TMI Blog2012 (8) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961 (The Act). 2. Briefly stated facts of the case are that Credit Suisse (Singapore) Limited (in short CSSL) is a company incorporated in Singapore and a tax resident of Singapore. CSSL, inter alia, conducts portfolio investments in Indian securities and is registered with the Securities and Exchange Board of India (SEBI) as a sub-account of Credit Suisse : a SEBI registered Foreign Institutional Investor (FII). The A.O. observed that for the year under consideration, the assessee company has shown the following income in the revised return of income (para 3 of the assessment order) : "Net short term capital loss from sale of shares of Rs. 348,207,4000/-. Net short term capital loss from sale of shares underlying FCCBs: Rs. 111,660,628/-. Gains from exchange traded derivative contracts Rs. 472,664,0493/-; The above net resultant gains of Rs. 1,132,905,865/- are claimed as exempt under Article 13(4) of the India-Singapore tax treaty by the assessee. Further the dividend income of Rs. 104,531,125/- is also claimed to be exempt u/s 10(34) of the Act." The A.O. further observed that in the notes to the computation of income, the assessee has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a -Singapore tax treaty. - Without prejudice to the above, the gains realized from cancellation of foreign exchange forward contracts may be taxed as business profits in the hands of CSSL. Such business profits are not liable to tax in India under Article 7 of the India-Singapore tax treaty since CSSL does not have a PE in India. - Gains realized from cancellation of foreign exchange forward contracts should first qualify as 'capital gains' under Article - 13 of the India-Singapore tax treaty or, at best, qualify as 'business profits' under Article 7 of the India-Singapore tax treaty. Since such gains would fall within one of the Articles expressly covering a specific type of income (i.e. either capital gains or business profits), the gains cannot be classified as 'income from other sources' taxable under Article 23 of the India-Singapore tax treaty." The A.O., however, did not accept the assessee's explanation. According to the A.O. the transaction in forward purchase of foreign exchange and settlement thereby cannot be said to be resulting in capital gains as the same was never held by the assessee as capital asset but meant to be settled by price difference. He f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Singapore ('the treaty'). 3. Notwithstanding ground 1 above, in not considering the gains arising on cancellation of forward covers as business profits and that such business profits are not liable to tax in India under Article 7 of the treaty, given that the Appellant does not have a permanent establishment in India as defined in Article 5 of the treaty. 4. In holding that the gains arising on cancellation of forward covers is taxable as 'Income from other Sources' under Article 23 of the treaty. 5. In disregarding the provisions of section 209 of the Act and levying interest under section 234B of the Act. 6. Notwithstanding ground 5 above, in not following the decision of the Bombay High Court (ie jurisdictional High Court) issued in the case of NGC Networks Asia LLC v. DIT (313 ITR 187) and levying interest under section 234B of the Act." 4. At the time of hearing the ld. counsel for the assessee, at the outset, submits that in this case the A.O. while treating the gains as income from other sources has followed the order of the ld. CIT(A) dtd. 28-11-2008 in the case of Citicorp Investment Bank (Singapore) Ltd. for the A.Y. 2005-06 which has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty of any kind. Since in the present case the assessee does not hold any such property, the A.O. has rightly treated the gain arising from the forward contracts as 'income from other sources' and, therefore, the order passed by the A.O. be upheld. 6. In the rejoinder, the ld. counsel for the assessee submits that in the case of Apollo Tyres Ltd. ( supra ) the issue before the Special Bench of the Tribunal was "Whether on facts and in law, the gains earned on cancellation of the foreign exchange forward contract are capital receipt or revenue receipt? If it is capital receipt, whether the same should be reduced from the cost of plant and machinery in connection with which the forward contract was entered into?". He further submits that at page 747 of the report the Special Bench has considered the above question as under:- "( i ) Whether the gains earned on cancellation of the foreign exchange forward contracts are capital receipt or revenue receipt; and ( ii ) If gains are capital receipt, whether the same should reduce the actual cost of plant and machinery by virtue of Expln. 3 to s. 43A." The question No. 1 has been answered by the Special Bench vide para 17 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us are concerned, nowhere it is controverted by both the authorities below that the dominant purpose for entering into foreign exchange forward contract by the assessee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee. It is also admitted fact that the assessee is not doing any business here and the assessee is FII and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIIS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed." 10. In All India Tea Trading Co. Ltd. ( supra ) relied on by the ld. D.R., it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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