Income Tax Appellate Tribunal - Mumbai
Samir Sevantilal Shah , Mumbai vs Department Of Income Tax
`IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'L' MUMBAI
BEFORE T.R.SOOD, A.M &
SHRI R.S.PADVEKAR, JM.
I.T.A.NO.3229/Mum/2009 - A.Y 2006-07
Income Tax Officer [IT] 2(1), Vs. Shri Salil Sevantilal Shah,
Mumbai '53', Halkesh Society, 'Shailab Bldg.'
2nd Floor, N.S.Road No.7,
JVPD Scheme, Near Jamunabai High
School, Vile Parle [West]
Mumbai 400 056
PAN: ACEPS 6597 H
AND
I.T.A.NO.3230/Mum/2009 - A.Y 2006-07
Income Tax Officer [IT] 2(1), Vs. Shri Smir Sevantilal Shah,
Mumbai Mumbai
PAN: ACEPS 6596 H
(Appellant) (Respondent)
Assessee by : Mr. Mayank Priyadarshi.
Revenue by : Mr. Sushil U.Lakhani.
ORDER
Per T.R.SOOD, AM:
In both these appeals identical grounds have been raised and even issues involved are identical. Therefore, with the consent of both the parties, I.T.A.No.3230/M/ is taken up for detailed arguments.
2. I.T.A.No.3230/M/:The grounds raised by the revenue are as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in holding that profit arising out of purchase and sale of shares were assessable as 'Captal Gain' and not as 'Business Income'.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in holding that Shri Sevantilal S. Shah, father of the assessee does not constitute the agency P.E in India.2
3. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in holding that M/s Sushil Finance Consultants Ltd. do not constitute the fixed P.E as per India Thailand DTAA
3. Ground No.1: After hearing both the parties we find that during the assessment proceedings AO noticed that assessee has entered into substantial and frequent sale and purchases of shares which had resulted into capital gains of approximately Rs.1.47 crores. AO was of the view that sale and purchase transactions of the shares were to be assessed under the head 'business income' and, accordingly, issued a show cause notice. In response to the same, it was mainly argued that assessee was a NRI based in Thailand since 1983 and was engaged in full business of manufacture and export of jewellery. The surplus generated from such business was being invested in Indian shares, mainly by making application in the public issues i.e. IPO. It was further explained that from the earlier records it would be clear that assessee has never traded in shares. The assessee being a NRI was not permitted under the RBI regulations to trade in shares and only investment in shares was allowed and that too under the "Portfolio Investment Scheme". In these guidelines various restrictions like how the transactions can be entered through authorized dealer in a specific manner were incorporated. Under the provisions of the Act the broker was required to deduct tax at sources on capital gains and tax amounting to Rs.16,60,675/- was deducted by the broker during the year. The investments were mainly made with the intention of earning dividend and were reflected in the balance- sheet as investments and assessee had also earned dividend 3 amounting to Rs.5,78,694/-. The assessee had a particular target rate of returns and since the target price reached very earlier because it was a booming market, and therefore, assessee sold the shares in small lots. All the transactions were only in the listed securities on delivery basis and not even a single transaction was intraday transaction. The funds invested in the shares were assessee's own funds and no borrowings have been made. Some legal submissions were also made and reliance was placed on various case laws, particularly, in the decision of AAR in the case of Fidelity Northstar Funds & Others In RE [288 ITR 641], wherein it was held that gains made under FII scheme were to be treated only as capital gains because the investment was not for trading. Reliance was also placed on the following decisions:
(a) Leeming Vs. Jones (15 TC 333) (b) CIT vs. Holck Larsen [160 ITR 77 (SC)] (c) G. Venkataswami Naide & Co. Vs. CIT [35 ITR 594 (SC)] (d) Raja Bahadur Visheshwar Singh Vs. CIT [41 ITR 685 (SC)] (e) CIT Vs. Rewashanker A. Kothari [283 ITR 338 (Guj.)] (f) CIT Vs. ESS Jay Enterprises (P) Ltd. [165 Taxmann 465 (Del.)] (g) Janak S.Rangwala Vs. ACIT [11 SOT 627] (h) ACIT Vs. B.N.Rathi Securities Ltd. [71 ITD 31 (Hyd.)] (i) ACIT Vs. Krishna Kumar Bangur [(2004) 87 TTJ (Jd) 368 : 2005 1 SOT 189 (Jd.)]
