IN RE: GENERAL ELECTRIC PENSION TRUST Vs. STATE

JUDGEMENT

(1.) THE applicant in this application under section 245Q(1) of the Income -tax Act, 1961 (for short "the Act") , is a trust established by General Electric Company and its participating affiliated companies (hereinafter referred to as "GE") by an indenture on December 28, 1927. The applicant is a tax resident of USA. The Trust forms part of a pension, profit sharing, or stock bonus plan qualified under section 401 of the USA Internal Revenue Code. The trust was formed for providing payment of pension and other benefits under the G.E. Pension Plan. The said trust indenture was amended from time to time and was restated in its entirety on July 1, 2000. GE sponsors a number of pension plans for the benefit of its employees. The plan -contributory defined benefit pension plan, is for US employees of GE. Under the plan contributions are received from the GE and its employees. The plan states that the payment of all benefits shall be made solely from the assets of the applicant and except as otherwise required by law, GE shall have no obligation to make or continue to make from its own fund any payment of the benefits provided by it. The applicant has various portfolios under it, which focus on different types of investments, different sectors and different geographical regions. The applicant holds approximately US $ 43 billion in worldwide assets of which approximately US $ 80 million (approximately 0.19% of the worldwide assets) are invested in Indian securities. The applicant is managed by a board of trustees which has exclusive authority and discretion to manage and control the assets of the applicant. The board has delegated to GE Asset Management (GEAM) the sole and the exclusive authority to manage the assets of the applicant. The applicant makes investments in India under the Foreign Institutional Investor ("FII") regime formulated by the Securities and Exchange Board of India ("SEBI") . The applicant has been registered as a FII with the SEBI as a sub -account of GEAM under the SEBI (Foreign Institutional Investors) Regulations Act, 1995 (for short 'FII Regulations') . Accordingly the applicant has been trading in securities in India continuously. The primary custodian of the applicant for investment held by it worldwide, is State Street Corporation which in turn appointed Deutsche Bank AG [Mumbai Branch] (for short "the Bank") as domestic custodian in India in respect of Indian investments of the applicant. As per the agreement, the main duties of the bank include physical holding of securities, making and receiving payments for the purchase and sale of securities. The Bank renders such services for other FIIs in its ordinary course of business. GEAM has appointed several portfolio managers located in Stamford, USA. They advise on the investments to be made by the applicant globally. The advice of all portfolios managers is analyzed and a decision for investment is taken by GEAM. The applicant states that it does not have any employee, branch, office or place of business in India nor does it have advisor or any agent in India. The sales and purchases of shares/securities in India are made through brokers and Bank holds securities on behalf of the applicant in India. The Government of the United States of America and the Government of the Republic of India entered into a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes and income on 18 -12 -1990 which was notified on 20 -12 -1990 (hereinafter referred to as "the Treaty") . On these facts, the applicant sought advance ruling of the Authority on the following questions: -

(2.) WHETHER in the absence of permanent establishment in India and in light of the provisions of Article 7 read with article 5 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains entered into between the Government of the Republic of India and the Government of the United States of America (hereinafter referred to as the "Treaty") , such business income of the applicant will be taxable in India?

(3.) MR . Kapila has submitted that the applicant is a sub -account of a FII as such separate taxable entity under the provisions of the FII's scheme. The applicant is only to invest in India in securities which means that it can only invest in securities as capital assets and not as stock -in -trade for the purpose of carrying on trade/business. Even from the special provision - section 115AD of the Act, it follows that the income of the applicant can be either long -term or short -term capital gains; had it been allowed to earn business income as contended, the application of provisions of sections 28 to 44C of the Act would not have been excluded, therefore the income of the applicant is not a business income but only capital gains. The nature of the income of the applicant, submits Mr. Kapila, is capital gains and not the business income because a FII can only make investment and cannot embark upon trading activity. The securities held by the applicant are referred to as investment and not as stock -in -trade, therefore the income of the applicant would be liable to tax as capital gains in India.