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TMI Blog2015 (4) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... 13(1) to 13(5) shall be taxable only in the contracting state of which allenaior is resident. Therefore, hold that appellant's income by way of capital gains on transfer of government securities would be exempt for tax in India under Article 13(6) of the Treaty. No infirmity in the findings recorded by the CIT(A) in holding that the gain arising from transactions in debt securities amounting is assessable as capital gains and not as business income. Charging of interest u/s.234B 234C - HELD THAT:- We found that since the alleged income was liable to tax deduction at source u/s.195, therefore, there was no liability to pay advance tax u/s.208 of the Act and in the absence of any liability to pay advance tax, the provisions of Section 234B 234C could not be invoked. The CIT(A) has rightly directed to delete the interest levied u/s.234B 234C, in which our interference is uncalled for. Accordingly, we do not find any infirmity in the findings of the CIT(A). - ITA No. 1207/Mum/2013 AND Cross Objection No.69/Mum/2014 (Arising out of ITA No.1207/Mum/2013) - - - Dated:- 17-4-2015 - SHRI R.C. SHARMA, AM AND SHRI SANJAY GARG, JM For the Appellant : Shri S.D. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Article 5 of the agreement, has been reproduced by the CIT(A) in its order at para 3.1. 4. The AO examined the case laws including ITAT, Mumbai's cases i.e. Raymond Limited [86 lID 791], Mahindra and Mahindra Ltd. [122 TTJ 577], Tata Iron and Steel Co. [132 TTJ 566] and Gujarat Ambuja Cements Ltd. [2 SOT 784]. The AO sought the details of employees of the appellant or other personnel during A.Y.2008-09 but the same was not submitted on the ground that such database is not maintained. The appellant has submitted before the AO that M/s. UBS Securities (Indian subsidiary of the appellant) was also working for HDFC Bank mandate and remuneration of US$ 0.73 mn was paid to M/s. UBS Securities on behalf of the appellant. However, the payment was made at arm's length. The AO applied the clause (1) of Article 5(2) of the Treaty and has held that employees or other personnel of the enterprise were present in India for more than 90 days in the 12 months period and hence the appellant had a service PE during the period and since the details of employees has not been furnished, it has been held against the assessee regarding existence of PE. The AO further noted that repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed under Article 7 read with Article 5(2)(1) of the Treaty since it is held to be taxable under Article 12. Hence, the AO is directed to tax the underwriting commission on gross basis as per Article 12 of the Treaty and u/s 9(1) (vii) of the Act as FTS. Thus, 1st ground of appeal is allowed and 2nd ground of appeal is partly allowed. In ground No.2, the revenue has raised the grievance in regard to holding the gain on transfer of debt securities amounting to ₹ 18,86,80,359/- is assessable as capital gain and not taxable as business income. The CIT(A) after recording a detailed finding and relying various judicial pronouncements allowed this ground after having the following observations :- 4.1 During the year under consideration, the Appellant had earned gains from transfer of Indian debt securities and shares of ₹ 188,680,359, which the Appellant vide its return of income offered to tax as 'Capital Gains'. During the financial year 2007-2008, the Appellant had 28 purchase transactions and 15 sale transactions in Indian securities. Details of all transactions in debt securities resulting into income of ₹ 18,86,80,359/- has been fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs is a binding precedent. 4.4 In support of the above, the Appellant had drawn attention to the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT {193 ITR 321 (1992) (SC)} wherein it was observed that where fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be appropriate to allow the position to be changed in subsequent year. 4.5 The Appellant also submitted that the characterization of income on sale of debt securities as capital gains is within the legal framework governing FII. Various legal provisions under various Acts. and regulations, press notes etc which were relied and submitted by the Appellant are as follows: Special provision in the IT Act under section 115 AD for taxing income of FIIs in respect of transfer of securities by way of long term capital gains or short term capital gains Press Note dated 14 September 1992 by department of Economic Affairs (Investment Division), Ministry of Finance for guidelines issued for FIIs to make investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains should not be taxed under the Article relating to interest but under Article relating to capital gains. Even certain provisions of the Act suggest that the term income does not always include capital gains and in each case interpretation should be based on the relevant context. The Delhi Tribunal judgement in the case of Smt. Trishla Jain vs. DCIT, which has been extensively relied upon by the learned Assessing Officer has been dissented by the Mumbai ribunal (which is the jurisdictional tribunal) in the case of Sunderdas Haridas vs. ACIT (supra). Accordingly, I