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Opening for business in India: retailers' options.

I. INTRODUCTION

India's retail market is currently valued at over $250 billion, and reports indicate it is growing at a rate of ten percent each year. (1) This tremendous growth is encouraging even Mickey Mouse to enter India's retail market. (2) Because of recent policy changes encouraging foreign investment, Disney and many other retailers have leapt at the opportunity to enter the market. (3) However, foreign retailers are still limited in their ability to operate in India because Indian law strictly regulates foreign participation in its retail market. (4) As foreign retailers formulate their plans to expand into India, they must consider the allowable modes of operation and identify which of these options best suit their business needs. (5)

This Note evaluates the various ways in which foreign retailers may operate retail stores and manufacturing facilities in India. (6) Part II of this Note introduces some of the reasons foreign retailers are so interested in India. (7) Part III discusses the legal obstacles foreign retailers face and recent developments in Indian law intended to open the country's doors to foreign businesses. (8) Part IV discusses the allowable modes of operation for foreign retailers. (9) Part V suggests the optimal choices for foreign retailers to operate retail stores and manufacturing facilities in India. (10)

II. INDIA'S ECONOMY--WHY FOREIGN RETAILERS ARE INTERESTED

India has one of the largest economies in the world. (11) Its consumer market stands at an estimated three hundred million people and is growing at approximately eight percent per year. (12) Currently, organized retail sales comprise only three percent of India's $250 billion in total retail sales. (13) However, organized retail is rapidly growing, and some analysts predict it could account for as much as thirty percent of India's total retail market by 2010. (14) This has led some to speculate that "[b]eing in India today is like being in the [U. S.] in the wild days of the dotcom era." (15)

Foreign retailers must initially consider two issues before expanding into India: (1) whether India presents a viable market for their products and (2) whether the opportunity in India exceeds that of other foreign markets. (16) First, cultural differences present one obstacle to the marketability of foreign products because Indian consumers wish to maintain the uniqueness of their culture and foreign brands may not suit their tastes. (17) However, foreign retailers who modify their products and services to cater to India's unique culture have enjoyed success. (18) Second, foreign retailers must consider whether another country would be more suitable for their expansion plans. (19) For instance, Chinese workers are more productive than their Indian counterparts and China has a much more developed infrastructure. (20) However, certain other factors such as lower minimum wages and lower levels of corruption, as well as India's potential for growth, lead some to anticipate that India will overtake China as the business leader in Asia. (21) Although observers can only speculate on whether India will enjoy the success some predict, many well-established, multinational companies already operate in India and continue to further expand their presence. (22)

III. BACKGROUND OF INDIAN LAW AFFECTING FOREIGN RETAILERS

India gained independence from Great Britain in 1947 and immediately placed heavy restrictions on foreign trade in an attempt to improve its economy. (23) As a result, India's share of world trade shrank. (24) In July of 1991, the Indian government introduced a new policy to address the international community's lack of confidence in its economic viability and removed some of the obstacles blocking foreign investment. (25) However, the Indian government did not allow foreign retailers to operate stores in India until January 2006, and even then it left a number of restrictions in place. (26) This policy change allows foreign retailers to operate single-brand retail stores, but they may only hold a fifty-one percent or less ownership interest in such ventures. (27) Indian law still prohibits foreign ownership of multi-brand retail ventures. (28)

When operating stores and manufacturing facilities, foreign retailers must also consider the impact of India's general laws; for instance, India's labor laws affect companies' abilities to terminate employees. (29) India has also changed its tax law to further encourage foreign investment. (30) In general, foreign companies are subject to Indian tax on business profits only if they have a permanent Indian establishment. (31) Foreign retailers' tax liability therefore differs based upon the chosen mode of operation. (32) Additionally, the Indian government offers tax incentives for foreign companies to establish themselves in certain geographic locations, such as through the creation of special economic zones (SEZs), which are designated duty-free zones for manufacturing, services, production, assembling, trading and other permitted activities. (33)

IV. FOREIGN RETAILERS' OPTIONS FOR OPERATING IN INDIA

A foreign retailer looking to expand its operations in India has several options. (34) If a foreign company does not want to incorporate an entity in India, it may set up a liaison office or branch office, or it may enter into franchise agreements with Indian partners. (35) If a foreign company instead decides to incorporate an entity under Indian law, the company may form a joint venture or a wholly-owned subsidiary. (36) However, a foreign retailer need not limit itself to one type of operating entity, but rather may simultaneously operate a number of different entities. (37) As retailers have a number of choices, deciding which type of entity to utilize requires consideration of each available option. (38)

A. Liaison Offices

Liaison offices are normally established by foreign companies to promote their presence in India by spreading awareness of their products and exploring the option of setting up a more permanent presence. (39) Essentially, a liaison office acts as a communication channel between foreign companies and Indian parties. (40) However, liaison offices are not allowed to conduct any trading or commercial activities in India other than collecting and transmitting information to the foreign company. (41) Wal-Mart and Carrefour of France, the world's largest and second largest retailers respectively, both operate liaison offices in India. (42)

To set up a liaison office, foreign companies must receive approval from the Reserve Bank of India (RBI). (43) The foreign company must cover all liaison office expenses because liaison offices cannot engage in any commercial activities. (44) Accordingly, liaison offices do not earn any taxable income. (45) However, foreign companies may be liable for income taxes even if they operate their liaison offices in compliance with the activity restrictions set forth by the RBI. (46) In determining the taxability of a foreign company's operations, the Indian government considers whether the company has a "business connection" in India, whether there is a Double Taxation Avoidance Agreement (DTAA) between India and the company's home country, and if the DTAA is applicable, whether the company has a permanent establishment in India, and how much income is attributable to that permanent establishment. (47)

B. Branch Offices

Foreign companies engaged in manufacturing and trading activities abroad may set up branch offices in India for various limited purposes, including exporting or importing goods, rendering professional or consultancy services, acting as buying or selling agents for the parent, or rendering technical support to the products supplied by the parent or group companies. (48) A branch office may not carry out manufacturing activities on its own unless it is located in a special economic zone (SEZ), nor may it undertake retail trading activities. (49) However, it may subcontract manufacturing activities to Indian manufacturers. (50) Furthermore, unlike a liaison office, which cannot engage in any commercial activities, a branch office may acquire property that is necessary or incidental to carrying on its activities. (51)

Foreign companies must receive approval from the RBI before establishing a branch office in India. (52) Companies may set up branch offices on a "stand alone basis," meaning they are established in a SEZ and may not engage in any business activities outside of the SEZs in India. (53) SEZs allow such benefits as duty-free import of capital goods and raw materials, duty-free procurement of capital goods from the domestic market, and exemption from payment of central sales tax on interstate purchases from the domestic market. (54) For tax purposes, branch offices are treated as an extension of the foreign company, and thus must pay taxes on income earned from operating in India. (55)

C. Franchising

A foreign company may enter franchising agreements with persons or entities in India. (56) No laws currently prevent foreign companies from entering such agreements with Indian franchisees. (57) However, the Indian Government imposes certain restrictions on the franchisor-franchisee relationship, such as the requirement of obtaining government approval. (58) Besides legal hurdles, international franchisors face the additional difficulty of maintaining control over their franchisees. (59) Notwithstanding these challenges, several well-known retailers have established franchises in India, such as Louis Vuitton, Nike, Nine West, and Adidas. (60) Additionally, Carrefour signed an exclusive agreement with an Indian company, and Wal-Mart recently entered a franchise agreement with an Indian company as part of a larger expansion plan. (61)

D. Joint Ventures

A foreign retailer may decide to enter a joint venture with an Indian partner. (62) Joint ventures allow foreign companies access to the Indian partner's established distribution and marketing processes, use of its financial resources, and access to its contacts. (63) In addition, joint ventures currently provide the only means by which foreign companies may own an interest in Indian retail ventures. (64) Because joint ventures are incorporated under Indian law, they are subject to Indian laws and regulations, including tax laws. (65) While a few retailers have entered the Indian retail market through joint ventures, their use by international retailers has yet to become widespread. (66)

