Rule 284 — Conditions for the purpose of Schedule VI [Table: Sl. No. 5] to the Act.
The rule sets the conditions on which income of a non-resident from certain derivative arrangements is exempted under Schedule VI [Table: Sl. No. 5].
Sub-rule (1) covers income accrued or arisen to, or received by, a non-resident as a result of the transfer of non-deliverable forward contracts, offshore derivative instruments or over-the-counter derivatives, or the distribution of income on offshore derivative instruments or over-the-counter derivatives. Such income is exempted subject to two conditions. First, the contract, instrument or derivative must be entered into by the non-resident with an offshore banking unit of an International Financial Services Centre holding a valid certificate of registration granted under the International Financial Services Centres Authority (Banking) Regulations, 2020 by the International Financial Services Centres Authority, or with a foreign portfolio investor being a unit of an International Financial Services Centre. Second, it must not be entered into by the non-resident through or on behalf of its permanent establishment in India.
Sub-rule (2) places a duty on the counterparty: the offshore banking unit or the foreign portfolio investor shall ensure that the condition in sub-rule (1)(ii) is complied with.
Sub-rule (3) defines the terms used — "derivative" from section 2(ac) of the Securities Contracts (Regulation) Act, 1956; "foreign portfolio investor" as a person registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019; "non-deliverable forward contract" as a contract for the difference between an exchange rate agreed before and the actual spot rate at maturity, the spot rate being the domestic rate or a market determined rate, settled with a single payment in a foreign currency; "offshore banking unit" as a banking branch Unit located in an International Financial Services Centre; "offshore derivative instrument" from regulation 2(1)(o) of those Foreign Portfolio Investors Regulations; "over-the-counter derivatives" as a derivative contract not traded on an exchange but privately negotiated between a purchaser and a seller; and "permanent establishment" from section 173(c).
The Schedule VI exemption is meant for genuinely offshore dealing routed through an International Financial Services Centre, and two things could defeat that: a counterparty that is not in fact a regulated Centre entity, and a non-resident that books the trade through its own Indian permanent establishment. The rule answers both — it names the permitted counterparties by their registration, and it excludes anything entered into through or on behalf of a permanent establishment in India — and then defines each instrument so that the boundary of the exemption does not have to be argued.
Both conditions in sub-rule (1) must hold, and the second is about how the trade was entered into rather than where the income ends up: a contract entered into through or on behalf of the non-resident's permanent establishment in India is outside the exemption even if the counterparty is a properly registered offshore banking unit. "Permanent establishment" takes the meaning in section 173(c), so that question is not answered by this rule either. Sub-rule (2) is unusual in putting the compliance duty on the Indian-side counterparty — the offshore banking unit or the foreign portfolio investor must ensure the permanent establishment condition is met — while the exemption it protects belongs to the non-resident. The permitted counterparties are exhaustively described: an offshore banking unit with a valid certificate of registration under the 2020 Banking Regulations, or a foreign portfolio investor that is a unit of an International Financial Services Centre. The rule states the conditions; the exemption itself is Schedule VI [Table: Sl. No. 5]'s.
A non-resident fund enters into an over-the-counter derivative, privately negotiated and not traded on an exchange, with an offshore banking unit in an International Financial Services Centre that holds a valid certificate of registration under the 2020 Banking Regulations, and books it entirely offshore. Income from its transfer is exempted, both conditions being met. Had the same trade been entered into on behalf of the fund's Indian branch, sub-rule (1)(ii) would fail, and the offshore banking unit would also have fallen short of its own duty under sub-rule (2) to ensure that condition was complied with.
You meet it when a non-resident claims the Schedule VI [Table: Sl. No. 5] exemption on income from these instruments, and in the offshore banking unit's or foreign portfolio investor's own checks on the counterparty before the contract is entered into.
such contract, instrument or derivative is not entered into by the non-resident through or on behalf of its permanent establishment in India
The offshore banking unit or the foreign portfolio investor shall ensure that the condition provided in sub-rule (1)(ii) is complied with.