4. AO examined the submissions and was of the view that even if assessee was engaged in the jewellery business, there was no restriction that he cannot enter into another business and for this he relied on the decision of the Hon'ble Madras High Court in the case of K.N. Nallathambi Pillai vs. CIT [98 ITR 13]. Then be observed that merely because assessee has earned dividend and reflected the shares 4 as investment, it will not change the character of the transaction and for this he relied on the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Associated Industrial Development Co. (P). Ltd. [82 ITR 586]. He also referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. CIT vs. Associated Industrial Development Co. (P). Ltd. [supra], wherein whether transactions of sale and purchase of shares were involved it was observed that the nature of the investment was a mixed question of law and fact. He also reproduced the following observations of the Hon'ble Supreme Court in the case of CIT vs. Distributors of Baroda {P} Ltd. [83 ITR 377]:
"We cannot say that the legislature did not know its own mind when it used that expression in s. 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression "business" is a well-known expression in income-tax law. It means, as observed by this Court in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) :
"some real, substantial and systematic or organized course of activity or conduct with a set purpose". This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the legislature was aware of the meaning given by Courts to that expression when it incorporated s. 23A into the Act in 1957. Hence we must hold that when the legislature speaks of the business of "holding of investments", it refers to real, substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits."
From the above, he observed that substantial systematic or organized investment would constitute business. He also referred to various other case laws and ultimately concluded that from the volume of transaction and frequency of transaction, it is clear that assessee was engaged in systematic and organized manner of dealing in shares with a profit 5 motive and, therefore, same was held to be assessable as income from business.
5. On appeal before the CIT(A), submissions made before the AO were reiterated and it was emphasized that though shares were purchased for a long term basis, because of booming market the target price has reached much sooner than expected and that is why such shares were sold in smaller lots which also led increase in the frequency of transactions. It was also emphasized that most of the gains were made out of the shares obtained through IPO. Before the ld. CIT(A) also following case laws were relied-
(c) In G.Venkataswami Naidu & Co. Vs. CIT [35 ITR 594 (SC)], the Hon'ble Apex Court held that all cases where there was an intention to resell at a profit are not cases of adventure in the nature of trade. In cases where the intention to resell is coupled with an intention to hold the test of adventure in the nature of trade fails.
(d) In the case of Raja Bahadur Visheshwar Singh Vs. CIT [41 ITR 685 (SC)], it was held that an amount invested out of the assessee's cash surplus would be taxable as capital gains while the borrowed funds utilized for purchase of bulk shares and such sale would be considered income from business.
(e) The Gujarat High Court in CIT Vs. Rewashanker A. Kothari [283 ITR 338 (Guj.)] held that transactions in shares by the assessee resulted in Capital Gains as merely because the sale of shares resulted in profit did not indicate that the purchase of shares was with intention to sell.
(f) in CIT Vs. ESS Jay Enterprises (P) Ltd. [165 Taxmann 465 (Del.)] the gains were held to be in the nature of Capital Gains as the assessee had reflected the shares as "investments" in their Balance Sheet.
(g) The Mumbai ITAT Bench `H' in the case of Janak S.Rangwala Vs. Assistant Commissioner of Income Tax, (11 SOT 627), it was held that the transactions in shares held as investments would give rise to capital gains, notwithstanding the high magnitude of transactions of shares.
(h) In the case of ACIT Vs. B.N.Rathi Securities Ltd. [71 ITD 31 (Hyd)], the assessee company was engaged in the main business of hire purchase and leasing. Its investments in shares and securities were shown as investments in the balance sheet at cost. The Tribunal held that the assessee was not carrying on the business of share 6 trading, as there was nothing on record to suggest that the company intended to trade in shares.
(i) In the case of ACIT Vs. Krishna Kumar Bangur [(2004) 87 TTJ (Jd) 368 : 2005 1 SOT 189 (Jd)] the main source of income of the assessee was from salary dividend and interest. He also invested in shares from long time and such a purchase was from his owned funds and not from loans, this was shown in the balance sheet under the head "investments". It was concluded that profit from sale of such shares would be considered as capital gain and not business income in the absence of any material to show that shares were purchased by the assessee to earn profits, when such similar profits in the earlier years was assessed as capital gains.
(j) In CIT Vs. Distributors Baroda (83 ITR 377-SC), the Supreme Court held that business of "holding of investments" refers to real, substantial and systematic or organized course of activity with a set purpose such as earning profits.
