TMI Blog2005 (12) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 28, 1927. The applicant is a tax resident of USA. The Trust forms part of a pension, profit sharing, or stock bonus plan qualified under section 401 (a) of the USA Internal Revenue Code. The trust was formed for providing payment of pension and other benefits under the G.E. Pension Plan. The said trust indenture was amended from time to time and was restated in its entirety on July 1, 2000. GE sponsors a number of pension plans for the benefit of its employees. The plan-contributory defined benefit pension plan, is for US employees of GE. Under the plan contributions are received from the GE and its employees. The plan states that the payment of all benefits shall be made solely from the assets of the applicant and except as otherwise required by law, GE shall have no obligation to make or continue to make from its own fund any payment of the benefits provided by it. The applicant has various portfolios under it, which focus on different types of investments, different sectors and different geographical regions. The applicant holds approximately US $ 43 billion in worldwide assets of which approximately US $ 80 million (approximately 0.19% of the worldwide assets) are invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India will be treated as business income of the Applicant. Whether in the absence of permanent establishment in India and in light of the provisions of Article 7 read with article 5 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains entered into between the Government of the Republic of India and the Government of the United States of America (hereinafter referred to as the "Treaty"), such business income of the applicant will be taxable in India? 2. The Director of Income-tax (International Taxation), Mumbai (hereinafter referred to as the "Commissioner") submitted the following comments to the application:- The applicant being a trust is an artificial juridical person under section 2 (31) of the Act. The applicant being a sub account is treated as a separate taxable entity from the FII. The tax liability of the applicant - a non-resident - has to be considered under section 5 read with section 9 (1) (i) of the Act. The definition of FII contained in clause (f) of section 2 of the FII Regulation and grant of registration under section 13 (1) (a) thereof clearly show that FII shall only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the applicant in India? 4. Mr. Desai, the learned Counsel appearing for the applicant, would submit that under the Trust the applicant has the power to trade in securities and the enormity of sales and purchases of securities in India by it would show that the income of the applicant is its business income. Mr. Desai argues that for the purposes of income-tax, the nature of income has to be considered under the Act and the terminology used in the FII Regulations, cannot be taken into consideration to determine the nature of transactions. It is submitted that the magnitude and frequency of the transaction as per the attachment-VIII of the application would show that the nature of transaction is carrying out business in securities. He relied on the judgements of the Supreme Court in Raja Bahadur Visheshwara Singh and Ors. v. Commissioner of Income-tax, Bihar and Orissa1, Dalhousie Investment Trust Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta2 , Commissioner of Income-tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd.3 , Commissioner of Income tax (Central) Calcutta v. Associated Industrial Development Co. Pvt. Ltd.4 and the following rulings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd. (Supra 3), the ruling of the Authority in the case of XYZ/ABC Equity Fund (supra 5) , A.V. Thomas Co. Ltd. v. CIT8, CIT v. P.K.N. Co. Ltd9, Commissioner of Income-tax v. Associated Industrial Development Co. P. Ltd. (Supra 4), the Authority formulated the following principles:- where a company purchases and sells shares, it must be shown that they were held as stock- in- trade and that existence of the power to purchase as sell shares in the memorandum of association is not decisive of the nature of transaction; substantial nature of transactions, manner of maintaining books of accounts, magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; ordinarily purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/an adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... States of America and the Government of the Republic of India entered into treaty which was notified on 20th December, 1990. Whereas Mr. Kapila having invited our attention to articles 1 and 4 (1)(b) of the Treaty, would submit that the applicant being tax exempt is not subjected to tax in USA, so it cannot be treated as a tax resident of USA and cannot avail the benefit of the terms of the Treaty. The claim of the applicant to the benefit of the Treaty is thus disputed by him. On these contentions, it would be necessary to refer to the relevant provisions of article 1 of the Treaty which deals with "General Scope" of the Treaty. Para 1 of article 1 which is material, reads as under:- "Article 1: General Scope 1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention". Para 1 of article 1, extracted above, says that the Treaty shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention. It is plain that the Treaty applies to persons who are residents of one or both of the States but the scope of the application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state (USA) applies only to the extent that the income derived by trust is subject to tax in that state (USA) as the income of a resident either in its hands or in the hands of the beneficiaries. It is worth pointing out that the phrase 'liable to tax' in para (1) and the phrase 'subject to tax' in proviso(b) are not synonymous. If both were to be read as synonymous, proviso (b) would become otiose. Whereas para(1) speaks of being in the tax net, proviso is concerned with actual taxation. Thus it would follow that the term "resident of USA" for the purpose of the treaty would mean a person who under the laws of USA is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature; however, in the case a trust, the term "resident of USA" would apply only to the extent that the income derived by such trust is subject to tax in USA as the income of a resident either in its hands or in the hands of its beneficiaries. Applying this test of residence to the applicant, it becomes clear that though under the laws of the USA, the applicant is liable to tax by reason of its place of manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to mean any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. Clause (b) thereof says that a legal person organized under the laws of a Contracting State and that is generally exempt from tax in that State and is established and maintained in that State either (i) exclusively for religious, charitable, educational, scientific, or other similar purpose; or (ii) to provide pensions or other similar benefits to employees pursuant to a plan, is to be treated for purposes of this paragraph as a resident of that Contracting State. Now Paras 54 55 relied upon by the learned counsel for the applicant are as follws:- "54. Sub-paragraph (b) provides that certain tax-exempt entities such as pension funds and charitable organizations will be regarded as residents regardless of whether they are generally liable for income tax in the State where they are established. An entity will be described in this sub-paragraph if it is generally exempt from tax by reason of the fact that it is organized and operated exclusively to perform a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that state (USA) from the definition of resident of a Contracting State (USA) for purposes of the treaty (USA-India treaty). 11. Mr. Desai filed a xerox copy of the tax resident certificate issued by the Department of Treasury Internal Revenue Service Philadelphia, PA 19255 in regard to the applicant, which is extracted below:- "DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE "Seal" PHILADELPHIA, PA 19255 CERTIFICATION PROGRAM Date: 04/08/2004 Taxpayer : GENERAL ELECTRIC PENSION TRUST TIN : 14-6015763 Tax Year : 2004 I certify that, to the best of our knowledge, the above-named entity is a trust forming part of a pension, profit sharing, or stock bonus plan qualified under section 401(a) of the U.S. Internal Revenue Code, which is exempt from U.S. taxation under section 501(a), and is a resident of the United States of America for purposes of U.S. taxation. Sd/- Daniel J. Nally Field Director, Philadelphia Accounts Management Center "Certified for Australia" Form 8106 (Rev.3-2004) Catalog Number 43134V" A perusal of the copy of the certificate of residence, extracted above, shows that the applicant is a trust forming a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sub-section (1) of Section-5 relates to total income of a resident. The applicant is a non-resident in India so sub-section (2) thereof will be attracted. It contains two clauses - (a) and (b) and two explanations. Clause (a) says that the total income of a non-resident shall include all income from whatever source derived, which is received or is deemed to be received in India in any previous year by or on behalf of such person. The import of clause (b) is that the total income of a non-resident includes all income, from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during any previous year. This takes us to Section 9(1)(i) and the explanation thereto which are pertinent here and read as follows:- "9. (1) The following incomes shall be deemed to accrue or arise in India:- all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [ * ] or through the transfer of a capital asset situate in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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