CA Rockey

CA RockeyInsertion of new section 9A-Certain activities not to constitute business connection in India, in Income Tax Act, 1961

Introduction:-The foreign portfolio investors (referred as foreign institutional investors in the Act) face a difficulty in characterization of their income arising from transaction in securities as to whether it is capital gain or business income. Further, the fund manager managing the funds of such investor remains outside India under the apprehension that its presence in India may have adverse tax consequences. Therefore, in order to end this uncertainty, it is proposed in Finance Bill, 2014, to amend the section 2(14) of Income Tax Act, 1961, which define the term capital asset to provide that any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be treated as capital asset only so that any income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.

In consequence of such amendment, now Foreign Portfolio Investors are entitle to avail the benefit of section 10(38) and 111A of Income tax Act, subject to fulfillment of stipulated provisions therein. However, these benefits could not availed when their income arising from transaction in securities considered as business income.

Analysis of proposed section 9A:-Finance Bill, 2015 comes forward with intent to end the another uncertainty which is leave unaddressed by Finance Bill, 2014, i.e. adverse tax consequences due to presence of fund manager in India managing the Funds of Foreign Portfolio Investors. Finance Bill, 2015 insert a new section 9A, which proposes that

1). 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.

Through this sub section (1) of section 9A, the provision of existing sub-section (1) of section 9 is override, which talk about Income deemed to accrue or arise in India due to business connection.

2). Further, an eligible investment fund shall not be said to be resident in India for this purpose merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

Through this sub-section (2) of section 9A, the provision of section 6 is override which contains the provisions to become resident in India.

Meaning of Eligible Investment Fund:-A fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions, namely:-

(a) the fund is not a person resident in India;

(b) the fund is a resident of a country or a specified territory with which an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A has been entered into (in simple words, the Fund must be a resident of a country/specified territory with whom India has a DTAA agreement);

(c) 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 (the total investment of person resident in India whether directly or indirectly shall not be more than 5% of corpus of fund);

(d) the fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident;

(e) the fund has a minimum of twenty-five members who are, directly or indirectly, not connected persons;

(f) any member of the fund along with connected persons shall not have any participation interest, directly or indirectly, in the fund exceeding ten per cent.;

(g) the aggregate participation interest, directly or indirectly, of ten or less members along with their connected persons in the fund, shall be less than fifty per cent.;

(h) the fund shall not invest more than twenty per cent. of its corpus in any entity;

(i) the fund shall not make any investment in its associate entity;

(j) the monthly average of the corpus of the fund shall not be less than one hundred crore rupees:

Provided that if 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 such previous year;

(k) the fund shall not carry on or control and manage, directly or indirectly, any business in India or from India;

(l) the fund is neither engaged in any activity which constitutes a business connection in India nor has any person acting on its behalf whose activities constitute a business connection in India other than the activities undertaken by the eligible fund manager on its behalf;

(m) the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the arm’s length price of the said activity.

Meaning of Eligible Fund Manager:-Any person who is engaged in the activity of fund management and fulfils the following conditions, namely:-

(a) the person is not an employee of the eligible investment fund or a connected person of the fund;

(b) the person is registered as a fund manager or an investment advisor in accordance with the specified regulations;

(c) the person is acting in the ordinary course of his business as a fund manager;

(d) the person along with his connected persons shall not be entitled, directly or indirectly, to more than twenty per cent. of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through the fund manager.

Every eligible investment fund shall, in respect of its activities in a financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form, to the prescribed income-tax authority containing information relating to the fulfilment of the conditions specified in this section and also provide such other relevant information or documents as may be prescribed.

However, nothing contained in section 9A shall have any effect on the scope of total income or determination of total income in the case of the eligible fund manager

Meanings of other terms:-

(a) “associate” means an entity in which a director or a trustee or a partner or a member or a fund manager of the investment fund or a director or a trustee or a partner or a member of the fund manager of such fund, holds, either individually or collectively, share or interest, being more than fifteen per cent. of its share capital or interest, as the case may be;

(b) “corpus” means the total amount of funds raised for the purpose of investment by the eligible investment fund as on a particular date;

(c) “connected person” shall have the meaning assigned to it in clause (4) of section 102;

(d) “entity” means any entity in which an eligible investment fund makes an investment;

(e) “specified regulations” means the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993 or the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, or such other regulations made under the Securities and Exchange Board of India Act, 1992 which may be notified by the Central Government under this clause.

Conclusion:- By insertion of new section 9A would result in shifting the investment fund manager in India by Foreign Portfolio Investors in view of ease in fund managing. This shifting would open the new avenues for investment fund managers and will create the new jobs. Revenue of Indian Income Tax authority will raise as Income tax Authority shall also collection the tax from these fund managers. However, new propose section 9A does not provide any tax benefit to eligible fund managers, these fund manager shall be continued to tax as per existing provisions.

Also Read- Fund Managers in India not to constitute business connection of offshore funds

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Location: GURUGRAM, Haryana, IN
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January 2021