E. Wholly-Owned Subsidiaries

Foreign companies may set up wholly-owned subsidiaries to commence operations in India, but only if the undertaken activities are within a category in which the Indian government allows one-hundred percent foreign direct investment (FDI). (67) In order to incorporate a wholly-owned subsidiary, the foreign company must file an application with the Registrar of Companies. (68) Once a subsidiary is registered and incorporated, it becomes subject to Indian laws and regulations, including tax laws. (69) Retailers such as Nike, Puma, ECCO, and Matsushita Electric Industrial Company (the owner of the Panasonic brand) have established wholly-owned subsidiaries in India. (70) These international retailers have used their wholly-owned subsidiaries for a variety of purposes. (71)

V. HOW RETAILERS SHOULD PROCEED

A. Operating Retail Stores in India

If foreign companies wish to operate retail stores in India, they should either enter the market through franchises or joint ventures. (72) Neither liaison offices nor branch offices may operate retail stores because Indian law prohibits both from engaging in commercial activities. (73) Indian law also prohibits foreign companies from owning a one-hundred percent interest in retail ventures, so foreign companies may not operate stores through wholly-owned subsidiaries. (74) However, India does allow foreign investment of up to fifty-one percent in single-brand retail ventures, giving foreign single-brand retailers more entry options than multi-brand retailers. (75)

1. How Single-Brand Retailers Should Operate

Given India's recent policy changes allowing foreign companies to own up to fifty-one percent of single-brand retail ventures, single-branded foreign retailers should consider entering joint ventures with Indian partners. (76) Joint venture agreements address issues such as changes of partners and liquidation, so single-brand retailers can ensure the agreement provides them an opportunity to buy out the Indian partner's interest should the Indian government later decide to allow foreign ownership in excess of fifty-one percent in single-brand retail ventures. (77) Joint ventures also allow foreign retailers the ability to realize more profits and exercise more control than through franchising. (78)

a. Joint Ventures

Foreign companies may only own a fifty-one percent interest in Indian single-brand retail ventures, but Indian law does not limit the number of ventures in which foreign companies may invest. (79) India's policy change is new, and so it is unclear whether the use of joint ventures by foreign retailers will become widespread, but investors view this policy change as an indication of India's willingness to open its door to the world, and they anticipate a resulting increase in demand for retail space from international retailers. (80) Joint ventures allow foreign retailers to enjoy a greater percentage of profits than franchises, and they also allow foreign retailers more control over operations. (81) However, the Indian government must approve all proposed retail joint ventures involving foreign companies, and the government indicated it will only approve joint ventures that do not displace neighborhood stores. (82) For at least some single-brand retailers, the advantages appear to outweigh the disadvantages, as several retailers that previously operated in India through franchising have moved to establish their own stores following this policy change. (83)

b. Franchising

Indian law does not specifically regulate franchising agreements in India, but laws covering such areas as intellectual property, taxation, labor regulations, competition, property and exchange control do affect the franchisor-franchisee relationship. (84) In addition, under Indian law, foreign franchisors may only charge Indian franchisees royalties of up to one percent for domestic sales and two percent on exports for use of their trademarks and brand name, without technology transfer; if a foreign franchisor would like to charge a greater amount, it must obtain government approval. (85) Foreign retailers must consider these restrictions before entering agreements with Indian franchisees. (86)

Franchising allows foreign retailers to enter the retail market without investing much labor or capital and it also provides the potential for explosive growth. (87) However, with franchising comes the need to oversee franchisees' adherence to quality and standards requirements. (88) Nevertheless, franchising is currently the most widely used entry route by international retailers. (89) Companies such as Disney and McDonald's have entered franchising agreements with Indian franchisees. (90) In fact, franchising remains the only way multiple-brand retailers can directly participate in retail stores. (91) However, single-brand retailers are entering into joint ventures to take advantage of India's recent policy changes. (92)

One major advantage of franchising is that it permits a company to use the same business model for all of its outlets, which allows franchisors to rapidly expand their presence. (93) However, foreign franchisors may face difficulties if they plan to use the same boilerplate business plan in India as they use in other countries. (94) For example, when Kentucky Fried Chicken offered Indian consumers the same product-line it offered to consumers everywhere else in the world, three of its first four outlets quickly failed because Indian consumers were unreceptive to Kentucky Fried Chicken's traditional menu. (95) McDonald's, on the other hand, spent six years studying consumer preferences and enjoyed success as a result of the changes it made to its menus in catering to Indians' unique tastes. (96)

2. How Multi-Brand Retailers Should Operate

Multi-brand retailers must consider alternative methods of entering India's retail market because they are still restricted from owning any interest in retail ventures. (97) First, foreign multi-brand retailers may enter franchise agreements with Indian franchisees. (98) Second, they may enter the retail market by implementing a direct-to-consumer model. (99) This model allows a foreign retailer to incorporate a company (or enter a joint venture) that manufactures its own products and sells those products through direct marketing (that is, by marketing its products through the internet, television, catalogs and mobile phones, and fulfilling orders through the mail). (100)

Furthermore, using the direct-to-consumer model would allow multi-brand foreign retailers to undertake wholesale trading and distribute their goods to Indian retailers. (101) Given the current state of Indian law, foreign multi-brand retailers would be best advised to utilize a combination of its options to maximize their profits, such as by creating a wholly-owned Indian subsidiary to distribute its products to Indian franchisees. (102)

B. Operating Manufacturing Facilities in India

Before deciding to manufacture products in India, international retailers should consider the opportunities presented in other countries, such as China. (103) One of the major problems with manufacturing in India is the country's infrastructure. (104) China spends seven times as much money supporting its infrastructure as India. (105) India has committed to improving its infrastructure through a $150 billion program, but it is not entirely clear how this program will be funded. (106)

Although India's infrastructure is a concern, India's manufacturing labor costs are relatively low. (107) Many Indian workers are also well-educated in the areas of engineering and sciences, and are typically fluent in English. (108) However, Indian labor laws make it difficult for employers to adjust their labor forces. (109) Indian workers are also less productive than their Chinese counterparts. (110) Yet, because of China's social policy changes, international manufacturers consider India the next major industrial power. (111)

Once foreign retailers decide to proceed with manufacturing in India, they must then consider which mode of operation is most appropriate for their needs. (112) Franchising is not a practical option for foreign retailers because franchisees have an interest in maximizing the charges for their services, whereas foreign retailers have an interest in minimizing their manufacturing costs. (113) Joint ventures are also not practical because foreign retailers would need to share the profits with the Indian partner. (114)

If foreign retailers wish to undertake manufacturing activities themselves, they should open branch offices in SEZs because of the tax advantages those entities provide. (115) Foreign companies may own Indian manufacturing companies, but such companies do not enjoy the same tax advantages as branch offices in SEZs. (116) However, if foreign retailers wish to manufacture in India but do not wish to undertake manufacturing activities themselves, they would be well-advised to operate branch offices. (117) Foreign retailers would prefer to use liaison offices to oversee Indian manufacturing activities because such offices are not subject to income taxes, but retailers must be cautious not to violate the restrictions imposed by the RBI nor subject themselves to tax liability. (118)

1. Liaison Offices

Liaison offices may act only as a communication channel for the foreign company. (119) Accordingly, liaison offices may place export orders with Indian manufacturers on a foreign company's behalf. (120) As previously stated, one advantage of liaison offices is that they do not earn any income, and thus they are typically not subject to income taxes. (121) However, foreign retailers may not engage in manufacturing activities themselves through liaison offices. (122) Moreover, foreign retailers would likely need to hire a third party agent to oversee manufacturing operations and perform quality inspections. (123)

Wal-Mart has established a liaison office to conduct retail market research. (124) Carrefour also set up a liaison office, but it uses the office for sourcing. (125) It seems some retailers use liaison offices more extensively than the Indian government allows. (126) Retailers should take care not to violate the regulations set forth by the RBI, which limit the activities liaison offices may undertake. (127) Retailers must also remember that, even if a liaison office's activities are not prohibited by the RBI, they may still be subject to tax liability if their office engages in substantial activities. (128)

