Authority Tribunal
In Re: General Electric Pension Trust vs Unknown on 14 December, 2005
RULINGS INCOME TAX A.A.R. No. 659 of 2005 Decided On: 14.12.2005 Appellants: In Re: General Electric Pension Trust Vs. Respondent: Hon'ble Judges: Syed Shah Mohammed Quadri, J. (Chairman) and A.S. Narang, Member Counsels: For Department: Sharat Dev Kapila and Suresh Ramchandani, Advs. For Appellant/Petitioner/Plaintiff: Nishith Desai and Shefali Goradia, Advs. Subject: Direct Taxation Acts/Rules/Orders: Income Tax Act, 1961 - Sections 2(31), 5, 5(2), 9(1), 28 to 44C, 57, 115AD, 163, 196D and 245Q(1); Foreign Institutional Investors Regulations Act, 1995 - Sections 2, 13(1) and 18 Cases Referred: Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685; Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486; CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706; CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586; A. V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR (SC) 67; CIT v. P. K. N. Co. Ltd. [1966] 60 ITR 65 (SC); In Re: XYZ/ABC Equity Fund [2001] 250 ITR 194; In Re: Morgan Stanley & Co. International Ltd. [2005] 272 ITR 416 (AAR); In Re: Fidelity Advisor Series VIII [2004] 271 ITR 1 (AAR) ORDER
Syed Shah Mohammed Quadri, J. (Chairman)
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(a) 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 portfolio managers is analysed 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 an advisor or any agent in India. The sales and purchases of shares/securities in India are made through brokers and the 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 on income on December 18, 1990 which was notified on December 20, 1990 (hereinafter referred to as "the Treaty"). On these facts, the applicant sought advance ruling of the Authority on the following questions :
1. Whether on the facts and the circumstances of the case, the profits arising to General Electric Pension Trust (hereinafter referred to as the 'applicant') from the sale of portfolios investments in India will be treated as business income of the applicant ?
2. Whether in the absence of permanent establishment in India and in the 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 ?
2. The Director of Income-tax (International Taxation), Mumbai (hereinafter referred to as the "Commissioner"), submitted the following comments to the application :
3. The applicant being a trust is an artificial juridical person under Section 2(31) of the Act. The applicant being a sub-account is treated as a separate taxable entity from the FII. The tax liability of the applicant--a non-resident--has to be considered under Section 5 read with Section 9(1)(i) of the Act. The definition of FII contained in Clause (f) of Section 2 of the FII Regulation and grant of registration under Section 13(1) (a) thereof clearly show that FII shall only make investment in India to realize capital gains on transfer of securities ; that was also the position under Clause 9 of the old regulation. Section 115AD of the Act which falls in the Chapter of "Special provisions" suggests that the income of a FII could be in the nature of interest, dividend or capital gains. The fact that deductions under Sections 28 to 44C and Section 57 are not allowed in computing the income from securities would also indicate that the intention of the Legislature was not to allow a FII to take up business venture. Though any income payable to a non-resident is subjected to deduction of tax at source under Section 196D of the Act, no tax is to be deducted at source from capital gains and the FII has to specify the agent for the purpose of Section 163 of the Act. This would show that the investments cannot be made for trading but only for earning capital gains--short-term and long-term. Had the applicant been permitted to trade in the securities by way of sales and purchases, the term would have been used as stock-in-trade and not investment. It is submitted that Indo-US Treaty would not apply to the applicant in view of Clause (b) of para. 1 of Article 4 of the Treaty. The applicant is a nonresident of USA for Treaty purposes. Even if the Treaty applies, having regard to the distributive rule the capital gains is taxable in India under Article 13 of the Treaty. Even if it is assumed that the applicant is receiving business income from the securities, it has a permanent establishment in India, so the income is chargeable to tax. In short, the Commissioner submitted that the income arising to the applicant from the purchases and sales of the securities is in the nature of capital gains and therefore liable to tax both under the Act as well as under the Treaty; the applicant being a trust enjoys tax exemption in the USA and in view of Clause (b) of para. 1 of Article 4 cannot avail of the benefit of the Treaty; the applicant has a PE in India therefore the income from the securities is liable to be taxed in India.