6. Reference was also made to CBDT's Circular No.4 of 2007 and it was pleaded that from above cases laws and circular it was clear that income from the sale and purchase of shares was clearly assessable under the head 'capital gains.'
7. The ld. CIT(A) after examining the submissions observed that assessee was a NRI having full time business of manufacturing and export of jewellary. The assessee had only invested surplus money from such jewellery business in the Indian share market subject to the regulations of RBI & SEBI. The assessee had regular exposure to the market in the earlier years also and total funds invested in various years were as under:
30-03-2004 `.3.38 crores
31-03-2005 `.1.82 crores
31-03-2006 `.5.50 crores
31-3-2007 `.7.59 crores
He also observed that most of the gains are out of investments in preliminary market [IPO] where a normal trader would not put his funds. He also noted the observation of Hon'ble Supreme Court in the 7 case of G.Venkataswami Naidu & Co. vs. CIT [35 ITR 594] that in cases where intention to resale is coupled with the intention to hold the test of advantage in nature of trade fails. Similarly, again Hon'ble Supreme Court in the case of Rajabhadur Visheshwar Singh vs. CIT [ 41 ITR 685] wherein it was observed that investments made out of assessee's cash surplus would be taxable as capital gain while purchase of bulk shares out of borrowed funds would be considered as 'business income'. He also referred to other case laws and ultimately observed as under:
"The appellant was constantly deploying his funds in India share market and upto Asst. Year 2004-05 the gains arisen were accepted by Department under the head capital gains. During the year also the pattern of transactions continued with increase in volume. Though the volume was high there was no borrowing for this purpose. The balance sheet reflects the transactions as investments. The appellant is an NRI is permitted to transact in shares subject to SEBI regulations as an investor and not as a trader. The appellant earned dividend from 108 companies to the tune of Rs.5,78,694/-. The cross examination of the appellant's father in AY 2005-06 in the appellant's brother's case did not reveal that any organized business activity was carried on in India as regards shares. It is clear that though the power of attorney (POA) was general in nature, the appellant's father had issued only certain cheques as per the instruction of his son. Further, the authorized stock broker was functioning as an independent entity giving advice to clients at large of which the appellant was one. There is no instance of transactions without delivery or any speculation in the nature of trade. In the light of the above contention of the appellant that the gains were realized as and when the target price was achieved sooner than expected is on a sound footing and cannot be dismissed on presumption. The decisions relied on by the appellant extracted above are covering the facts of the case on hand. The treatment in the books, there being no borrowings, the volume of investments in shares and mutual funds over the years preceding and succeeding the Asst. Year only reinforced the position that the assessee was dealing in shares and mutual funds as an investor, not to highlight regulation for NRI in this regard. The Supreme Court decision in Distributors Baroda (83 ITR 377) is in favour of the appellant as in the present case as the intention of the assessee was not to trade in shares to earn business profits but to investment in shares for appreciation."
On the basis of above, he held that profit from the share transaction was assessable only under the head 'capital gains' 8
8. Before us, Ld.DR submitted that the CIT(A) has mainly allowed the relief because in earlier years also assessee had made investments in shares and the same was taxed under the head 'capital gains'. But it is not necessary that if share transactions were held as investment transactions in one year, then in next year also same was to be held as investment transaction only and in this respect he referred to the decision Hon'ble Supreme Court in the case of New Jehangir Vakil Milk Co. Ltd. Vs. CIT [49 ITR 137], wherein it was observed that even if the assessee was treated as investor till 1943 it will not stop the assessing authority from considering for the computation of profit under the head business in 1944. He also submitted that basically what has to be seen is the nature of transaction, volume of transaction and frequency of transaction. Merely because RBI did not permit trading in shares in the case of the NRI, it cannot be said that assessee was not doing business. He argued that the decision of Authority for Advance Ruling in the case of Fidelity Northstar Funds & Others In RE [supra] was rendered in the context of FII and cannot be applied in the case of an individual. He also strongly supported the order of the AO.
