The Indian Authority for Advance Rulings (AAR) recently examined whether a US pension trust is entitled to claim benefits under the India-US tax treaty for income from the sale of portfolio investments in India.
In this case, a US-based pension trust, registered with the Securities & Exchange Board of India as a sub-account of a foreign institutional investor, made a gain from the sale of securities in India. The trust contended that the gain was a business profit and exempt from tax in India under the treaty in the absence of a permanent establishment in India.
The AAR agreed that the gains were business profits. Furthermore, it observed that only a person 'resident of USA' is entitled to claim benefit of exemption under the treaty. Article 4(1) of the treaty provides for the definition of 'resident of a contracting state' as a "person who under the laws of that state is liable to tax therein by reason of his place of management, incorporation....". However, article 4(1)(b) specifically states that "in the case of income derived or paid by a trust, this term applies only to the extent that the income derived by such trust is subject to tax in that State as the income of a resident, either in its hand or in the hands of its beneficiaries."
The AAR observed that although the trust was liable to tax in USA because of its place of management and incorporation, it was exempt from tax in the US under section 501C of the US Internal Revenue Code and its income was not subject to tax even in the hands of beneficiaries. Hence it was held that the trust was not US-resident under the treaty and hence ineligible to claim the treaty exemption. Without treaty benefits, under Indian tax law, the trust's income is taxable under Indian tax law to the extent it is reasonably attributable to business operations carried out in India.
Rajesh Kadakia (rajesh.kadakia@in.ey.com) and Samit Sawant (samit.sawant@in.ey.com), Mumbai
