The Direct Tax Code (DTC) 2025 empowers the Central Government to notify certain jurisdictions as "notified jurisdictional areas" (NJAs) where there is a lack of effective exchange of information. Offshore AIF feeder structures involving NJAs face significant compliance obligations and tax risks under Section 176. This guide analyses the NJA rules and their implications for offshore AIF feeder structures.
The NJA Framework Under Section 176
Section 176(1) — Notification of Jurisdictional Area
Section 176(1) provides that "The Central Government may, by notification specify any country or territory outside India, as a notified jurisdictional area in relation to transactions entered into by any assessee, having regard to the lack of effective exchange of information with such jurisdiction."
Section 176(2) — Deemed Associated Enterprises
Section 176(2) provides that "If an assessee enters into a transaction where one of the parties to the transaction is a person located in a notified jurisdictional area, then:
- (a) all the parties to the transaction shall be deemed to be associated enterprises within the meaning of section 162
- (b) any transaction of the nature described in section 163(1) and (2) shall be deemed to be an international transaction within the meaning of section 163"
This is a deeming provision — it applies regardless of whether the parties would otherwise be associated enterprises or the transaction would otherwise be an international transaction.
Section 176(3) — Disallowance of Deductions
Section 176(3) provides that "No deduction shall be allowed:
- (a) for any payment made to any financial institution located in a notified jurisdictional area, unless the assessee furnishes an authorisation in the prescribed form authorising the Board or any other income-tax authority acting on its behalf to seek relevant information from the said financial institution on behalf of such assessee
- (b) for any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area, unless the assessee maintains such other documents and furnishes such information as may be prescribed"
Section 176(4) — Deemed Income
Section 176(4) provides that "If, in any tax year, the assessee has received or credited any sum from any person located in a notified jurisdictional area and:
- (a) the assessee does not provide any explanation about the source of the said sum in the hands of such person or in the hands of the beneficial owner; or
- (b) the explanation provided by the assessee, in the opinion of the Assessing Officer, is not satisfactory,
then such sum shall be deemed to be the income of the assessee for that tax year."
Section 176(5) — Higher TDS Rate
Section 176(5) provides that "If any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XIX-B, the tax shall be deducted at the highest of the following rates:
- (a) at the rate or rates in force
- (b) at the rate specified in the relevant provisions of this Act
- (c) at the rate of 30%"
Application to Offshore AIF Feeder Structures
What are Offshore AIF Feeder Structures?
Offshore AIF feeder structures typically involve:
- An offshore fund (feeder fund) that invests in an Indian AIF (master fund)
- Investors in the offshore fund who are not resident in India
- The offshore fund may be located in a jurisdiction that is an NJA
NJA Risks in Feeder Structures
1. Deemed Associated Enterprise
If the offshore feeder fund is located in an NJA, the Indian AIF and the offshore feeder fund shall be deemed to be associated enterprises. All transactions between them shall be deemed to be international transactions, subject to transfer pricing rules.
2. Disallowance of Deductions
If the Indian AIF makes any payment to a financial institution located in an NJA, the deduction may be disallowed unless the AIF furnishes an authorisation in the prescribed form (Form No. 61).
3. Deemed Income
If the Indian AIF receives or credits any sum from an NJA person and cannot satisfactorily explain the source, the sum may be deemed to be the income of the AIF.
4. Higher TDS
If the Indian AIF makes any payment to an NJA person on which tax is deductible, the TDS rate shall be the highest of the rates in force, the rate specified in the relevant provisions, or 30%.
Rule 125 — Authorisation and Documentation
Rule 125 prescribes the requirements for Section 176:
Rule 125(1) provides that the authorisation to be submitted by the assessee shall be in Form No. 61.
Rule 125(3) provides that the second copy of the filled up Form No. 61 along with the evidence of the first copy having been deposited or transmitted to the financial institution shall be submitted to the Assessing Officer.
Rule 125(5) provides that the assessee shall keep and maintain the following information and documents:
- A description of the ownership structure of the specified person
- A profile of the multinational group
- A broad description of the business of the specified person
- Any other information, data or document which may be relevant for the transaction with the specified person
Rule 125(6) provides that the information and documents shall be for the period up to the due date of filing of return of income under Section 263(1).
Rule 125(7) provides that the information and documents shall be kept and maintained for a period of eight years from the end of the financial year succeeding the relevant tax year.
Practical Compliance for Offshore AIF Feeder Structures
1. Identify NJA Exposure
- Determine whether any party to the feeder structure is located in an NJA
- Identify all transactions with NJA persons
- Assess the tax risks
2. Obtain Authorisation (Form No. 61)
- If payments are made to financial institutions in NJAs, obtain the authorisation in Form No. 61
- Deposit the first copy with the financial institution
- Submit the second copy to the Assessing Officer
3. Maintain Documentation
- Maintain documentation as required under Rule 125(5)
- Ensure documentation is complete and accurate
- Retain documentation for eight years
4. Comply with Transfer Pricing
- Since NJA transactions are deemed international transactions, comply with transfer pricing rules
- Maintain TP documentation
- File TP report
5. Be Prepared for Higher TDS
- If payments are made to NJA persons, apply the highest TDS rate
- Ensure TDS is deducted at the correct rate
Risk Mitigation Strategies
1. Avoid NJA Jurisdictions
- Consider relocating the offshore feeder fund to a non-NJA jurisdiction
- This eliminates the NJA risks entirely
2. Ensure Proper Documentation
- Maintain comprehensive documentation for all transactions
- Ensure explanations for sources of funds are satisfactory
3. Comply with All Requirements
- Obtain the required authorisations
- Maintain the required documentation
- Comply with transfer pricing rules
- Deduct TDS at the correct rate
4. Seek Expert Advice
- Given the complexity of NJA rules, seek expert legal and tax advice
- Obtain tax opinions on the NJA implications
Consequences of Non-Compliance
Disallowance of Deductions
Failure to comply with Section 176(3)(a) or (b) may result in disallowance of deductions.
Deemed Income
Failure to explain the source of sums received from NJA persons may result in the sums being deemed to be income.
Higher TDS
Failure to deduct TDS at the highest rate may result in interest and penalty.
Transfer Pricing Adjustment
Failure to comply with transfer pricing rules may result in transfer pricing adjustments.
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on NJA compliance for offshore AIF feeder structures. Our international tax experts help AIF managers understand NJA risks, obtain required authorisations, and navigate the regulatory framework. We assist in risk assessment, documentation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on NJA compliance or any other international tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex NJA framework for offshore AIF feeder structures requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive international tax advisory services, including:
- NJA Risk Assessment: Evaluation of NJA exposure
- Authorisation: Assistance with Form No. 61 filing
- Documentation: Guidance on maintaining required documentation
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your NJA compliance matters.