9. On the other hand, Ld.counsel of the assessee reiterated the submissions made before the lower authorities and particularly emphasized that the assessee was running full time business of manufacture and export of jewellery in Thailand and only surplus money from this business was invested in Indian share market and that too through public issues i.e. IPO. He further emphasized that RBI had clearly prohibited NRIs from trading in shares and only investment 9 is permitted and that too under the "Portfolio Investment Scheme", under which certain ceiling has been placed and such purchase and sale can be carried out only through authorized dealers. The share broker is required to deduct tax on capital gains earned by such NRIs and even TDS in the case of the assessee amounting to Rs.16,60,675/- has been deducted. He submitted that Advanced Authority of Ruling has already held in the case of Fidelity North Star Funds & Others In- Re [supra] that once FII is restricted under SEBI and SEBI condition does not allow share trading, then it cannot be said that income arising from such a situation on account of sale and purchase of shares, is to be treated as business income and such income has to be assessed only as 'capital gains'.
10. He argued that the intention of the assessee right from day one was to invest in shares. No trader would make an application in IPO, whereas in the case of the assessee most of the money was invested through IPO. The assessee has also earned dividend income of Rs.5,78,694/-. Though shares were purchased on the long term basis with certain target, but because of the rising market consequently such target reached much sooner than expected and assessee has sold the shares in smaller lots to reap the benefit of investment. This has certainly led to increase in the frequency of transaction but large frequency of transactions itself cannot lead to the conclusion that assessee was a trader in shares. He also emphasized that not even a single speculation transaction has been entered into by the assessee. He invited our attention to the decision of Rajkot Bench of the Tribunal 10 in the case of Divyaben C. Shah vs. CIT [117 Taxman 188] wherein it was held that if shares were treated as investment and not as stock-in- trade then profit on such shares has to be held as capital gains. Further in the case of Sarnath Infrastructure Pvt. Ltd. Vs. ACIT [120 TTJ 116] wherein it was observed that where assessee had two portfolios, one as investment portfolio and another as trading portfolio and valuation of the same was done separately and in the case of investment portfolio the valuation was on cost only and assessee had earned dividend income, then profits from investment portfolio are required to be assessed as capital gain only. He also referred to the decision of Bombay Bench in the case of Janak S. Rangwalla vs. ACIT [11 SOT 627] wherein it was held that even if the volume and magnitude of transaction was higher then that would not alter the nature of transaction, particularly, when such transaction was treated as in the nature of investment in the earlier year. He argued that the decision of the Hon'ble Supreme Court in the case of New Jehangir Vakil Milk Ltd. [supra] is distinguishable in view of the later decision of the Hon'ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh [77 ITR 253] wherein it was observed that investment was done out of the surplus funds, then it cannot be said that transactions were on account of trade. He submitted that this position has been confirmed by the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit [228 CTR 582] wherein it was held that delivery based transactions should be generally held to be investment transactions and even though the principles of res judicata is not 11 attracted, since each assessment year is separate in itself, there ought to be some uniformity in treatment and consistency when facts and circumstances are identical.
11. We have considered the rival submissions carefully and agree with the submissions of the Ld.counsel of the assessee. First of all assessee is already engaged in full time business of manufacture and sale of jewellery in Thailand and has invested only the surplus money in the Indian share market. It has not been denied that substantial portion of such money was invested through public issues i.e. IPO. Normally a trader in shares would not make application through IP0s and wait for sometime for allotment which is generally very long and then hold the shares and wait for a particular price. In the case before us, though it was admitted by the Ld.counsel of the assessee, that the transactions were frequent but the reasons have also been explained because it was a unique phase of booming market and the target price reached very fast and assessee sold his holdings in smaller lots so as to take the benefit of the rising market. Secondly, assessee has not borrowed any money and invested his own funds and quite a substantial amounts of investments are there which has been noted by the ld. CIT(A) as under:
30-03-2004 `.3.38 crores
31-03-2005 `.1.82 crores
31-03-2006 `.5.50 crores
31-3-2007 `.7.59 crores
12. One of the most important aspect in favour of the assessee is that the assessee is a NRI and as such not allowed to trade in shares in view of the RBI regulations. Assessee could have possibly invested in 12 shares and that too through portfolio investment schemes through certain authorized dealers. In the case of Fidelity North Star Funds & Others In-Re [supra] following questions were raised-
(i). whether profits from the sale of portfolio investments in India will be treated as business income;
(ii). whether the applicant could be regarded as having a permanent establishment in India'
(iii) If the income is found to be in the nature of business income whether the applicant will be taxable in India; and
(iv) whether the income from the portfolio investments would be taxable in India at the fixed rate of 20 per cent under section 115AD of the Income Tax Act, 1961.
