Section 9A of Income Tax Act 1961-Certain activities not to constitute business connection in India
Section 9A(1) of Income Tax Act 1961
Notwithstanding anything contained in sub-section (1) of section 9 and subject to the provisions of this section, 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.
Section 9A(2) of Income Tax Act 1961
Notwithstanding anything contained in section 6, an eligible investment fund shall not be said to be resident in India for the purpose of that section merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.
Section 9A(3) of Income Tax Act 1961
The eligible investment fund referred to in sub-section (1), means 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 or is established or incorporated or registered in a country or a specified territory notified by the Central Government in this behalf;
(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:
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;
(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 a period of twelve months from the last day of the month of its establishment or incorporation:
Provided further that nothing contained in this clause shall apply to a fund which has been wound up in the previous year;
(k) the fund shall not carry on or control and manage, directly or indirectly, any business in 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 amount calculated in such manner as may be prescribed :
Provided that the conditions specified in clauses (e), (f) and (g) shall not apply in case of an investment fund set up by the Government or the Central Bank of a foreign State or a sovereign fund, or such other fund as the Central Government may subject to conditions, if any, by notification in the Official Gazette, specify in this behalf.
Section 9A(4) of Income Tax Act 1961
The eligible fund manager, in respect of an eligible investment fund, means 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.
Section 9A(5) of Income Tax Act 1961
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.
Section 9A(6) of Income Tax Act 1961
Nothing contained in this section shall apply to exclude any income from the total income of the eligible investment fund, which would have been so included irrespective of whether the activity of the eligible fund manager constituted the business connection in India of such fund or not.
Section 9A(7) of Income Tax Act 1961
Nothing contained in this section shall have any effect on the scope of total income or determination of total income in the case of the eligible fund manager.
Section 9A(8) of Income Tax Act 1961
The provisions of this section shall be applied in accordance with such guidelines and in such manner as the Board may prescribe in this behalf.
Section 9A(8A) of Income Tax Act 1961
The Central Government may, by notification in the Official Gazette, specify that any one or more of the conditions specified in clauses (a) to (m) of sub-section (3) or clauses (a) to (d) of sub-section (4) shall not apply or shall apply with such modifications, as may be specified in such notification, in case of an eligible investment fund and its eligible fund manager, if such fund manager is located in an International Financial Services Centre, as defined in clause (a) of the Explanation to section 80LA, and has commenced its operations on or before the 31st day of March, 2024.
Section 9A(9) of Income Tax Act 1961
For the purposes of this section,—
(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) “connected person” shall have the meaning assigned to it in clause (4) of section 102;
(c) “corpus” means the total amount of funds raised for the purpose of investment by the eligible investment fund as on a particular date;
(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 (15 of 1992), which may be notified by the Central Government under this clause.
Related Income-tax Rules
Rule 10V:- Guidelines for application of section 9A
(1) Where the investment in the fund has been made directly by an institutional entity, the number of members and the participation interest in the fund shall be determined by looking through the said entity, if it,—
| (a) | independently satisfies the conditions mentioned in clauses (c), (e), (f) and (g) of sub-section (3) of section 9A; |
| (b) | has been set up solely for the purpose of pooling funds and investment thereof; and |
| (c) | is resident of a country or 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 [or is established or incorporated or registered in a country or a specified territory notified by the Central Government in this behalf]. |
(2) For the purposes of clause (c) of sub-section (3) of section 9A, where direct investor in the fund is a person other than a natural person, the fund shall undertake appropriate due diligence to ascertain the indirect participation, if any, of a person resident in India and the extent thereof:
Provided that where such direct investor is, the Government or the Central bank or a sovereign fund or a multilateral agency or appropriately regulated investor in the form of pension fund or University fund or a bank or collective investment vehicles such as mutual funds, the fund shall obtain a declaration in writing from the direct investor regarding the participation, if any, of a person resident in India and the indirect participation in the fund of any person resident in India may be determined by the fund on the basis of such declaration.
Explanation.—For the purposes of this sub-rule an investor shall be considered to be appropriately regulated if it is regulated or supervised by the securities market regulator or the banking regulator of the country outside India of which it is resident, in the same capacity in which it has made investment in the fund.
(3) A fund shall not be denied the benefit of being an eligible fund for the purposes of section 9A, if,—
| (a) | non-fulfilment of any of the conditions specified in clauses (c), (d) and (e) of sub-section (3) of section 9A,— |
| (i) | is for the reasons beyond the control of the fund and it does not exceed a period of ninety days; |
| (ii) | does not exceed a period of eighteen months beginning from the date on which the fund is setup or is not beyond the final closing of the fund, whichever is earlier, and bona fide efforts are made to satisfy the conditions specified in the clauses (c), (d) and (e) of sub-section (3) of section 9A; |
| (iii) | is for the reason that the fund is in the process of being wound up and it does not exceed a period of one year beginning from the date on which the process of winding has begun; or |
| (b) | there is delay in furnishing the statement referred to in sub-section (5) of section 9A and such delay does not exceed a period of ninety days. |
(4) For the purposes of clause (k) of sub-section (3) of section 9A, a fund shall be said to be controlling or managing a business carried out by any entity, if the fund directly or indirectly holds such rights in, or in relation to, the entity, which results in the fund holding the share capital or a voting power or an interest exceeding twenty six per cent of the total share capital of, or as the case may be, total voting power or total interest in, the entity.
