• Governing Laws in Nepal

Contract manufacturing is an arrangement in which one company (the client or hiring company) hires another company (the contractor or manufacturer) to produce goods or components on its behalf. In this setup, the hiring company provides the design, specifications, and often the raw materials, while the contracted manufacturer focuses on the production process.

The Industrial Enterprises Act, 2076 (hereinafter ‘IEA’) and the Foreign Investment and Technology Transfer Act (FITTA), 2075 (hereinafter ‘FITTA’) govern contract manufacturing in the context of Nepal.

 

• Value Addition Requirement

Both IEA and FITTA provide regulations concerning contract manufacturing. Under Section 50 of the IEA, industries registered under prevailing law are permitted to outsource portions of their production or required subsidiary goods and services through contracts or subcontracts with other industries. However, it is important to note that such outsourcing must not involve the primary product of the industry. For instance, a company that manufactures bicycles may outsource the production of its bicycle accessories, such as helmets and bike lights, to specialized manufacturers. In this scenario, the primary product ‘the bicycle itself’ remains produced in-house, while the accessories are sourced from external suppliers.

Meanwhile, Section 45(1) of FITTA (as per the latest amendment in “Ordinance to Amend Certain Nepalese Laws Relating to Investment Facilitation, 2081”), allows industries with foreign investment to enter into contracts or subcontracts with other industries that share similar objectives for the purpose of producing goods or services. For instance, a company with foreign investment in Nepal produces solar panels as its main product. Previously, under FITTA, this company couldn’t contract or subcontract a local manufacturer to help produce the solar panels themselves. It could only outsource tasks that did not involve the primary product, like producing packaging materials or assembling smaller components. Now, with the amendment, this company can collaborate with other local industries to produce its main product (solar panels).

While the FITTA amendment has removed such a criterion, such primary-product rule is still present in the text of the IEA (which is applicable to domestic industries). This has created an unintended uncertainty on whether domestic industry can indeed outsource their primary product. It is expected that this discrepancy will be sorted out soon by the legislators.

In the context of bilateral treaties, there are additional value addition requirements that primarily apply to export activities. Certain instruments, such as the and the Agreement of Co-operation to Control Unauthorized Trade, 2009 rule out activities like “packaging” and “storage” from the definition of manufacturing. Similarly, the Protocol to the reaty of Trade between the Government of India and the Government of Nepal, 2009 mandates that the Freight on Board (FOB) value of materials originating outside of either India or Nepal should not exceed 70%, and that the final manufacturing activity must be carried out in Nepal.

 

• Registration requirements for Contract Manufacturing in Nepal

Recently enacted guideline on “Standards for Contracts or Subcontracts Related to the Production of Goods, 2081″ (“Contract Standards”) regulates the registration of contract manufacturing contracts in Nepal. Based on the nature and size of the industry, registration of contract manufacturing must be completed with the appropriate authority. The details are as follows:

Industry Type	Registering Authority
Cottage and Small Industries	Cottage and Small Industry Office (District Level)
Medium and Large Industries	Department of Industry (DOI), Kathmandu
Industries with Foreign Investment (up to NPR 6 billion)	Department of Industry (DOI), Kathmandu
Industries Requiring Industrial and Investment Promotion Board (“IIPB”) Firearm and Explosives Security Printing Tobacco Products Alcoholic Beverages Stone and Sand Excavation Radio Equipment Precious Minerals and Petroleum Extraction LPG Bottling Drone Production and Services	IIPB

 

• Criteria for Contract or Subcontract Registration in Nepal

When registering a production contract or subcontract, the concerned industry approval body, discussed in point no. 3, evaluates applications based on the following criteria and conditions.

Valid Contract Agreement

A legally binding agreement must exist between the contracting (outsourcing) industry and the contracted (producer) industry.

Trademark Registration

The trademark of the product to be produced under contract must be registered or legally secured by the contracting industry.

