M/s. CITIBANK OVERSEAS INVESTMENT CORPORATION, MUMBAI V. DDIT (I.T) 1(2), MUMBAI

ITA 4436/MUM/2005

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9070 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 17-12-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 15-06-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALA
• Keywords: Capital asset; Business income; Double taxation relief; Permanent establishment; Cost of acquisition; Wholly owned subsidiary; Capital receipt
• Section: 143(3)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 4436/MUM./2005 ( &) * !+* / ASSESSMENT YEAR : 200102 ) CITIBANK OVERSEAS INVESTMENT CORP. C/O PLOT C61, BANDRA KURLA COMPLEX GBLOCK, BANDRA (E), MUMBAI 400 038 .. ,- / APPELLANT ) V/S DY. DIRECTOR OF INCOME TAX (I.T)1(2) SCINDIA HOUSE, N.M. MARG BALLARD EAST, MUMBAI 400 038 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AABCC5333N &) *1# 2 3 / ASSESSEE BY : MR. P.J. PARDIWALA 4 ! 2 3 / REVENUE BY : MR. MAHESH KUMAR )! 2 # / DATE OF HEARING 18.12.2012 $ 5+ 2 # / DATE OF ORDER 21.12.2012 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH THE PRESENT APPEAL PREFERRED BY THE ASSESSEE, IS DI RECTED AGAINST THE IMPUGNED ASSESSMENT ORDER DATED 25 TH FEBRUARY 2005, PASSED BY THE LEARNED COMMISSIONER (APPEALS)XXXI, MUMBAI, FOR TH E QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOM E TAX ACT, 1961 (FOR M/S. GARWARE POLYESTER LTD. 2 SHORT THE ACT ) FOR THE ASSESSMENT YEAR 200102, ON THE FOLLOWIN G GROUNDS: THE COMMISSIONER OF INCOME-TAX (APPEALS)-XXXI, MUMB AI [HEREINAFTER REFERRED TO AS THE CIT(A)] ERRED IN UP HOLDING THE ACTION OF THE ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATIO NAL TAXATION) 1(2), MUMBAI (HEREINAFTER REFERRED TO AS THE AO) IN TAXING THE NET PROFIT OF RS.2,93,47,992 MADE ON ACTUAL PURCHASE AN D SALE OF CURRENCY PURSUANT TO UNDERLYING FOREX CONTRACTS AND FURTHER ERRED IN TREATING IT AS INCOME FROM OTHER SOURCES. 2. THE CIT(A) OUGHT TO HAVE HELD THAT AS THE PURCHA SE AND SALE OF FOREIGN CURRENCY HAS BEEN DONE AS PART OF HEDGE CONTRACTS ENTERED INTO BY THEM TO PROTECT ITS INVESTMENTS FRO M FOREIGN CURRENCY FLUCTUATIONS, SUCH INCOME CONSTITUTES BUSI NESS INCOME NOT CHARGEABLE TO TAX. 3. WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) OUGHT TO HAVE HELD THAT THE GAIN ON PURCHASE AND SALE OF FOREIGN CURRENCY CAN ONLY BE TREATED AS ON CAPITAL ACCOUNT NOT CHARGEABL E TO TAX SINCE THE CONTRACTS DO NOT HAVE A COST OF ACQUISITION. 