Presence of eligible fund manager in India not to constitute business connection in India of such eligible investment fund on behalf of which he undertakes fund management activity [Section 9A] – Income Tax

Presence of eligible fund manager in India not to constitute business connection in India of such eligible investment fund on behalf of which he undertakes fund management activity [Section 9A]
(1) Under section 9(1)(i), income would be deemed to accrue or arise in India in the hands of non-resident, if it arises from a business connection in India. Consequently, income attributable to the activities constituting business connection in India would be taxable in India.

(2) As per Double Taxation Avoidance Agreements (DTAAs), the source country assumes taxation rights on certain incomes, if the non-resident has a Permanent Establishment (PE) in that country.

(3) Under section 6, the residential status of a person other than individual is determinedbased upon the location of its ―control and management‖. As per the existing provisions of law, in case of off-shore funds, the presence of a fund manager in India may create sufficient nexus of the off-shore fund with India and may constitute a business connection in India inspite of the fund manager being an independent person. Likewise, if the fund manager located in India undertakes fund management activity in respect of investments outside India for an off -shore fund, the profits made by the fund from such investments may be liable to tax in India due to the location of fund manager in India and attribution of such profits to the activity of the fund manager undertaken on behalf of the off-shore fund.

(4) Further, presence of the fund manager under certain circumstances may lead to the off shore fund being held to be resident in India on the basis of its control and management being in India.

(5) On account of the fund management activity undertaken in, and from India constituting a business connection –

(a) the fees received by the fund manager for fund management activity gets taxed in India; and

(b) income of off-shore fund from investments made in countries outside India may also get taxed in India.
Due to the above tax consequences in respect of income from the investments of offshore funds made in other jurisdictions, many fund managers who are of Indian origin, are managing the investment of offshore funds in other countries without locating in India.

(6) With a view to facilitate location of fund managers of off-shore funds in India, section 9A has been inserted to provide for a specific regime in the Act in line with global best practices with the aim that, subject to fulfillment of certain conditions by the fund and the fund manager,-

(a) the tax liability in respect of income arising to the Fund from investment in India would be neutral to the fact as to whether the investment is made directly by the
fund or through engagement of Fund manager located in India; and
(b) that income of the fund from the investments outside India would not be taxable in India solely on the basis that the Fund management activity in respect of such investments have been undertaken through a fund manager located in India.

(7) Fund Management Activity through an eligible fund manager not to constitute business connection: 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, subject to fulfillment of certain conditions.

(8) Location of Fund Manager in India not to affect residential status of an eligible investment fund: 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.

(9) Conditions to be fulfilled by an Eligible Investment Fund: The eligible investment fund means a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit. Further, it should fulfill the following conditions:

(a) the fund should not be a person resident in India;

(b) the fund should be a resident of a country or a specified territory with which an agreement referred to in section 90(1) or section 90A(1) has been entered into;

(c) the aggregate participation or investment in the fund, directly or indirectly, by persons being resident in India should not exceed 5% of the corpus of the fund;

(d) the fund and its activities should be 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 should have a minimum of 25 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 10%;

(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 50%;

(h) the investment by the fund in any entity shall not exceed 20% of the corpus of the fund;

(i) no investment shall be made by the fund in its associate entity;

(j) the monthly average of the corpus of the fund shall not be less than Rs 100 crore. If the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than ` 100 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 should neither be engaged in any activity which constitutes a business connection in India nor should have 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 respec t of fund management activity undertaken on its behalf should not be less than the arm’s length price of such activity.

(10) Certain conditions not to apply to investment fund set up by the Government or the Central Bank of a foreign State or a Sovereign Fund
The following conditions would, however, not be applicable 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 notified by the Central Government:

(i) the fund should have a minimum of 25 members who are, directly or indirectly, not connected persons;

(ii) any member of the fund along with connected persons shall not have any participation interest, directly or indirectly, in the fund exceeding 10%;

(iii) the aggregate participation interest, directly or indirectly, of ten or less members along with their connected persons in the fund, shall be less than 50%.

(11) Eligible Fund Manager [Section 9A(4)]: The eligible fund manager, in respect of an eligible investment fund, means any person who is engaged in the activity of fund management and fulfills the following conditions:

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

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

(d) the person along with his connected persons shall not be entitled, directly or indirectly, to more than 20% of the profits accruing or arising to the eligible
investment fund from the transactions carried out by the fund through such fund manager.

(12) Furnishing of Statement in prescribed form [Section 9A(5)] : Every eligible investment fund shall, in respect of its activities in a financial year, furnish within 90 days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority. The statement should contain information relating to –

(1) the fulfillment of the above conditions; and

(2) such other relevant information or document which may be prescribed.

(13) Non-applicability of special taxation regime under section 9A: This special taxation regime would not have any impact on taxability of any income of the eligible investment fund which would have been chargeable to tax irrespective of whether the activity of the eligible fund manager constituted business connection in India of such fund or not. Further, the said regime shall not have any effect on the scope of total income or determination of total income in the case of the eligible fund manager.

(14) CBDT to prescribe guidelines for the manner of application of the provisions of this section.

(15) Meaning of certain terms:

*Term*	*Meaning*
Associate	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 15% of its share capital or interest, as the case may be.
Corpus	The total amount of funds raised for the purpose of investment by the eligible investment fund as on a particular date.
Connected person	Any person who is connected directly or indirectly to another person and includes,— (a) any relative of the person, if such person is an individual; (b) any director of the company or any relative of such director, if the person is a company; (c) any partner or member of a firm or association of persons or body of individuals or any relative of such partner or member, if the person is a firm or association of persons or body of individuals; (d) any member of the Hindu undivided family or any relative of such member, if the person is a Hindu undivided family; (e) any individual who has a substantial interest in the business of the person or any relative of such individual; (f) a company, firm or an association of persons or a body of individuals, whether incorporated or not, or a Hindu undivided family having a substantial interest in the business of the person or any director, partner, or member of the company, firm or association of persons or body of individuals or family, or any relative of such director, partner or member; (g) a company, firm or association of persons or body of individuals, whether incorporated or not, or a Hindu undivided family, whose director, partner, or member has a substantial interest in the business of the person, or family or any relative of such di rector, partner or member; (h) any other person who carries on a business, if – (i) the person being an individual, or any relative of such person, has a substantial interest in the business of that other person; or (ii) the person being a company, firm, association of persons, body of individuals, whether incorporated or not, or a Hindu undivided family, or any director, partner or member of such company, firm or association of persons or body of individuals or family, or any relative of such director, par tner or member, has a substantial interest in the business of that other person;

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