4. In the light of the respective pleas of the parties, the following points arise for consideration :
(i) What is the nature of income of the applicant from transactions in securities ?
(ii) Whether the applicant is entitled to avail of the benefits of the Treaty ?
(iii) Whether the applicant has a PE in India ?
(iv) What is the tax liability of the applicant in India ?
5. Mr. Desai, learned Counsel appearing for the applicant, would submit that under the trust the applicant has the power to trade in securities and the enormity of sales and purchases of securities in India by it would show that the income of the applicant is its business income. Mr. Desai argues that for the purposes of income-tax, the nature of income has to be considered under the Act and the terminology used in the FII Regulations, cannot be taken into consideration to determine the nature of transactions. It is submitted that the magnitude and frequency of the transaction as per attachment VIII of the application would show that the nature of the transaction is carrying out business in securities. He relied on the judgments of the Supreme Court in Raja Bahadur Visheshwara Singh v. CIT ; Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 ; CIT v. Sutlej Cotton Mills Supply Agency Ltd. ; CIT v. Associated Industrial Development Co. P. Ltd. , and the following rulings of the Authority :
(i) XYZ/ABC Equity Fund, In re [2001] 250 ITR 194 (AAR) ;
(ii) Fidelity Advisor Series VIII, In re ; and
(iii) Morgan Stanley & Co. International Ltd., In re .
6. Mr. Kapila has submitted that the applicant is a sub-account of a FII as such a 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 the 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 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.
7. So far as the nature of the income of the applicant is concerned, it is no doubt true that the provisions of the FII investors scheme under both the old guidelines and the amended guidelines suggest that the investment in shares would be to acquire capital assets, the requirement of Section 18 of the FII's regulations also speaks of realization of capital gains of investment from the corpus. Section 115AD--a special provision in the Act--provides special rates for taxation of short-term capital gains as well as long-term gains. However, in Fidelity Advisor Series VIII, In re , the Authority observed (page 8) :
Whether a company is an investment company or trading company or whether any amount received by a person is a revenue receipt or a capital receipt is a mixed question of law and fact which has to be decided on the facts and in the circumstances of each case.
8. And having discussed the decisions of the hon'ble Supreme Court in Raja Bahadur Visheshwara Singh v. CIT ; Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486 (SC) ; CIT v. Sutlej Cotton Mills Supply Agency Ltd. , the ruling of the Authority in the case of XYZ/ABC Equity Fund, In re [2001] 250 ITR 194 ; A. V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR (SC) 67; CIT v. P. K. N. Co. Ltd. ; CIT v. Associated Industrial Development Co. P. Ltd. , the Authority formulated the following principles (page 12) :
(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and the existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction ;
(ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions ;
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend, etc. then the profits occuring by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.
9. On considering the facts and the circumstances of that case, it was held that the applicant therein had invested in shares and securities in Indian companies as business assets and profits from the purchases and sales of those shares/securities were in the nature of business income.
10. Again in Morgan Stanley & Co. International Ltd., In re , after discussing the above mentioned cases, the aforementioned principles were restated. We, therefore, consider it unnecessary to discuss the same cases over again in this case. It would suffice to mention that in the light of the above principles we shall examine the facts of the case.
11. Keeping the above principles in mind, we shall advert to the facts of this case. It is noticed from the investment management agreement between the applicants-trust and GEAM that the trustee and investment managers, consistent with sound business judgment, are required to maintain a continuous programme for the assets and to use reasonable best efforts to increase the value of the assets of causing them to be invested and reinvested from time to time and in accordance with the investment guidelines. Accordingly the applicant got registered with the SEBI as sub-account of FII. A perusal of attachment VIII filed by the applicant shows the substantial nature of the transactions and magnitude of the purchases and sales of shares/securities in various companies in India. Nothing is produced before us to show that the object of the investment in the shares of Indian companies was to derive only income by way of dividend. The material relied upon by the Commissioner referred to above, namely, registration under the FII Regulations, etc., to show that the investment should be only for the purpose of purchasing shares as capital assets and reference to the special provision, Section 115AD of the Act, for that purpose is, in our view, far from clinching to hold that the activities of purchases and sales entered into by the applicant was not in the nature of trade/business. Therefore, we are not persuaded to hold that the investment in shares/securities in Indian companies could only be for acquiring capital assets and not for trading in shares and securities.