2. Branch Offices

India allows foreign companies engaged in manufacturing and trading activities to set up branch offices. (129) However, branch offices may not undertake manufacturing activities themselves, unless they are located in SEZs. (130) Branch offices located outside of SEZs may act as buying agents for the head office and may thus oversee manufacturing operations and perform quality inspections. (131) Yet, since a third party would be producing the goods, manufacturing costs may be higher than if the company operated its own manufacturing facility. (132) Branch offices are also subject to income taxes for the services they perform. (133)

Manufacturing in SEZs provides foreign companies with several advantages. (134) For undertakings established in SEZs on or after April 1, 2005, companies may take a one-hundred percent tax deduction of profits derived from export for the first five years from the year in which manufacturing or production begins. (135) For the next five years, companies may take a fifty percent tax deduction on profits derived from export, and, if they meet certain reinvestment conditions, they may take the deduction for another five years. (136) By setting up a branch office in a SEZ, a foreign retailer is able to operate its own manufacturing facility and realize substantial tax advantages. (137)

3. Wholly-Owned Subsidiaries

Foreign companies may operate wholly-owned subsidiaries that undertake manufacturing activities. (138) Moreover, foreign retailers typically do not need industrial licenses to conduct manufacturing activities. (139) However, foreign retailers operating their own manufacturing facilities must deal directly with Indian workers. (140) Additionally, once the wholly-owned subsidiary is incorporated as an Indian company, it is subject to Indian laws and regulations, including tax laws. (141) For instance, because certain transfer pricing regulations apply, wholly-owned Indian subsidiaries are not allowed to transfer manufactured products to their foreign parent companies without charging certain minimum fees (thereby insuring the subsidiary's liability for income taxes in India). (142)

International companies have used wholly-owned Indian subsidiaries for more than just manufacturing. (143) Puma set up a wholly-owned subsidiary in India to undertake wholesale trading in Puma-brand footwear, apparel, caps, bags and other sports and leisure materials. (144) Matsushita Electric Industrial Company, which owns the Panasonic brand, created an Indian subsidiary to act as the holding company for its six existing Indian joint ventures. (145) Matsushita's subsidiary also provides shared services to all of Matsushita's group companies, both inside and outside of India. (146)

VI. CONCLUSION

India's economy is booming, and it is still growing. (147) Although small shopkeepers currently dominate India's $250 billion retail industry, organized retail is beginning to spread. (148) India offers foreign companies an opportunity to take advantage of a largely untapped and rapidly growing market. (149) In order to take advantage of this opportunity and enter India's retail market, international retailers must consider the limited options through which they are allowed to operate under Indian law. (150)

(1.) See India High on Agenda, FDI Policy Under Scanner: Wal-Mart, THE PRESS TRUST OF INDIA, Aug. 1, 2006, at Nationwide Int'l News Section [hereinafter India High on Agenda] (describing size and growth rate of India's retail market); see also Sundeep Tucker, Group at the Head of the Property Curve Singapore's CapitaLand Plans to Help Build Up to 100 Shopping Malls Across the Country, FINANCIAL TIMES (London), Oct. 10, 2006, FT Report-Investing in India, at 4 (announcing joint ventures by Singapore investor with Indian companies to build up to 100 shopping malls).

(2.) See Disney Partners with Indian Company, HOUSTON CHRONICLE, (Oct. 9, 2006) at http://www.chron.com/disp/story.mpl/ap/business/4245603.html [hereinafter Disney] (describing Walt Disney Company's decision to partner with Indian company to sell its products in India); see also Walt Disney Co. On Wednesday Announced Plans to Set Up a Chain of Exclusive Stores in India, DSN RETAIL FAX, Oct. 16, 2006, at 2(1) [hereinafter Walt Disney Co.] (reporting Disney entered franchise agreement with Indian partner to open 150 "Disney Artist" stores).

(3.) See India High on Agenda, supra note 1 (describing India's policy change allowing foreign companies to operate retail stores by partnering with Indian entities).; see also Global Retail Brands Have Designs on India, ECONOMIC TIMES (India), June 14, 2006, at Business and Financial News Section (observing WalMart, GAP, JC Penney and Target have doubled their sourcing operations from India).

(4.) See generally ERNST & YOUNG, INDIA, DOING BUSINESS IN INDIA (2006), available at http://ibef.org/download/doingbusinessinindia2006.pdf [hereinafter DOING BUSINESS IN INDIA] (describing ways foreign companies can operate in India and applicable laws).

(5.) See Carrefour Eyes India Ground (Looking at Options Like Cash-and-Carry and the Franchisee Model to Facilitate its Entry into India), GLOBAL NEWS WIRE--ASIA AFRICA INTELLIGENCE WIRE, July 1, 2006 [hereinafter Carrefour Eyes India Ground] (stating Carrefour, second largest retail chain in world, considering options available to operate in India).

(6.) See infra Parts IV and V (describing available options for foreign retailers to operate in India).

(7.) See infra Part II (discussing India's economy).

(8.) See infra Part III (describing legal hurdles facing foreign retailers looking to operate in India).

(9.) See infra Part IV (explaining permissible forms of operation for foreign retailers in India).

(10.) See infra Part V (evaluating foreign retailers' various options when operating stores or manufacturing facilities).

(11.) See Mark B. Baker, "Awakening the Sleeping Giant:" India and Foreign Direct Investment in the 21st Century, 15 IND. INT'L & COMP. L. REV. 389, 390 (2005) (stating India has fourth largest economy in world). With a population of over one billion, India also has the second largest population in the world. Id. See also DOING BUSINESS IN INDIA, supra note 4, at 10 (citing Goldman Sachs report forecasting India will have third largest economy in world by year 2050).

(12.) Baker, supra note 11, at 390. Retail sales are increasing by approximately ten percent per year and spending on luxury goods is increasing by approximately twenty percent per year. John Elliott, Waiting for Wal-Mart; India's Retail Sector is Booming, FORTUNE INTERNATIONAL (Asia), May 15, 2006, at 32 (describing growth in consumer demand in India).

(13.) See Jo Johnson & Joe Leahy, Ambitions of India's Retail Revolutionary Growth Strategy, FINANCIAL TIMES (London), Oct. 20, 2006, at 12 (explaining India's fragmented retail market). India's twelve million shopkeepers account for ninety-seven percent of the $258 billion in annual retail sales. Elliott, supra note 12 (stating political power of fragmented Indian retailers strong enough to maintain restrictions on foreign investment). More than eighty percent of these twelve million retail outlets are run by small family businesses that use only household labor. ERNST & YOUNG, INDIA, THE GREAT INDIAN RETAIL STORY 8 (2006), available at http://www.ey.com/global/download.nsf/India/Retail_TheGreat_Indian_Retail_Sto ry/$file/TheGreat_Indian_Retail_Story.pdf. In comparison with India, where only three percent of the industry is comprised of organized retail, eighty-five percent of the retail sector in the United States is comprised of organized retail. Id.

(14.) Anita Jain, The "Crown Jewel" Sector That's Ripe for Modernisation Retail: Global Brands Are Moving In and Retailers Are Racing to Accommodate the New Indian Shopper, FINANCIAL TIMES (London), Jan. 26, 2006, at 7 (citing retail consultancy's forecast organized retail's growth equals thirty to thirty-five percent each year). Cf. Johnson & Leahy, supra note 13 (stating analysts predict organized retail's share will increase to ten to twelve percent by 2011). Arguably, there is "plenty of room for foreign companies as well as for big Indian players and small shops." Elliott, supra note 12 (citing chairman of Indian retail consultancy arguing Indian retail market is underserved).

(15.) Johnson & Leahy, supra note 13 (describing potential for growth in retail industry).

(16.) See Edward Luce, Hard Sell to a Billion Consumers: Marketing India, FINANCIAL TIMES (London), Apr. 25, 2002, at 14 (arguing one obstacle foreign retailers must overcome is culture); IRA KALISH, DELOITTE SERVICES LP, CHINA AND INDIA: THE REALITY BEYOND THE HYPE 1 (2006) (explaining businesses see China as place to procure goods and India as place to procure information technology services).

