Direct Tax Alert

Background

1. In order to augment the infrastructure investments in India, the Finance Act 2020 had introduced Section 10(23FE) in the Income-tax Act, 1961 (IT Act) to grant exemption to:

Specified investors, including Pension Funds (PF) towards specified income earned from funds deployed in infrastructure investment (viz. interest, dividend, Long-term capital gains);
Investment - to be made in ‘Specified sector’ like Infrastructure company, Catgory-I and Category-II AIF, which have their investments in Infra company and ReITs and InvITs.

2. To be eligible for exemption under Section 10(23FE) of the IT Act, the following conditions are required to be fulfilled by the PF:

PF is to be created or established under the laws of a foreign country (including state or provincial laws);
is not liable to tax in such foreign country;
satisfies such other conditions as may be prescribed; and
is specified by the Central Government, by notification in the Official Gazette, for this purpose.

3. In the Notification¹ issued in 2020, the Central Board of Direct Taxes (CBDT) had inserted Rule 2DB in the Income-tax Rules, 1962 (IT Rules) prescribing the conditions that the PF should satisfy to claim exemption viz:

Regulated by law – The PF is required to be regulated by the laws of the foreign country including the local body, provincial or state laws of the place where it is established or created.
Administration of investments – The PF needs to be responsible for administering the assets or investing the assets for meeting statutory obligations and defined contributions of the plan or of the funds such as employment, social security, death benefits etc.
No benefit to private person – The PF should be using its earnings and assets only for meeting statutory obligations and defined contributions, and any portion of the earnings and assets should not inure to the benefit of any private person.
No commercial activity – The PF should not be undertaking any commercial activity within or outside India.
Filing of details regarding investment – The PF should intimate the details of the investments to the Assessing Officer in Form 10BBB within a month of the end of each quarter of the financial year.
Furnish return of income and CA certificate – The PF is required to file its return of income in Form 10BBC on or before the applicable due date prescribed under the IT Act.
Additionally, the said notification has also prescribed Form 10BBA for making the application to the CBDT along with relevant documents and evidence, so as to avail benefit under Section 10(23FE) of the IT Act. The said form seeks confirmation that the PF meets all the terms and conditions for such eligibility.

First amendment to Rule 2DB of IT Rules and substitution of Form 10BBA:

1. The CBDT, vide a notification² dated 15 April 2021, amended Rule 2DB prescribing conditions to be satisfied by PF under Section 10(23FE) of the IT Act, which is as follows:

A proviso was inserted in Clause (iii) (supra), which restricts benefit to private person to exclude any payment made to creditors or depositors for loan taken or borrowing for the purposes other than for making investment in India;
Further, Clause (iv) which restricted undertaking of commercial activity by PF is omitted.

2. Pursuant to the above, updated Form No. 10BBA incorporating the above amendments was brought into effect from 15 April 2021.

Second amendment to Rule 2DB of IT Rules and substitution of Form 10BBA:

1. The CBDT, vide a recent notification³ has further amended Rule 2DB prescribing conditions to be satisfied by the PF under Section 10(23FE) of the IT Act, which is as follows:

Clause ii - Administration of investments

Clause iii - No benefit to private person

Rule 2DB(ii), as mentioned above, provides for administration of assets by the PF for meeting the statutory obligations and defined contributions of one or more funds or plans established for providing retirement, social security benefits, etc. to the participants or beneficiaries of such funds or plans, as the case may be

It has been provided that conditions mentioned under Rule 2DB(ii) shall be deemed to have been satisfied with respect to assets being administered or invested if the following conditions are satisfied:-

Value of such assets is not more than 10% of the total value of assets administered or invested by such fund;
Such assets are wholly owned directly or indirectly by the Government of a foreign country; and
such assets vests in the Government of such foreign country upon dissolution.

As per Rule 2DB(iii), earnings and assets of the PF are to be used only for meeting statutory obligations and defined contributions for participants or beneficiaries of funds or plans referred to in Rule 2DB(ii) and no portion of the earnings or assets of the pension fund inures any benefit to any other private person.

It has been provided that conditions mentioned under Rule 2DB(iii) shall not apply to earnings from the assets mentioned above, if said the earnings are credited either to:

The account of the Government of that foreign country; or
to any other account designated by such Government so that no portion of the earnings inures any benefit to any private person.

2. Further, the new rule also substitutes Form No. 10BBA incorporating the above amendments.

3. The notification shall come into force from 26 April 2021.

Conclusion

The new rules issued in the first instance relaxes eligibility conditions for a PF to get itself notified in order to be eligible for investment exemption under section 10(23EF) of IT Act. The Government has recently notified a prominent overseas PF as a ‘Specified Investor’, eligible to claim exemption under Section 10(23FE) of the IT Act. To augment the inflows and develop the relation with Sovereign countries the Government is making constant efforts to simplify the tax regime in India for PF and SWF, to attract more foreign investment in the infrastructure sector.