Rule 126 — Conditions and activities for finance company located in any International Financial Services Centre for section 177. Made under s.177 of the Income-tax Act, 2025.
Rule 126 gives effect to Section 177 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) provides that, for the purposes of section 177(7)(b), a finance company located in any International Financial Services Centre shall only carry out one or more of three activities: lending in the form of loans, commitments and guarantees, credit enhancement, securitisation or financial lease; factoring and forfaiting of receivables; and the functions of a Global or Regional Corporate Treasury Centre, such as borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other treasury services and activities.
Sub-rule (2) requires the interest paid by such a finance company, as borrower, in respect of any debt issued by a non-resident to be in foreign currency.
Sub-rule (3) defines "finance company" by reference to regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019, and "International Financial Services Centre" by reference to section 2(q) of the Special Economic Zones Act, 2005.
Section 177(7)(b) leaves the conditions for a finance company located in an International Financial Services Centre to be prescribed, and this rule prescribes two: what the company may do, and the currency in which it must pay interest on non-resident debt. The activity list confines the concession to genuine financing and treasury functions rather than any business carried on from the Centre, and the foreign currency requirement keeps the borrowing and its servicing outside the rupee, which is the point of locating the company in such a Centre.
The word in sub-rule (1) is "only": the company may carry out one or more of the listed activities and nothing else, so an activity outside lending, factoring and forfaiting, and Global or Regional Corporate Treasury Centre functions takes it outside section 177(7)(b). Sub-rule (2) is a separate and absolute requirement — the interest on the non-resident's debt must be paid in foreign currency, whatever the currency of the loan documentation. Both definitions in sub-rule (3) are borrowed from other laws, so a body that is not a finance company under the 2021 Regulations does not become one for this rule by carrying on the listed activities.
A finance company set up in an International Financial Services Centre lends to group companies, runs the group's regional treasury and, separately, begins offering investment advisory services. The advisory business is not among the activities listed in sub-rule (1), which permits only those activities, so the condition in section 177(7)(b) is no longer met. On its borrowing from a non-resident lender, sub-rule (2) requires the interest to be paid in foreign currency.
In the examination of a claim under section 177 in respect of interest on debt issued by a non-resident to a finance company in an International Financial Services Centre, where the company's permitted activities and the currency of interest are tested.
the finance company located in any International Financial Services Centre shall only carry out one or more of the following activities
The interest being paid by such finance company, being the borrower, in respect of any debt issued by a non-resident, shall be in foreign currency.
