No.- ITA No. 2824, 4987/Mum/2012 And ITA No. 4578/Mum/2014

RAJENDRA, ACCOUNTANT MEMBER AND RAM LAL NEGI, JUDICIAL MEMBER

For The Appellant : Samuel Darse, CIT-DR
For The Respondent : Nitesh Joshi

ORDER

Rajendra, Accounting Member -

Challenging the orders of the CIT(A)-11, Mumbai, the Assessing Officer (AO) has filed appeals for the above mentioned assessment years (AYs.). Assessee-company, a resident of Spain, is registered as a FII with SEBI.As the issues involved in all the appeals are identical, so, we are adjudicating them together. The details of dates of filing of ROI, returned incomes, assessment dates, assessed incomes etc can be summarised as under:

ITA/2824/Mum/2012-AY.2007-08:

2. First ground of appeal is about treating the’ncome on account of gain on foreign exchange transaction under the head income from capital gains as per Article 14(6) of the India Spain tax treaty. During the assessment proceedings, the AO found that the assessee had earned a profit of Rs. 32.57 crores on account of its transaction in Foreign Exchange, that it had treated the same as Short-Term Capital Gain (STCG),that referring to the provisions of Article 14 of the Indo-Spain DTAA the assessee had claimed it as exempt. He directed the assessee to explain as to why said gain should not be taxed under the head income from other sources as per the Article 23 of the tax treaty. After considering the submission of the assessee, the AO held that FII in India had to carry out its activities in terms of approval as granted by the SEBI only to invest in shares and trade in derivatives, that FII was not authorised to invest in foreign exchange market, that no capital gain could accrue to FII on account of transaction in foreign exchange, that for an income to be in nature of business income the same should be directly derived from business activity, that FII could not carry out any business activity, that the income from dealing in foreign exchange was assessable under the head income from other sources.

3. Aggrieved by the order of the AO, the assessee filed an appeal before the First Appellate Authority (FAA) and made elaborate submissions. It also relied upon the certain case laws along with the FAMA Regulations, 2000-Notification dated 03/05/2000. After considering the available material, he held that as per the certificate issued by the Citibank and as permitted by the RBI and FEMA Regulation, FII was permitted to enter into a foreign exchange derivative contract with a person resident India to hedge an exposure to risk in respect of such transaction. He referred to the case of Citicorp Banking Corpn, (IT Appeal/6525 (Mum.) of 2009, dated 25/02/2011) and observed that the issue raised by the assessee was covered by the above order of the tribunal, that investment income of the assessee was not taxable in India as per Article 14 (6) of the tax treaty, that the gain on forex transaction entered in to hedge the investment in securities was capital gains and not taxable in India.

4. During the course of hearing before us, the Departmental Representative (DR) supported the order of the AO. The assessee relied upon the order of the FAA. We find that the issue of taxation of gains arising out of forward contracts to hedge against the fluctuation in the rate of foreign exchange has been deliberated upon the tribunal in the case of Citicorp Banking Corpn. (supra). We would like to reproduce the relevant portion of the order and it reads as under:

“So far as the facts before us are concerned, nowhere it is controverted by both the authorities below that the dominal purpose for entering into foreign exchange forward contract by the assessee was for clearly to hedge against the depreciation of the foreign currency and it has direct nexus with the investments made by the assessee . It is also admitted fact that the assessee is not doing any business here and the assessee is FII and only engaged in the investment and this fact is nowhere denied by both the authorities below. In our opinion, the loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115 AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIIS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed.”

Respectfully, following the above order of the tribunal we decide the first ground of appeal against the AO.

5. Next ground of appeal is about treating gain on sale of shares of companies, engaged in the real estate development, as eligible to benefit of exemption under Article 14 (6) of the India Spain treaty. During the assessment proceedings, the AO found that income had arisen from sale of shares of the companies dealing in real estate in India and deriving their value from the immovable property. He directed the assessee to explain as to why the capital gains arising from the sale of shares of such companies should not be covered under Article 14 (5) of the DTAA and charged to tax in India. After considering the submission of the assessee, he held that the language of Article 14(5)of the treaty was very simple, that nothing more could be read into it, that right to occupy immovable property is nowhere mentioned in the Article, that India was not signatory to UN model, that no outside help was necessary when language of DTAA was very clear, that various companies dealing in real estate sector, that they would derive their value of shares from the value of immovable properties owned by them, that it was immaterial that immovable properties were held as stock in trade, that there was no bar in the treaty to hold immovable property as stock in trade, that the only condition as per Article 14(5)was that property of the company should principally be immovable property, that companies included in BSE Realty index and other similar companies had to be considered for charging of capital gains under article 14(5) of the DTAA. Accordingly, he calculated the STCG at Rs. 1,12,56,98,525/-.

6. After considering the submissions of the assessee, made during the appellate proceedings, the FAA held that the assessee, at a given point of time, was holding maximum of 5.9% shares in Ansal Housing Consortium Ltd., that the lowest holding was of 0.16% in Shobha developers, that all the companies were real estate companies and were engaged in development of properties, that their business was development of real estate and not holding the immovable property, that shares of the companies were listed on BSE and NSE exchanges, that the holders of the shares of such companies would not get any right in the immovable properties held by those companies, that it was not correct to hold that the value of shares of those companies was derived from the value of immovable property held by them, that the value of shares of such companies was derived from market forces and demand and supply rules, that the AO was not justified in invoking the Article of 14(5)of the India-Spain Treaty and denying the benefit of exemption available to the assessee under Article 14(6) of the treaty. Finally, he allowed the appeal of the assessee.

7. Before us, the DR stated that the assessee was deriving income from immovable properties. The AR supported the order of the FAA. We find that the assessee had invested in certain companies that were in the business of developing properties, that it was not holding any property directly or indirectly, that the provisions of Article14(5)were applicable for the properties held by a Spanish Company. The FAA had given a categorical finding of fact that assessee was not holding any property in India. In our opinion, the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order, we decide the effective GOA against the AO.

ITA/Mum/4987/2012 &/IT/4578/Mum/2014-AYs. 2008-09, 2009-10:

8. The facts and circumstances of both the AY.s are identical o he facts of the earlier years-the only difference is of the amounts involved. Following our order for the AY 2007-08 we decide both the appeals against the AO.