ITAT Ruling Offers Relief to Offshore Debt Funds: Key Takeaways
The Income Tax Appellate Tribunal (ITAT) has recently provided major relief to offshore debt funds in India by clarifying key interpretations under Section 9A of the Income Tax Act. This ruling is likely to ease compliance burdens for foreign fund managers operating from India.
Let’s break down what this means, why it matters, and how it could impact the Indian fund management ecosystem.
What is Section 9A of the Income Tax Act?
Section 9A was introduced to encourage offshore funds to appoint India-based fund managers without triggering a ‘business connection’ or permanent establishment (PE) risk in India.
Key conditions include:
- The fund must be a resident of a notified jurisdiction.
- The fund manager must act in an independent capacity.
- The fund must satisfy ownership and activity thresholds prescribed in Rule 10V.
However, compliance was often viewed as complex and ambiguous—until now.
What Did the ITAT Rule?
In the case of ACIT vs. Banyan Tree Growth Capital LLC (Mumbai ITAT, 2024), the Tribunal held:
- Mere presence of a fund manager in India does not automatically create a tax liability for the offshore fund, if conditions under Section 9A are broadly met.
- The substantive nature of fund activities and investment policy control lies outside India, not with the Indian fund manager.
- The fund was entitled to claim exemption under Section 9A even if minor deviations existed in procedural compliance.
Why This Matters for Offshore Debt Funds
Relief from Tax Uncertainty
- Offshore debt funds that previously feared ‘business connection’ exposure under Indian tax laws can now operate with more confidence.
Boost to GIFT City and Fund Management Sector
- Helps position GIFT IFSC as a viable base for asset managers handling foreign capital.
Encouragement for India-Based Portfolio Management
- May encourage foreign institutional investors (FIIs) to appoint Indian advisors or managers without tax paranoia.
Key Compliance Relaxations Post Ruling
| Compliance Condition | Old Interpretation | Post-ITAT Ruling |
|---|---|---|
| Fund Manager Location | Could create PE risk | No PE risk if conditions met |
| Procedural Deviations | May lead to disqualification | Allowed if intent and substance met |
| Ownership Limits | Strictly enforced | Interpreted liberally in light of investment intent |
Expert View: What Fund Managers Should Do
Tax Expert Insight:
“Offshore debt funds should still maintain documented adherence to Section 9A conditions but can now rely on the ITAT’s interpretation for reasonable leeway. Substance over form is key.”
— Senior Tax Advisor, Efiletax
Pro Tip:
Always document:
- Investor jurisdictions
- Fund control location
- Role and independence of Indian managers
This will protect your fund during scrutiny.
Legal Reference
- Section 9A of Income-tax Act, 1961
- Rule 10V, Income Tax Rules
- ACIT vs. Banyan Tree Growth Capital LLC [Mumbai ITAT Ruling, 2024]
Frequently Asked Questions (FAQ)
Q1. Can an offshore fund now freely appoint an Indian fund manager?
Yes, as long as the conditions under Section 9A are substantively met.
Q2. Does this ruling apply to equity funds as well?
While the case involved a debt fund, the interpretation can influence equity funds too.
Q3. Will CBDT issue a circular based on this ruling?
So far, no official circular. But this ruling sets persuasive precedent.
Final Thoughts
This ITAT ruling is a positive signal for the Indian fund ecosystem. It reduces tax fears, especially for offshore debt funds that want to use Indian expertise. If you’re an investor or fund manager, this is the right time to review your fund structure in light of this ruling.
👉 Need help with offshore tax compliance or Section 9A certification? Talk to Efiletax experts today
Summary
The ITAT has ruled in favour of offshore debt funds under Section 9A, easing tax burdens for funds appointing India-based managers. Here’s what the ruling means and how it benefits the fund management industry.