US group, should we deduct non-resident TDS?"

Answer: Not merely for those reasons.

The legal recipient is ABC India Pvt Ltd — an Indian-incorporated company.

Therefore, the first payment is examined under the domestic TDS framework applicable to the nature of that payment.

If ABC India later pays USD 900,000 to its US parent, that is a separate cross-border payment requiring an independent analysis.

Lesson: Follow the legal payment leg, not merely the ultimate movement of money.

Income-tax Act, 2025: The Compliance Transition

The Income-tax Act, 2025 reorganises the TDS framework, including the provisions now contained in Section 393.

For cross-border remittances, the familiar forms have also changed:

Earlier Form	Current Form
Form 15CA	Form 145
Form 15CB	Form 146

The important practical point is:

Do not confuse TDS liability with remittance reporting.

Whether tax is deductible and what remittance form must be furnished are related but distinct questions.

During the transition, finance teams should also maintain a clear record of the date of accrual, credit, payment, and remittance, because the applicable substantive and procedural rules can depend on the relevant period.

Five Questions Before Releasing the Payment

1. Who is the legal recipient? Match the contract, invoice, payment instructions, and accounting records.
2. What are we actually paying for? Service, royalty, interest, commission, rent, reimbursement, or something else?
3. Is the income chargeable in India? Consider domestic law, source rules, PE, and DTAA.
4. Which TDS provision applies? Only determine the provision after the first three questions.
5. What evidence supports the conclusion? Document the analysis before the payment, not after a tax notice.

Five Mistakes That Create TDS Risk

Mistake	Why It Fails
"USD means non-resident TDS"	Currency does not determine residence
"Foreign parent means foreign recipient"	Parent and subsidiary can be separate taxpayers
"PAN/GSTIN means Indian company"	Branches and project offices may also have Indian registrations
"Reimbursement means no TDS"	Substance and income element must be tested
"Later payment to parent changes the first payment"	Each payment leg requires separate analysis

Final Takeaway

When a finance team sees a USD invoice from a foreign-linked business, the first question should not be:

"Should we deduct non-resident TDS?"

It should be:

"Who is legally entitled to the payment, what are we paying for, and is that income chargeable to tax in India?"

The complete framework is:

Recipient → Nature → Chargeability → Provision → Documentation

USD does not make an Indian company foreign. A foreign parent does not make its Indian subsidiary non-resident. And a foreign remittance does not automatically mean TDS.

The answer follows from the legal recipient, the substance of the transaction, and chargeability under the applicable law.

Professional Caution

Cross-border withholding requires particular care where transactions involve foreign parents, branches, project offices, reimbursements, treaty claims, PE, POEM, agency/conduit structures, or back-to-back payments.

For material transactions, maintain a contemporaneous taxability analysis based on the exact facts, contractual structure, and law applicable to the relevant period.

Form 41, Non-PAN Registration & Cross-Border Remittances Under the Income-tax Act, 2025

 By CA Surekha Ahuja

A practical guide to FTS payments to foreign companies from FY 2026-27

PAN should not become the bottleneck to a legitimate treaty claim. But before money crosses the border, the tax, treaty and remittance trail must tell the same story.

More than a change in form numbers

From 1 April 2026, the Income-tax Act, 2025 replaces the earlier framework. For cross-border payments:

Earlier	New	Purpose
Form 10F	Form 41	Treaty-related information
Form 15CA	Form 145	Remittance reporting
Form 15CB	Form 146	CA certification, where applicable

The larger change is the move towards a connected transaction trail:

Identity → Residence → Treaty → Taxability → Withholding → Certification → Remittance

FEMA/banking and transfer pricing operate alongside this chain.

Foreign company without PAN: can Form 41 still be filed?

Yes, where the non-resident is eligible for the prescribed non-PAN route.

The Income Tax Department provides a separate NR-ID registration/login for a non-resident who does not hold PAN and is not required to have PAN. The prescribed information includes foreign TIN and the certificate referred to in section 159(8).

Therefore: PAN pending does not automatically mean that Form 41 must wait.