12. The second point relates to the entitlement of the applicant to avail of the terms of the Treaty. It is a common ground that the Government of the United States of America and the Government of the Republic of India entered into a treaty which was notified on December 20, 1990. Whereas Mr. Kapila having invited our attention to Articles 1 and 4(1)(b) of the Treaty, would submit that the applicant being tax exempt is not subjected to tax in the USA, so it cannot be treated as a tax resident of the USA and cannot avail of the benefit of the terms of the Treaty. The claim of the applicant to the benefit of the Treaty is thus disputed by him.
13. On these contentions, it would be necessary to refer to the relevant provisions of Article 1 of the Treaty which deals with "General scope" of the Treaty. Para. 1 of Article 1 which is material, reads as under (see [1991] 187 ITR (St.) 102) :
Article 1 : GENERAL SCOPE
1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.
14. Para. 1 of Article 1, extracted above, says that the Treaty shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention. It is plain that the Treaty applies to persons who are residents of one or both of the States but the scope of the application of the Treaty to such residents is subservient to any contra-provision of the Treaty. Article 4 of the Treaty deals with "Residence". Para. 1 of Article 4 which is relevant for the present discussion, is in the following terms (see [1991] 187 ITR (St.) 102, 105) :
Article 4 : RESIDENCE
1. For the purposes of this Convention, the term 'resident of a Contracting State' means any person who, under the laws of that State is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided however, that
(a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State ; and
(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.
15. The provision, quoted above, defines the term ''resident of a Contracting State" for the purpose of the Treaty to mean any person who under the laws of that State is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. In view of Clause (c) of para. 1 of Article 3 (definition clause), the term "Contracting State and the other Contracting State" would mean India or the United States (as the context requires). In the context of Article 4 "resident of a Contracting State" would mean a resident of the USA. But this is subject to provisos (a) and (b) to para. 1 thereof. Proviso (a) says that resident of a Contracting State does not include any person who is liable to tax in that State in respect only of income from sources in that State. Proviso (b) which is germane, states that in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. Leaving the unnecessary portions of the proviso, for the purpose of the present discussion, it would read that in the case of income derived or paid by a trust, the term resident of a Contracting State (USA) applies only to the extent that the income derived by trust is subject to tax in that State (USA) as the income of a resident either in its hands or in the hands of the beneficiaries. It is worth pointing out that the phrase "liable to tax" in para. 1 and the phrase "subject to tax" in proviso (b) are not synonymous. If both were to be read as synonymous, proviso (b) would become otiose. Whereas para. 1 speaks of being in the tax net, the proviso is concerned with actual taxation. Thus it would follow that the term "resident of USA" for the purpose of the treaty would mean a person who under the laws of USA is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature ; however, in the case a trust, the term "resident of USA" would apply only to the extent that the income derived by such trust is subject to tax in the USA as the income of a resident either in its hands or in the hands of its beneficiaries. Applying this test of residence to the applicant, it becomes clear that though under the laws of the USA, the applicant is liable to tax by reason of its place of management and place of incorporation and as such "the tax resident" yet having regard to the wording of proviso (b), the applicant being tax exempt in the USA can be treated as a tax resident of the USA for the purpose of the Treaty only to the extent that the income derived by the applicant is subject to tax in the USA as the income of a resident either in its hands or in the hands of beneficiaries to avail of the terms of the Treaty. It has been noticed above that para. 1 of Article 1 provides that the Convention (treaty) shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention (treaty). It has already been pointed out that proviso (b) which governs para. 1 of Article 4, renders the applicant a resident of USA only to the extent that the income of the trust is subject to tax in the USA. It is an admitted case of both the parties that the applicant enjoys exemption from payment of the USA tax under Section 501C of the USA Act and nothing is brought on record to show that the income from securities of Indian companies is being taxed in the USA in the hands of the beneficiaries of the trust.
