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CBDT Amends Rules for Remuneration of a Fund Manager Under Section 9A

CBDT Amends Rules for Remuneration of a Fund Manager Under Section 9A

CBDT notified the Income Tax (10^th Amendment) Rules, 2020 on 27^th May 2020 to amend Rule 10V to provide clarity on the remuneration paid to an eligible offshore investment fund manager to be considered for the purposes of Section 9A of the Income Tax Act, 1961.

Section 9A provides relief to such offshore investment funds that are incorporated or established or registered outside India and satisfy certain conditions shall not be treated as resident in India merely because the eligible fund manager who is undertaking the activities of fund management on behalf of the eligible investment fund is situated in India. The section also states that the fund management activities carried out by an eligible fund manager on behalf of the eligible fund shall not be considered as to constitute a business connection in India for the fund. One of the conditions that is provided in the section relates to the maximum remuneration that can be paid by the fund to its fund manager in order to be covered under this section. Rules have been amended to provide clarity on the manner in which such maximum remuneration has to be calculated.

Now Rule 10V has been amended and three sub-rules have been added:

Rule 10V (11) has been added and it states that the provisions of sub-rule (5) to sub-rule (10) shall not be applicable with effect from 1^st April 2019.

Sub-rule (5) to sub-rule (10) dealt with the applicability of transfer pricing provisions to the remuneration paid by the eligible offshore investment fund to its eligible fund manager. It provided for determination of the arm’s length price for the remuneration paid by treating the transaction as an international transaction and treating the fund manager and the investment fund as associated enterprises.

Now, these provisions are done away from 1^st April 2019 since through this notification guidance has been provided regarding the amount of remuneration that is to be considered for Section 9A and thus, the need for calculating arm’s length price doesn’t arise.

Rule 10V (12) has been added and it provides for the manner in which remuneration mentioned under section 9A shall be calculated to be eligible for treatment under the section.

Section 9A (3) provides the conditions to be satisfied by the investment fund to be considered as an eligible investment fund. Clause (m) of this subsection provides a condition regarding the maximum remuneration that can be paid by the fund to its fund manager for his fund management activities to be considered as an eligible investment fund.

Now Rule 10V (12) states that the maximum remuneration has to be calculated in the following manner:

1. For Category-I foreign portfolio investor referred to in Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, remuneration shall be calculated as 0.10 percent of the asset under management.
2. Government and Government related investors like the central bank, sovereign wealth funds, international or multilateral organizations or agencies including such agencies that are either controlled or at least 75% owned whether directly or indirectly by such Government and Government related investors,
3. Pension funds and university funds;
4. Appropriately regulated entities like insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker-dealers, and swap dealers;
5. University-related endowments of those universities that have been existing for more than 5 years and form part of entities from Financial Action Task Force member countries.
6. For all other cases, the remuneration shall be arrived by any of the following ways:
7. 30 % of the asset under management.
8. 10% of profits earned by the fund from the fund management activities carried out by the manager in excess of a specified hurdle rate. This clause will apply when the fund manager is entitled only to remuneration linked to the incomes or profits of the fund
9. 50% of management fees paid by the fund for the fund management activities carried out by the fund manager as reduced by operational expenses incurred by the fund. The management fees can either be a fixed charge or a percentage of profits or income earned by the fund. This clause will apply only when the fund is making payment of management fees to other fund managers as well.

In a case where the remuneration that is paid by the fund is less than the amounts calculated as per the above two clauses (whichever clause applies), an option has been provided to the fund that it can apply to CBDT for its approval for the payment of a lower remuneration and the Board may its disposal approve such amount.

Sub-rule (13) has been added and a new Form 3CEJA has been introduced

This new sub-rule requires a fund manager to obtain an accountant’s report for the activities undertaken for the fund and a duly verified report by the accountant has to furnished in Form 3CEJA as per the due dates specified for the same.

Existing sub-rule (11) and sub-rule (12) have been renumbered as sub-rule (14) and sub-rule (15) respectively.

With this notification now offshore investment funds have clarity regarding the amount of remuneration that will be eligible for relaxation under Section 9A.