But Form 41 is an information filing supporting the treaty claim—not a grant of treaty benefit. The actual entitlement depends on the applicable DTAA and facts.

Keep ready

TIN + TRC + entity details + agreement/invoice + treaty analysis + Form 41 acknowledgement

The core particulars should remain consistent across Form 41, Form 146, Form 145 and the remittance documents.

FTS: determine taxability before choosing the form

For Fees for Technical Services, the correct sequence is:

Nature of service → Domestic-law taxability → DTAA article → Treaty conditions → Withholding rate

The core domestic definition of FTS has substantially been carried forward into section 9(7)(b) of the 2025 Act.

However:

Domestic-law FTS does not automatically mean taxable FTS under the DTAA.

The treaty must be separately examined, including make-available or PE conditions where relevant.

Form 145 and 146: the ₹5 lakh decision point

Taxable remittance	Route
Up to ₹5 lakh	Form 145 – Part A
Above ₹5 lakh + AO certificate	Part B
Above ₹5 lakh + CA certificate	Part C + Form 146
Not taxable, subject to conditions	Part D

The ₹5 lakh limit is a procedural threshold, not a taxability threshold, and the prescribed framework considers the payment/aggregate during the tax year.

Form 146 is the CA's certificate covering, among other matters, domestic-law taxability, DTAA taxability and TDS. The prescribed process contemplates it for each qualifying payment.

Case study: ₹2 crore FTS to a foreign parent without PAN

Facts 

Fco, resident in a treaty country, provides technical services to its Indian subsidiary Ico.

• Fco has a valid TRC and foreign TIN.
• Indian PAN is still pending.
• Annual fee: ₹2 crore.
• Ico intends to claim DTAA benefit.

Correct sequence

1. Characterise the service

→ Is it FTS?

2. Determine taxability

→ Domestic law + DTAA

3. Establish treaty documentation

→ TRC + eligible NR-ID/Form 41

4. Certification

→ Form 146, where Part C applies

5. Remittance reporting

→ Form 145 – Part C

6. Withholding

→ Apply the correctly determined domestic/DTAA rate

7. Remittance

→ Complete applicable FEMA/AD-bank requirements

8. Group transaction

→ Separately examine transfer pricing

Key point

Fco need not necessarily wait for PAN merely to complete the prescribed Form 41 process, if it qualifies for the NR-ID route.

But: Form 41 does not, by itself, establish the DTAA rate.

Eight defaults finance teams should avoid

⚠️ Waiting for PAN unnecessarily when the NR-ID route is available.

⚠️ Treating Form 41 as treaty approval.

⚠️ Testing ₹5 lakh invoice-by-invoice instead of considering the prescribed aggregate.

⚠️ Treating Form 146 as an annual certificate covering all future payments.

⚠️ Using the wrong Form 145 route—AO certificate means Part B; CA certificate means Part C + Form 146.

⚠️ Assuming Form 145 completes FEMA compliance.

⚠️ Assuming TDS compliance proves transfer-pricing compliance.

⚠️ Assuming NR-ID and later PAN will automatically merge—profile linkage is an administrative issue and no statutory SLA should be promised.

The compliance chain that should exist before payment

Workstream	Core evidence
Income-tax	Taxability + withholding analysis
DTAA	TRC + Form 41 + treaty analysis
Remittance	Form 145 + Form 146, where applicable
FEMA / Bank	AD-bank documents + purpose classification
Transfer pricing	Arm's-length analysis, where applicable

The ideal audit trail

Contract → Invoice → Tax analysis → TRC/Form 41 → Form 146 → Form 145 → TDS → Bank remittance → TP file

If these documents do not describe the same transaction, the compliance file is vulnerable.

Penalty: Form 145 is not merely a bank form

Failure to furnish Form 145 or furnishing inaccurate information can attract a penalty up to ₹1 lakh under section 462.

This is apart from possible consequences relating to TDS, incorrect treaty claims, transfer pricing or other applicable requirements.

The larger message

The Income-tax Act, 2025 is not simply replacing old forms.

