Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961

Circular No. 9 of 2022

F. No.370142/2/2022-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes (TPL Division)

Dated: 9th May, 2022

Sub.: Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961 – reg.

The Finance Act, 2020, inter-alia, inserted clause (23FE) in section 10 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) to provide for exemption to wholly owned subsidiaries of Abu Dhabi Investment Authority (ADIA), sovereign wealth funds (SWF) and pension funds (PF) [these are referred as “specified person” hereinafter] on their income in the nature of dividend, interest and long-term capital gains arising from investment made in infrastructure in India, during the period beginning with 01.04.2020 and ending on 31.03.2024 subject to fulfilment of certain conditions.

2. In order to incentivise infrastructure investments by specified persons in India the Finance Act, 2021, hereinafter referred to as “Finance Act”, inter alia, amended the following provisions of clause (23FE) of section 10 of the Act:
   • (i) amended item (c) of sub-clause (iii) thereof to allow exemption for investment by specified person in Category I or Category II Alternative Investment Funds (hereinafter referred as AIF) which invest in one or more of the companies, enterprises or entities as referred to in item (b) (hereinafter referred to as “eligible infrastructure entity”) through domestic companies and Non-Banking Finance Companies or in AIFs investing in an Infrastructure Investment Trust referred to in sub-clause (i) of clause (13A) of section 2 of the Act (hereinafter referred to as InvIT). Further, the Finance Act also relaxed the condition requiring an AIF to have investment in eligible infrastructure entity or InvIT from 100% to 50%;
   • (ii) inserted item (d) in sub-clause (iii) thereof, to allow investment by specified person in a domestic company set up and registered on or after 01.04.2021, having minimum 75 per cent investments in eligible infrastructure entity;
   • (iii) inserted item (e) in sub-clause (iii) thereof, to allow investment by specified person in a Non-Banking Financial Company registered as an Infrastructure Finance Company or in an Infrastructure Debt Fund (hereinafter referred to as NBFC), having minimum 90 per cent lending in eligible infrastructure entity;
   • (iv) inserted Explanation 3 thereof, to provide that the method for determination of 50 per cent, 75 per cent or 90 per cent investment referred to in item (c), (d) or (e) of sub-clause (iii) of the said clause (23FE) shall be prescribed by the Central Government;
   • (v) inserted fourth proviso thereof, providing that in case of an AIF, referred to in item (c) of sub-clause (iii), has investment of less than hundred percent in eligible infrastructure entity or in InvIT, income accrued or arisen to, or received by, or attributable to such investment, directly or indirectly, which is exempt under this clause shall be calculated proportionately to the investment made in eligible infrastructure entity or in InvIT , in the prescribed manner.
   • (vi) inserted fifth proviso thereof providing that in case a domestic company, referred to in item (d) of sub-clause (iii), has investment of less than hundred percent in eligible infrastructure entity, income accrued or arisen to, or received by, or attributable to such investments, directly or indirectly, which is exempt under this clause shall be calculated proportionately to the investment made in eligible infrastructure entity, in the prescribed manner.
   • (vii) inserted sixth proviso thereof, providing that in case an NBFC, referred to in item (e) of sub-clause (iii), has lending of less than hundred percent in eligible infrastructure entity, income accrued or arisen to, or received by, or attributable to such lending, directly or indirectly, which is exempt under this clause shall be calculated proportionately to the lending in eligible infrastructure entity, in the prescribed manner.
3. The method for computation of eligible threshold of 50 per cent, 75 per cent or 90 per cent and exempt income under clause (23FE) of section 10 of the Act has been prescribed in rule 2DCA of the Income Tax Rules (the Rules) vide Notification No 50 of 2022 dated 6th May, 2022.
4. First proviso to clause (23FE) of section 10 of the Act provides that if any difficulty arises regarding interpretation or implementation of the provisions of the said clause, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. In exercise of the powers under this proviso, Board, with the approval of the Central Government, hereby issues the following guidelines:

Guidelines

• 4.1. Transfer of investment within 3 years by the specified person or AIF/ domestic Company/NBFC
• 4.1.1. As per clause (23FE) of section 10 of the Act, any income of a specified person in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India, whether in the form of debt or share capital or unit, is exempt from income tax subject to certain conditions. One of such conditions is prescribed in sub-clause (ii) of clause (23FE) of section 10 of the Act. Under this sub-clause, such investment is required to be held for at least three years’. It has been brought to the notice of the Board that there may be cases where any of the following investments is transferred before the lock-in period of 3 years (“three years’ rule”):
  • (a) Investment by the specified person in eligible infrastructure entity or InvIT or AIF or domestic company or NBFC;
  • (b) Investment by the AIF, out of the investment made by the specified person, in domestic company or NBFC or eligible infrastructure entity or InvIT;
  • (c) Investment by the domestic company, out of the investment made by the specified person directly or through AIF, in eligible infrastructure entity;
  • (d) Lending by NBFC, out of the investment made by the specified person either directly or through AIF, to eligible infrastructure entity.
• 4.1.2. In such cases, as per the third proviso to clause (23FE) of section 10 of the Act, any income which has not been included in the total income of the specified person due to the provisions of this clause, shall be chargeable to income-tax as the income of the specified person of the previous year during which such specified person fails to satisfy any of the conditions of the said clause.
• 4.1.3. In this context, it is hereby clarified that any capital gain accruing or arising on transfer of such investments (which have been transferred in violation of the three years’’ rule) will be treated as follows:
  • (a) Investment by the specified person in eligible infrastructure entity or InvIT or AIF or domestic company or NBFC: such capital gain will not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person.
  • (b) Investment by the AIF, out of the investment made by the specified person, in domestic company or NBFC or eligible infrastructure entity or InvIT: Since AIF is a pass through entity, such capital gain will be taxable in the hands of the specified person and since three years’ rule has not been complied with, the income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person.
  • (c) Investment by the domestic company, out of the investment made by the specified person directly or through AIF, in eligible infrastructure entity: the income, attributable to such capital gains, shall be taxable in the hands of the specified person and since three years’ rule has not been complied with, such income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person
  • (d) Lending by NBFC, out of the investment made by the specified person directly or through AIF, to eligible infrastructure entity: the income, attributable to such capital gain or other income of the NBFC, shall be taxable in the hands of the specified person and since three years’ rule has not been complied with, such income shall not be exempt from tax under clause (23FE) of section 10 of the Act in the hands of the specified person

• 4.1.4. Further any interest or dividend on such investments (which is transferred in violation of the three years’ rule) which has been exempted from income-tax under clause (23FE) of section 10 of the Act in the earlier years, will be subjected to tax in the hands of the specified person as the income of the previous year in which such investment is transferred in violation of the three year rule by the specified person or AIF or domestic company or NBFC, as the case may be.
• 4.1.5. The above guidelines are explained with the help of following examples:
  
  Example 1: Specified person invests Rs 100 crore in an eligible infrastructure entity. The specified person is notified as on 30.04.2021 and such investment is made on 31.03.2022 in the form of shares. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from such investment which is claimed to be exempt. Further during the previous year 2023-24, dividend of Rs 12 crore is received which is also claimed to be exempt. As on 01.04.2024, the specified person decides to exit and transfers its shares for an amount of Rs 120 crore. In such case, during the previous year 2024-25, the dividend income given exemption during the previous year 2022-23 amounting to Rs 10 crore and Rs 12 crore dividend income given exemption during the previous year 2023-24 will be taxable as income of the previous year 2024-25 in the hands of the specified person. Further, there will be no capital gains tax exemption on transfer of shares of infrastructure company by the specified person.
  
