Section 9A- Certain Activities Not To Constitute Business Connection In India

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The Income Tax Act, of 1961 is the main statute of Income Tax in India. It provides for levy, administration, collection, and recovery of Income Tax.

In order to understand this section, let's understand a few terms and definitions first.

Associate

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 percent of its share capital or interest, as the case may be.

Corpus

Corpus means the total amount of funds raised for the purpose of investment by the eligible investment fund on a particular date.

Entity

Entity means any entity in which an eligible investment fund makes an investment.

Specified Regulations

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.

This section of the Income Tax Act, 1961 primarily talks about the activities which cannot constitute business connections in India. Let’s have a look at those activities.

(1) Regardless of anything mentioned 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 will not constitute business connection in India of the said fund.

(2) Regardless of anything mentioned in section 6, an eligible investment fund will not be known to be a resident of India for the purpose of that section just because the eligible fund manager, undertaking fund management activities on its behalf, is located in India.

(3) The eligible investment fund mentioned 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 fulfills the following conditions: —

(a) the fund should not be a resident of India.

(b) the fund is a resident of a country or a specified territory with which an agreement mentioned in subsection (1) of section 90 or sub-section (1) of section 90A has been entered into;

(c) the aggregate participation or investment in the fund, directly or indirectly, by a person resident in India does not exceed five percent of the corpus of the 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 percent;

(g) the aggregate participation interest, directly or indirectly, of ten or fewer members along with their connected persons in the fund, will be less than fifty percent;

(h) the fund will not invest more than twenty percent of its corpus in any entity;

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

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

Also if the fund has been established or incorporated in the previous year, the corpus of the fund will not be less than one hundred crore rupees at the end of such previous year;

(k) the fund will 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:

Also, the conditions specified in clauses (e), (f), and (g) will not apply in the 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.

(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, 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 will not be entitled, directly or indirectly, to more than twenty percent of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through the fund manager.

(5) Every eligible investment fund will, 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 fulfillment of the conditions specified in this section and also provide such other relevant information or documents as may be prescribed.

(6) Nothing contained in this section will 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.

(7) Nothing contained in this section will have any effect on the scope of total income or determination of total income in the case of the eligible fund manager.

(8) The provisions of this section will be applied in accordance with such guidelines and in such manner as the Board may prescribe on this behalf.