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Authority
for Advance Rulings denies treaty benefit to US FII - holds the
pension trust taxable in India
TThe
Authority for Advance Rulings ("Authority") has held in
a recent judgment that the $43bn General Electric Pension Trust
("GEPT") is liable to be taxed in India. GEPT's investment
in India is over $80m.
GEPT,
a trust set up in the US, is registered as a Foreign Institutional
Investor in India, and invests in Indian securities, the returns
from which are used for General Electric's pension liabilities.
It had sought a ruling on taxability of its income in India.
In
the case of GEPT, the Authority upheld its decision in the cases
of Fidelity
and Morgan
Stanley to the extent that it classified the income of the
FII in India from the trading of securities as profits from business.
However, unlike
the earlier cases, where the Authority had held that the business
income of the FIIs would not be liable to tax in India on the
basis that the FIIs had no permanent establishment in India under
the applicable tax treaties, in the case of GEPT, the Authority
held that the benefit of the India - US tax treaty was unavailable.
The basis for holding as such was that the applicant (GEPT) was
a trust and the residential status of a trust under the India-
US tax treaty was determined in accordance with the provision
of clause (1)(b) of Article 4 of the treaty. GEPT enjoys a tax
exemption in the US and it would appear that the Authority held
that GEPT was ineligible to treaty benefits on this ground. The
immediate consequence of the denial of tax treaty benefits to
the US based FIIs structured as trusts, is that the business income
of these entities could become taxable in India. As opposed to
this, had the income of these FIIs been classified as capital
gains, where the trading of securities had been done on a recognized
stock exchange, the liability to tax in India would have been
either 0% or 10% depending on whether the gains were long term
or short term. This change in the tax situation would have a significant
negative impact on the business costs of FIIs.
It may be
noted that this clause regarding residential status of trusts
is not a standard feature in India's tax treaties, and is absent
in many treaties with other countries. The decision is therefore
unlikely to affect similarly structured FIIs from other jurisdictions.
Thus, where a US pension fund were to invest into India through
Mauritius instead of directly, the FII would be tax exempt in
India in the absence of a PE, whether its income were to be classified
as business income or capital gains.
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can direct your queries or comments to the authors
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Source:
The Economic Times, December 24, 2005
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