2. THE ASSESSEE IS A 100% SUBSIDIARY OF CITIBANK N.A., NEW YORK, AND IS INCORPORATED IN U.S.A. ITS PRINCIPAL ACTIVITY IS TO INVEST IN THE SHARES OF GROUP COMPANIES. AS NOTED BY THE ASSESSING OFFICER, THE ASSESSEE HAD TWO SOURCES OF RECEIPTS ARISING FROM INDIA. (A) FROM THE SALE OF SHARES OF M/S. CITICORP OVERSEAS S OFTWARE LTD. TO M/S. CITICORP TECHNOLOGY HOLDINGS, INC. A 1 00% SUBSIDIARY OF CITIBANK N.A. BASED IN DELAWARE, USA. THE SHARES WERE SOLD FOR USD 12,920,103 (EQUIVALENT TO INR 60,22,06,000 AT T HE EXCHANGE RATE OF 1 USD = 46.61 INR). (B) NET PROFIT OF ` 2,93,47,992 MADE ON PURCHASE AND SALE OF CURRENCY PURSUANT TO UNDERLYING FOREX CONTRACTS. 3. THE AMOUNT OF ` 2,93,47,992, WAS NOT OFFERED TO TAX ON THE GROUND THAT IT CONSTITUTED BUSINESS INCOME WHICH WAS NOT T AXABLE IN INDIA IN THE ABSENCE OF A P.E. (PERMANENT ESTABLISHMENT) IN INDI A. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTIONS THAT IT IS A BUSINESS INCOME AND NOT TAXABLE IN INDIA AND ALSO THE ALTERNATE SUBMISS IONS THAT IN ANY CASE INCOME IS ON ACCOUNT OF CAPITAL, HENCE, TO BE TAXED AS GAINS. THE ASSESSING OFFICER TREATED THE SAID AMOUNT AS INCOME FROM OTHER SOURCES LIABLE TO BE TAXED IN INDIA AS PER ARTICLE 23 OF THE DTAA BET WEEN INDIA AND U.S.A. M/S. GARWARE POLYESTER LTD. 3 4. BEFORE THE COMMISSIONER (APPEALS), THE MAIN PLANK O F THE ARGUMENT OF THE ASSESSEE WAS:- (I) THE INCOME REPRESENTS BUSINESS INCOME OF THE AP PELLANT COMPANY AND IN THE ABSENCE OF A PE, THE SAME IS NOT CHARGEABLE TO TAX. (II) WITHOUT PREJUDICE, THE DIFFERENTIAL CAN ONLY B E CLASSIFIED AS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX AS THE UNDERL YING TRANSACTION IS ON INVESTMENT ACCOUNT AND NOT ON TRADING ACCOUNT . IT IS FURTHER SUBMITTED THAT AS THERE IS NO COST TO THE ASSESSEE IN RESPECT OF THE FORWARD EXCHANGE CONTRACT, THE DIFFERENTIAL RECEIPT CONSTITUTES A CAPITAL RECEIPT NOT EXIGIBLE TO CAPITAL GAINS. (III) IN ANY EVENT AND WITHOUT PREJUDICE, THE DIFFE RENTIAL CANNOT BE CLASSIFIED UNDER THE HEAD INCOME FROM OTHER SOURCES AND AT BEST IT WOULD DERIVE ITS CHARACTER FROM THE UNDERLYING ASSE T WHICH IS ON CAPITAL ACCOUNT. 5. BEFORE THE LEARNED COMMISSIONER (APPEALS), THE ASSE SSEE HAS ALSO RELIED UPON THE DECISION OF A SPECIAL BENCH OF THE TRIBUNAL, DELHI, IN APOLLO TYRES LTD., 89 ITD 235 (SC) , WHEREIN IT HAS BEEN HELD THAT THE GAIN ARISING FROM THE CANCELLATION OF FOREIGN EXCHANGE FORWARD C ONTRACTS ON ACCOUNT OF LOAN RAISED FOR PURCHASE OF MACHINERY ARE CAPITAL I N NATURE AND AT BEST THE GAIN SHOULD BE TREATED AS CAPITAL GAIN. THE COMMISS IONER (APPEALS), HOWEVER, REJECTED THE ASSESSEES ENTIRE CONTENTIONS WHICH HAS BEEN DISCUSSED IN DETAIL BY THE COMMISSIONER (APPEALS) F ROM PAGES-4 TO 9 AND UPHELD THE ACTION