2024 (12) TMI 1337 - AT - Income Tax

Income deemed to accrue or arise in India - taxability as per India-Singapore Tax Treaty - Addition on account of washing charging charges - difference between the buying price and selling price between both contracts is recorded as Washout Charges by the assessee - AO held that the assessee did not offer the consideration received for washout charges - HELD THAT - Washout charges are in the nature of business transaction and therefore credit of washout charges will be business income of the assessee. We find support from the decision of Louis Defrus 2019 (11) TMI 95 - ITAT DELHI wherein washout charges are held to be business expense in the hands of tax payer. The nature of transaction is nothing more than a business transaction and where it is credited, it will be business income and where it is debited, it will be revenue expense. As the said transactions are not speculative in nature, but hedging transactions entered to protect the price risk fluctuation, let us examine the result of the AO's contention that transactions being entered into by the assessee are in the nature of speculative activities u/s 43(5). We find that the income from the same would still be covered under business income as the proviso (a) of section 43(5) excludes hedging transaction from being speculative. Even if the contention of AO is accepted that the transaction is speculative income, the same will still be considered as part of business income governed by Article 7 read with Article 5 of the India-Singapore DTAA. Assessee having no Permanent Establishment (PE) in India, in terms of Article 5 of the India-Singapore tax treaty, the said washout receipts, being in nature of business income of the assessee, would still be not taxable in India. There are no business activities of the assessee, namely entering of contract, receipts of money etc. is performed in India and the fact that assessee does not have any PE in India to carry out any business activities, there is no source for the assessee in India resulting in any income - Decided in favour of assessee.

Summary

Issues Involved:

1. Taxability of washout charges under the Income Tax Act, 1961 and India-Singapore DTAA.
2. Classification of washout charges as speculative or business income.
3. Applicability of Article 23 versus Article 7 of the India-Singapore DTAA.
4. Determination of the source of income under Section 9(1)(i) of the Income Tax Act.

Detailed Analysis:

1. Taxability of Washout Charges:

The primary issue in this case is whether the washout charges received by the assessee are taxable in India. The assessee, a Singapore-based entity, engaged in trading agricultural commodities, argued that these charges were part of hedging transactions to manage price risks and not speculative in nature. The Assessing Officer (AO) contended that these charges were speculative and taxable under Article 23 as "Other Income" of the India-Singapore DTAA. However, the Tribunal found that since the assessee did not have a Permanent Establishment (PE) in India, the washout charges, being business income, are not taxable in India under Article 7 of the DTAA.

2. Classification as Speculative or Business Income:

The AO classified the washout charges as speculative income, arguing that no actual delivery of goods occurred. The assessee contended that these transactions were integral to its business model for hedging price risks and should be considered business income. The Tribunal agreed with the assessee, stating that hedging transactions are an integral part of the business and not independent speculative activities. The Tribunal also referenced CBDT Circular No. 23 (XXXIX)D of 1960, supporting the view that such transactions are not speculative.

3. Applicability of Article 23 versus Article 7 of the DTAA:

The Tribunal examined whether the washout charges should be classified under Article 23 (Other Income) or Article 7 (Business Income) of the India-Singapore DTAA. It concluded that since the washout charges arose from business transactions related to the purchase of palm oil, they fall under Article 7. Consequently, in the absence of a PE in India, these charges are not taxable in India. The Tribunal relied on the decision in JCIT vs Merrill Lynch Capital Market Espana SA SV, which supports this interpretation.

4. Determination of Source of Income:

The AO argued that the income was taxable in India under Section 9(1)(i) of the Income Tax Act, as it arose from an Indian entity, Adani Wilmar. The assessee countered that the source of income is not the payer but the activities generating the income, which occurred outside India. The Tribunal agreed with the assessee, citing judicial precedents that the source of income refers to the activities giving rise to the income, not the payer. It concluded that the washout charges are business income arising from activities outside India and thus not taxable under Section 9(1)(i).

Conclusion:

The Tribunal allowed the appeal, directing the AO to delete the addition of washout charges, affirming that these charges are business income not taxable in India due to the absence of a PE and the application of Article 7 of the India-Singapore DTAA.