And the answers given by the authorities are as under:
"(i) That the transactions were only in the nature of investment in capital assets to earn capital gains because"
(a) the whole scheme meant for FIIs was to invest in securities in India to receive income from them so long as they hold the same and realize capital gains on their transfer.
(b) the expression "Income received in respect of securities" in cl. (a) connotes the income therefrom when the securities held by a FII are intact, e.g. dividends, interest, etc. like fruits from a tree or a rent from an immovable property. The term ' income ' employed therein, having regard to the context, can, by no stretch of imagination, be assumed as income arising from the transfer of such securities for the simple reason that such type of income is referred to in cl. (b) where the income is specified as being by way of short-term and long-term capital gains arising from the transfer of such securities. It was against deduction of expenditure such as by way of salary of the staff, etc., expenditure in obtaining loans and paying interest thereon that Parliament guarded, by providing in clause {a} of section 115AD(2) that no deduction shall be allowed in computing income in respect of securities referred in clause [a] of sub-section [1].
© The plethora of legislative provisions unmistakably pointed out that an FII was not registered for carrying on trade in securities; it could only invest in securities for the purpose of earning income by way of dividends and interest and realizing capital gains on their transfer. Trading in securities by a FII was prohibited.
(d) It would be preposterous to impute an intention to FIIs, who responded to the offer of investment in securities in response to the guidelines, got themselves registered under the SEBI Regulations and undertook to abide by those regulations that they would, in the very first step itself, have intended to violate all the legislative requirements which provided them the opportunity to enter the capital market in India.
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(ii) That therefore, the question did not require any ruling. There is no scope for reading the SEBI [Foreign Institutional Investors] Regulations, 1995, as permitting trading in securities. The expression "or otherwise deal in" in regulation 3(1) means other than buying and selling, e.g. lending/borrowing permitted under regulation 15(8). It cannot be understood to mean doing business in securities because trading itself involves buying and selling and if it is construed to mean the expression becomes otiose. Regulation 15A of SEBI Regulations permits dealing in offshore derivative instruments only and none other. The words "transact business" and the "transaction of business" in clauses (a) and (c) respectively of sub-regulation (3) of regulation 15 postulate transaction of sale and purchase, they do not refer, as such, to the trading activity. Transacting business is different and distinguishable from carrying on business. Transact business is a general term which refers to carrying on all types of activities whereas business transaction refers to only commercial trading activities. These words and expressions, in the context in which they are used, do not deal with the subject of trading in securities much less do they permit activities of trading in securities by a FII. In the case before us also the RBI has issued the following directions which have been intimated to the assessee by HDFC Bank through their letter which has been filed before us.
"NRIs/OCBs have to take delivery of the shares/convertible debentures and give delivery of the shares/convertible debenture sold under the scheme and are not allowed to trade."
The above clearly shows that when as per the SEBI regulations [in the case before us RBI regulations] the assessee was not permitted to do in trading then gains received from sale and purchase of shares can be only taxed as capital gains.
13. We further find that Hon'ble Bombay High Court in the case of Gopal Purohit [supra] has held that though the principles of res judcata is not attracted because each assessment year is separate entity, but there ought to be some uniformity in treatment and consistency when the facts and circumstances are identical. In the case of the assessee in the earlier years also share income was held be on account of capital gains. Under these circumstances , we are of the 14 view, that the ld. CIT(A) has correctly held that profits received by the assessee on account of sale and purchase of shares are to be treated as income from capital gains and accordingly we confirm his order.
14. Groun Nos. 2 & 3: Though once the income from the sale and purchase of shares is held to be income from capital gains these two grounds are only in the nature of academic issues and have become infructuous, but since both the parties have argued the issues we are adjudicating the same.
15. Once the income from sale and purchase of shares was held to be assessable as income from business by the AO then it was argued before him that in that case no tax at all can be charged because in the case of a NRI ass, income cannot be assessed under the head 'income from business' unless and until such an assessee has a permanent establishment i.e. PE in India in terms of Article 7 of Double Taxation Act [DTA] agreement with Thailand. However, AO did not agree with the same and he referred to Article 5 of the treaty with Thailand. AO noticed that the assessee had given a general power of attorney to his father Mr.Sevanti S.Shah who was a resident in India and as per this power of attorney Mr.Sevanti S.Shah had an authority to transact, manage, carry on and looks after business and to do each and all matters and things necessary for conducting the business. According to the AO since the share transactions also involved a contract when the same were executed by his father without taking the consent of the assessee. He raised the following question vide notice 142[1]:
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1. How did you place the purchase orders with M/s Sushil Financial Consultants Ltd.? To whom did you speak/instruct for placing the orders?