  Example 2: Specified person invests Rs 100 crore in an AIF, as referred to in item (c) of sub-clause (iii) of clause (23FE) of section 10 of the Act. The specified person is notified as on 30.04.2021 and such investment is made on 30.05.2021 in the form of units. The AIF in turn invests in a domestic company referred to in item (d) of sub-clause (iii) of clause (23FE) of section 10 of the Act as on 30.06.2021 out of the investment made by the specified person. The domestic company in turn invests Rs. 100 crore in an eligible infrastructure entity, on 31.07.2021 out of the investment made by the AIF. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from the investment made in the domestic company through AIF. Under Rule 2DCA of the Rules, an amount of Rs 8 crore is found to be exempt. Further during the previous year 2023-24, dividend of Rs 12 crore is received. Under Rule 2DCA of the Rules, an amount of Rs 10 crore is found to be exempt. As on 15.07.2024, the domestic company decides to exit and transfers its shares in the infrastructure company for an amount of Rs 120 crore. During the previous year 2024-25, dividend of Rs 20 crore is received by the AIF from the domestic company which is passed on by the AIF to the specified person. In such case, during the previous year 2024-25, the dividend of Rs 20 crore received during the previous year 2024-25, the dividend income which was granted exemption during the previous year 2022-23 amounting to Rs 8 crore and the dividend income treated as exempt during the previous year 2023-24 amounting to Rs 10 crore will be taxable as income of the previous year 2024-25 in the hands of the specified person. Further, there will be no capital gain tax exemption on transfer of share of the domestic company through AIF by the specified person.
  
  Example 3: Specified person invests Rs 100 crore in an AIF, as referred to in item (c) of sub-clause (iii) of clause (23FE) of section 10 of the Act. The specified person is notified as on 30.04.2021 and such investment is made as on 30.05.2021 in the form of units. The AIF in turn invests the entire amount in a domestic company referred to in item (d) of sub-clause (iii) of clause (23FE) of section 10 of the Act as on 30.06.2021 out of the investment made by the specified person. The domestic company in turn invests Rs. 60 crore in an eligible infrastructure entity A and Rs 40 crore in eligible infrastructure entity B, on 31.07.2021 out of the investment made by the AIF. During the previous year 2022-23, the specified person gets dividend of Rs 10 crore from the investment made in the domestic company through AIF. Under Rule 2DCA of the Rules, an amount of Rs 8 crore is found to be exempt (Rs 4.8 crore attributable to investment in eligible infrastructure entity A and 3.2 crore attributable to investment in eligible infrastructure entity B). Further during the previous year 2023-24, dividend of Rs 12 crore is received. Under Rule 2DCA of the Rules, an amount of Rs 10 crore is found to be exempt (Rs 6 crore attributable to investment in eligible infrastructure entity A and 4 crore attributable to investment in eligible infrastructure entity B). As on 15.07.2024, the domestic company decides to exit and transfers its shares in the eligible infrastructure entity A for an amount of Rs 120 crore. During the previous year 2024-25, dividend of Rs 25 crore is received by the AIF from the domestic company which is passed on by the AIF to the specified person (Rs 20 crore attributable to investment in eligible infrastructure entity A and 5 crore attributable to investment in eligible infrastructure entity B). In such case, during the previous year 2024-25, the dividend of Rs 20 crore received during the previous year 2024-25, which is attributable to investment in eligible infrastructure entity A, the dividend income granted exemption during the previous year 2022-23 amounting to Rs 4.8 crore, which is also attributable to investment in eligible infrastructure entity A, and the dividend income granted exemption during the previous year 2023-24 amounting to Rs 6 crore, which is attributable to investment eligible infrastructure entity A, will be taxable as income of the previous year 2024-25 in the hands of the specified person. Further, there will be no capital gain tax exemption on transfer of share of the domestic company through AIF by the specified person with respect to this investment. The amount of exemption under clause (23FE) of section 10 of the Act, with respect to the income of the specified person attributable to the investment in eligible infrastructure entity B, will be decided as per the provisions of rule 2DCA. The minimum threshold of investment by the AIF/domestic company, as per sub-rule (2) and (3) of rule 2DCA, in eligible infrastructure entities or InVIT, as the case may be, will also have to be maintained.