OF THE ASSESSING OFFICER IN TAXIN G THE INCOME OF ` 2,93,47,994 FROM THE TRANSACTIONS OF FORWARD CONTRA CTS UNDERTAKEN BY THE ASSESSEE AS INCOME FROM OTHER SOURCES LIABLE TO BE TAXED IN INDIA AS PER THE ARTICLE 23 OF INDO U.S. DTAA. 6. BEFORE US, THE LEARNED SR. COUNSEL, MR. P.J. PARDIW ALA, ON BEHALF OF THE ASSESSEE, SUBMITTED THAT EVEN THOUGH THE ASSESS EE HAS, PRIMA-FACIE, A VERY STRONG CASE WITH REGARD TO NON-TAXABILITY OF S UCH A RECEIPT FROM FORWARD CONTRACT EITHER AS BUSINESS INCOME OR CAPIT AL GAIN BECAUSE THERE IS NO P.E. AND NO COST OF ACQUISITION OF ASSET. HOWEVE R, HE SUBMITTED THAT THE ISSUE I.E., SUCH KIND OF RECEIPTS ARE CAPITAL RECEI PTS AND CAN ONLY BE TAXED AS CAPITAL GAIN, NOW STANDS COVERED IN FAVOUR OF TH E ASSESSEE BY A SERIES OF DECISIONS OF THE TRIBUNAL, MUMBAI BENCHES, IN CITICORP BANK M/S. GARWARE POLYESTER LTD. 4 CORPORATION, BAHRAIN V/S ADIT, ITA NO.6525/MUM./200 9 , WHICH HAS FOLLOWED THE SPECIAL BENCH DECISION OF APOLLO TYERS LTD. (SUPRA), CITICORP INVESTMENT BANK SINGAPORE LTD. V/S DDIT (IT), [2012 ] 24 TAXMAN.COM 211 , CREDIT SUISSE SINGAPORE LTD. V/S ADIT, [2012] 24 TA XMAN.COM 66 AND DDIT V/S D.B. INTERNATIONAL ASIA LTD., ITA NO.2954/ MUM./2010 . HE SUBMITTED THAT IN VIEW OF THE ABOVE DECISIONS, SUCH AN AMOUNT HAS TO BE TREATED AS CAPITAL RECEIPT LIABLE TO BE TAXED AS CA PITAL GAIN. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELIED UPON THE FINDINGS OF THE COMMISSIONER (APPEALS) AS WELL AS BY THE ASSESSING OFFICER. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND THE ORDERS PASSED BY THE COMMISSIONER (APPEALS) AS WELL AS BY THE ASSESSING OFFICER AND THE CASE LAWS RELIED UPON BY THE LEARNED SR. CO UNSEL FOR THE ASSESSEE. THE ASSESSEE IS A NON-RESIDENT COMPANY AND HAS INVE STED IN THE EQUITY SHARES OF CITICORP FINANCE INDIA LTD., WHICH WAS DO NE BY BRINGING THE CAPITAL IN FOREIGN CURRENCY IN MARCH 1997. IN ORDER TO PROTECT ITS INVESTMENT IN ACCORDANCE WITH THE PROVISIONS OF F.E .M.A. (FOREIGN EXCHANGE MANAGEMENT ACT), WHEREIN OVERSEAS INVESTOR S ARE ALLOWED TO HEDGE THEIR CAPITAL INVESTMENT IN INDIA AND ACCORDI NGLY, THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACT WHICH ARE PERIODICALL Y ROLLED OVER. ON ACCOUNT OF THIS PERIODICAL ROLL OVER OF FORWARD CON TRACTS, THE ASSESSEE HAS REALIZED A NET GAIN IN INDIA AT ` 2,93,47,992. SUCH A FORWARD EXCHANGE CONTRACT TO PROVIDE A HEDGING MECHANISM AGAINST ADV ERSE FOREIGN EXCHANGE MOVEMENT, THE TRIBUNAL IN VARIOUS CASES HA S TAKEN CONSISTENT VIEW THAT IN SUCH A SITUATION, THE RECEIPT IS TO BE TREATED AS CAPITAL RECEIPT AND THE INCOME OR LOSS FROM