2. How was the payment made/received to/from M/s Sushil Financial Consultants Ltd.?
3. How did you manage your share transactions when you are not in india?
4. Do you have given power of attorney to someone in India to transact on your behalf? If yes give details?
He noted that the assessee remained evasive in his reply and did not file details as who was operating the bank account and demat account. He then noted that as per Article 5.4 assessee's father was agent of the assessee and constituted PE. For this he also relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Vishaka Patnam Port Trust [144 ITR 416]. Alternatively, he observed that since the assessee has done transaction in shares through M/s Sushil Finance Consultancy Ltd., Mumbai and Mr. Amol Joshi was looking after all the share transactions of the assessee by tracking the daily price movement of the company on assessee's behalf. On enquiry it was submitted that relation between the assessee and M/s Sushil Finance Consultancy Ltd., is that of a client and broker and services rendered by him like keeping track pf price movements, giving advice etc. are in the ordinary course of the business of a broker. However, AO referred to para-1 of Article 5 of DTAA between India and Thailand which contained the following conditions-
a) The existence of place of business.
b) The place of business must be fixed i.e. it must be established at the distinct place with certain degree of permanence.
c) The business of enterprise must be carried on through this place of business.
16AO again observed that since Mr. Amol Joshi was keeping track of daily price movement of the company on behalf of the assessee and all necessary work regarding share trading activity was done from office of M/s Sushil Finance Consultancy Ltd., therefore, the assessee's case would fall under Article 5(1) as M/s Sushil Finance Consultancy Ltd., would constitute his PE.
16. On appeal before the CIT[A], it was argued that AO has himself decided that one of the either i.e. father of the assessee Sri Sevantilal S. Shah, or the broker M/s Sushil Finance Consultancy Ltd., was the PE. This only indicates that AO himself was not clear whether assessee has a PE in India or not. It was further submitted that all the share transactions were done on the basis of the instructions given by the assessee and broker rendered only broking services. It was pointed out that Mr. Amol Joshi, Client Relationship Manager was also examined by Bombay Income Tax Office and the out come of the enquiry with him has been completely ignored. It was submitted that unless assessee has a fixed place at his disposal in the broker's office, it cannot be said to have a PE in India. Reliance was placed on the following decisions-
i. Boudier Christian vs. ITO 46 ITD 114 [Del] ii. Clifford Chance United Kingdom vs. DCIT 82 ITD 106 [Mum] iii. ABC, In RE 237 ITR 798 AAR] iv. Motorola Inc. vs. DCIT 95 ITD 269 [Del ]SSB] It was also pointed out that in assessee's brother's case, CIT[A] XXXI, Ahmedabad, had already taken a view that share broker cannot constitute PE.
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17. As far as PE in the form of father being an agent is concerned, it was argued that giving of power of attorney to the close member of the family was a normal and customary practice with most of the NRIs. AO has not brought any material on record to show that assessee's father had actually exercised his authority under the power of attorney. The assessee had given auto pay instructions which would mean that shares would be debited to the assessee's de mat account automatically, cheques given to the brokers were generally signed by the assessee and in very rare cases cheques have been signed by his brother or father. Under Article 5[5] for a dependant agent PE it was necessary that agent should have habitually and actually exercise such authority and merely having an authority does not constitute PE. In this regard reliance was placed on the following decisions-
a) TVM Ltd. In RE 237 ITR 230 [AAR]
b) Boudier Christian vs. ITO 46 ITD 114 [Del]
c) Motorola Inc. vs. DCIT 95 ITD 269 [Del]
18. It was explained that assessee's father has not signed any contract. It was also argued that if an agent simply signs a contract after taking approval of its principal then no PE would be constituted and in this regard reliance was placed on Sutron Corporation In. RE 268 ITR 156 [AAR]. It was also pointed out that in the case of Western Union Financial Services Inc. vs. Addl.DIT 101 TTJ 56 and Director of IT [I.T] vs. Morgan Stanley & Co. Inc. 292 ITR 460, it has been observed that if an agent simply implements on source country the contracts which were concluded by the foreign principal outside the 18 country, then no PE would be there in the form of an agent. It was pointed out that dependent agent would mean an agent who is legally and economically dependent on the principal.