It is building a more structured cross-border trail:

Who → Where resident → What income → Why taxable/not taxable → Why treaty benefit → What was certified → What was reported → What was withheld → What was remitted

The policy direction is therefore clear: Less friction for genuine non-residents, but greater consistency and traceability for tax administration.

Final takeaway

The question should not be: “Which form do we file?”

It should be: “Can we defend the entire transaction from contract to cross-border remittance?”

If yes, the forms become the output of sound tax analysis—not a substitute for it.

The safest foreign remittance is one where every document tells the same story.

Position as of September 2026. This article is for general professional information. The applicable Act, Rules, DTAA, CBDT instructions, portal procedures and AD-bank/FEMA requirements should be verified for the specific transaction before remittance.

Finalisation of Financial Statements: Getting the Numbers—and the Story—Right

 By CA Surekha Ahuja

A practical year-end framework for CFOs, finance teams, and finance professionals

Financial statements are not final merely because the trial balance agrees. They are final when the numbers, underlying evidence, estimates, and disclosures together present a consistent and supportable picture of the business.

Year-end finalisation is usually treated as a mechanical closing exercise:

Trial Balance → Adjustments → Schedules → Financial Statements → Approval

That sequence is necessary. It is not sufficient.

A trial balance can agree perfectly while revenue is recognised in the wrong period, a material expense goes unrecorded, an old receivable is no longer collectible, an asset is carried above its supportable value, profit rises while cash generation weakens, or the notes tell a different story than the underlying records.

The real purpose of finalisation isn't to close the books — it's to establish whether the financial statements are complete, supportable, analytically consistent, and appropriately disclosed. A stronger sequence looks like this:

Complete → Reconcile → Analyse → Evidence → Judge → Adjust → Disclose → Approve

Order matters here. Analysis built on incomplete records misleads. Adjustments made without adequate evidence create new errors. And correct accounting without complete disclosure still adds up to incomplete reporting.

The five questions that should drive the final review

Before signing off, the finance team should be able to answer five questions clearly:

Question	What it tests
Is the reported income real and attributable to this year?	Revenue recognition and cut-off
Have all material costs and obligations been recognised?	Completeness of expenses and liabilities
Are the reported assets genuinely recoverable and supportable?	Balance-sheet quality
Does reported profit convert into cash over a reasonable period?	Earnings quality and liquidity
Do the numbers, notes, and disclosures tell one consistent story?	Reporting integrity

These five questions do more work than reviewing every ledger balance in isolation — they shift the process from checking numbers to understanding the business behind the numbers.

1. Start with completeness and reconciliation

The first discipline is simple: don't run sophisticated analysis on incomplete or unreliable data. Before the analytical review begins, confirm the major accounting records are substantially up to date.

Area	Key review
Bank and cash	Reconciliation and verification of significant reconciling items
Receivables	Confirmation, reconciliation, ageing, subsequent collections
Payables	Reconciliation and review for unrecorded liabilities
Inter-company balances	Confirmation and elimination of unexplained differences
Statutory balances	Reconciliation with underlying returns and records
Inventory	Record completeness, physical verification, ageing
Fixed assets	Agreement between asset register and general ledger
Borrowings	Reconciliation with lender statements and agreements
Suspense/miscellaneous balances	Clear explanation and resolution of material items

Reconciliation establishes consistency. It does not, by itself, establish correctness — and that distinction matters for everything that follows.

2. Review movements, not just closing balances

A closing balance tells only part of the story. Start instead from the movement:

Opening Balance + Additions − Reductions ± Reclassification = Closing Balance

For every material movement, ask: What changed? Why? Does the explanation make commercial sense? What evidence supports it? Does it affect recognition, measurement, or disclosure?

Track this for revenue, receivables, inventory, major expenses, provisions, and borrowings. The most useful question during finalisation is rarely "What is the balance?" — it's "Why did it move?"

3. Test the economic reality of revenue

Revenue is usually the starting point of analysis because errors here ripple through profit, receivables, taxes, and disclosures. The real question isn't whether the sales ledger agrees with the general ledger — it's did the income genuinely belong to this financial year?