SUCH A TRANSACTION IS T O BE CONSIDERED AS CAPITAL GAIN OR CAPITAL LOSS. IN CITICORP BANKING C ORPORATION, BAHRAIN (SUPRA) AND CITICORP INVESTMENT BANK SINGAPORE (SUP RA), IT HAS BEEN HELD THAT INCOME ON ACCOUNT OF CANCELLATION OF FORWARD E XCHANGE CONTRACT IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS BECAUSE IT HAS A DIRECT NEXUS WITH THE INVESTMENT OF THE ASSESSEE. RELEVANT FINDINGS G IVEN IN CITICORP INVESTMENT BANK SINGAPORE LTD. ARE REPRODUCED HEREI N BELOW:- M/S. GARWARE POLYESTER LTD. 5 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVA L SUBMISSIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INCOM E ARISING FROM EARLY SETTLEMENT OF FORWARD FOREIGN EXCHANGE CONTRA CT. THERE IS NO DISPUTE THAT THE FORWARD CONTRACT HAD BEEN ENTERED INTO BY THE ASSESSEE TO SAFEGUARD THE FOREIGN EXCHANGE LOAN TAK EN FOR PURCHASE OF DEBENTURES. THERE IS ALSO NO DISPUTE TH AT DEBENTURES ARE CAPITAL ASSETS AND THE INCOME FROM SALE OF WHIC H HAS BEEN TREATED AS CAPITAL GAIN. THE ONLY DISPUTE IS REGARD ING NATURE OF INCOME FROM THE SETTLEMENT OF FORWARD CONTRACT. WE FIND THAT THE SAME ISSUE HAS ALREADY BEEN CONSIDERED BY THE TRIBU NAL IN THE CASE OF SISTER CONCERN OF THE ASSESSEE I.E. CITICORP BAN KING CORPORATION BAHRAIN [ITA NO. 6525/M/09J FOR THE ASSESSMENT YEAR 2005-06. THE TRIBUNAL IN THE SAID CASE REFERRED TO THE DECIS ION OF SPECIAL BENCH IN THE CASE OF APOLLO TYRES LTD. (SUPRA), IN WHICH NATURE OF INCOME ARISING FROM CANCELLATION OF FOREIGN EXCHANG E FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE TO SAFEGUARD THE FOREIGN EXCHANGE LOAN TAKEN FOR PURCHASE OF PLANT AND MACHI NERY HAD BEEN CONSIDERED. SINCE THE FORWARD CONTRACT HAD BEEN TAK EN TO SAFEGUARD THE FOREIGN EXCHANGE LOAN TAKEN IN CONNECTION WITH ACQUISITION OF CAPITAL ASSETS IT WAS HELD THAT INCOME ARISING FROM SETTLEMENT OF FORWARD CONTRACT WAS CAPITAL IN NATURE. THE TRIBUNA L IN CASE OF THE SISTER CONCERN NOTED THAT, THE FORWARD CONTRACT HAD BEEN TAKEN TO SAFEGUARD FOREIGN CURRENCY LOAN AVAILED FOR PURCHAS E OF SHARES WHICH WERE CAPITAL ASSETS. THEREFORE, INCOME ARISIN G FROM SETTLEMENT OF FORWARD CONTRACT WAS TREATED AS CAPIT AL IN NATURE. THE FACTS IN THE PRESENT CASE ARE IDENTICAL WITH THE ON LY DIFFERENCE THAT IN THIS CASE THE ASSESSEE HAD ACQUIRED THE FOREIGN EXCHANGE LOAN FOR PURCHASE OF DEBENTURES WHICH ARE ADMITTEDLY CAP ITAL ASSETS. THEREFORE, IN OUR VIEW THE CASE IS COVERED BY THE D ECISION OF THE TRIBUNAL IN CASE OF CITICORP BANKING CORPORATION, B AH RAIN (SUPRA). THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE D ECISION OF DRP IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007 -08 IN WHICH IT HAS HELD THAT LOSS ARISING FROM SETTLEMENT OF FORWA RD CONTRACT TAKEN BY THE ASSESSEE TO SAFEGUARD THE FOREIGN EXCHANGE L OAN TAKEN FOR ACQUISITION OF SHARES/DEBENTURES WAS CAPITAL LOSS. 4.4 THE LD. DR HAS RAISED AN ADDITIONAL PLEA THAT T HE ASSESSEE SHOULD BE GIVEN BENEFIT OF DTAA ONLY IT WAS PROVED THAT MONEY HAD BEEN SENT TO SINGAPORE. BUT WE FIND THAT NO DISPUTE HAS BEEN RAISED BY AUTHORITIES BELOW REGARDING MONEY BEING T RANSFERRED TO SINGAPORE NOR ANY SUCH ISSUE IS IN DISPUTE BEFORE U S. NO DOUBT THE RESPONDENT CAN RAISE AN ADDITIONAL PLEA FOR THE FIR ST TIME BEFORE THE TRIBUNAL IN SUPPORT OF ORDER OF CIT(A) BUT SAME SHO ULD BE BASED ON FACTS ALREADY ON RECORD. THE PLEA RAISED ON THE PRE SUMPTION THAT MONEY MAY NOT HAVE BEEN TRANSFERRED TO SINGAPORE CA NNOT BE ADMITTED AT THIS STAGE. THE DISPUTE RAISED BEFORE U S IS ONLY WITH REGARD TO THE NATURE OF INCOME FROM EARLY SETTLEMEN T OF FORWARD FOREIGN EXCHANGE CONTRACT TAKEN TO SAFEGUARD THE FO REIGN EXCHANGE LOAN WHICH HAD BEEN AVAILED BY THE ASSESSEE FOR PUR CHASE OF DEBENTURES. THE INCOME FROM SALE OF DEBENTURE HAS B EEN ASSESSED AS CAPITAL GAIN. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SISTER CONCERN CITICORP BAN KING CORPORATION, BAHRAIN ( SUPRA ) WE HOLD THAT GAINS ARISING FROM E ARLY SETTLEMENT OF FORWARD FOREIGN EXCHANGE CONTRACT HAS TO BE TREA TED AS CAPITAL M/S. GARWARE POLYESTER LTD. 6 GAIN. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE CI T(A) AND ALLOW THE APPEALS FILED BY THE ASSESSEE . 9. SINCE NO CONTRARY DECISION HAS BEEN BROUGHT TO OUR NOTICE, WE RESPECTFULLY FOLLOW THE RATIO LAID DOWN BY THE AFOR ESAID DECISIONS WHICH HAS BEEN CONSISTENTLY FOLLOWED BY THE TRIBUNAL, MUMBAI BENCHES, AND HOLD THAT THE INCOME ARISING FROM FORWARD EXCHANGE CONTRACT I S ASSESSABLE AS CAPITAL GAIN. CONSEQUENTLY, THE GROUNDS RAISED BY THE ASSES SEE ARE TREATED AS PARTLY ALLOWED. 10. 1 #6 4 ! 2 '$ !# 7 2 4# 89 : 10. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. $ 2 + ; <)6 21 ST DECEMBER 2012 2 = : ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER 2012 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, <) <) <) <) DATED: 21 ST DECEMBER 2012 $ 2 .&#'> ?>+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4 ! / THE REVENUE; (3) @ () / THE CIT(A); (4) @ / THE CIT, MUMBAI CITY CONCERNED; (5) >!C= .&#&) , , / THE DR, ITAT, MUMBAI; (6) =D* E / GUARD FILE. /># .&# / TRUE COPY $) / BY ORDER . 4. FG / PRADEEP J. CHOWDHURY !1H &)4 F! / SR. PRIVATE SECRETARY I / 8 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI