When Does a Foreigner Setting Up Business in India Stop Being a “Foreigner” Under FEMA? 

The Karnataka High Court’s Ruling in ED v. Joy of India Partnership Firm

Foreign nationals who move to India, live here for a stretch, and start a business often assume that every rupee they spend and every asset they buy will be scrutinised as a cross-border transaction. The Karnataka High Court’s decision in Special Director, Directorate of Enforcement v. Joy of India Partnership Firm [[2026] 187 taxmann.com 603 (Karnataka), decided 09.06.2026] says otherwise, and the reasoning matters well beyond the two individuals who fought this case for eleven years.

At its core, the ruling asks a fundamental question that surprises expatriates, consultants, and foreign promoters setting up shop in India. Once you cross the residency threshold under Section 2(v) of the Foreign Exchange Management Act, 1999, do FEMA’s foreign-investment and immovable-property rules still apply to you? The Court’s answer was no, and it explained precisely why.

A Closer Look at The Facts

Two foreign nationals entered India in August 2008 on a business visa. They formed a partnership called Joy of India and, in September 2009, bought a plot of land with a building attached to it in Bengaluru. Six years later, in 2015, the Enforcement Directorate issued a show-cause notice alleging FEMA violations. By June 2016, the Joint Director had adjudicated against them, imposed penalties, and ordered confiscation of the property along with the balances in two bank accounts.

Case timeline

Eleven years, three forums, and the underlying assets at stake were two bank accounts holding a few thousand rupees and one parcel of land.

The Regulatory Question: Who Counts as a “Person Resident in India”?

FEMA does not use passport nationality as its organising principle. It uses residency, defined in Section 2(v). A person residing in India for more than 182 days during the preceding financial year is, subject to certain carve-outs, regardless of citizenship.

The dispute in this case is centred on how to read the exclusionary language in Section 2(v)(i)(B). That clause defines a person resident in India as someone who has come to or stays in India either for employment, business, vocation, or any purpose indicating an intention to stay for an uncertain period. ED argued that the respondents fell outside this definition because their stay was for business purposes, and the “otherwise than” wording seemed to exclude exactly that.

The Court rejected this reading by comparing Part (B) with Part (A) of the same clause, which governs persons who leave India. Part (A), dealing with Indians going abroad, does not use the words “otherwise than.” Part (B), dealing with foreigners coming to India, does. Reading the two side by side, the Court held that Part (B)’s structure operates to include, not exclude, a person who comes to India for business, employment, or an indefinite purpose. A foreign national who satisfies the 182-day threshold and is in India for business is therefore squarely a “person resident in India,” not outside it.

Part A vs Part B of Section 2(v)(i): The Distinction the Court Relied On

This is the crux of the judgment. The presence of “otherwise than” in Part (B) flips the ordinary intuition that a foreigner conducting business in India remains, by default, a “person resident outside India.”

What Residency Status Switches Off

Once “person resident in India” status is established under Section 2(v), a cluster of FEMA regulations that exist specifically to govern non-residents simply stop applying. The Court set these out one by one.

This is the operative takeaway for practitioners advising foreign clients: residency status under Section 2(v) is not a technicality. It is the gatekeeping test that determines which entire chapters of FEMA regulation are even in play.

Why Documentation was Central to the Case

The legal finding on residency did the heavy lifting, but the Court was equally attentive to the paper trail, and this is where the judgment offers a practical template for anyone structuring a similar transaction.

Three facts that the court used to anchor its outcome:

RBI was consulted in advance. The respondents wrote to the RBI before purchasing the property and were told, in writing, that no prior approval was required if they met the Section 2(v) test. That letter became the single most important document in the case, because it meant the respondents had not simply assumed compliance but had tested their position with the regulator itself.

The money trail was clean. The purchase consideration of Rs. 16,03,000 came through two inward remittances into an ICICI Bank account on 26.08.2009, evidenced by FIRCs (Foreign Inward Remittance Certificates) issued by the bank. Every rupee was traceable to a legitimate banking channel, in Indian currency, with no unexplained forex movement.

Tax compliance was continuous. The firm held a PAN and had filed income tax returns from Assessment Year 2010-11 through AY 2017-18 without interruption.

None of these three facts, on their own, would have settled the FEMA question. Residency status is a legal determination, not a documentation exercise. But together they gave the Tribunal and then the High Court a transaction with no gaps for ED to exploit on facts, which meant the case ultimately turned entirely on the legal interpretation of Section 2(v), where the respondents had the stronger argument.

A Note on the Enforcement Directorate’s Own Conduct

One detail in the judgment deserves attention on its own. From January 2026, the High Court repeatedly directed ED to produce the original case record and even required the appellant to appear in person with it. On 26.02.2026, ED’s own Deputy Director appeared and stated that the records could not be traced. The Court proceeded to decide the appeal on the material available.

For a case running eleven years, involving the confiscation of a person’s residence, the regulator’s inability to produce its own original file more than a decade in is a data point in itself. It underscores why maintaining your own contemporaneous records, correspondence with RBI, FIRCs, tax filings, and visa documentation, is not a defensive formality. In a dispute that can run a decade or more, your file may end up more complete than the regulator’s.

What This Means If You Are Setting Up or Already Operating in India

For foreign promoters, expatriate founders, and consultants advising them, this case sets out a fairly clear operating checklist.

Before the transaction

• Establish and document your residency position under Section 2(v) at the time of the transaction, not retrospectively. The 182-day test is measured against the preceding financial year, so timing matters.
• Where there is any ambiguity, write to the RBI and get a written response before you act, exactly as the respondents did here. A regulator’s letter, obtained proactively, carries far more weight in a later dispute than an internal legal opinion.
• Route all inward funds through authorised banking channels and retain the FIRCs. This is the single most defensible form of evidence FEMA proceedings recognise.

On an ongoing basis

• File and maintain continuous tax returns and PAN records tied to the Indian entity or individual, since these become corroborating evidence of genuine residency and business activity.
• Keep the RBI correspondence, remittance certificates, and tax filings together in one file, and treat that file as a permanent compliance record, not a transaction-closing formality.
• Reassess residency status periodically if your presence in India is intermittent. Section 2(v) is tested year on year; a status established once is not necessarily permanent if the underlying facts change.

If a dispute arises

The burden is on the regulator to show why the resident-status conclusion should not apply, once the taxpayer or firm has produced clean documentation. This judgment, and the Tribunal decision it affirms, both indicate that Indian courts scrutinise ED’s own evidentiary record with the same rigour applied to the respondent’s.

The Broader Point

This is not a case about a loophole but rather a definition that Indian regulators, taxpayers, and courts have debated for years. A foreign national who comes to India, stays long enough, and conducts business here is, in FEMA’s own terms, a person resident in India. That status is not a burden to escape. For a foreign promoter who has done the groundwork, RBI clearance in writing, clean banking channels, continuous tax compliance, it is the very thing that keeps FEMA’s non-resident restrictions from applying to routine business and property decisions in the first place.

For businesses currently structuring an India entry, or reviewing a structure set up some years ago, the message from this ruling is straightforward: get the residency determination right at the outset, document it as you go, and treat RBI’s written guidance as the anchor of your compliance file. Eleven years and three forums later, that is exactly what settled this case.