4.2. Eligible infrastructure entity carrying on other businesses as well

4.2.1. A specified person may invest in an eligible infrastructure entity. Such investment by specified person may be either directly or through an AIF or a domestic company or NBFC. It has been brought to the notice of the Board that some such eligible infrastructure entities may be carrying on businesses other than the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as referred to in item (b) of clause (23FE) of section 10 of the Act. Concerns have been raised that in such cases, whether the entire investment will disqualify for exemption under the said clause.

4.2.2. In order to remove difficulty to the taxpayer, it is clarified that if eligible infrastructure entity carries on businesses other than the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA of the Act or such other business as the Central Government may, by notification in the Official Gazette, specify in this behalf (hereinafter referred as “eligible activity”), the exemption could still be provided if the profit before tax of the eligible infrastructure entity from eligible activity is 50% or more of the total profit before tax of the eligible infrastructure entity. The exempt income from investment in such eligible infrastructure entity (hereinafter referred to as “hybrid infrastructure entity”) attributable to such eligible activity shall be calculated proportionately. For the purposes of determination of such exempt income attributable to eligible activity, separate books of account shall be maintained by such hybrid infrastructure entity. The income of the specified person, from such hybrid infrastructure entity attributable to such eligible activity, exempt under clause (23FE) of section 10 of the Act shall be calculated using the following formula, namely:

A= B*C/D, where −

A= The income of the specified person from hybrid infrastructure entity attributable to the investment in eligible activity during the relevant previous year.
C= Profit before tax of the hybrid infrastructure entity from the eligible activity for the relevant previous year.
D= Profit before tax of the hybrid infrastructure entity from all the businesses/activities/sources for the relevant previous year.

“B” shall have the following meaning:

I. In case of direct investment by the specified person in the hybrid infrastructure entity:

B=Income accrued or arisen or attributed to, or received by, the specified person during the relevant previous year from the hybrid infrastructure entity, with respect to eligible investments made under clause (23FE), on or after the date of notification of the specified person under the said clause (23FE).

II. In case of investment by specified person in the hybrid infrastructure entity through AIF:
B= “I” as specified in sub-rule (5) of rule 2DCA of the rules attributable to the investment in hybrid infrastructure entity;

III. In case of investment by specified person in the hybrid infrastructure entity through AIF and domestic company:
B= “J” as specified in sub-rule (5) of rule 2DCA of the rules attributable to the investment in hybrid infrastructure entity;

IV. In case of investment by specified person in the hybrid infrastructure entity through AIF, and non-banking finance company
B=“K” as specified in sub-rule (5) of rule 2DCA of the rules attributable to the investment in hybrid infrastructure entity;

V. In case of investment by specified person in the hybrid infrastructure entity through a domestic company:
B= exempt income computed under sub-rule (6) of rule 2DCA of the rules attributable to the investment in hybrid infrastructure entity;

VI. In case of investment by specified person in the hybrid infrastructure entity through non-banking finance company,
B= exempt income computed under sub-rule (7) of rule 2DCA of the rules attributable to the investment in hybrid infrastructure entity.

4.2.3. Where investment has been made by the specified person, either directly or through AIF or domestic company or NBFC, in different eligible infrastructure entities and one or more of such eligible infrastructure entities are hybrid infrastructure entities, exemption under rule 2DCA of the rules shall be computed as follows:

• (a) in respect of the hybrid infrastructure entities as per paragraph 4.2.2 of these guidelines;
• (b) in respect of other eligible infrastructure entities, as per rule 2DCA of the rules, to the extent attributable to the investment in such entities.

Download complete Circular No. 9 of 2022 dated 9th May 2022 from official website of Central Board of Direct Taxes.