Watch for: unusual monthly spikes (what commercial event explains them?), large year-end invoices (was delivery or service actually completed?), new significant customers, post-year-end credit notes, receivables growing faster than revenue, and high customer concentration.

The trail should hold together: Revenue → Delivery/Service → Receivable → Collection. Not every sale needs to result in immediate collection — but every sale should have an understandable economic trail. Where the trail breaks, dig deeper.

4. Test whether expenses and liabilities are complete

The most common year-end risk usually isn't a misrecorded expense — it's one that was never recorded at all. That means the review has to look past the reporting date: invoices received late, services consumed but not yet invoiced, employee obligations, interest and finance costs, professional and legal costs, recurring operating costs, contractual commitments, and material claims or disputes.

The governing question: if the obligation or consumption relates to this year, has it been recognised?

Provisions need their own discipline. For each material provision, document the nature of the obligation, the basis of the estimate, the key assumptions, the evidence available at year-end, and any subsequent developments relevant to those assumptions. A provision shouldn't survive purely out of habit — and it shouldn't be reversed purely because reversal flatters this year's profit. Consistency is not a substitute for reassessment.

5. Examine the quality of assets, not just their existence

For the balance sheet, the question isn't "does this balance exist in the ledger?" — it's what evidence supports its carrying value?

• Receivables: ageing, subsequent collections, disputes, customer financial position, concentration of exposure.
• Inventory: physical existence, slow-moving or obsolete stock, unusual build-up, the relationship between inventory and sales.
• Advances and other recoverables: flag balances that are old, unchanged for long periods, poorly documented, or hard to tie to a clear business purpose. Age doesn't make an unexplained balance safer — it may just mean the issue has survived several year-end closes undetected.
• Fixed assets and intangibles: major additions, disposals, capitalisation decisions, useful lives, depreciation, and any indicators affecting recoverability.

The sharpest test: would this carrying value still be supportable if reviewed for the first time today?

6. Read profit together with cash flow

Profit and cash flow answer different questions — a company can report strong earnings while liquidity quietly tightens. So trace the bridge from profit through receivables, inventory, payables and other liabilities, and non-cash items and provisions, down to operating cash flow.

Pattern	Possible area for review
Profit ↑, operating cash flow ↓	Earnings quality or working-capital pressure
Receivables ↑ sharply	Collection or revenue-recognition risk
Inventory ↑ while sales stay weak	Slow-moving or obsolete stock
Payables ↑ significantly	Liquidity pressure or delayed payments
Borrowings ↑ despite profits	Weak internal cash generation

None of these patterns proves an error on its own. But every significant divergence deserves a credible explanation. Profitability and liquidity are related — they are not the same thing.

7. Review significant estimates as standalone items

Some of the most consequential numbers in the accounts — expected credit losses, impairment, provisions, useful lives, fair values, employee obligations, deferred tax assets — come from judgment, not invoices. A material estimate shouldn't live only inside a spreadsheet; it needs a documented trail: what's being estimated, what assumptions are used, what evidence supports them, what changed from last year, and how sensitive the outcome is to those assumptions.

A documented estimate isn't automatically a reasonable one — the assumptions still have to hold up commercially and evidentially.

8. Give related parties and unusual transactions extra scrutiny

Related-party transactions, inter-company balances, common counterparties, unusual financing arrangements, and large or non-routine year-end transactions all warrant review beyond ordinary ledger checks: who's the counterparty, what's the commercial purpose, are the terms documented, are balances reconciled, and are approvals and disclosures complete?

A useful gut-check: would this transaction look materially different if it had been entered into with an unrelated party? The answer doesn't determine the accounting treatment by itself, but it flags where closer scrutiny belongs.

9. Finalise disclosures with the same discipline as the numbers

One of the most avoidable weaknesses in year-end closing is treating disclosures as a drafting task done after the accounting is finished. Disclosures are part of financial reporting, not an appendix to it.

