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TMI Blog2004 (9) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... th of Massachusetts, USA. The applicant is registered with the Securities and Exchange Board of India (SEBI) as a sub-account of "Fidelity Management & Research Company and a "Foreign Institutional Investors" under the SEBI (Foreign Institutional Investors) Regulations, 1995. It has invested in equity shares of various companies in India and in other countries like Hong Kong, Indonesia, Korea , Singapore and United Kingdom. Under the FII regime the applicant has invested in the listed Indian companies. As per Regulation 16(1) of the SEBI FII Regulations, 1995 all registered FIIs are required to appoint a domestic custodian in India. Accordingly an FII or a global custodian acting on behalf of the FII is required to enter into an agreement with a domestic custodian of securities for the FII. The applicant appointed M/s Brown Brothers Harriman (Luxembourg) S.A. as its global custodian for its investments. The global custodian, in turn, appointed M/s Standard Chartered Bank (SCB) as its correspondent to act as domestic custodian. It is stated that the global custodian and the domestic custodian are acting in the ordinary course of business. The SCB performs services for the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as to whether it would be having any permanent establishment in India under article 5 of the Treaty. Going by the nature of the operations proposed to be carried out by the applicant in India, it would be required to maintain a branch office or a place of management for entering into transactions in securities, it must be availing the advice of some investment advisors but no details are given. It is only on examining the role of investment advisor that one can say whether the domestic guardian is a dependent agent of the applicant in India. It is pointed out that para 6 of article 7 of the Treaty made specific distinction among various heads of income which have to be dealt with separately under other articles even if such items of income form part of business income of the applicant. The taxability or otherwise of such income would be governed by the specific provisions postulated for that purpose and not by article 7 of the Treaty. The taxability of dividend income is dealt with in article 10, interest income in article 11 and capital gains in article 13 of the Treaty. As the applicant is carrying out business in India it has to file a return of income under section 139 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and Capital gains entered into between the Government of the Republic of India and the Government of United States of America (hereinafter referred to as the " Treaty" )? • Whether on the facts and the circumstances of the case, the applicant has a permanent establishment in India in terms of Article 5 of the Treaty? 8. Mr. Nishith Desai argued that the applicant was carrying on the business as an Investment Trust; the income arising to the trust could only be characterized as a business income and in view of the provisions of the Treaty between India and USA, the profits of business could be taxed in India only if the applicant had a permanent establishment in India; the applicant had no branch office or place of business in India, nor did it have any employee of its own, therefore, it had no permanent establishment in India. 9. Mr. Salil Gupta vehemently contended that no material was produced by the applicant to show that shares were held by it as stock in trade; the documents relating to the trust were only enabling documents from which it could not be inferred that the shares were held by the trust as investment; as the period between the purchases and sales of shares wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal of tangible personal property other than property described in paragraph 3(b) of article 12 (royalties and fees for included services). Article - 13 (Gains) Except as provided in article 8 (Shipping and Air Transport) to this Convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law. 12. A plain reading of para 1 of article 7, suggests that profits of an enterprise (applicant) of a contracting state (USA) shall be taxable only in that state (USA) unless the enterprise (the applicant) carries on business in the other contracting state (India) through a permanent establishment situate therein. If the enterprise (the applicant) carries on business as aforesaid, the profits of the enterprise (applicant) may be taxed in the other state(India) but only so much of them as is attributable to (a) that permanent establishment; (b) sales in other state (India) of goods merchandise of the same are similar kind as those so sold through the permanent establishment or (c) other business activities carried on in the other state (India) of the same or similar kind as those effected through the permanent establishment. We are concerned here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in article 5 of the Treaty. It is not necessary to delve into it here. 17. Whether a company is an investment company or trading company or whether any amount received by a person is a revenue receipt or a capital receipt is a mixed question of law and fact which has to be decided on the facts and in the circumstances of each case. Before adverting to the facts of this case on this question, it will be useful to refer to the decisions cited by the parties. 