TaxTMI 
TaxTMI 
2004 (11) TMI 102
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....nsactions in relation to or involving and in any other way deal with or arrange dealings with or perform any service or function in relation to shares, stocks, debentures, loans, bonds,….., options, futures,…….., or any combination of the foregoing. Accordingly, the applicant has been investing in Indian stock markets and the income thereof is being offered for tax as capital gains. The applicant has been carrying on business in derivatives in other countries. Derivative products have been introduced in India in a phased manner starting with Index Futures Contracts in June, 2000, Index Options and Stock Options in June, 2001 and July 2001 respectively. In November, 2001 Stock Futures were also introduced. The exchange traded derivative contracts have a maximum of three months trading cycle. Now, the applicant proposes to expand its business in derivative trading operations in India, which it is already carrying on outside India . For this purpose it obtained permission of the Reserve Bank of India (RBI). In connection with this business, the applicant would avail services of certain independent parties like brokers, custodians and bankers. The broker will execute the contract....
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....ereinafter referred to as the "Commissioner") submitted the following comments to the application- In the context of Section 5(2) of the Act, the situs of the "derivatives" in which the applicant will be dealing is in India, therefore the income from the transactions in derivatives would arise in India and would be liable to tax in India . But the real issue in the application is: whether the income would be liable to tax as business income or capital gains. It is stated, the scheme of the Treaty suggests that for deciding taxability of an item of income it has to be placed under a particular head of income; if that income falls under a specific head other than profits and gains of business or profession, it cannot be taxed under article 7 as "business income". This is also clear from paragraph 9 of article 7 of the Treaty. The applicant has been dealing in two types of assets- (1) shares and (2) share based exchange traded derivatives. The income from the first type of assets is offered for taxation under the head 'capital gains' whereas in respect of the second type, the applicant claims that the income is business income and is not taxable in India. The income arising to the ap....
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....ion of the applicant to show the organized course of activities adopted by the applicant by entering into agreement with brokers, the custodian and bankers; he has also shown registration of the applicant with SEBI as FII and the permission of the RBI. In short, its contention is that the income of the applicant cannot be termed as capital gains; its business income is not chargeable to tax as the applicant has no PE in India. Mr. Pramjeet Singh, JDIT(IT), Mumbai who appeared for the Commissioner pointed out that the applicant is not the beneficial owner of the derivatives, the investment is by the third parties who alone will be entitled to the income and the applicant would get some commission. He submits that first it has to be seen whether the applicant is taxable under domestic law without recourse to tax Treaty, it is only then the tax Treaty has to be applied to see how it allocates the right to tax and then domestic law has to be applied within the limits of the tax Treaty. The income from the derivatives which is received in India, would be taxable in India; the income is to be classified as falling under the head "capital gains"; under the scheme of the treaty, if the in....
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....dealt with in other articles thereof. In passing we may mention that income by way of "Capital Gains" is covered by head 'E' of section 14 of the Act and is the subject matter of article 14 of the Treaty. 6. A reference to articles 7 and 14 of the Treaty will be relevant here. In so far as they are pertinent to the present discussion, they are extracted hereunder: Article 7 : Business profits • The 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. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. to 8. xxx xxx xxx xx 9. Where profits include items of income which are dealt with separately in the other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. A plain reading of para 1 of article 7, suggests that profits of an enterprise (applicant) of a contracting state (UK) shall be taxab....
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....nent establishment in India as defined in article 5, and income falling under other heads will be treated as postulated under other articles of the Treaty. If the business profits include capital gains, the same will be taxed as provided in article 14 and not in terms of article 7 of the Treaty. In this context, it will be necessary to consider whether the income of the applicant from transactions in derivatives is a revenue receipt or a capital receipt. It is a mixed question of law and fact. Before adverting to the facts of this case on this question, it will be useful to refer to the relevant decisions cited by the applicant. 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 se....
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....ut for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade and the profit derived by the appellant from the sale of shares was a revenue 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 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 int....
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.... advert to the provisions of the Act on the subject. Section 45 of the Act deals with capital gains. Sub-section (1) of section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year, except those dealt in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income tax under the head "capital gains" and shall be deemed to be income of the previous year in which the transfer took place. The term "capital asset" is defined in sub section (14) of section 2 to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include, inter alia, any stock in trade , consumable stores or raw materials held for the purposes of business or profession. Two categories of capital assets are dealt with under the Act - (i) long-term capital asset and (ii) short-term capital asset. A long term capital asset means a capital asset which is not a short-term capital asset (sub-section 29A of section - 2). And Sub section 42A of Section 2 of the Act defines short-term capital asset to means a capital asset held by an assessee for not more than 36 months immediately pre....