(17.) See Luce, supra note 16 (citing Pepsi executive's statement "[India]... is particularly resistant to western influence"); Jain, supra note 14 (noting foreign retailers' difficulty in catering to women's clothing market in India). "Nearly 80 percent of women's clothing in India is ethnic wear, which no international player can cater for effectively [sic]." Jain, supra note 14. See also Nita Bhalla & Rina Chandran, Shopkeepers Protest as Wal-Mart Checks Out India, REUTERS, Feb. 22, 2007, http://today.reuters.com/misc/PrinterFriendlyPopup.aspx?type=consumerProducts &storyID=nBOM83121 (describing protests following Wal-Mart's announcement of partnership with Indian company). But see Saritha Rai, Executives See U. S. Link as Crucial in India's Growth, N.Y. TIMES, Mar. 3, 2006, at C13 [hereinafter U. S. Link Crucial] (observing growing demand for products of American companies in India). Some Indians shop almost exclusively for foreign consumer products. Id. (describing Indian employee's confession she does not purchase many Indian branded consumer products).

(18.) See Luce, supra note 16 (describing McDonald's creation of Maharajah Mac, consisting of chicken, because most Indians do not eat beef). McDonald's, which has catered to India's culture, is continuing to open new stores in India. See id. (noting McDonald's, in 2002, anticipated nearly tripling its presence by 2003). Cf. id. (describing Coca-Cola's struggle to compete in India's soft drink market). Although Indian soft drink Thums Up is of lower quality than Coca-Cola, it outperforms Coca-Cola because "it is an Indian brand." Id.

(19.) See Cait Murphy, Why India Will Overtake China, FORTUNE (New York), Aug. 31, 2006, at http://money.cnn.com/2006/08/30/magazines/fortune/IndiavsChina_pluggedin.fort une/index.htm (explaining China has higher literacy and better infrastructure than India).

(20.) See id.; Joe Leahy, Hong Kong Clothes Company Considers Its Options, FINANCIAL TIMES (London), Oct. 10, 2006, at 4 (stating Indian workers half as productive as Chinese counterparts).

(21.) See Murphy, supra note 19 (arguing India's institutional strengths, including stronger civil society and accountable government, provide advantage over China). See also Leahy, supra note 20 (stating India's minimum wage is about half of China's); Murphy, supra note 19 (arguing China will break the law for any reason it feels like). China will also soon face a shortage of factory labor. See Keith Bradsher, A Younger India Is Flexing Its Industrial Brawn, N.Y. TIMES, Sept. 1, 2006, at A1 (explaining shrinking of Chinese family since 1980's due to China's "one child" policy).

(22.) See Global Retail Brands Have Designs On India, supra note 3 (observing Wal-Mart, JC Penney, GAP and Target account for fifty percent of apparel sourced from India); id. (noting Target's intent to triple business from India to $300 million from $120 million in 2003).

(23.) See Baker, supra note 11, at 412-13 (commenting on India's post-independence foreign policy).

(24.) See Baker, supra note 11, at 413 (stating India "essentially isolated itself from the global market"). India's government felt trade was biased toward developing countries, and so adopted a policy aimed at self-sufficiency. Id.

(25.) See Baker, supra note 11, at 413 (describing negative effects of India's pre-1991 foreign policies); id. at 392-94 (explaining obstacles removed following adoption of Industrial Policy of 1991). The Industrial Policy of 1991 facilitated easy access to foreign technology and foreign direct investment. Id. at 392. Prior to the reforms, each foreign investment required prior approval from the Indian government and the amount of such investments were substantially capped. Id. at 392-93. Under the Industrial Policy of 1991, most investments fall into a category of automatic approval. Id. at 393.

(26.) See Saritha Rai, India to End One Limit on Foreign Retailers, N.Y. TIMES, Jan. 26, 2006, at C11 [hereinafter India to End Limit] (reporting India's announcement allowing international companies to open stores).

(27.) See id. (describing various restrictions placed on foreign retailers). By permitting only single-brand retail chains into the retail market, the Indian Government allowed brands like Louis Vuitton, Nike and Nine West to open stores, but prevented chains such as Wal-Mart, Target and Carrefour from entering the market because they sell multiple brands. Id. However, the Indian government did not place a limit on the number of stores a foreign company can operate under a single-brand. Id.

(28.) See id. (explaining foreign ownership of multi-brand retail ventures prohibited).

(29.) See Baker, supra note 11, at 418 (describing India's labor laws as substantial challenge for doing business in India).

(30.) Baker, supra note 11, at 398.

(31.) See DOING BUSINESS IN INDIA, supra note 4, at 111 (explaining tax treaties determine taxation on foreign companies' income).

(32.) See infra Part IV (describing tax treatment for each operation option available to foreign retailers).

(33.) See Amy Yee, In Need of Much More Clarity Special Economic Zones, FINANCIAL TIMES (London), Oct. 10, 2006, at 4 (describing incentives offered by SEZs, including income tax, customs duty, and excise duty exemptions); DOING BUSINESS IN INDIA, supra note 4, at 91 (describing features of SEZs). Because the SEZ Act was passed in 2005, there is still much uncertainty about SEZ policy. See Yee, supra note 33. Because of their uncertainty, most foreign investors are waiting for clarification of SEZ policy before participating in SEZs. See id. (citing foreign investors' reluctance to participate in SEZs). One such concern is the size requirement for SEZs, as multi-service SEZs must be at least 2400 acres and service sector SEZs must be at least 240 acres, because success of SEZs is dependent upon the development of such sites. See id. (describing difficulty in managing large development projects).

(34.) Ministry of Overseas Indian Affairs, Entry Options For Investors, http://moia.gov.in/showsublink.asp?sublinkid=497 (last visited Sept. 2, 2006) [hereinafter Entry Options for Investors] (describing foreign companies' options for setting up business operations in India); Embassy of India, Incorporation of Business Entity, http://www.indianembassy.org/newsite//Doing_business_In_India/ Incorporation_of_business,asp (last visited Sept. 2, 2006) [hereinafter Incorporation of Business Entity] (discussing foreign companies' entry options).

(35.) See Entry Options For Investors, supra note 34 (stating foreign companies may act as incorporated entities through liaison offices and branch offices); infra Part IV.E. (describing foreign companies' ability to use franchising to operate in India). Foreign companies may also operate an unincorporated entity through a project office; however, such offices may carry out activities only relating to that project. See Entry Options For Investors, supra note 34 (identifying project office as available option for foreign companies); Incorporation of Business Entity, supra note 34 (explaining temporary nature of project offices and limitations placed on offices' activities). See also infra Part IV.A. (describing foreign companies' ability to use liaison offices to operate in India); infra Part IV.B. (describing foreign companies' ability to use branch offices to operate in India).

(36.) See Entry Options For Investors, supra note 34 (explaining foreign companies may incorporate under India's Companies Act, 1956). Foreign companies' equity in such incorporated entities are subject to caps in various areas, as prescribed under India's Foreign Direct Investment Policy. Id. See also infra Part IV.C. (describing foreign companies' ability to use joint ventures to operate in India); infra Part IV.D. (describing foreign companies' ability to use subsidiaries to operate in India).

(37.) See Carrefour Eyes India Ground, supra note 5 (reporting Carrefour has liaison office used for sourcing and evaluating organizational options for operating retail stores); see also Parija B. Kavilanz, Wal-Mart: 'Auf Wiedersehen' Germany, Hello India, CNNMONEY.COM, July 28, 2006, http://money.cnn.com/2006/07/28/news/international/walmart_international/ index.htm (reporting Wal-Mart received approval for liaison office and discussing franchise deal with Indian real estate firm).

(38.) See infra Parts IV.A.--IV.E. (explaining restrictions faced by foreign companies operating through allowable business forms).

(39.) See DOING BUSINESS IN INDIA, supra note 4, at 104 (describing reasons foreign companies establish liaison offices in India).

(40.) See DOING BUSINESS IN INDIA, supra note 4, at 104 (describing role of liaison office as communication channel). As defined by the Reserve Bank of India (RBI), a "liaison office" is a place of business to act "as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel." Exchange Control Dept., Reserve Bank of India, Foreign Exch. Mgmt. (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000, Notification No. 22/2000-RB, May 3, 2000, at [section] 2(e) available at http://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=176 [hereinafter FEMA Regulation, 2000].

(41.) Baker, supra note 11, at 405. See also Reserve Bank of India, FAQs--Foreign Investments in India, http://www.rbi.org.in/scripts/ FAQView.aspx?Id=26 (last visited Sept. 2, 2006) [hereinafter FAQs] (explaining liaison offices limited to gathering information about opportunities and informing prospective Indian customers about products); Technopark, Setting Up a Company, http://www.technopark.org/settingupcompany.htm (last visited Sept. 2, 2006) [hereinafter Setting Up a Company] (advising liaison offices should not receive compensation from Indian customers for providing services); DELOITTE TOUCHE TOHMATSU, INDIA INTERNATIONAL TAX AND BUSINESS GUIDE 9 (2006) available at http://www.deloittetaxguides.com/report_dl.asp?mode=pdf& issue_id=1510609536 (indicating liaison offices may place export orders on behalf of head office). The Reserve Bank of India specifies that liaison offices may carry on only the following activities, unless otherwise permitted by the RBI: (i) representing the parent company and group companies in India; (ii) promoting export and import from and to India; (iii) promoting technical and financial collaborations between parent and group companies and companies in India; and (iv) acting as a communication channel between the parent company and Indian companies. FEMA Regulation, 2000, supra note 40, at [section] 6(i).

(42.) See Carrefour Eyes India Ground, supra note 5 (identifying Carrefour as second largest retail chain and having liaison office); India High on Agenda, supra note 1 (identifying Wal-Mart as world's largest retailer and reporting approval of liaison office application).

(43.) See FEMA Regulation, 2000, supra note 40, at [section] 3 ("No person resident outside India shall, without prior approval of the Reserve Bank, establish in India ... a liaison office.... "). The Reserve Bank of India grants permission to approved liaison offices for an initial period of three years, after which foreign companies may seek extensions. See Setting Up a Company, supra note 41.

(44.) See FAQs, supra note 41 (advising expenses must be met entirely through "inward remittances of foreign exchange" from Head Office abroad); supra note 41 and accompanying text (explaining liaison offices cannot engage in commercial activities).

(45.) See Entry Options For Investors, supra note 34 (stating liaison offices cannot earn income).

(46.) See In re UAE Exchange Centre LLC, (2004) 268 I.T.R. 9 (finding foreign company earned taxable income in India despite compliance with RBI's terms for liaison office).

(47.) See W. Union Fin. Services Inc. v. ADIT, (2006) ITA No. 4889/Del/04, [paragraph] 16 (discussing questions considered in determining taxability of foreign company's activities in India). Wherever there is a DTAA between India and another country, the provisions of the DTAA override those of India's domestic income tax laws, but the non-resident must assert its claim either that there is no or less tax liability under the DTAA. Id. at [paragraph]17, 19. The United States entered into a DTAA with India in 1989. See generally Convention Between the Government of the United States and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U. S.-India, Sept. 12, 1989, S. Treaty Doc. No. 101-5 [hereinafter U. S.-India DTAA]. See also In re Angel Garment Ltd., (2006) 157 TAXMAN 195 (holding foreign company not taxable for liaison office's limited purchasing activities for head office).

(48.) See Entry Options For Investors, supra note 34 (describing activities branch office permitted to undertake). As defined by The Companies Act, 1956, a branch office is "(a) any establishment described as a branch by the company; or (b) any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or (c) any establishment engaged in any production, processing or manufacture.... " THE COMPANIES ACT, 1956, [section] 2(9) (India).

(49.) See SECRETARIAT FOR INDUSTRIAL ASSISTANCE, MINISTRY OF COMMERCE & INDUSTRY, ENTRY STRATEGIES FOR FOREIGN INVESTORS: STARTING OPERATIONS IN INDIA, http://siadipp.nic.in/policy/entry.htm (last visited Oct. 6, 2006) [hereinafter STARTING OPERATIONS IN INDIA] (explaining branch offices may not engage in manufacturing); FAQs, supra note 41 (advising branch offices may not undertake manufacturing or retail trading activities in India). See also MINISTRY OF SMALL SCALE INDUSTRIES, GOVERNMENT OF INDIA, LIST OF ITEMS RESERVED FOR EXCLUSIVE MANUFACTURE IN THE SMALL SCALE SECTOR (2007), available at http://www. Smallindustryindia.com/publications/reserveditems/ 239_items_reserved.pdf [hereinafter LIST OF EXCLUSIVE SMALL SCALE SECTOR ITEMS] (listing items only small scale manufacturers allowed to produce).

(50.) See STARTING OPERATIONS IN INDIA, supra note 49 (indicating branch offices may subcontract manufacturing activities to Indian manufacturers).

(51.) See DOING BUSINESS IN INDIA, supra note 4, at 103 (describing branch offices' permitted activities).

(52.) See FEMA Regulation, 2000, supra note 40 (prohibiting non-resident Indians from establishing branch offices with RBI's approval).

(53.) Exchange Control Dept., Reserve Bank of India, Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) (Second Amendment) Regulations, 2003, Notification No. FEMA 102/2003-RB, Oct. 3, 2000, at [section] 2 available at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/50824.pdf [hereinafter FEMA (Second Amendment), 2003] (defining "stand alone basis" as branch office restricted to SEZ). The RBI's approval is not necessary for a company opening a branch office on a "stand alone basis," but such offices are allowed only when they: (i) function in a sector allowing 100% FDI; (ii) comply with certain provision of the Companies Act; (iii) operate on a stand alone basis; and (iv) approach an Authorized Dealer in Foreign Exchange in the event of a winding-up of the business. Id. See also ERNST & YOUNG, INDIA, DOING BUSINESS IN INDIA 39 (2006), available at http://www.ey.com/Global/download.nsf/India/Final_DBI_2006/$file/Final%20D BI%202006.pdf [hereinafter DOING BUSINESS IN INDIA (MAY 31, 2006)] (indicating over 150 SEZs approved by Indian government in variety of locations).

(54.) See DOING BUSINESS IN INDIA, supra note 4, at 91 (listing incentives for companies in SEZs).

(55.) See DOING BUSINESS IN INDIA, supra note 4, at 103. Transactions between a branch office and the foreign company are subject to transfer pricing regulations. Id. However, foreign companies may return post-tax profits to their home countries. See id. (indicating repatriation of post-tax profits permissible).

(56.) See Srijoy Das & Kartik Srivastava, Franchising In India: The Time Is Right, FRANCHISE.COM, June 30, 2004, http://www.franchise.com/en/us/template/buyer,ResearchCenter.vm/display/1252 [hereinafter Franchising In India] (describing options available to foreign companies considering franchising in India). Franchising agreements could range from simply allowing a franchisee to use the foreign company's trademark for a fee to allowing a franchisee to use its system of operation for a franchise fee. Id. The International Franchise Association defines franchising as a "'continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising, and management' in exchange for fees and royalties from the franchisee." Arthur G. Sharp, Franchising, REFERENCEFORBUSINESS.COM, http://www.referenceforbusiness.com/encyclopedia/For-Gol/Franchising.html (last visited Jan. 26, 2007). See also Franchise Council of Australia, Advantages of the Franchising System, http://www.franchise.org.au/content/?id=185 (last visited Jan. 27, 2007) (listing advantages of franchising); Franchise Council of Australia, Disadvantages of the Franchising System, http://www.franchise.org.au/content/?id=186 (last visited Jan. 27, 2007) (listing disadvantages of franchising).

(57.) See Franchising in India, supra note 56 (noting certain laws, such as labor and exchange control laws, affect franchisor-franchisee relationship); see also Kavilanz, supra note 37 (indicating international retailers enter franchise agreements with Indian partners).

(58.) See Franchising In India, supra note 56 (describing restrictions Indian government imposes on foreign companies). If the foreign franchisor is only allowing a franchisee to use franchisor's brand name or trademark, the Indian government permits foreign franchisors to charge royalties of up to 1% of domestic sales and 2% of exports without requiring them to seek government approval. Id. If a foreign franchisor allows a franchisee to use the franchisor's foreign technology, which includes manuals and systems, in addition to use of the franchisor's brand name or trademark, the Indian government permits the franchisor to collect a lump sum payment of up to two-million dollars and charge royalties of up to 5% of domestic sales and 8% of exports. Id. If a foreign franchisor seeks amounts in excess of those previously described, it must receive permission from the Indian government. Id. See also SECRETARIAT FOR INDUS. ASSISTANCE, GOV'T OF INDIA, INVESTING IN INDIA: FOREIGN DIRECT INVESTMENT--POLICY AND PROCEDURES 23 (2004), available at http://www.indiacgny.org/documents/manual_10_04.pdf [hereinafter 2004 FDI POLICY & PROCEDURES] (outlining amount of franchise payments allowed without Indian Government's approval).

(59.) See Franchising In India, supra note 56 (discussing lack of oversight as concern for international franchisors). Indian consumers' tastes, languages and demands vary from region to region. Id.

(60.) See India to End Limit, supra note 26 (noting Louis Vuitton, Nike and Nine West depend on Indian franchisees); Disney, supra note 2 (indicating Adidas previously sold products in India through franchisees).

(61.) See Bharti to Invest $2.5 Billion in Venture with Wal-Mart, INTERNATIONAL HERALD TRIBUNE, Feb. 19, 2007, http://www.iht.com/articles/ap/2007/02/20/business/ AS-FIN-COM-India-BhartiWal-Mart.php (reporting Wal-Mart entered franchise agreement and joint venture with Indian company); French Carrefour Teams Up With UAE Landmark Group To Enter Indian Market, FRENCH BUS. DIGEST, Sept. 15, 2006 (reporting Carrefour signed franchise agreement with Indian company) ; Rajesh Mahapatra, Wal-Mart to Open Retail Stores in India, WASH. POST, available at http://www.washingtonpost.com/wpdyn/content/article/2006/11/27/ AR2006112700108_pf.html (announcing WalMart's partnership with India's Bharti Enterprises); Kavilanz, supra note 37 (indicating Wal-Mart in discussions with Indian real estate firm for franchise deal).

(62.) See STARTING OPERATIONS IN INDIA, supra note 49 (stating foreign companies may set up operations in India through strategic alliances with Indian partners). In a typical joint venture, two parties incorporate a company in India, subscribe to the shares of the joint venture company in agreed proportion and then collaborate to carry on the business of that joint venture company. See Madaan & Co., Attorneys at Law, Joint Ventures In India, http://madaan.com/jointventure.html (last visited Nov. 15, 2006) [hereinafter Joint Ventures In India] (describing typical joint venture). See also Small Enterprise Development Agency, Partnership/Joint Venture, http://www. Seda.org.za/content.asp?subID=556 (last visited Jan. 26, 2007) [hereinafter Small Enterprise Development Agency] (listing issues partnership agreement should address).

(63.) Baker, supra note 11, at 405. These advantages can help foreign companies ease their entry and set up of operations in India. Id. See also Mark Siebert, The Franchisor/Franchisee Relationship, ENTREPRENEUR.COM, Apr. 25, 2005, http://www.entrepreneur.com/franchises/ franchisingyourbusinesscolumnistmarksiebert/article77374.html (comparing joint venture relationship with franchisor-franchisee relationship).

(64.) See DEPT. OF INDUS. POLICY & PROMOTION, GOV'T OF INDIA, INVESTING IN INDIA--FOREIGN DIRECT INVESTMENT--POLICY & PROCEDURES 66-67 (2006), http://www.dipp.nic.in/manual/fdi_manual_11_2006.pdf [hereinafter INVESTING IN INDIA--POLICY & PROCEDURES 2006] (stating FDI greater than fifty-one percent in retail trading prohibited). In addition to limiting foreign companies to owning no more than fifty-one percent of a retail venture, the Indian government must also approve the foreign company's investment in this venture and the venture may only engage in "single brand retailing." Id. at 67. Single brand retailing means the venture is subject to the following conditions: (i) products for sale must be of a single brand; (ii) products must be sold under the same brand internationally; and (iii) products for sale must have been branded during manufacturing. Id. at 79.

(65.) See Incorporation of Business Entity, supra note 34 (explaining companies incorporated in India, including joint ventures, subject to Indian laws).

(66.) See India Tops Annual List of Most Attractive Countries For International Retail Expansion, As Increasingly Saturated Chinese Market Continues To Decline, PR NEWSWIRE U. S. (Chicago), Apr. 26, 2006 [hereinafter India Tops Annual List] (indicating Gap, Zara and Timex entering retail market through joint ventures); Starbucks' Foray Faces Scrutiny, THE TIMES OF INDIA, Jan. 10, 2007 (discussing Starbucks' joint venture with Indian company New Horizon Retail); Amy Yee, Staples Shows A Taste for India, FINANCIAL TIMES (London), Jan. 23, 2007, at 26 (announcing Staples' 50:50 joint venture with Pantaloon, India's largest retailer); Setting Up Shop In India, THE ECONOMIST (U. S.), Nov. 2, 2006, available at http://www.economist.com/displayStory.cfm?Story_ID=8109636 [hereinafter Setting Up Shop In India] (indicating use of joint ventures by foreign retailers not yet used extensively).

(67.) See STARTING OPERATIONS IN INDIA, supra note 49 (stating foreign companies may operate wholly-owned subsidiaries). Foreign equity in Indian companies is, however, subject to limitations set by FDI policy. Id.

(68.) STARTING OPERATIONS IN INDIA, supra note 49.

(69.) See Incorporation of Business Entity, supra note 34 (stating subsidiaries of foreign companies subject to same laws as other domestic Indian companies); DOING BUSINESS IN INDIA, supra note 4, at 102 (noting subsidiary company treated as domestic company for tax purposes).

(70.) See John Sujit, Puma Plans Headquarters in Bangalore, THE TIMES OF INDIA, Nov. 12, 2005 (noting Nike's and Puma's establishment of wholly-owned subsidiaries); ECCO Makes Indian Foray, GLOBAL NEWS WIRE--ASIA AFRICA INTELLIGENCE WIRE, Jan. 19, 2005 (reporting Danish shoe brand ECCO established wholly-owned subsidiary); Matsushita Gets Nod to Float Wholly-Owned Arm, GLOBAL NEWS WIRE--ASIA AFRICA INTELLIGENCE WIRE, July 12, 2006 [hereinafter Matsushita Gets Nod] (reporting Matsushita received permission from Indian Government to set up wholly-owned subsidiary).

(71.) Compare Puma Setting Up India Arm Through Austrian Subsidiary, GLOBAL NEWS WIRE--ASIA AFRICA INTELLIGENCE WIRE, Aug. 22, 2005 (reporting subsidiary would undertake wholesale trading), with Matsushita Gets Nod, supra note 70 (stating subsidiary acting as holding company for existing Indian joint ventures and providing shared services).

(72.) See infra Part V.A. (discussing foreign retailers' options for operating stores in India).

(73.) See supra notes 39-41 and accompanying text (describing restrictions on liaison offices' activities); see also supra notes 48-49 and accompanying text (describing restrictions on branch offices' activities).

(74.) See supra note 64 and accompanying text (explaining restrictions on foreign ownership of Indian retail ventures). Foreign companies may not hold any stake in a retail venture unless that venture engages in single brand retailing and the foreign company owns a fifty-one percent or less interest in the venture. Id.

(75.) See supra note 64 and accompanying text (explaining foreign investment allowed in single-brand retail ventures).

(76.) See supra Part IV.D. and accompanying text (discussing foreign companies' ability to operate single-branded retail stores through joint ventures); infra Part V.A.1.a. and accompanying text (explaining advantages of joint ventures).

(77.) See Small Enterprise Development Agency, supra note 62 (explaining issues partnership agreement should address).

(78.) See infra note 81 and accompanying text (comparing joint ventures and franchises).

(79.) See India to End Limit, supra note 26 (explaining restrictions on foreign ownership of single-brand chains).

(80.) See Tucker, supra note 1 (announcing joint ventures between Singapore investor and India's largest retailer to build one-hundred shopping malls). Construction of these malls will also provide a forum for foreign retailers to enter the market, as the majority of India's current retail industry is unorganized. See supra note 13 and accompanying text (explaining only three percent of India's retail sales attributable to organized retail).

(81.) See Small Enterprise Development Agency, supra note 62 (indicating joint venture agreement addresses profit sharing and control issues); India to End Limit, supra note 26 (explaining policy change allowed foreign companies to operate stores).

(82.) See Elliot, supra note 12 (describing India's model for lowering foreign retailers' barriers to entry). According to India's Commerce Minister, India is looking for an "incremental model that creates new jobs and does not replace or displace employment in small neighborhood shops." Id. See also Starbucks' Foray Faces Scrutiny, supra note 66 (reporting Indian government approved nine proposals for single-brand retailing and rejected three). Among the retailers obtaining the government's approval are Louis Vuitton and Fendi Bags. Id.

(83.) See Disney, supra note 2 (reporting Nokia and Adidas shifted from franchises to operating own stores); India Tops Annual List, supra note 66 (indicating Gap, Zara and Timex among retailers announced decisions to enter joint ventures).

(84.) Franchising in India, supra note 56.

(85.) See Franchising in India, supra note 56 (describing restrictions on franchise payments to foreign franchisors). If a foreign franchisor allows an Indian franchisee to use the franchisor's foreign technology, such as manuals and systems, then the franchisor may charge a lump sum payment of $2 million and royalties of up to five percent on domestic sales and eight percent on exports without government approval. Id.

(86.) See Sharp, supra note 56 (describing various payment structures contained in franchising agreements). Royalty payments, which are typically charged in addition to a franchise fee, are either calculated as a percentage of the franchisee's gross income or the franchisee periodically pays fixed fees. Id. If the franchising agreement provides for royalty payments calculated as a percentage of the franchisee's gross income, the royalty is usually less than ten percent of the franchisee's gross income. Id. If, however, the franchise agreement requires a royalty payment in excess of one percent of earnings (or five percent, if the franchisor is providing foreign technology), the franchisor must first obtain government approval. See Franchising in India, supra note 56 (explaining restrictions on royalty payments in foreign franchising agreements).

(87.) See Sharp, supra note 56 (describing advantages of franchising and citing examples of fast-growing franchises). Furthermore, franchisees' financial success depends upon the success of their outlets. Id. Thus, franchisees have an incentive to run a successful business, and franchisors benefit from this success through royalty payments. See id. (arguing franchisees' responsibility for success of outlets will motivate them to put in strong effort).

(88.) See Disadvantages of the Franchising System, supra note 56 (recognizing need for imposition of controls in franchisor-franchisee relationship); Siebert, supra note 63 (comparing franchising to parent-child relationship and joint venture to marriage). Franchisees may also become too dependent upon franchisors, relying on the franchisor's continued involvement for success. See Disadvantages of the Franchising System, supra note 56 (explaining continued involvement inconsistent with franchising model).

(89.) THE GREAT INDIAN RETAIL STORY, supra note 13, at 17.

(90.) See Walt Disney Co., supra note 2 (reporting Indian company opening about 150 "Disney Artist" stores under franchise agreement); Jain, supra note 14 (identifying Pizza Hut and Subway as foreign franchisors); Luce, supra note 16 (discussing McDonald's success in India).

(91.) See India to End Limit, supra note 26 (explaining India's policy change continues to prohibit multiple-brand retailers from owning Indian retail stores).

(92.) See India to End Limit, supra note 26 (anticipating transition from franchise to direct-ownership models of Nike and other foreign retailers after policy changes); infra Part V.A.2. (discussing foreign single-brand retailers' use of joint ventures).

(93.) See Sharp, supra note 56 (explaining franchisors provide franchisees with proven and efficient method of operation).

(94.) See Luce, supra note 16 (describing cultural obstacle foreign retailers must overcome to enter Indian market). According to one Indian CEO, "[n]early 80 per cent [sic] of women's clothing in India is ethnic wear, which no international player can cater for effectively (sic)." Jain, supra note 14 (quoting chief executive of Piramyd Retail).

(95.) See Luce, supra note 16 (describing KFC's failure to adapt to Indian culture).

(96.) See Luce, supra note 16 (discussing McDonald's study of Indian culture before opening its first outlet). McDonald's recognized that seventy percent of Indians do not eat beef. Id. To cater to Indians' tastes, McDonald's created the Indian Big Mac, which is made from chicken and local spices. Id.

(97.) See supra note 64 and accompanying text (explaining foreign multi-brand retailers unable to maintain ownership in retail industry).

(98.) See supra note 91 and accompanying text (explaining franchising only way for foreign multi-brand retailers to participate directly in retail industry).

(99.) See Kavilanz, supra note 37 (citing CEO of investment firm). Moreover, this method of operation does not require government approval. Id.

(100.) See infra note 138 and accompanying text (explaining foreign companies able to own interest in companies engaged in manufacturing activities); supra note 99 and accompanying text (describing direct-to-consumer model). Foreign retailers would not be able to operate through the direct-to-consumer model through either liaison offices or branch offices, because India does not allow those entities to undertake commercial activities. See supra note 41 and accompanying text (explaining limitations on liaison office activities); supra note 49 and accompanying text (explaining restrictions on branch office activities).

(101.) See infra note 144 and accompanying text (considering Puma's entry into India's retail market).

(102.) See infra notes 145-146 and accompanying text (discussing Matsushita's use of shared services subsidiary supporting other Indian operations).

(103.) See supra note 16 and accompanying text (indicating retailers should consider alternative manufacturing opportunities).

(104.) See Bradsher, supra note 21 (describing concern about whether India has enough roads, ports and electricity-generating plants). Indian ports have struggled to handle the rise in exports, blackouts are frequent and dirt roads are common. Id.

(105.) See Bradsher, supra note 21 (stating China invests $7 on infrastructure for every $1 spent by India). In 2002, for example, China spent $128 billion on power and transport infrastructure compared to $18 billion spent by India. KALISH, supra note 16, at 4. In addition, China's highway network totals 1.4 million kilometers compared to 200,000 kilometers in India. Id.

(106.) See KALISH, supra note 16, at 5 (cautioning political difficulties may impede funding plans).

(107.) See KALISH, supra note 16, at 8 (indicating India's manufacturing labor costs less than China's). In 2002, for example, the average monthly wage of a manufacturing worker in India was $23.80 compared with $110.80 in China. Id. (citing International Monetary Fund as source for figures). See also Leahy, supra note 20 (reporting India's manufacturing costs up to thirty percent lower than China's). But see Baker, supra note 11, at 418 (indicating Indian workers cost more than Chinese workers).

(108.) See Baker, supra note 11, at 394-95 (describing India's labor force).

(109.) See Baker, supra note 11, at 418 (explaining restrictions on hiring and firing workers impedes companies' attempts to efficiently allocate workforce); Leahy, supra note 20 (reporting laws make it more difficult to adjust to business cycles than in China).

(110.) See Leahy, supra note 20 (stating Indian workers half as productive as Chinese counterparts); Baker, supra, note 11, at 418 (stating Indian workers one-quarter as efficient as Chinese workers).

(111.) See Bradsher, supra note 21 (explaining China's "one-child" policy means less availability of young factory labor). India will have more young workers between the ages of 20 to 24 than China by 2013. Id. See also Murphy, supra note 19 (arguing India on path to overtake China because India's political infrastructure more stable). India's democratic political system is more stable than China's autocracy. Id.