(5) Subject to the provisions of sub-rules (6), (7) and (8), for the purposes of determining the arm’s length price in respect of any remuneration, paid by the eligible investment fund to an eligible fund manager, referred to in clause (m) of sub-section (3) of section 9A, the provisions of the Act shall apply as if,—
| (i) | the transaction between the eligible investment fund and the eligible fund manager is an international transaction; and |
| (ii) | the eligible investment fund and the eligible fund manager are associated enterprises. |
(6) The fund manager shall keep and maintain information and documents as required under section 92D and the rules made thereunder.
(7) The fund manager shall, in addition to any report required to be furnished by it under section 92E, obtain a report from the accountant in respect of activity undertaken for the fund and furnish such report on or before the specified date in the Form No. 3CEJ duly verified by such accountant in the manner indicated therein and all the provisions of the Act shall apply as if it is a report to be furnished under section 92E.
Explanation.—For the purposes of this sub-rule “specified date” shall have the same meaning as assigned to “due date” in the Explanation 2 below sub-section (1) of section 139.
(8) Where the fund manager has either not maintained the document or information as required under section 92D and the rules made thereunder or not produced the document or information before the Assessing Officer or the Transfer Pricing Officer, as the case may be, then, the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall, before determining the arm’s length price for the purposes of clause (m) of sub-section (3) of section 9A, provide an opportunity to the fund to produce the information and documents necessary for the determination of the arm’s length price and the arm’s length price shall be determined after considering the documents or information, if any, provided by the fund.
(9) If in any previous year, it is determined that the remuneration paid or payable by a fund to the fund manager is not in accordance with the provisions of clause (m) of sub-section (3) of section 9A, then the benefits of section 9A shall not be denied to the fund which otherwise satisfies all other conditions specified in section 9A.
(10) Nothing contained in sub-rule (9) shall apply to a fund if the remuneration paid or payable by the fund to the fund manager has been determined to be not at arm’s length price,—
| (a) | for a period of three previous years in succession; or |
| (b) | for any three out of the preceding four previous years. |
(11) The provisions of sub-rule (5) to sub-rule (10) shall not apply on or after the 1st day of April, 2019.
(12) The amount of remuneration to be paid by the fund to a fund manager, referred to in clause (m) of sub-section (3) of section 9A, shall be calculated in the following manner, namely:—
| (i) | In case where the fund is Category-I foreign portfolio investor referred to in item (i), item (ii) or item (iii), and sub-item (III) of item (iv) of clause (a) of regulation 5 of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), the amount of remuneration shall be 0.10 per cent of the asset under management. |
| (ii) | In other cases, the amount of remuneration shall be,— |
| (a) | 0.30 per cent of the asset under management; or |
| (b) | 10 per cent of profits derived by the fund in excess of the specified hurdle rate from the fund management activity undertaken by the fund manager, where it is entitled only to remuneration linked to the income or profits derived by the fund; or |
| (c) | 50 per cent of the management fee, whether in the nature of fixed charge or linked to the income or profits derived by the fund from the management activity undertaken by the fund manager, paid by such fund in respect of the fund management activity undertaken by the fund manager as reduced by the amount incurred towards operational expenses including distribution expenses, if any: |
Provided that the provisions of this sub-clause shall apply only in case the fund is also making payment of management fee to any other fund manager :
Provided further that in case where the amount of remuneration is lower than the amount arrived at under clause (i) or clause (ii), the fund may, at its option, apply to the Member, Central Board of Direct Taxes referred to in sub-rule (2) of rule 10VA seeking approval of the Board under said rule for that lower amount to be the amount of remuneration, and, on receipt of such application the Board may, after satisfying itself considering the relevant facts, approve such lower amount to be the amount of remuneration:
[Provided also that the provisions of sub-rules (3) to (12) of rule 10VA shall, mutatis mutandis, apply to the application made under the second proviso as they apply to application made under sub-rule (2) of the said rule:
Provided also that the provisions of sub-rule (3) of rule 10VA shall not apply to an application made under the second proviso, if it is for the previous year beginning on the 1st day of April, 2021, and made on or before the 1st day of February, 2021.