16. Mr. Desai relied on paras. 54-55 of the technical explanation of Article 4 of the USA Treasury Department Draft Model Income-Tax Convention. It would be apt to refer to Article 4 of the US Model, before noting paras. 54-55 of the technical explanation of the US Treasury Department, which is in the following terms :
Article 4 Except as provided in this paragraph, for the purposes of this convention, the term 'resident of a Contracting State' means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.
(a) ...
(b) A legal person organized under the laws of a Contracting State and that is generally exempt from tax in that State and is established and maintained in that State either :
(i) exclusively for a religious, charitable, educational, scientific, or other similar purpose ; or
(ii) to provide pensions or other similar benefits to employees pursuant to a plan is to be treated for purpose of this paragraph as a resident of that Contracting State. ...
17. A perusal of Article 4 of the US Model, noted above, shows that the term "resident of a Contracting State" is defined to mean any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. Clause (b) thereof says that a legal person organized under the laws of a Contracting State and that is generally exempt from tax in that State and is established and maintained in that State either (i) exclusively for religious, charitable, educational, scientific, or other similar purpose; or (ii) to provide pensions or other similar benefits to employees pursuant to a plan, is to be treated for purposes of this paragraph as a resident of that Contracting State.
18. Now paras. 54 and 55 relied upon by learned Counsel for the applicant are as follows :
54. Sub-paragraph (b) provides that certain tax-exempt entities such as pension funds and charitable organizations will be regarded as residents regardless of whether they are generally liable for income-tax in the State where they are established. An entity will be described in this sub-paragraph if it is generally exempt from tax by reason of the fact that it is organized and operated exclusively to perform a charitable or similar purpose or to provide pension or similar benefits to employees. The reference to 'similar benefits' is intended to encompass employee benefits such as health and disability benefits.
55. The inclusion of this provision is intended to clarify the generally accepted practice of treating an entity that would be liable for tax as a resident under the internal law of a State but for a specific exemption from tax (either complete or partial) as a resident of that State for purpose of paragraph 1. The reference to a general exemption is intended to reflect the fact that under US law, certain organisations that generally are considered to be tax-exempt entities may be subject to certain excise taxes or to income-tax or their unrelated business income. Thus, a US pension trust, or an exempt 501(C) organization (such as a US charity) that is generally exempt from tax under US law is considered a resident of the United States for all purposes of the treaty.
19. Para. 54 says that sub-paragraph (b) of the US Model provides that certain tax-exempt entities such as pension funds and charitable organizations will be regarded as residents regardless of whether they are generally liable for income-tax in the State where they are established. Para. 55 clarifies the generally accepted practice of treating an entity that would be liable for tax as a resident under the internal law of a State but for a specific exemption from tax (either complete or partial) as a resident of that State for purpose of paragraph 1. The reference to a general exemption is intended to reflect the fact that under USA law, certain organizations that generally are considered to be tax-exempt entities may be subject to certain excise taxes or to income-tax on their unrelated business income. Thus, a US pension trust or an exempt under Section 501(c) organization (such as a US charity) that is generally exempt from tax under US law is considered a resident of the United States for all purposes of the treaty. In this technical explanation obviously the term "treaty" refers to the US Model convention. It is evident that proviso (b) of Article 4 of the Treaty (i.e., Indo-US treaty referred to above) is differently worded. Indeed, as pointed out above, the import of Article 1(1) read with Article 4(1)(b) is to exclude to the extent that the income of a trust is not subject to tax in that State (USA) from the definition of resident of a Contracting State (USA) for purposes of the treaty (USA-India treaty).