Follow the chain from ledger → supporting schedule → accounting analysis → note → financial statement, and for material balances check consistency of amounts, comparatives, cross-references, policy application, related disclosures, and explanations for significant movements. If a note explains a transaction differently than the underlying records do, either the accounting or the explanation needs a second look.

10. Review events after the reporting date before closing the file

Don't finalise without a structured look at what's happened since year-end: customer defaults, major credit notes, litigation developments, significant losses, refinancing, major contracts, acquisitions or disposals, and anything affecting liquidity or going concern.

The key question: does the subsequent event provide evidence about a condition that already existed at the reporting date, or does it relate to a new condition arising later? The answer can change recognition, measurement, or disclosure.

11. Run a red-flag matrix before sign-off

Red flag	Question to investigate
Revenue rises sharply near year-end	Was the underlying obligation completed?
Receivables grow faster than revenue	Are balances genuinely recoverable?
Significant credit notes arise after year-end	Do they relate to year-end transactions?
Material expenses booked after year-end	Did they relate to the closed year?
Provisions are frequently reversed	Is the estimation process reliable?
"Exceptional" costs recur	Are they genuinely exceptional?
Inventory rises while sales stagnate	Impairment or obsolescence risk?
Old advances remain unchanged	Is recovery genuinely expected?
Profit rises but operating cash flow weakens	What explains the divergence?
Large period-end journals are posted	What's the commercial and accounting basis?
Round-sum adjustments are material	Is there adequate evidence?
Related-party movements shift significantly	Are approvals and disclosures complete?
Major estimates change	What evidence supports the revised assumptions?
Notes differ from schedules	Which is correct, and why?

A red flag isn't proof of an error — it's a trigger for evidence-based investigation.

12. Where AI can strengthen finalisation — and where it can't

AI adds real value here, but only with its role clearly bounded. It's well suited to surfacing unusual trends, large or unusual journal entries, unexplained movements, ageing patterns, inconsistencies between schedules and notes, and unusual relationships between profit and cash flow.

The framework that keeps this useful: AI → Exception → Evidence → Professional judgment → Action, with four stages kept distinct — observation (what does the data show?), inference (what could explain it?), evidence (what supports or contradicts that explanation?), and conclusion (what action does this require?).

The biggest AI risk: it can generate a detailed, plausible-sounding explanation even when the information it had access to was incomplete. Every significant AI-assisted finding should be tested against three questions — what was actually reviewed, what relevant information was missing, and what independent evidence backs the conclusion. A plausible explanation is not evidence. And sensitive financial data still needs to be handled within proper confidentiality, access-control, and governance arrangements.

The final approval test

Before the statements move for approval, the team should be able to answer each of these clearly and with evidence:

Final question	What it establishes
Does the reported profit make commercial sense?	Economic reality
Has all material income and expenditure been appropriately recognised?	Completeness and cut-off
Are major assets genuinely recoverable?	Balance-sheet quality
Does profit convert into cash over time?	Earnings quality
Are significant estimates supported by evidence?	Quality of judgment
Are related-party and unusual transactions properly addressed?	Transparency
Have significant subsequent events been reviewed?	Reporting completeness
Do the notes agree with the underlying records?	Disclosure integrity
Can every material unusual movement be explained?	Overall reliability

If a material question can't be answered clearly and supported with evidence, the accounts aren't ready yet — no matter how well the trial balance ties out.

The bottom line

Finalising financial statements isn't just about proving that Assets = Liabilities + Equity. A set of accounts can balance perfectly and still need significant work. The real test is whether the statements are reliable, complete, supportable, consistent, and appropriately disclosed.

AI can help by processing more information and surfacing exceptions faster than a manual review alone. But the responsibility stays human: numbers identify the issue, analysis asks the question, evidence supports the answer, and professional judgment reaches the conclusion. That's the actual discipline of finalisation.

CSR COMPLIANCE NOTICE UNDER SECTION 206? RECONCILE FIRST, RESPOND SECOND

By CA Surekha Ahuja

A practical framework for CSR computation, unspent amounts, project delays and an evidence-backed ROC response

“The strongest regulatory response is not the longest one. It is the one in which every number, date and conclusion can be traced to the law and the underlying evidence.”