Explanation.—For the purposes of this rule,—
| (a) | “asset under management” means the annual average of the monthly average of the opening and closing balances of the value of such part of the fund which is managed by the fund manager; |
| (b) | “management fee” means the amount as mentioned in the certificate obtained from an accountant, as defined in clause (i) of Explanation to rule 11UB, for this purpose; |
| (c) | “specified hurdle rate” means a pre-defined threshold beyond which the fund agrees to pay a share of the profits earned by the fund from the fund management activity undertaken by the fund manager. |
(13) The fund manager shall, in addition to any report required to be furnished by it under section 92E, obtain a report from the accountant in respect of activity undertaken for the fund and furnish such report on or before the specified date in the Form No. 3CEJA duly verified by such accountant in the manner indicated therein and all the provisions of the Act shall apply as if it is a report to be furnished under section 92E.]
(14) For the purposes of clause (a) of sub-section (4) of section 9A, a fund manager shall not be considered to be a connected person of the fund merely for the reason that the fund manager is undertaking fund management activity of the said fund.
[(15)] For the purposes of clause (d) of sub-section (4) of section 9A, any remuneration paid to the fund manager, by the fund, which is in the nature of fixed charge and not dependent on the income or profits derived by the fund from the fund management activity undertaken by the fund manager shall not be included in the profits referred to in the said clause, if the conditions specified in clause (m) of sub-section (3) of section 9A are satisfied and such fixed charge has been agreed by the fund manager in writing at the beginning of the relevant fund management activity.
Rule 10VA-Approval of the fund
(1) An investment fund may at its option seek approval of the Board regarding its eligibility for the purposes of section 9A.
(2) The fund seeking approval may make an application in writing, enclosing relevant documents and evidence, to 1[the Member, Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, North Block, New Delhi having supervision and control over the work of Foreign Tax and Tax Research (FT&TR) Division].
(3) The application under sub-rule (2) shall be made three months before the beginning of the previous year for which the fund seeks the approval.
(4) A committee as notified by the Board, shall examine the application and submit its recommendations regarding grant of approval or otherwise and the conditions, if any, subject to which such an approval is to be granted.
(5) The committee referred to in sub-rule(4) shall be headed by a Principal Chief Commissioner or Chief Commissioner, as the case may be, and consist of two other Income-tax authorities not below the rank of Commissioner.
(6) The committee on behalf of the Board may, before giving its recommendation, call for such documents or information from the investment fund as it may consider necessary and may call for further details or information from the fund as well as from the Income-tax authorities and other Departments or agencies, as it may deem fit.
(7) The Board, on the basis of the recommendations of the committee, shall, within sixty days from the end of the month in which the application under sub-rule (2) has been made,—
| (i) | by an order in writing, grant approval to the fund subject to such conditions as it may deem fit; or |
| (ii) | for reasons to be recorded in writing, reject the application. |
(8) The approval once granted, subject to any condition specified in this behalf, shall be applicable for the previous year referred to in sub-rule(3) and subsequent previous years unless it is withdrawn by the Board.
(9) The benefit of section 9A shall not be denied to an eligible investment fund, which has been granted approval, for any previous year for which the approval is in force and has not been withdrawn.
(10) The Board may withdraw the approval granted to any fund, if it is satisfied that,—
| (a) | the approval has been obtained on the basis of misrepresentation of facts or fraud ;or |
| (b) | the conditions mentioned in section 9A are not fulfilled; or |
| (c) | any condition subject to which approval was granted, has been violated. |
(11) No order rejecting the application or withdrawing the approval, shall be passed without giving an opportunity of being heard.
(12) A copy of the order rejecting the application or withdrawing the approval shall be communicated to the fund as well as the Assessing Officer and the Principal Commissioner or Commissioner having jurisdiction over the fund.
Rule 10VB-Statement to be furnished by the fund
(1) The statement required to be furnished under sub-section (5) of section 9A shall be furnished for every financial year by the eligible investment fund in Form No.3CEK duly verified in the manner indicated therein, to the Assessing Officer who has the jurisdiction over the fund or would have had the jurisdiction had such fund been assessable to tax in India but for the provision of section 9A.
(2) The annual statement referred to in sub-rule (1) shall be furnished electronically under digital signature.
(3) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture and transmission of data and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to furnishing of annual statement in the manner specified in sub-rule (2).]
Related FAQ(s)
Q. When is a business connection said to be established?
Ans:- Business connection includes a profession at connection. Business connection includes any activity carried out through a person acting on behalf of a non-resident who performs any one or more of the following:
- If such person has in India authority to conclude contracts on behalf of the non-resident (it will not include cases where authority is restricted to contract for purchase of goods or merchandise on behalf such non-resident); or
- If such person in India habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident;
- If such person habitually secures orders in India mainly or wholly for the non-resident or for the other non-resident under the same management.
No business connection shall be deemed to have been established, if the business is carried on through an independent broker, general commission agent or other agent (i.e., a broker or commission agent who is not working mainly or wholly for such non-resident or other non-resident under same management), provided such person is working in his ordinary course of business.
Only so much of income which accrues or arises due to such business connection is deemed to be income accruing or arising from India and not the entire income of the non-resident.