20. Mr. Desai filed a xerox copy of the tax resident certificate issued by the Department of Treasury Internal Revenue Service Philadelphia, PA 19255 in regard to the applicant, which is extracted below :
Department of the Treasury Internal Revenue Service Philadelphia, PA 19255 'Seal' Date : 04.08.2004 Certification Program Taxpayer : General Electric Pension Trust TIN : 14-6015763 Tax year : 2004 I certify that, to the best of our knowledge, the above-named entity is a trust forming part of a pension, profit sharing or stock bonus plan qualified under Section 401(a) of the U. S. Internal Revenue Code, which is exempt from U. S. taxation under Section 501(a), and is a resident of the United States of America for purposes of U. S. taxation.
(Sd.) Daniel J. Nally Field Director, Philadelphia Accounts Management Center.
'Certified for Australia' Form 8106 (Rev. 3-2004) Catalog Number 43134V.
21. A perusal of the copy of the certificate of residence, extracted above, shows that the applicant is a trust forming a part of a pension, profit sharing, or stock bonus plan qualified under Section 401(a) of the U. S. Internal Revenue Code, which is exempt from U.S. taxation under Section 501(a), and that it is a resident of USA for purposes of U.S. taxation. (emphasis supplied). At the end of the left hand corner of the certificate "Certified for Australia" is endorsed. It is thus obvious that this certificate is issued for purposes of being used in Australia and not in India. Obviously it has no relation to the treaty (USA--India Treaty). Therefore, it has no relevance in interpretating the Treaty in this case. At any rate it is important to note that residence for the purpose of US taxation would only satisfy the requirement of para. 1 of Article 4 which we have not doubted in the present discussion even without reference to that certificate. In resolving the quandary, which arises by virtue of the proviso (b) to para. 1 of Article 4 of the treaty, this certificate is of no assistance.
22. From the above discussion, it follows that for purposes of the treaty, the applicant is not a resident of the Contracting State (USA) and therefore it cannot avail of the benefit of the terms of the Treaty in this case. In view of the conclusion, arrived at by us, it is unnecessary to decide the point whether the applicant has a PE in India within the meaning of Article 5 of the treaty and consequently the effect of absence of a PE on the taxability of the business income under Article 7 of the said treaty.
23. In the case of an enterprise of a Contracting State with which India has treaty, the provisions of the Act will apply only when they are more beneficial to it provided the enterprise is entitled to invoke the provisions of the treaty. It has been held above that the applicant is not entitled to invoke the provisions of the treaty, therefore, the applicant--non-resident--will be taxable under the Act. In regard to taxability of business income of a non-resident arising or accruing in India, it would be apposite to notice Sections 5(2) and 9(1)(i) of the Act.
Section 5(2) of the Act is in the following terms :
(2) subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
24. Sub-section (1) of Section 5 relates to the total income of a resident. The applicant is a non-resident in India, so Sub-section (2) thereof will be attracted. It contains two Clauses--(a) and (b) and two Explanations. Clause (a) says that the total income of a non-resident shall include all income from whatever source derived, which is received or is deemed to be received in India in any previous year by or on behalf of such person. The import of Clause (b) is that the total income of a non-resident includes all income, from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during any previous year. This takes us to Section 9(1)(i) and the Explanation thereto which are pertinent here and read as follows :
9.(1) The following incomes shall be deemed to accrue or arise in India--
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
Explanation 1.--For the purposes of this clause--
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ; . . .
25. A perusal of the provisions extracted above shows that all income accruing or arising whether directly or indirectly, inter alia, through or from any business connection in India shall be deemed to accrue or arise in India. Explanation 1(a) indicates that for the purpose of the aforementioned clause where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. To attract the provisions referred to above, it must be shown that (i) the applicant has "business connection" in India; and (ii) income accrues or arises (whether directly or indirectly) from such business connection in India. In such a situation Explanation 1(a) limits the quantum of taxable income deemed to accrue or arise only to such part of the income as is reasonably attributable to the business operations carried out in India.
26. In the light of the above discussion, we rule on question Nos. :
1. that profits arising to General Electric Pension Trust (hereinafter referred to as the "applicant") from the sale of portfolio investments in India will be treated as business income of the applicant;
2. that as the applicant is not entitled to avail of the benefits of the terms of the treaty, such business income of the applicant will be taxable in India under the Act.