Alignment of Objectives

The objectives of both the contracting and contracted industries must be similar to ensure consistency in production standards and goals.

Production Capacity Compliance

The production contract must adhere to the capacity limits stated in the contracted industry’s approved project proposal (scheme).

Operational Status

Both the contracting and contracted industries must have commenced business operations prior to contract registration.

Contract Duration

Each production contract approval is granted for a maximum period of five years at one time, after which it may be renewed if necessary.

Subcontracting Flexibility

Contracting and contracted industries may enter into contracts or subcontracts with each other for production purposes. Furthermore, if the contracted industry requires subsidiary goods related to the primary product, it may establish production agreements with one or more additional industries.

 

• Documents required for registration of Contract Manufacturing in Nepal

For a contract manufacturing arrangement to be registered with the relevant industry approval body, the following documents are required:

Requirement	Description
Production Contract Agreement	A signed agreement between the contracting (outsourcing) and contracted (producer) industries.
Registration Certificates	Valid registration certificates for both contracting and contracted industries to ensure regulatory compliance
Approved Project Proposal	The approved project proposal (scheme) for both industries involved in the contract.
Trademark Certificate	Trademark certificate for the product or service to be produced, if applicable.
Updated Company Registration Certificates	Up-to-date company registration certificates for both contracting and contracted industries.
Updated Business Details	Current business details for both parties involved in the contract.
Tax Clearance Certificates	Valid tax clearance certificates for both contracting and contracted industries.
Environmental Impact Assessment Report	Approved environmental impact assessment report, if required by law, for both industries.
Board of Director’s Decision	Official decision from the board of directors of both the contracting and contracted companies.

 

• Key Subject Matters to Include in a Contract Manufacturing Agreement

The following are the key subject matters to be included in a contract manufacturing agreement:

Subject Matter	Description
Product and Specifications and Quantity	The contract should detail the name of the product(s) to be manufactured along with the projected annual quantity.
Workforce Utilization and Management	The The contract should specify provisions for workforce management, detailing the responsibilities and resources that each party will allocate to ensure efficient production; this may include stipulations regarding labor requirements, the recruitment process, and any necessary training provisions applicable to the workforce involved in the contract manufacturing arrangement.
Supply of Raw Materials	The contract must clearly define the sourcing, supply, and quality standards for raw materials, specifying the criteria that the materials must meet to ensure compliance with industry standards. Additionally, it should indicate whether the commissioning business or the manufacturer is responsible for providing these materials to prevent any potential misunderstandings between the parties involved.
Responsibilities of the Parties	The contract should clearly delineate the roles and responsibilities of each party involved, encompassing responsibilities for regulatory compliance, adherence to production timelines, fulfillment of delivery obligations, and conformity to the agreed-upon standards throughout the manufacturing process.
Quality Standards	The agreement should specify product quality standards and acceptable benchmarks. For example, it may include standards such as quality assurance processes, inspection rights, and criteria for rejecting defective goods.
Contractual Compensation	Th The contract must outline the financial compensation that the manufacturing entity will receive for its services, including any potential bonuses, penalties, or adjustments based on performance metrics.
Payment Terms	The contract must include a detailed payment schedule that specifies the payment methods, intervals, and conditions under which payments may be withheld or adjusted, ensuring both parties are aligned on financial expectations and obligations.
Insurance Coverage	The contract should outline the insurance requirements and responsibilities, detailing the necessary types of coverage, such as liability insurance, property insurance, and any other relevant policies, to ensure adequate protection for both parties involved in the contract manufacturing arrangement.
Dispute Resolution Mechanism	The contract should establish a clear dispute resolution process, specifying the methods of mediation or arbitration to be used, the jurisdiction in which disputes will be addressed, and the applicable laws governing the resolution of such disputes.

Niti Partners and Associates Private Limited, with deep expertise in business registration and advisory on presence requirements, is ready to assist—

 

contact us at [email protected].