AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1462
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....ance 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 this purpose approval from RBI and License was obtained on 27th February, 2008. . Thus, the investment in Indian security activities was carried out through FII, which was regulated by SEBI and the Branch was opened to carry out banking business regulated by the RBI under 'Banking Regulation Act, 1949'. The first issue which has been rai....
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....e 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 income earned from short-termcapital- gain of Rs.100,92,23,761/- cannot be treated as capital gain so as to give benefit under Article 13(6) but is assessable as a 'business income' to be taxed under Article 7. The assessee's case before the AO apart from distinguishing the different functions carried out by the Branch as well as by the a....
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....rs 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) after considering the entire gamut of facts and contention of the assessee, observed and held as under:- "The AO, in the assessment order, has presumed that the PE of the assessee company in India, represented by the branch, was directly or indirectly engaged in the FII trading in debt securities. No factual basis for ....
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....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 the Indian Branch undertaking banking activity. The entire process of how FII activities have been carried out had also been explained. Thus, the finding of the CIT(A) is not only in the consonance of the earlier and subsequent years precedence but also on the facts of the present year. 7. On the other hand, Ld. DR relyin....
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....d 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 the UBS investment team. • The UBS investment team sends a trade confirmation directly to the Indian custodian. • Based on the confirmation received from the UBS investment team and the Indian broker, the Indian custodian arranges to settle the trade. • Depending....
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....ered 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 taxability of income of FII as capital gains, we find that, first of all, the gain from the transaction of securities has always been assessed as capital gains in the earlier years and as pointed out by the Ld. Senior Counsel by the DRP in AY 2011-12 also. Not....
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.... 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 been deducted on such expenses claimed by the Branch and secondly, these expenses have not been reported in Form 3CEB filed along with the return of income, therefore they cannot be allowed. Before the CIT(A), the assessee's contention had been that, Head offi....
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....ncurred 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, therefore, qua this expenditure, the finding of the AO is not relevant, however, with regard to other expenses it has been confirmed by the CIT(A) that same has to be computed as per section 44C in view of Article 7(3), the same is not in dispute before us. Accordingly, the order of the CIT(A) is confirmed on this point. 15. Now, we will come to the Cross Objection No.210 of 2015 of the assessee, which reads as under:- "1. On the facts and in the circumstances of the case and in law, presuming and not admittin....