Section 9A of the Act provides for a special regime in respect of offshore funds by providing them exemption from creating a “business connection” in India on fulfilment of certain conditions. It provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund. Further, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India. The benefit under section 9A is available subject to the conditions as provided in sub-sections (3), (4) and (5) thereof. Sub-section (3) of section 9A provides the conditions for eligibility of the fund.

One of the conditions for eligibility of the fund provided under clause (c) of said sub-section (3) requires that the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five per cent of the corpus of the fund. Representations have been received in this regard stating that this condition is difficult to comply with in the initial years for the reason that eligible fund manager, who is resident in India, is required to invest his money as “skin in the game” to create reputation to attract investment.

One other condition for eligibility of the fund provided under clause (j) of said sub-section (3) requires that the monthly average of the corpus of the fund shall not be less than one hundred crore rupees except where the fund has been established or incorporated in the previous year in which case, the corpus of fund shall not be less than one hundred crore rupees at the end of a period of six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later. This condition does not apply in a case where the fund has been wound up.

Representations have been received in this regard stating that as per this condition, the period for fulfilling the requirement of monthly average of the corpus of one hundred crore rupees ranges from six months to eighteen months, in so far as the fund established or incorporated on last day of the financial year would get six months and the fund established or incorporated on first day of the financial year would get eighteen months. It has been stated that this results in anomaly as certain funds due to its date of establishment and incorporation get favoured or discriminated against.

Accordingly, it is proposed to amend section 9A of the Act to relax these two conditions so as to provide that,-

(i) for the purpose of calculation of the aggregate participation or investment in the fund, directly or indirectly, by Indian resident, contribution of the eligible fund manager during first three years up to twenty-five crore rupees shall not be accounted for; and

(ii) if the fund has been established or incorporated in the previous year, the condition of monthly average of the corpus of the fund to be at one hundred crore rupees shall be fulfilled within twelve months from the last day of the month of its establishment or incorporation.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

[Clause 6]

Extract of Relevant Clauses of Finance Bill 2020

Clause 6

“Clause 6 of the Bill seeks to amend section 9A of the Income-tax Act relating to certain activities not to constitute business connection in India.

Sub-section (3) of the said section provides for the conditions to be fulfilled for being an eligible investment fund.

Clause (c) of said sub-section provides that the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India should not exceed five per cent. of the corpus of the fund.

It is proposed to amend the said clause (c) by insertion of a proviso so as to provide that for the purposes of calculation of the aggregate participation or investment in the fund, any contribution made by the eligible fund manager during the first three years of operation of the fund, not exceeding twenty-five crore rupees, shall not be taken into account.

Clause (j) of said sub-section provides that the monthly average of the corpus of the fund shall not be less than one hundred crore rupees. First proviso to said clause further provides that where the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than one hundred crore rupees at the end of a period of six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later.

It is proposed to amend the first proviso to said clause (j) of said sub-section so as to provide that where the fund has been established or incorporated in the previous year, the fund shall be required to fulfil the condition of maintaining the corpus of one hundred crore rupees within a period of twelve months from the end of the month of its establishment or incorporation.

These amendments will take effect from 1st April, 2020 and will, accordingly apply in relation to the assessment year 2020-2021 and subsequent assessment years.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

6. Amendment of section 9A.

In section 9A of the Income-tax Act, in sub-section (3),––

(a) in clause (c), the following proviso shall be inserted, namely:––

“Provided that for the purposes of calculation of the said aggregate participation or investment in the fund, any contribution made by the eligible fund manager during the first three years of operation of the fund, not exceeding twenty-five crore rupees, shall not be taken into account;”;

(b) in clause (j), in the first proviso, for the words “six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later”, the words “twelve months from the last day of the month of its establishment or incorporation”shall be substituted.

Source- Finance Bill 2020 / Union Budget 2020-21

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