A notice under Section 206 of the Companies Act, 2013 should never be treated as a routine request for information.

The immediate task may be to answer questions raised by the Registrar of Companies (ROC). The more important task is to reconstruct the company’s complete CSR position—from the statutory obligation and Section 198 computation to actual expenditure, unspent amounts, project status, transfers, disclosures and supporting records.

That leads to the most important practical principle:

DON’T START WITH THE NOTICE. START WITH THE RECONCILIATION.

Section 206 enables the ROC to seek further information, explanations and documents where scrutiny of filed documents or information warrants it. If the response is inadequate, further books, papers and explanations may be called for.

Therefore, a CSR response should not be prepared as a collection of explanations. It should be prepared as a reconciled evidence file.

THE CSR COMPLIANCE CHAIN

The complete position should ideally be reconstructed in this sequence:

CSR Applicability
↓
Section 198 Net Profit
↓
CSR Obligation @ 2%
↓
Eligible CSR Expenditure
↓
Unspent Amount, if any
↓
Ongoing Project / Other Unspent
↓
Statutory Transfer / Utilisation
↓
Board’s Report & CSR Disclosures
↓
CSR-2
↓
Books + Bank + Project Evidence
↓
ROC Response - A mismatch at any stage can create questions at the next.

ESTABLISH THE CSR OBLIGATION BEFORE EXAMINING THE SPEND

The first question is not: “How much CSR did the company spend?”

It is: “How much CSR was the company legally required to spend?”

Section 135 applies where the prescribed thresholds relating to net worth, turnover or net profit are met in the immediately preceding financial year.

Once applicable, the company generally has to spend at least 2% of the average net profits of the three immediately preceding financial years, calculated in accordance with Section 198. Where the company has not completed three financial years since incorporation, the prescribed computation is based on the completed preceding financial years.

A simple working paper

Financial Year	Section 198 Net Profit	CSR Base	2% CSR Obligation
Year 1	₹X
Year 2	₹Y
Year 3	₹Z
Average		₹A	₹A × 2%

This computation should be capable of being traced to the audited financial statements and the underlying Section 198 adjustments.

A CSR reconciliation built on the wrong base will produce the wrong conclusion, however perfect the subsequent documentation may appear.

BUILD ONE MASTER CSR RECONCILIATION

Before drafting the ROC response, prepare one master statement covering the entire relevant financial year.

Particulars	Amount / Date / Status
CSR obligation	₹_____
Eligible CSR expenditure	₹_____
Unspent amount	₹_____
Nature of unspent amount	Ongoing project / Other
Statutory action required	_____
Amount transferred	₹_____
Date of transfer	_____
Applicable due date	_____
Amount actually utilised	₹_____
Amount reported in Board’s Report	₹_____
Amount reported in CSR-2	₹_____
Present status	_____
Supporting evidence available	Yes / No

This table often exposes issues before the ROC does. For example:

Books say ₹60 lakh spent.
Board’s Report says ₹75 lakh.
CSR-2 says ₹60 lakh.

The problem is no longer simply CSR expenditure. It is now a reconciliation and disclosure issue.

UNSPENT CSR: CLASSIFY BEFORE EXPLAINING

“Unspent CSR” is a factual position. Its legal treatment depends on the circumstances.

Broadly, the company must distinguish between:

Situation	Statutory treatment
Unspent amount relating to an ongoing project	Transfer to the prescribed Unspent CSR Account within the specified statutory period and utilisation in accordance with Section 135
Other unspent amount	Transfer to a Schedule VII fund within the prescribed statutory period

For an ongoing project, the amount transferred to the Unspent CSR Account is required to be spent within the statutory period; failure to spend the amount within that period triggers the subsequent transfer requirement prescribed under Section 135. For other unspent amounts, the transfer to a Schedule VII fund is required within the prescribed six-month period from the end of the financial year.

The professional mistake

A response should not simply say:

“The project was delayed, therefore the amount remained unspent.”

That explains the fact, but not the legal treatment.

