TMI Blog2016 (6) TMI 1462X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. Senior Counsel by the DRP in AY 2011-12 also. CIT(A) has clearly brought out as to why such an activity has to be reckoned as taxable under the head capital gain specifically in light of his finding given at paragraph 3.6. Accordingly, we affirmed the order of the CIT (A) and hold that, assessee s income is chargeable under the head capital gain and not business income and consequently, under Article 13(6) such a capital gain is exempt from tax in India. Thus, ground No.1 as raised by the revenue stands dismissed. Taxability of interest income earned in respect of debt securities - whether under Article 11 or under Article 7 as held by the AO by treating it as a business income? - HELD THAT:- The assessee had shown interest income on debt securities as income from other sources and had offered to tax @ 10% in terms of Article 11 of Indo-Swiss DTAA. Since the AO has held that the entire income from transaction of securities and the activities as FII is to treated as income from business directly or indirectly attributable to the PE, therefore, he has taxed the same under Article 7 as business income. CIT(A) held that, mere existence of Mumbai Branch of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has raised following grounds of appeal:- 1. Whether on the fact and in the circumstance of the case and in law, the Ld. CIT(A) was right in holding the gain on transfer of debt securities amounting to Rs.100,92,23,761/- is assessable as capital gain and not taxable as business income. 2. Whether on the fact and in the circumstance of the case and in law, the Ld. CIT(A) was right in allowing the interest income earned in respect of debt securities of Rs.28,23,12,500/- under Article 11 of the Treaty instead of under Article 7 of the Treaty as Business income. 3. Whether on the fact and in the circumstance of the case and in law, the Ld. CIT(A) was right in allowing the claim of additional expenses of Rs.2,45,73,373/- as deduction while computing the business income . 2. The assessee, UBS AG is tax resident of Switzerland and has been registered as Foreign Institutional Investor (FII) in India with Security Board of Exchange of India (SEBI) from 1996 for the purpose of making investments in Indian securities. During the period relevant to the assessment year 2009-10, the assessee had also opened a branch in Mumbai for carrying out banking business in India. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce and skilled employees to undertake investment activities. Further, based on the magnitude and volume of transactions undertaken by the FII, AO held that there was a systematic and regular trading activity with the intention to earn profit. Thus on both the counts, he held that all the income including those shown by the assessee in the capacity of FII would be attributable directly or indirectly to the PE of the assessee in India represented by the Branch and accordingly, the same would be taxable under the head business income in terms of Article 7 of DTAA. From the perusal of the assessment order, it is seen that, the AO first of all, tried to highlight that the Branch was carrying out a systematic activity of investment in interest bearing debt securities/ instruments which were classified as held to maturity and held for trade and these investments were acquired with intention for trading purpose. FII activities carried out by assessee in India also involved debt securities which is akin and similar to activities carried out by the Branch, Thus, he held that both the activities were connected with the Branch in India. After coming to this conclusion, he held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required. Hence, the assessee s reliance on the Protocol cannot be sustained. Accordingly, he taxed the entire gain as business income in India in terms of Article 7. 5. Before the CIT(A), the assessee demonstrated that both the activities were entirely different. The FII activities were carried out since last several years and income there from has always been treated as capital gains and benefit of Article 13(6) was always given. The registration of FII was renewed from time to time and so also the certificate of registration with the SEBI. Separate and independent approvals under the law have been sought for the FII activity which is only for the purpose of trading in securities. Whereas, banking operations carried out with RBI approval was entirely different a activity altogether. Further, assessee has shown separately the closing stock of FII Division which was valued at Rs.103,49.57 crores, whereas Government securities held by Mumbai Branch reflected in the Balance sheet was at Rs.75.85 crores. Thus, there was not only different division and different operations carried but both had entirely different set of personnel, investment teams and expenditures. The Ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of capital gains and would remain exempt from tax in terms of the provisions of Article 13(6) of the relevant DTAA even after the branch operations of the assessee company were set up in India. Appeal filed by the assessee on this ground is accordingly allowed . 