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2010 (3) TMI 107 - AAR - Income TaxBusiness Income versus capital gains – DTAA - Agreement for Avoidance of Double Taxation between India and Canada (Treaty) - permanent establishment (PE) in India as per Article 5 of the Treaty - profits/losses from futures and options contracts (derivative transactions) carried out on the Indian Stock exchanges - profits/losses from transactions relating to purchase and sale of equity shares or other tradable securities on the Indian stock exchanges Held that - If the income derived by the applicant can be characterized as business income rather than the capital gain, such income cannot be taxed in India in the absence of permanent establishment. If, on the other hand, the income is in the nature of capital gains, the same is liable to be taxed under the IT Act. Thus the classification of income for the purpose of treaty is necessary. Such classification has to be done in accordance with the ordinary and well settled principles. The profits/losses from futures and options contracts (derivative transactions) carried out on the Indian Stock exchanges are in the nature of “Business income” in the hands of the applicant under the provisions of the Act read with the Agreement for Avoidance of Double Taxation between India and Canada (Treaty). This income is not taxable under section 115AD - the purpose and purport of Section 115AD is to provide for special or concessional rate of taxation in relation to securities received or arising from the income of FIIs (Foreign Institutional Investor). No advance ruling is given on the issue of profits/losses from transactions relating to purchase and sale of equity shares or other tradable securities on the Indian stock exchanges - No doubt, the advance ruling can be sought in respect of a transaction “proposed to be undertaken”. But where the determination of the question depends on assessment of certain crucial facts, the actual pattern of dealings or the modus operandi of the transactions, it would not be appropriate to undertake the task of giving a definite ruling at this juncture, especially when we are called upon to reconsider the earlier ruling of this Authority on the same issue. It may also be relevant to consider whether the actual modalities of the transactions have the attributes of index arbitrage trading or they are in the nature of hedging activity. The question can be answered depending on the actual state of affairs
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