19. After considering the rival submissions, ld. CIT[A] accepted the submissions of the assessee by the following para:
"In view of the above factual position and legal views relied on by the appellant, I am convinced to hold that there is no factual or legal base to conclude that the appellant's father constituted agency P.E. or in the alternative the share broker constituted fixed place P.E. In short the appellant had no P.E. at all in India during the year ended 31-03- 2006. Accordingly, ground Nos.2 and 3 succeed."
20. Before us, ld. DR submitted that it is not denied that assessee had given power of attorney to the father Shri Sevantilal S.Shah. Further assessee had never clarified that how the purchases orders were placed, how the payments were made and how the share transactions were managed. This would mean that all these activities were done through assessee's father only and, therefore, assessee's father being an agent of the assessee would constitute PE in terms of Article 5[4] of the DTAA between India and Thailand.
21. On the other hand, ld. counsel of the assessee reiterated the submissions made before the lower authorities. He also emphasized that with a view to ascertain the role of Mr. Amol Joshi, Client Relationship Manager of M/s Sushil Finance Consultancy Ltd., an enquiry was conducted on 22-12-2008 in which it was clearly clarified that assessee was giving instructions after taking advisory services of BNP Paribas but AO has intentionally not brought this enquiry in the assessment order because it was contrary to the observations made by him. Since the assessee has no fixed place at his disposal in the office 19 of the share broker and, therefore, share broker cannot constitute PE for the assessee and in this regard reliance was placed on the decisions relied before the CIT[A].
22. He admitted that though power of attorney was given to assessee's father, but this was the normal practice for most of the NRIs to issue power of attorney in favour of the close relative. Assessee's father was 76 years old person at the relevant point of time and he did not carried out any share transactions but occasionally he might have signed a cheque, but that would not constitute a PE. He submitted that assessee's father's affidavit was filed before the AO which is placed as Annexure-6 of the paper book, in which it was clearly stated that he had retired from active service since 21 years from Champion Engineering Mumbai and after retirement he was persuing his hobby of painting. It was also stated that though his son Shri Samir S.Shah had given the power of attorney, but this was never used by him for any transaction in stock market relating to his son. It was further stated that being the authorised signatory in the bank account in HDFC Bank sometimes he had signed the cheques. The ld. counsel of the assessee argued that AO has not controverted this statement and has not brought any material on record to show that assessee's father would constitute his PE. He also reiterated the submissions that assessee's father was not dependent on the assessee and in any case at best the contracts were being executed outside India and merely giving an authority would not make him PE. In this regard also the case laws relied before the CIT[A] were reiterated. 20
23. We have considered the rival submissions carefully and find force in the submissions of the ld. counsel of the assessee. We wonder as to why the AO has not brought the out come of the enquiry conducted with Mr. Amol Joshi, Client Relationship Manager of M/s Sushil Finance Consultancy Ltd, on record. The ld. DR has not denied of such enquiry, but at the same time he has not brought the out come of the enquiry to our notice. In any case, we fail to understand that simply by stating that Mr. Amol Joshi was tracking the price movements of the shares and was advising the clients to make the share broker of the assessee as his PE. The movements in share prices can be monitored by anybody in the world by opening any commercial TV channel or internet services. As far as the advice is concerned, merely if broker is advising the client regarding certain shares, then it cannot be said that such broker is also taking business decisions on behalf of the assessee. No fixed place or exclusive person was provided for assessee to conduct his business. It has been observed by the Special Bench of the Tribunal in the case of Motorola Inc. vs. DCIT [supra], that simply because certain employees were allowed to visit the facilities locally, it cannot be said that assessee had at its disposal as a matter of right certain places which could be characterized as fixed place of business in terms of Article 5.1. It was also stated that portfolio investment services were provided to the assessee by BNP Paribas and under those guidelines only assessee was making investments. But even if the broker was giving certain advices, we are of the view that it would not make the broker as PE of the assessee. it 21 is also to be noted that clause [4] of Article 5 which has been invoked by AO specifically excludes broker and general commission agent from being considered as an agent.
24. As far as PE in the form of father is concerned, Article 5 of the DTAA with Thailand reads as under:
"Article 5 Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include:
(a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, a quarry, an oil or gas well or other place of extraction of natural resources (g) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; (h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for the same or a connected project for a period or periods aggregating more than 183 days; (i) a warehouse, in relation to a person providing storage facilities for others; (j) the furnishing of services, including consultancy services, by a personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days.
