2005 (12) TMI 51 - AAR - Income Tax

Applicant, trust, tax resident of USA, formed for providing payment of pension and other benefits under the G.E. Pension Plan - GE sponsors a number of pension plans for the benefit of its employees held that profits arising to Trust from the sale of portfolio investments in India will be treated as its business income held that as the applicant is not entitled to avail of the benefits of the terms of the treaty, such business income of the applicant will be taxable in India under IT Act

Issues Involved:
1. Nature of income from transactions in securities.
2. Entitlement to avail the benefits of the Treaty.
3. Existence of a Permanent Establishment (PE) in India.
4. Tax liability in India.

Detailed Analysis:

1. Nature of Income from Transactions in Securities:
The applicant, a US-based trust, argued that its income from the sale of securities in India should be treated as business income due to the magnitude and frequency of transactions. The Commissioner contended that the income should be considered capital gains, as the applicant is a sub-account of a Foreign Institutional Investor (FII) and is only allowed to invest in securities as capital assets, not for trading purposes. The Authority noted that while FII regulations and Section 115AD of the Act suggest that investments should be for capital gains, the nature of the income must be determined based on the facts and circumstances of each case. The Authority concluded that the applicant's substantial transactions in Indian securities were in the nature of trade/business, thus treating the income as business income.

2. Entitlement to Avail the Benefits of the Treaty:
The applicant sought to avail the benefits of the Indo-US Treaty for avoidance of double taxation. The Commissioner argued that the applicant, being tax-exempt in the USA, could not be considered a tax resident under the Treaty. The Authority examined Article 4 of the Treaty, which defines a resident of a Contracting State. It noted that for a trust to be considered a resident, its income must be subject to tax in the USA, either in its hands or in the hands of its beneficiaries. Since the applicant is exempt from US taxes under Section 501C and there was no evidence that the income from Indian securities was taxed in the USA, the Authority concluded that the applicant could not avail the benefits of the Treaty.

3. Existence of a Permanent Establishment (PE) in India:
Given the conclusion that the applicant could not avail the Treaty benefits, the Authority found it unnecessary to decide whether the applicant had a PE in India under Article 5 of the Treaty and the implications of its absence on the taxability of business income under Article 7.

4. Tax Liability in India:
The Authority ruled that since the applicant could not invoke the Treaty provisions, its tax liability would be determined under the Income Tax Act. Sections 5(2) and 9(1)(i) of the Act were pertinent. Section 5(2) includes all income received or deemed to be received in India or accruing or arising in India. Section 9(1)(i) deems income to accrue or arise in India through a business connection in India. The Authority concluded that the profits from the sale of portfolio investments in India would be treated as business income and taxable in India under the Act.

Conclusion:
1. The profits arising from the sale of portfolio investments in India will be treated as business income.
2. The applicant is not entitled to avail the benefits of the Treaty, and such business income will be taxable in India under the Act.

(Pronounced in the open Court of the Authority on this 14th day of December, 2005.)

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