The response must establish:

What was the project?
Why did it qualify as ongoing, if that is the position?
How much was actually spent?
How much remained unspent?
What statutory action was required?
Was that action taken within time?
What happened thereafter?

CASE STUDY: THE PROJECT WAS GENUINE — BUT DELAYED

Consider a company with a genuine CSR project having an approved budget of ₹1 crore.

During the year:

• ₹40 lakh was actually spent;
• the balance ₹60 lakh remained unspent;
• implementation was delayed because of land, regulatory, contractor or other documented issues.

Three statements must be kept separate:

1. COMMITMENT IS NOT EXPENDITURE

Approval of a ₹1 crore project does not establish that ₹1 crore was spent.

The accounts, bank records, invoices, utilisation evidence and project records must support actual expenditure.

2. PROJECT DELAY IS NOT NECESSARILY PROJECT ABANDONMENT

If the project genuinely satisfies the statutory conditions for an ongoing project, the prescribed unspent-CSR mechanism must be followed.

A delay should therefore be analysed under the ongoing-project provisions, rather than automatically labelled a default.

3. SUBSEQUENT UTILISATION IS NOT THE SAME AS TIMELY COMPLIANCE

If an amount was required to be transferred within a statutory deadline and was transferred later, the later action may demonstrate remediation, but it does not retrospectively convert a delayed statutory action into a timely one.

This distinction is critical in a regulatory response.

MCA guidance also makes an important point: mere disbursal of funds to an implementing agency does not by itself establish CSR expenditure where the amount has not actually been utilised; the utilisation position and supporting certification must be examined.

IF THE STATUTORY TRANSFER WAS DELAYED, SEPARATE THE TWO STORIES

A mature ROC response should distinguish between:

Historical position	Present position
What was required by law?	What has now been done?
What was actually done?	What remains outstanding?
What was the applicable due date?	Has the position been regularised?
Was there a delay?	What corrective action was taken?
What evidence existed at the relevant time?	What evidence now supports remediation?

The temptation is to write: “The amount has now been transferred; therefore there is no default.”

That is an unsafe formulation where the statutory deadline had already expired.

The better approach is factual: Acknowledge the historical position → explain the circumstances → establish the present status → document corrective action → address the applicable statutory consequences.

Section 135(7) prescribes penalties for failure to comply with the transfer requirements, subject to the statutory limits.

Do not convert a remediation fact into a historical compliance claim.

MAKE THE ROC RESPONSE MIRROR THE RECONCILIATION

A Section 206 response should preferably follow the ROC's questions one by one.

ROC Query	What the response should establish
CSR obligation	Section 135 applicability and Section 198 computation
Amount spent	Actual eligible expenditure and accounting support
Unspent amount	Exact reconciliation
Project status	Ongoing / other, with factual basis
Delay	Specific reasons and documentary evidence
Transfer	Amount, account/fund, date and proof
Utilisation	Actual utilisation and supporting records
Disclosures	Agreement with Board’s Report and CSR-2
Present status	Current position and corrective action, if any

A useful drafting formula is:  QUERY → LAW → FACT → RECONCILIATION → EVIDENCE → CONCLUSION

This keeps the response factual and prevents lengthy explanations from obscuring the actual issue.

EVIDENCE SHOULD FOLLOW THE ASSERTION

Every material statement in the response should have an evidence trail.

Assertion	Evidence that should ordinarily support it
CSR obligation was ₹X	Section 198 computation + financial statements
₹X was spent	Ledger + bank statement + invoices
Project was ongoing	Project approval + project documentation + implementation records
Delay was genuine	Correspondence, approvals, regulatory/contractual records
Amount was transferred	Bank statement + transfer proof
Amount was utilised	Utilisation records/certification + project expenditure
Disclosure was correct	Board’s Report + CSR-2 + reconciliation
Corrective action was taken	Transfer/payment proof + revised internal reconciliation

The principle is simple: Every important conclusion should be traceable backwards—from the ROC reply to the document, from the document to the accounting entry, and from the accounting entry to the underlying transaction.