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....ity, securities, shares etc. derivatives do not have either voting rights or right to control. There is no pride of possession of derivatives. They also do not involve initial investment; they are priced by reference to value derived from an underlying index, commodity or other asset and their value fluctuates with the market movement of the aforementioned items. The applicant purchases and sells derivatives and some times first sells and then purchases them and this ordinarily does not happen in share and other securities. It is stated that as they have a short life of about 3 months, they do not yield any income like dividend, therefore, investment of money in them with a view to derive any income is not feasible. Income can be derived only on their purchases and sales so they are held only as stock-in-trade. The clause in Memorandum of Association, referred to above, empowers the applicant to do so. Mr. Mehrotra is right in submitting that SEBI speaks of investment and the very word FII indicate 'foreign institutional investor', but SEBI's permission regarding FIIs to trade in all exchange derivatives contracts cannot be ignored. SEBI's circular of Feb. 12, 2002 , in so far as i....
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.... article applies - shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if : • he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or • he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or • he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. • An enterprise of a Contracting State shall not be deemed to have 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, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out ....
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.... goods or merchandise in the first mentioned state from which he regularly delivers them on behalf of the enterprise; and clause (c) speaks of a case when he habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control, as that enterprise. Para 5 incorporates a deemed exclusion clause and says that an enterprise of a contracting State shall not be deemed to have permanent establishment in the other contracting State merely because it carries on business in the 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 business. Nonetheless when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same control, as that enterprise, he shall not be considered as an agent of an independent status within the meaning of the paragraph. There is no merit in the plea of the Commissioner that th....
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....Mumbai Bench 'D', Mumbai in I.T.A. Nos. 7987 and 7988/Bom/92 (Assistant Commissioner of Income Circle 12(2), Mumbai Vs DHL Operations B.V. Netherlands), we are not persuaded to agree with their approach outlined in their Order dated 3 rd October, 2000, thus: "First condition for application of paragraph 6 is that the agent should be of independent status. The second condition to be satisfied for application of paragraph 6 is that the agent of independent status should not be carrying on the business of the non-resident wholly or almost wholly. We have no hesitation to state that second condition is capable of being misinterpreted unless one keeps in mind the first condition. For application of paragraph 6 of Article 5, agent has to be of independent status. If a person carries on wholly or almost wholly all the activities of the non-resident and does not carry on any other activity, that person will not be an agent of independent status. Therefore the contention that since Airfreight Ltd. is carrying on activities of business other than the activities of respondent they are excluded from operation of paragraph 5, does not hold water. It is well settled principle of law that the wo....
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....ithin the meaning of PE. The Commissioner sought to interpret it to mean a case of dependent agent and proceeded to argue that if an agent was not an independent agent within the meaning of para 5, he would be a dependent agent within the meaning of para 4. It may be pointed out that para 4 is coached in very wide language, to take in its fold a person other than an agent covered under para 5, which includes a dependent agent. But merely because an agent does not satisfy the test embodied in para 5, he does not per se become a dependent agent so as to be called deemed permanent establishment under para 4. For bringing a person within the meaning of permanent establishment under para 4, the following conditions will have to be satisfied:- • a person must be acting in a Contracting State for and on behalf of an enterprise of the other Contracting State ; • such a person must be other than an agent of an independent status to whom para 5 of article 5 applies. The aforementioned two conditions are the qualifications of the person referred to in para 4. In addition the activities of such a person should fall under any one of the three clauses [(a) to (c)] of para 4. On the mere g....
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....., are registered as a broker with National Stock Exchange of India having Registration no. INF-231123333. Providing you the services for Indian Index futures and stock futures trading. As brokers, we provide only brokerage services to more than nine overseas clients including Morgan Stanley & Co. International Inc. for derivative trading. A list of few of our clients is as under: • Society General Paris • BNP Paribas • Merrill Lynch Capital Markets Espana • Geomatrix HK Ltd • Citi Group Mauritius • ABN Amro ( Mauritius ) Asia Ltd. • India Man Fund , Singapore • Marshal Fund , Australia . Yours faithfully, For Refco-Sifty Securities India Pvt. Ltd. Sd/- Vineet Bhatnagar Managing Director Motilal Oswal Securities Limited Dear Sir, This is to confirm that we, Motilal Oswal Securities Limited, are registered as a broker with National Stock Exchange of India having SEBI Registration no. INF 231041238 NSE Code No. TM 10412, CM M50175. We are providing the below mentioned service to you. Derivatives Segment Broking. As brokers, we provide only brokerage services to more than 20 clients including Morgan Stanley & Co. International Inc., for deriv....