(112.) See supra Part IV (describing foreign retailers' options for operating in India); infra Part V.B. (evaluating options for modes of operation to manufacture in India).

(113.) See Sharp, supra note 56 (explaining franchisees pay royalty payments based on their gross income). Companies can grant manufacturers the right to produce and sell goods using its name and trademark. Id. For example, food and beverage companies often grant franchise rights to companies to produce, bottle and distribute their food and drinks. See id. (describing manufacturing franchises). However, for the manufacturing franchise model to be successful, the franchisee must be able to sell the manufactured products to third parties. See id. (indicating responsibility of distribution on manufacturing franchisees).

(114.) See supra note 63 and accompanying text (describing advantages of joint ventures); Small Enterprise Development Agency, supra note 62 (indicating joint venture agreements address profit sharing arrangements). See also Baker, supra note 11 (arguing joint ventures not prevalent in practice).

(115.) See infra notes 134-137 and accompanying text (discussing advantages of manufacturing in India through branch offices in SEZs).

(116.) See infra notes 138-142 and accompanying text (describing use of wholly-owned subsidiaries to undertake manufacturing activities).

(117.) See infra note 131 and accompanying text (explaining branch offices, unlike liaison offices, able to perform buying agent services).

(118.) See infra note 127 and accompanying text (cautioning foreign retailers to consider RBI regulations).

(119.) See STARTING OPERATIONS IN INDIA, supra note 49 (stating liaison office not able to undertake commercial activity or earn any income); see also Setting Up a Company, supra note 41 (describing role of liaison offices limited to providing information about company to prospective Indian customers).

(120.) See DELOITTE TOUCHE TOHMATSU, supra note 41, at 9 (indicating liaison offices may place export orders with Indian companies on foreign company's behalf). The Indian government has already made clear that liaison offices engaging in limited purchasing activities, such as collecting information, collecting samples of garments and textiles from manufacturers and following up with Indian exporters for timely export of goods, do not earn taxable income for such services. In re Angel Garment Ltd., (2006) 157 TAXMAN 195.

(121.) See STARTING OPERATIONS IN INDIA, supra note 49 (explaining liaison offices cannot earn income in India).

(122.) See STARTING OPERATIONS IN INDIA, supra note 49 (stating liaison offices may not directly or indirectly undertake any commercial activity).

(123.) See STARTING OPERATIONS IN INDIA, supra note 49 (indicating inspection services outside scope of liaison office's permitted activities). Even if the RBI granted permission for a liaison office to engage in these types of activities, the Indian government would likely find such activities generate taxable income. See In re UAE Exchange Centre LLC, (2004) 268 I.T.R. 9, at [paragraph]14 (holding liaison office activities beyond auxiliary activities taxable). In UAE Exchange, the Authority for Advance Ruling (AAR) was interpreting the DTAA between India and the United Arab Emirates, which excludes "maintenance of a fixed place of business solely for... activity of a preparatory or auxiliary character" from falling within the scope of a taxable "permanent establishment." Id. at [paragraph]13. The DTAA between India and the United States contains a similar "permanent establishment" exception for offices engaging in auxiliary activities. Compare id. with U. S.-India DTAA, supra note 47, at art. 5.3.(e).

(124.) See India High on Agenda, supra note 1 (noting liaison office considered part of Wal-Mart's broader plans for opening retail outlets).

(125.) See Carrefour Eyes India Ground, supra note 5 (explaining Carrefour considering options to facilitate entry into Indian retail market).

(126.) See Global Retail Brands Have Designs on India, supra note 3 (reporting retailers setting up liaison offices rather than opting for third-party buyers).

(127.) See supra note 43 and accompanying text (explaining requirement of approval by Reserve Bank of India); FEMA Regulation, 2000, supra note 40 (indicating Reserve Bank of India empowered to regulate establishment of liaison offices).

(128.) See supra note 46 and accompanying text (explaining liaison offices' activities potentially taxable even if in compliance with RBI's terms).

(129.) See supra note 48 and accompanying text (describing allowable functions of branch offices).

(130.) See STARTING OPERATIONS IN INDIA, supra note 49 (indicating branch offices located in SEZs able to undertake manufacturing activities).

(131.) See STARTING OPERATIONS IN INDIA, supra note 49 (stating branch offices allowed to represent parent company as buying agents); Id. (stating branch offices allowed to render professional and consultancy services); Setting Up a Company, supra note 41 (indicating branch offices permitted to act as buying agents in India).

(132.) See also Setting Up a Company, supra note 41 (explaining branch offices unable to manufacture but may sub-contract to Indian manufacturers).

(133.) See supra note 55 and accompanying text (explaining branch offices treated as extension of foreign company for tax purposes).

(134.) See supra notes 54-55 and accompanying text (describing benefits of SEZs).

(135.) DOING BUSINESS IN INDIA (MAY 31, 2006), supra note 53, at 62.

(136.) DOING BUSINESS IN INDIA (MAY 31, 2006), supra note 53, at 62. The reinvestment conditions require transferring the profits to a separate reserve account that is to be utilized for capital expansion. Id.

(137.) See supra note 130 and accompanying text (indicating branch offices able to undertake manufacturing activities in SEZs); supra notes 134-136 and accompanying text (describing tax advantages of SEZs).

(138.) See supra note 67 and accompanying text (stating foreign companies able to establish wholly-owned subsidiaries if in category allowing 100% FDI); INVESTING IN INDIA--POLICY & PROCEDURES 2006, supra note 64, at 80 (indicating 100% FDI allowed in cash and carry wholesale trading).

(139.) See INVESTING IN INDIA--POLICY & PROCEDURES 2006, supra note 64, at 14 (describing industrial licensing requirements). Industrial manufacturing licenses are currently only required in industries that impose compulsory licenses, for manufacture of items reserved for the small scale sector by units not in the small scale sector and when the proposed manufacturing is in a restricted location. Id. Most retailers' manufacturing activities would not fall within the categories requiring compulsory industrial licenses. See id. (listing industries requiring compulsory industrial licenses). An industrial undertaking qualifies as a small-scale unit if the capital investment in plant and machinery does not exceed Res 50 million, or approximately $1,138,000. Id. Some of the items reserved for the small scale sector may be items retailers wish to manufacture in India, but most of the products foreign retailers may wish to produce, such as shoes and apparel, are not reserved for the small scale sector. See LIST OF EXCLUSIVE SMALL SCALE SECTOR ITEMS, supra note 49 (listing items reserved for manufacture by small-scale units). Industrial undertakings require an industrial license if the proposed location is within 25 kilometers of the Standard Urban Area limits of 23 cities having populations of one million as indicated by a 1991 census. INVESTING IN INDIA--POLICY & PROCEDURES 2006, supra note 64, at 15.

(140.) See supra note 110 and accompanying text (explaining Indian workers relatively less productive than workers in other countries).

(141.) See Incorporation of Business Entity, supra note 34 (explaining subsidiaries subject to Indian law once incorporated).

(142.) See DOING BUSINESS IN INDIA (MAY 31, 2006), supra note 53, at 48 (describing features of subsidiary company).

(143.) See supra note 71 and accompanying text (comparing different uses of Indian subsidiaries).

(144.) See Puma, supra note 71 (describing Puma's planned use of its subsidiary). Rather than manufacturing the products it sold, the subsidiary planned to adopt a dual sourcing strategy, importing from Puma's facilities outside of India and sourcing from Indian manufacturers. Id.

(145.) Matsushita Gets Nod, supra note 70.

(146.) Matsushita Gets Nod, supra note 70. The subsidiary provides shared services such as finance, accounting, human resources, administration, management, corporate planning and information technology. Id. Matsushita also planned to make use of the India talent pool for furthering its research and development and product and software development activities. Id.

(147.) See supra notes 11-12 and accompanying text (describing state of India's economy).

(148.) See supra notes 13-14 and accompanying text (describing growth of organized retail in India).

(149.) See supra note 15 and accompanying text (describing potential for growth in India's retail industry).

(150.) See supra Parts IV-V (describing and evaluating available means of operating in India).
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Date:Dec 22, 2007
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