2012 (8) TMI 284 - AT - Income Tax

India-Singapore tax treaty - Gains arising from early settlement of forward foreign exchange contract - capital gain or income from other sources - Held that - As decided by Special Bench of the Tribunal in Apollo Tyres Ltd. Versus Assistant Commissioner Of Income-Tax 2004 (3) TMI 345 - ITAT DELHI-E gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain - consequently the gains realized from early settlement should be regarded as capital gains and not income from other sources - Such capital gains are not liable to tax in India as per Article 13(4) of the India -Singapore tax treaty - in favour of assessee.

Summary

Issues Involved:
1. Classification of gains from cancellation of foreign exchange forward contracts.
2. Taxability of gains under the India-Singapore tax treaty.
3. Levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Gains from Cancellation of Foreign Exchange Forward Contracts:
The primary issue was whether the gains of Rs. 304,847,277/- from the cancellation of foreign exchange forward contracts should be classified as capital gains or income from other sources. The assessee argued that these gains were capital in nature, as they were linked to hedging exposures related to investments in Indian securities. The Assessing Officer (A.O.) disagreed, stating that these transactions were not held as capital assets but were settled by price difference, thus classifying them as 'income from other sources' under Article 23 of the India-Singapore tax treaty. The Tribunal referenced previous cases, including Citicorp Investment Bank (Singapore) Ltd. and Citicorp Banking Corporation, Behrain, which had ruled that such gains should be treated as capital gains. Consequently, the Tribunal held that the gains from the cancellation of foreign exchange forward contracts should be classified as capital gains.

2. Taxability of Gains under the India-Singapore Tax Treaty:
The assessee claimed that the gains were exempt under Article 13(4) of the India-Singapore tax treaty, which pertains to capital gains. Alternatively, if considered business income, the gains would not be taxable under Article 7 of the treaty, as the assessee did not have a permanent establishment (PE) in India. The A.O. rejected these claims, treating the gains as 'income from other sources' under Article 23 of the treaty. The Tribunal, however, sided with the assessee, referencing consistent Tribunal rulings that such gains should be treated as capital gains and thus exempt under Article 13(4) of the treaty.

3. Levy of Interest under Section 234B of the Income Tax Act:
The assessee contested the levy of interest under section 234B, arguing it was not applicable. The Tribunal noted that the issue was not argued by either party during the hearing and concluded that the levy of interest under section 234B is consequential. The A.O. was directed to recompute the interest based on the Tribunal's order.

Conclusion:
The Tribunal ruled in favor of the assessee, classifying the gains from the cancellation of foreign exchange forward contracts as capital gains and exempt under the India-Singapore tax treaty. The levy of interest under section 234B was deemed consequential and subject to recomputation. The appeal was thus partly allowed.