2004 (9) TMI 100 - AAR - Income Tax

Applicant's Portfolio Gains Not Taxable in India

The Authority ruled that the applicant does not have a permanent establishment in India under the Treaty. Therefore, the gains from the sale of portfolio ... Applicant, a non-resident, is a trust, set up to provide investors a continuous source of managed investments in securities - applicant has no PE in India in terms of article 5 of the treaty, therefore, the gains arising from the sales of portfolio investments in India are the applicant's business profits, covered under article 7 of the Convention dated December 20, 1990, regarding the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion (Treaty) Issues Involved:1. Taxability of gains from the sale of portfolio investments in India.2. Obligation to file tax returns in India.3. Applicability of penal provisions for non-filing of tax returns.4. Determination of permanent establishment in India.Detailed Analysis:1. Taxability of Gains from the Sale of Portfolio Investments in India:The applicant, a non-resident company registered in the USA, sought an advance ruling on whether the gains from the sale of portfolio investments in India would be treated as business income under Article 7 of the Treaty between India and the USA, and thus not taxable in India. The Authority concluded that the applicant held shares and securities as business assets and the profits from the purchases and sales of shares are in the nature of business income. According to Article 7, business profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. Since the applicant does not have a permanent establishment in India, the gains arising from the sale of portfolio investments in India are the applicant's business profits and are not taxable in India under the Treaty.2. Obligation to File Tax Returns in India:The applicant questioned whether it would be absolved from filing a tax return in India if its entire income is subject to tax only in the USA. The Authority did not provide a specific ruling on this issue in the summarized judgment, focusing instead on the taxability of the business profits and the existence of a permanent establishment.3. Applicability of Penal Provisions for Non-filing of Tax Returns:The applicant inquired whether any penal provisions of the Indian Income Tax Act would be invoked due to non-filing of tax returns. Similar to the previous issue, the Authority did not explicitly address this question in the summarized judgment, as the primary focus was on the taxability of the business profits and the existence of a permanent establishment.4. Determination of Permanent Establishment in India:The Authority examined whether the applicant had a permanent establishment in India as defined in Article 5 of the Treaty. The applicant argued that it did not have any branch office, place of business, or employees in India, and its business operations were carried out through brokers and custodians. The domestic custodian, Standard Chartered Bank (SCB), provided custodial services to many FIIs and domestic mutual funds and was considered an independent agent. The Authority concluded that SCB was an independent agent and the applicant did not have a permanent establishment in India. Therefore, under Article 7 of the Treaty, the applicant's business profits would not be taxable in India.Conclusion:The Authority ruled that the applicant has no permanent establishment in India in terms of Article 5 of the Treaty. Consequently, the gains arising from the sale of portfolio investments in India are the applicant's business profits and are covered under Article 7 of the Treaty, making them not taxable in India.