FIVE RED FLAGS THAT CAN WEAKEN A CSR RESPONSE

1. CSR LIABILITY DOES NOT RECONCILE

The obligation differs between the working, Board’s Report and CSR-2.

2. “SPENT” DOES NOT AGREE WITH THE BOOKS

The response claims expenditure that cannot be traced to actual utilisation.

3. WRONG TREATMENT OF UNSPENT AMOUNT

The company explains the project delay but does not establish the statutory treatment of the unspent amount.

4. FILINGS TELL A DIFFERENT STORY

Annual Report, CSR disclosures, CSR-2, financial statements and the ROC response contain inconsistent figures or descriptions.

5. OVER-CLAIMING COMPLIANCE

A response attempts to describe a historical delay as complete compliance merely because the position was subsequently corrected.

A precise admission supported by evidence is usually stronger than an aggressive denial unsupported by reconciliation.

THE BOARD-LEVEL TEST BEFORE SIGNING THE RESPONSE

Before the response goes to the ROC, management and the Board should be able to answer YES to these questions:

• Do we know exactly how the CSR obligation was computed?
• Does the computation agree with Section 198 and the financial statements?
• Does actual CSR expenditure agree with the books and bank records?
• Have all unspent amounts been correctly classified?
• Have the applicable statutory transfers been identified and evidenced?
• Do the Board’s Report disclosures agree with CSR-2?
• Is every project-delay explanation supported by contemporaneous evidence?
• Have we separated historical compliance from subsequent remediation?
• Can every material figure and date in the response be independently verified?

If the answer to any is NO, the response should not be finalised merely because the deadline is approaching.

THREE POSSIBLE COMPLIANCE POSITIONS

Not every Section 206 response is a defence of a perfect compliance record.

The company may fall into one of three broad positions:

Position	Best response strategy
Compliant + well documented	Reconcile and demonstrate compliance clearly
Substantively correct + poorly documented	Reconstruct, substantiate and strengthen the evidence trail
Historical compliance gap	State the position accurately, explain the circumstances, remediate where possible and address the statutory consequences

This is an important professional distinction. The objective is not to make every historical position look perfect. The objective is to make the present response accurate, complete and defensible.

THE BIGGER PROFESSIONAL LESSON

CSR compliance is often viewed as a 2% calculation.

In practice, a regulatory review can turn it into a much broader exercise involving:

Profit computation → obligation → expenditure → project classification → unspent amount → statutory transfer → utilisation → accounting → Board disclosures → CSR-2 → evidence.

That is why a CSR compliance file should not be maintained as a collection of disconnected documents.

It should be maintained as a single audit trail. And the discipline should be year-wise.

CSR planning may extend across multiple years, but the statutory treatment of obligation, expenditure and unspent amounts must still be examined for each relevant financial year.

THE PROFESSIONAL FORMULA - INTERNAL COMPLIANCE

RECONSTRUCT
↓
RECONCILE
↓
VERIFY
↓
REMEDIATE, IF REQUIRED
↓
DOCUMENT
↓
RESPOND

ROC RESPONSE

QUERY
↓
LAW
↓
FACT
↓
EVIDENCE
↓
CONCLUSION

This is far more effective than beginning with a narrative and trying to find supporting documents afterwards.

FINAL TAKEAWAY

The most important question after receiving a CSR notice under Section 206 is not: “How do we reply to the ROC?”

It is:  “What exactly was the company required to do, what did it actually do, what happened subsequently, and can we substantiate every material number, date and conclusion?”

That is the real compliance exercise.

DON’T START WITH THE NOTICE. START WITH THE RECONCILIATION.

Because in regulatory compliance, credibility is built not by the strength of the explanation, but by the consistency of the evidence behind it.

LEGAL REFERENCE

Companies Act, 2013: Sections 135, 198 and 206, read with the applicable CSR Rules and MCA guidance on CSR implementation, unspent CSR and utilisation.

This article expresses general professional views for educational purposes. A response to a Section 206 notice should be finalised only after reviewing the specific notice, relevant financial years, statutory timelines, CSR records, books of account, filings and supporting evidence.