6. Before us, the Ld. Senior Counsel, Mr. Sonde after explaining entire facts as above, submitted that, here in this case the assessee has checkered history in favour of the assessee and pointed out that in AY 2011-12, the DRP itself has held that gain from transaction of security undertaken by the FII is to be taxed under the head capital gain . The Tribunal also in AY 2008-09 had also held the same thing. Thus, so far as the issue, whether the gain from transactions undertaken by the FIIs on the debt securities is to be treated as income chargeable under the head capital gain should be no longer in dispute and principle of consistency should be followed. Once it is held to a capital gain, then admittedly the same is not taxable in view of Article 13(6) Indo-Swiss-DTAA. He submitted that, before the AO the assessee had pointed out the entire difference of activities carried out by the assessee as FII and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a separate approval and license has been obtained by the RBI and its entire activities are strongly regulated by the RBI under the Banking Regulation Act, 1949. Thus, to say that FII and the banking activities are one and the same would be incorrect because both the activities are entirely different and governed by different authorities and regulation of laws. It is also not the case of the AO that the Branch was carrying out the FII activity, albeit both the activities banking and investment activities are akin to each other; therefore, same should be construed as one. Before the AO, the assessee had described the process of investment in debt securities in the capacity of FII in the following manner:- Based on in-house research, reports from research houses and commercial parameters, UBS investment team decides on investment/ divestment in a particular debt security. Based on the same, the UBS investment team gives instructions to Indian brokers for executing the transaction i.e. to purchase or sell Indian debt securities. The transaction is thereafter executed by the Indian broker on behalf of UBS AG FIl and a confirmation is sent to the Indian custodian and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Protocol of the Treaty for Article 7 clearly specifies and defines the meaning of term applicable directly or indirectly attributable which is to be understood, whether the PE takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise and if so, then it can be held to be attributable to the PE that proportionate of the profit of the enterprise arising out those contracts as the contribution of the PE to those transactions bears to that enterprise as a whole. Here, as pointed out by the assessee, the brokers, the employees and the activities are entirely different. There is no active part by the Branch in negotiating, concluding or fulfilling the contracts of purchase and sale of securities carried out by the PE. Thus, Mumbai Branch cannot be held to be involved directly or indirectly of the activities carried out by the assessee in India, therefore, the FII activities have to be segregated from the activities carried out by the Branch. Accordingly, we hold that the income of the FII is separate and distinct from the Branch and accordingly, the income has to be separately considered in the hands of the assessee as FII. As regards ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Head Office such as Group IT expenses; ESOP costs; and management fees, which were allocated to the Branch of assessee in India as the same were relatable to the branch operations carried out in India. These expenses were not debited to the profit and loss account but were claimed during the course of the assessment proceedings vide letter dated 28.01.2013. The said note had been reproduced by the AO at page 11 of the assessment order. However, the AO required the assessee to explain whether the TDS has been deducted on such expenses as per the provisions of section 40(a)(i) or not. In response, the assessee submitted that the said expenses have not been paid or credited by UBS AG Mumbai Branch to UBS AG HO; therefore, there is no question of deducting TDS. Reliance was also placed on the decision of ITAT Special Bench in the case of Sumitomo Mitsui Banking Corporation v DDIT, reported in [2012] 136 ITD 66. Apart from that, reliance was also placed on various ITAT decision including that of Bank of America NT SA v DCIT, reported in 27 SOT 97. The assessee s submission in this regard has been dealt by the AO from pages 12 to 14 and ultimately he held that, firstly, no TDS has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Bank of America NT SA vs DCIT [2005] 27 SOT 97 Mumbai ITAT) 4 British Bank of Middle East vs JCIT [2005] 4 SOT 122 (Mumbai ITAT) 5 Biocon Limited vs DCIT [2013] 35 taxmann.com 355 (Bang ITAT SB) 14. After considering the rival submissions and on perusal of the impugned order of the AO as well as CIT(A), we find that the CIT(A) has allowed only ESOP costs incurred by the Head Office for sum of Rs.1,87,25,998/-. The Head Office of the assessee company had granted various employees, stock compensation awards to some of the employees of the Mumbai Branch under various employee share plans, wherein the shares of the assessee company were allotted to the credits of employees. The claim of ESOP cost relatable to the Mumbai Branch was identified and such quantification has also been certified by the independent Accountant which has not been disputed. This being the nature of direct expenses, it has been rightly allowed by the CIT(A) under section 37(1). There is no obligation on the Branch to deduct TDS on such ESOP costs, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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