A recent ruling by the Authority
for Advance Ruling (AAR) will greatly boost FII
sentiment. In this ruling, awarded to Fidelity,
a resident of the US, the AAR bench has clearly
held that all income arising from investments
in India, will be treated as business income.
Further, such income would not be subject to tax
in India.
India can tax the business
income of a foreign entity, only if such an entity
has a permanent establishment (PE) i.e. a fixed
place through which business is conducted in India.
A dependent agent in India also creates a PE.
In this case, Standard Chartered
Bank (SCB) was appointed as the domestic custodian
to comply with SEBI guidelines. In its capacity
as the domestic custodian, it received dividend,
interest and capital gains arising out of investments
made by Fidelity. Similar custodial services were
provided by it routinely to other entities as
well. The AAR held that the domestic custodian
appointed by Fidelity, in accordance with the
existing SEBI regulations, cannot be regarded
as its dependent agent and hence cannot create
a PE of the FII in India since SCB was an independent
agent of Fidelity, both legally and economically.
As a result it was held
that, Fidelity did not have a PE in India. The
AAR also held that
its business profits would not be subject to any
tax in India.
