CBDT vide Notification No. 87/2022 dated 01.08.2022 in G.S.R. 610(E) through Income-tax (Twenty Third Amendment) Rules, 2022 has amended Rule 21AK of the Income-tax Rules, 1962 (‘Rules’) to include offshore derivative instruments or over-the-counter derivatives for the purpose of claiming income-tax exemption under section 10(4E) of the Income-tax Act, 1961 (‘Act’) on any income accrued or arisen to, or received by a non-resident under specified conditions.
Clause (4E) under section 10 was inserted by the Finance Act, 2021 to exempt any income accrued or arisen to, or received by a non-resident if–
(i) Such income is a result of transfer of non-deliverable forward contracts; and
(ii) Such contracts are entered into with an offshore banking unit of an International Financial Services Centre (IFSC).
The amendment by the Finance Act 2021 also provided that the above exemption is subject to the fulfilment of prescribed conditions.
In order to provide impetus to IFSC, the Board had inserted Rule 21AK to the Rules prescribing conditions for availing the exemption vide Notification No. 136/2021 dated 15.12.2021.
Original Rule 21AK prescribed conditions only for allowing income-tax exemption in respect of income arising from the transfer of non-deliverable forward contracts under clause (4E) of section 10 of the Act.
Section 10(4E) was further amended by the Finance Act, 2022 to provide for exemption on income arising from the transfer of offshore derivative instruments or over-the-counter derivatives to a non-resident. Now, the board has incorporated the said amendments under Rule 21AK which provides conditions for the purpose of claiming income-tax exemption section 10(4E) of the Act.
In order to claim exemption from any income arising from the transfer of offshore derivative instruments or over-the-counter derivatives shall be exempt if both the conditions specified in Rule 21AK are fulfilled.
This amended Rule also casts a critical responsibility on the offshore banking unit, to ensure that the offshore derivative instruments or over-the-counter derivatives do not have a connection with any non-resident’s permanent establishment in India.
The amended Rule has also defined the expression “offshore derivative instrument” and “over-the-counter derivatives”.
Read the full text of CBDT Notification No. 87/2022 dated 01.08.2022 on Inclusion of offshore derivative instruments or over-the-counter derivatives in Rule 21AK
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 1st August, 2022
INCOME-TAX
G.S.R. 610(E).— In exercise of the powers conferred by clause (4E) of section 10 read with section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct taxes hereby makes the following rules further to amend the Income-tax Rules,1962, namely:─
1. Short title and commencement.—(1) These rules may be called the Income-tax (Twenty Third Amendment) Rules, 2022.
(2) They shall come into force from the date of their publication in the Official Gazette.
2. In the Income-tax Rules, 1962 (hereinafter referred to as the principal rules), in rule 21AK, - (A) in sub-rule (1), -
(a) in the opening paragraph, after the words “non-deliverable forward contracts”, the words “or offshore derivative instruments or over-the-counter derivatives,” shall be inserted;
(b) in clause (i), after the words “non-deliverable forward contract”, the words “or offshore derivative instrument or over-the-counter derivative” shall be inserted;
(c) in clause (ii), after the word “contract”, the words “, instrument or derivative” shall be inserted;
(B) for the Explanation, following shall be substituted, namely:-
“Explanation.—For the purpose of this rule, the expression,—
(i) “derivative” shall have the same meaning as assigned to it in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956);
(ii) "a non-deliverable forward contract" shall mean a contract for the difference between an exchange rate agreed before and the actual spot rate at maturity, with the spot rate being taken as the domestic rate or a market determined rate and such contract being settled with a single payment in a foreign currency;
(iii) "offshore banking unit" means a banking branch Unit located in an International Financial Services Centre, as referred to in sub-section (1A) of section 80LA of the Act;
(iv) “offshore derivative instrument” shall have the same meaning as assigned to it in clause (o) of sub-regulation (1) of regulation (2) of the SEBI Foreign Portfolio Investor Regulations, 2019;
(v) “over-the-counter derivatives" shall mean a derivative contract that is not traded on an exchange but instead is privately negotiated between a purchaser and a seller; and
(vi) "permanent establishment" shall have the meaning as assigned to it in clause (iiia) of section 92F of the Act.
[Notification No. 87/2022/ F. No. 370142/36/2022-TPL]
UMME FARDINA ADIL, Under Secy. (Tax Policy and Legislation Division)
Note : The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section-3, Subsection (ii), vide notification number S.O. 969(E) dated the 26th March, 1962 and were last amended vide notification number G.S.R. 537(E) dated the 12th July, 2022.
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