Investment characterisation of FII securities gains upheld, with treaty protection denying Indian tax under the permanent establishment test.

Income from a foreign institutional investor's sale and purchase of securities was treated as capital gains, not business income, because the transactions were characterised as investment activity rather than trading in the course of banking operations. The Tribunal also noted that the Indian banking branch did not constitute a permanent establishment for that securities income under the India-Switzerland tax treaty. On that basis, Article 13(6) applied and the force of attraction argument did not change the result, so the income was not taxable in India under the treaty and the Revenue's challenge failed.

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Issues: (i) Whether the income of a foreign institutional investor from sale and purchase of securities in India was taxable as capital gains or as business income; (ii) Whether such income was taxable in India under the India-Switzerland tax treaty on the footing that the Indian branch constituted a permanent establishment for that activity.

Issue (i): Whether the income of a foreign institutional investor from sale and purchase of securities in India was taxable as capital gains or as business income.

Analysis: The dispute on characterisation was covered by the Tribunal's earlier decisions in the assessee's own case. The assessee's securities transactions as a foreign institutional investor were treated as investment activity and not as trading forming part of banking operations. The earlier view that such gains were assessable as capital gains was followed.

Conclusion: The income from sale and purchase of securities was held to be taxable as capital gains and not as business income.

Issue (ii): Whether such income was taxable in India under the India-Switzerland tax treaty on the footing that the Indian branch constituted a permanent establishment for that activity.

Analysis: The earlier decisions had also held that the assessee's Indian banking branch did not constitute a permanent establishment in relation to the securities income. On that basis, the income was held not taxable in India under Article 13(6) of the treaty, and the force of attraction argument did not alter that conclusion.

Conclusion: The securities income was held not taxable in India under the treaty on account of the Indian branch.

Final Conclusion: The Revenue's challenge failed on both characterisation and treaty taxability, and the order of the CIT(A) was sustained.

Ratio Decidendi: Income from securities transactions of a foreign institutional investor is taxable as capital gains where the activity is in the nature of investment, and the Indian banking branch will not create a taxable permanent establishment for that income under the applicable tax treaty.

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