1.0 Following the insertion of Section 9A in the Income-tax Act, 1961 ('Act, 1961') (popularly known as "Safe Harbour Norms"), SEBI has hailed to foreign fund management activity in the country and has come up with a consultation paper seeking comments from public for the amendments to the SEBI (Portfolio Managers) Regulations, 1993 wherein it is proposed that an existing or new SEBI registered Portfolio Manager maybe permitted to act as Eligible Fund Manager ("EFM") to manage Eligible Investment Funds ("EIFs").
Amendment to clause (b) of section 9A
2.0 The said amendment came in the backdrop of the amendment to clause (b) of Section 9A of the Finance Act, 2016 where the scope of the tax relief of funds is widened by including the words"is established or incorporated or registered in a country or a specified territory notified by Central Government in this behalf" which until now was limited to the countries with which India had entered into Double Tax Avoidance Agreement (DTAA) under Section 90 or the agreement between specified associations for double taxation relief under Section 90A (1). After the amendment, the funds established or incorporated or registered in a country or a specified territory notified by the Central Government shall also be treated as EIFs.
Status of offshore funds before amendment
3.0 Before the amendment, in the case of offshore funds, under the existing provisions, the presence of a fund manager in India may create sufficient nexus of the offshore fund with India and may constitute a business connection in India, even though the fund manager may be an independent person. Similarly, if the fund manager located in India undertakes fund management activity in respect of investments outside India for an offshore 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 offshore fund.
Therefore, apart from taxation of income received by the fund manager as fees for fund management activity, income of offshore fund from investments made in countries outside India may also get taxed in India due to such fund management activity undertaken in, and from, India constituting a business connection. Further, presence of the fund manager under certain circumstances may lead to the offshore fund being held to be resident in India on the basis of itscontrol and management being in India. As there are a large number of fund managers who are of Indian origin and managing the investment of offshore funds in various countries, are not locating in India due to the above tax consequence in respect of income from the investments of offshore funds made in other jurisdictions.
Luring of fund managers to relocate to India
4.0 Therefore, to lure offshore fund managers to relocate to India, the permanent establishment norms have been modified to the effect that mere presence of a fund manager in India would not constitute Permanent Establishment (PE) of the offshore funds resulting in adverse tax consequences. Clause (k) of sub-section (3) of section 9A has also been modified to exclude that the eligible investment fund shall not carry on or control and manage, directly or indirectly, any business from India. Sub-section 6 provides that any income deemed to accrue or arise in India out of total income of EIFs shall be liable to tax, irrespective of whether the activity of the eligible fund manager constituted the business connection in India or not. TDS provisions u/s 195 & taxation of dividend, capital gains, interest u/s 115A & 115AB of the Act shall continue to apply. However, the requirement to furnish PAN by the EIFs u/s 206AA of the Act is not applicable. Further, sub-section 7 of section 9A states that total income of the eligible fund manager shall continue to be taxable as per the normal provisions of the Act.
Further, section 9A of the Act, 1961, inter alia, provides that fund management activity carried out through an EFM located in India acting on behalf of an EIF, established or incorporated or registered outside India, which collects funds from its members for investing it for their benefitsshall not constitute business connection in India, subject to the fund and the fund manager meeting certain specified conditions mentioned under the section.