3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or deli very;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.22
4. Notwithstanding the provisions of the preceding paragraphs a person (other than a broker, general commission agent or any other agent of an independent status to whom paragraph 5 applies) acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned Contracting State, if:
(a) he has and habitually exercises in the first-mentioned Contracting State in authority to conclude contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;
(b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to that enterprise from which he regularly delivers goods or merchandise on behalf of the enterprise; or
(c) he habitually secures orders in the first-mentioned State wholly or almost wholly for the enterprise or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. This shall not apply if such broker or agent carries on in that other State an activity descripted in paragraph 4 wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises which are controlled by or have a controlling interest in it.
6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not, of itself, constitute either company a permanent establishment of the other.
7. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establishment in the other State if it collects premiums in the territory of that State or insures risks situated therein through an employee or through a representative who is not an agent of an independent status within the meaning of paragraph 5 of this Article."
The AO has invoked clause [4] and clause [4] clearly states that a person who is acting on behalf of an enterprise shall be deemed to be PE of the assessee. But nothing has been brought on record by the AO as to how the father of the assessee acted on behalf of the assessee. 23 In fact, as observed earlier, enquiries made with Mr. Amol Joshi have not been brought on record. Further an affidavit in the form of Annexure-6 was filed and various averments read as under:
i. I am father of Mr. Samir S. Shah [hereinafter referred to "Samir"] having PAN ACEPS 6596. R, who is presently settled at Bangkok, Thailand.
ii. I am retired since 21 years (Twenty one year). Till retirement I was employed as Assistant Manager with Champion Engineering Mumbai, post retirement, I am pursuing my hobby of painting.
iii. Though for convenience sake, my son Samir has given me a General Power of Attorney, I have so far not used this power of Attorney for any transactions in stock market relating to my son Samir.
iv. Without prejudice to the generality of the above, I confirm that I have not bought or sold any shares on the stock market on behalf of my son Samir.
v. Being one of the authorised signatory of Samir's Bank A/c.
No.0011220003572 with HDFC Bank Ltd, Tulsiani Chambers, Nariman Point, Mumbai 400021. I have at times only signed cheques under instruction of my son Samir in favour of his share Brokers for the amounts instructed by my son Samir. vi. Whatever stated herein above is true and correct to the best of our knowledge belief and information and nothing has been concealed herein.
From above averments it was made clear that assessee's father was 76 years old and was a retired person. He has not acted on behalf of the assessee. This has not been rebutted by the department. If AO had any material he should have called Mr. Sevantilal S. Shah and examined him. But nothing like that has been done to prove that assessee's father constituted PE. Occasionally he might have signed cheques and that itself would not construe him as PE of the assessee.24
As the ld. DR has referred to the question raised by the AO that how the payments were received and paid through the broker, how the shares were delivered, we had called for the bank statements as well as copies of the demat account. A perusal of the bank statements show that as far as sale proceeds are concerned, they have been directly credited to the assessee and no cheques as such have been issued by the brokers. Some of the credit proceeds have been used for purchase of shares, but at times cheques have also been paid on behalf of the assessee. As far as movement of share price is concerned, it is a matter of common knowledge that whenever shares are purchased, then same are automatically credited by the broker to demat account of the purchaser once the payments are received.
Normally delivery has to be given when the shares are sold, but in the case before us it was pointed out that auto-pay-in instructions were issued. Therefore, there is no material on record to show that assessee's father was regularly executing the contracts on behalf of the assessee and receiving the payments and/or receiving shares. In these circumstances, in our view, he cannot be called PE of the assessee.25
Therefore, grounds Nos.2 & 3 of the revenue's appeal are dismissed.
25. I.T.A.No.3229/M/2009: In this appeal the grounds and facts are identical as discussed in above I.T.A.No.3230/M/2009. Even the arguments of both parties were identical. In view of the above discussion, this appeal of the revenue is also dismissed.
26. In the result, both the revenue's appeals are dismissed.
Order pronounced in the open Court on this 7th day of September, 2010.
Sd/- Sd/-
(R.S.PADVEKAR) (T.R.SOOD)
Judicial Member Accountant Member
Mumbai: 7th September, 2010.
P/-*
Copy to-
1) Appellant
2) Respondent
3) CITA Mumbai.
4) CIT City Mumbai
5) DR Bench Mumbai
True Copy By Order
Dy/Asst.Registrar,ITAT MUMBAI.