hold that the term income from government securities under Article 11(5) of the Treaty does not include capital gains on transfer of government securities . Taxability of capital gains on sale of government securities would be governed by Article 13 of the Treaty. Articles 13(1) to 13(5) of the Treaty deal with taxability of capital gains on transfer of specified properties, which do not cover government securities. According to Article 13(6) of the Treaty, gains from allenation of any property other than that referred to in Articles 13(1) to 13(5) shall be taxable only in the contracting state of which al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e then as per the rule of uniformity, the same is binding on us in the absence of any contrary decision of Tribunal or the High Court. The coordinate Bench of this Tribunal has considered and decided the issue after a detail and elaborate discussion of the relevant provisions and aspect relating to the transactions of derivatives by FII. The relevant concluding part of the order from para 8.12 to 11 is as under :- 8.11. From the Memorandum explaining the provisions of the Finance Bill, it is palpable that the foreign institutional investors shall be allowed to invest in the country‟s capital market. Income in respect of securities and income from transfer of securities has been made the subject matter of sec. 115AD. As per this provision, the income arising from the transfer of such securities is to be considered as short-term or long-term capital gain. 8.12. Thus, on a close scrutiny of the SEBI (FII) Regulations, 1995 together with section 115AD seen in the light of the Memorandum explaining this provisions of the Finance Bill, 1993, it is visible that a FII is allowed to invest only in the `securities‟ and further the income from securities, eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gross total income of a FII may include income other than that received in respect of securities or from the transfer of such securities. The emphasis of the ld. DR is on this part of the provision to bring home the point that a FII may also have `Business income‟ arising from the transfer of securities. The argument is that a FII may have income from securities as falling under the head `Capital gains‟, which is covered under section 115AD(1)(b) and also business income, as comes out from sec. 115AD(2)(b). This argument though looks attractive at first flush, but does not stand scrutiny in depth. The rationale behind section 115AD(2)(b) is that the income of a FII, other than that arising from the holding or transfer of securities, should find its place in the total income and the deductions under Chapter VI-A be allowed by considering gross total income net of income received in respect of securities or arising from the transfer of such securities. It is quite possible that a FII may deposit its surplus funds in banks resulting into interest income. Such interest income, which shall not fall under sub-sec. (1) of sec. 115AD, shall constitute part of the gross tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Incometax Act. 2. The expression Foreign Institutional Investor has been defined in section 115AD of the Incometax Act to mean such investors as the Central Government may, by notification in the Official Gazette, specify in this behalf. The FIIs as are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purpose of section 115AD. 8.15. From the above Press Note, it is abundantly clear that FIIs have been considered as investors (and not as traders). Secondly, income from transfer of securities has been viewed as chargeable to tax under the head `capital gains‟ as long-term or short-term capital gain depending upon the period for which such securities are held. 8.16. In view of the above discussion, it is out-and-out that income arising to a FII from the transfer of `securities‟ as specified in Explanation (b) to sec. 115AD can only be considered as short-term or long-term capital gain and not as business incomeR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the general provision. The Hon‟ble Supreme Court in the case of Britannia Industries Ltd. vs. CIT (2005) 278 ITR 546 (SC) has held that expenditure towards rent, repairs, maintenance of guest house used in connection with business is to be disallowed u/s. 37(4) because this is a special provision overriding the general provision. 9. Coming back to our context, it is seen that income arising from the transfer of securities of the FIIs has been included under sec. 115AD(1)(b) to be categorized as short-term or long-term capital gain depending upon the period of holding. In such a situation, it is impermissible to consider such income as falling under the head Profits and gains of business or profession . Such income arising from the transfer of securities shall be charged to tax under the head capital gains alone. Once inclusion of such income from the transfer of securities is held to be falling only under the head Capital gains , it cannot be considered as `Business income‟, whether speculative or non-speculative. 10. The heading of section 43 is : `Definitions of certain terms relevant to income from profits and gains of business or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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