2001 (3) TMI 1035 - AAR - Income Tax

Summary

Issues Involved:
1. Residency and entitlement to Treaty benefits
2. Taxability of capital gains from transfer of securities
3. Permanent establishment due to investment adviser's activities
4. Permanent establishment due to custodian's activities
5. Permanent establishment due to nominee directors
6. Taxability of securities held by a permanent establishment
7. Taxability of income from Indian mutual fund units
8. Taxability of interest received under a loan agreement
9. Classification of interest or capital gains as business income
10. Taxability of business income without a permanent establishment
11. Taxability of front-end fees
12. Treatment of premium on redemption of debentures
13. Obligation to file a tax return in India
14. Obligation to file a tax return if tax is withheld
15. Penal consequences for failure to file a tax return
16. Tax rate applicable to profits attributable to a permanent establishment

Summary:

1. Residency and Entitlement to Treaty Benefits:
The applicant, XYZ/ABC Equity Fund, Mauritius, is entitled to be treated as a "resident" of Mauritius as defined in the Agreement for Avoidance of Double Taxation (the Treaty) between India and Mauritius.

2. Taxability of Capital Gains from Transfer of Securities:
The proceeds of sale of shares in India will amount to business receipts and not capital gains, as the company has been formed with the object of carrying on the business of acquiring and investing in and holding securities of all kinds and ultimately selling them at a profit.

3. Permanent Establishment Due to Investment Adviser's Activities:
Based on the facts stated, the activities done by the investment adviser cannot be converted into a "permanent establishment" of the applicant-company in India.

4. Permanent Establishment Due to Custodian's Activities:
The activities of the custodian cannot be treated to constitute a permanent establishment of the applicant in India.

5. Permanent Establishment Due to Nominee Directors:
The role and functions of the nominee directors will have to be examined in depth. Therefore, this question is not answered.

6. Taxability of Securities Held by a Permanent Establishment:
This question requires detailed investigation and is not answered.

7. Taxability of Income from Indian Mutual Fund Units:
This question is not answered due to the need for detailed investigation on the capacity and role of the nominee director.

8. Taxability of Interest Received Under a Loan Agreement:
Both the interest and penal interest should be taxed in accordance with the provisions of article 11 of the Treaty.

9. Classification of Interest or Capital Gains as Business Income:
This question is not specifically answered in view of the answers given to questions Nos. 4, 5, and 6.

10. Taxability of Business Income Without a Permanent Establishment:
This question is not specifically answered in view of the answers given to questions Nos. 4, 5, and 6.

11. Taxability of Front-End Fees:
If the basic character of such fees is in the nature of compensation for loss of possible investment, the taxability of such fees will fall within the purview of article 22 of the Treaty.

12. Treatment of Premium on Redemption of Debentures:
Premium on redemption of debentures is usually treated as capital gains and will fall within the ambit of article 13 of the Treaty.

13. Obligation to File a Tax Return in India:
The applicant has to file a return of income in India under the provisions of section 139 of the Income-tax Act even if entitled to exemptions and deductions under it and the benefit of the Treaty between India and Mauritius.

14. Obligation to File a Tax Return if Tax is Withheld:
This question need not be separately answered in view of the answer to question No. 13.

15. Penal Consequences for Failure to File a Tax Return:
If the applicant is liable to pay income-tax in India, he is under an obligation to file a return of income. Non-filing of return will attract penal provisions of section 271(1)(b).

16. Tax Rate Applicable to Profits Attributable to a Permanent Establishment:
Mere charging of a higher rate of tax does not constitute discrimination between a domestic and a non-domestic company, as concluded by the principles laid down in the judgment of the Authority for Advance Rulings in the case of Societe General, France.