FDI is defined as a company from one country making a physical investment into building a factory in another country. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. 
In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.
2.Financial and technical collaboration agreements
1. Technical collaboration agreements Initial Lump sum With transfer Of rights Royalty for use of patent Fees for tech. Services/managerial Payment for Drawings/ design Payment for Supply of machinery
2. Financial and technical collaboration agreements
In addition to technical agreements makes investment in the capital of the Indian collaborator besides transfer of technology
The collaborator receives payments and also dividend on shares/Interest on money lent.
Such collaboration should match with policies of Government of India.
Section 44AD-computation of income who is engaged in the business of civil construction if gross receipt does not exceed Rs.40 lakhs-8% of the gross receipts paid /payable to the tax payer.
Section 44DA-Computation of income by way of royalties and technical service fees in the case of foreign companies if agreements made after March 31 st , 1976 but before 1-4-2003., -ia-10% tax on royalty payable/paid.
If agreement after March 31, 2003 where royalty or technical fees is effectively connected to Permanent establishment(PE) in India-10%
1.Revenue expenditure-deduction is allowed. 2. Capital expenditure-depreciation u/s 32 is allowed. 3. Payment to foreign personnel in India-installation of equipment-capitalised-depreciation allowed . 4.Training expenditure-allowed deduction 5.Payment for acquisition of plant and machinery-depreciation allowed 6.Interest-allowed deduction u/s 36(1)(iii) 6. Interest paid to acquire capital asset-capitalised upto the date of put into use/ready to use. 1.Non residents-Income received, deemed to be received and accrued, or deemed to accrue in India-taxable 2.Exempted income U/S 10 of IT Act. 3. Special computation of Income u/s 44DA, 115A, 115AB, 115AC and 115AD 4.Double taxation avoidance agreements. Indian Collaborators Foreign Collaborator
1. Technical collaboration fees attract-20% TDS u/s 115A.Otherwise it is 40% tax.
2.If total income of a foreign company does not exceed 1 crore-no surcharge.
3.TDS paid by Indian company on behalf of foreign company for royalty payable under the terms of an agreement entered before 1 st June 2002 relating to matter included in Industrial policy is exempt from tax u/s 10(6A)[Grossing the income is not required.]
1. S Ltd a foreign company entered into an agreement with K ltd. an Indian company.This agreement is related to industrial policy of the central government and is in accordance with the policy. The royalty paid by K ltd is 100 lakh to S ltd.compute the tax payable by S ltd.under the following circumstances.
A) K ltd pays Income tax payable by S ltd.as per the terms of agreement entered before 1 st June 2002.
B) The agreement does not provide that K ltd will bear the tax but understanding that 100 lakh is net of tax.
Since debentures issued for technical services and service charges amounts to royalty which is paid by an Indian company it shall be deemed to accrue or arise in India as per section 9(1)(v),( vi),(vii).It is taxed u/s 115A.It is taxed at 20% rate. Otherwise they are taxed at 40% rate.
Income to be taxed-debentures 100 lakhs x20%=10 lakhs
FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.
FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments.
Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations.
An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as “direct investments abroad.”
These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization act cleared the path for foreign investment to meet the demand into development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.
Until now, only Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs) were permitted to invest in the housing and the real estate sectors. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements either through a wholly owned subsidiary or through a joint venture company in India along with a local partner.
Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called “market-seeking FDIs.” “Resource-seeking FDIs” are aimed at factors of production which have more operational efficiency than those available in the home country of the investor.
Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as “efficiency-seeking.”
In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. In 2004-05 this increased to US$ 3.75 billion of which, the real estate shares was 10.6%.
However, in 2005-06, while total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The Study, nevertheless projects that in 2006-07, total FDIs will touch about US$ 8 billion in which the real estate share is estimated to be about 26.5%.