18. In Raja Bahadur Visheshwara Singh & Others V. Commissioner of Income Tax, Bihar & Orissa, (41 ITR 685), the assessee purchased shares during a period of 10 years from his own funds. He then borrowed substantial amounts for making further purchases of shares and securities. He made profits on selling some shares in the subsequent years. The Income Tax Appellate Tribunal, taking note of the magnitude and frequency of the transactions and the ratio of sales to purchases and total holdings, held that the appellant must be regarded as a dealer in shares and securities and that the profits of those years were assessable to income tax. On reference, the Patna High Court held that there was sufficient material to support the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue receipt and as such liable to income tax. The fact that the department in the earlier years treated the transactions in the nature of investments was not binding in the proceedings for assessment during the subsequent years. In Commissioner of Income Tax, Nagpur v.. Sutlej Cotton Mills Supply Agency Ltd. (100 ITR 706), the respondent assessee subscribed for 3,49,000 shares of a new issue of Gwalior Rayon and paid the application and call moneys. Subsequently, he sold 1,58,200 shares with a profit. The Income Tax Appellate Tribunal found that the transaction constituted business being an adventure in the nature of trade and that the profit was liable to income tax. On reference to the High Court of Madhya Pradesh held that the transaction was held not an adventure in the nature of trade. On appeal to the Hon'ble Supreme Court, the decision of the High Court was reversed holding that the Tribunal had considered the evidence on record and applied the correct test in law, and there was no scope for interference with the finding of the Tribunal. We may notice here a recent judgement of the Authority in the case of XYZ/ABC Equity Fund (250 ITR at page 194). In that case the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal in the memorandum of association is not conclusive of the nature of transaction, there must be some material to show that in furtherance of the object clause in the memorandum steps are taken and it is given effect to. In CIT v.. P.K.N.Co.Ltd. (Supra), the question for consideration before the Hon'ble Supreme Court was whether the profits realized by the assessee company from the sale of properties could be brought to tax. It is observed that the question whether in purchasing and selling land, the assessee company enters upon a business activity has to be determined in the light of the facts and circumstances; the purpose or the object for which it is incorporated may have some bearing, but is not decisive, nor is the profit motive in entering into a transaction is decisive. In that case, the respondent company was formed primarily to take over the assets of a firm. The memorandum of association, inter alia, specified in the objects clause purchase or acquisition, sale, development and disposal of land. It was held that the profits arising from the sale of the land in plots were not taxable income; the primary object of the company was to take over the assets of the firm to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 and not revenue receipt. 20. Keeping in view the above principle, we shall examine the facts of the case to determine the aforementioned question. In the instant case, the applicant was registered as an investment company under the Investment Company's Act, 1940 of USA. The purpose of setting up of the company as mentioned in the Article II of the Amended and Related Declaration of Trust dated April 18, 2001, is: "The purpose of this trust is to provide investors a continuous source of managed investments in securities" . It invested in equity share and also sought to provide long-te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's-length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph". 22. It is stated in the application that the applicant does not have any branch or office in India, nor does it have any place of business in India that would lead to an inference that the applicant has a permanent establishment in India. It is also mentioned that the applicant does not have any dependent agent or otherwise any employee in India that could be considered as applicant's permanent establishment in India. The only connection the applicant has in India is independent domestic custodian appointed by the global custodian. The appointment of a global custodian and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Securities Regulation, 1996 and it is currently providing custodial services to many FIIs, domestic mutual funds and having contractual relationship with global custodian and not directly with the FII. These aspects are not denied by the revenue. Indeed the grievance of the Revenue has been that no details have been given by the applicant which, we are afraid, is unsustainable. In our view there is enough material to determine whether the applicant has a permanent establishment In India. 25. On a perusal of the agreement of the global custodian and the domestic custodian and the letter of the domestic custodian, we are satisfied that the SCB is an independent agent and satisfies the requirement of clause 5 of article 5. We are, therefore, of the view that the applicant has no permanent establishment in India. Having regard to the provision of article-7 of the Treaty, we conclude that the applicant would not be taxable in India under the Treaty. 26. For the above mentioned reasons, we rule on question (2) that on the facts and circumstances of the case, the applicant has no permanent establishment in India in terms of article 5 of the treaty and on question (1) we rule that on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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