CARGILL INTERNATIONAL TRADING PTE LTD.,SINGAPORE vs. ACIT CIRCLE INTL. TAXATION 1(2)(1), NEW DELHI

PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-

This appeal by the assessee is preferred against the order of the

Assessing Officer, New Delhi dated 23.06.2023 u/s 143(3) r.w.s

144C(13) of the Income-tax Act, 1961 [the Act, for short] pertaining to

A.Y. 2020-21.

however, the solitary issue pertains to the addition made by

the Assessing Officer on account of washing charging charges

amounting to Rs. 10,58,32,302/-.

return of income for the assessment year 2020-21 declaring income of

Rs.23,97,94,240/- on 31.12.2020 for Tax as per section 115A of the IT

Act, 1961 @ 20% plus applicable surcharge and cess. Subsequently, this

case was selected for scrutiny on the basis of CASS and notice u/s

143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the

Act") dated 29.06.2021 was issued and duly served upon the assessee

within the stipulated time.

including palm oil. The assessee, during the year, has received a

further consideration amounting to Rs. 10,58,32,302/- from Adani

Wilmar group. The Assessing Officer found that assessee entered into a

buying contract for Palm Cargo with Adani Wilmar, however, at the

later stage, the assessee decided to settle the contract and thus, it

entered into another contract for selling of Palm Cargo to Adam

Wilmar. The difference between the buying price and selling price

between both contracts is recorded as “Washout Charges” by the

assessee. The AO held that the assessee did not offer the consideration

received for washout charges amounting to Rs. 10,58,32,302/- as

income.

the purpose of protecting itself from risk of price fluctuations of

various commodities (as in its industry, prices are subject to

fluctuations), it enters into various contracts with parties across globe

including India. The contracts entered into by the assessee with Adani

Wilmar were for purpose of hedging. It was pre-agreed that the

contract will be closed near to the delivery time and the washout price

will be an agreed market price at the time of entering into opposite

contract for closing the contract. The purpose of entering into such

contracts is hedging the pricing risk of assessee's extensive portfolio of

physical palm oil trades. The purpose of these contracts is not to

speculate on palm oil prices but based on assessee's business model, it

is required to manage the risk of prices for physical cargos.

the final assessment order holding that the washout transaction of Rs.

10,58,32,302/- undertaken by the assessee with Adani Wilmar was in

the nature of commodity trading without actual movement of goods.

Hence, the transaction is distinct from business activities and is

speculative in nature. Accordingly, the AO held that the transaction,

not being in nature of business income, is governed by Article 23 as

"Other Income" of India Singapore DTAA and hence, taxable under the

Indian domestic tax laws under section 9(1)(i) of the Act.

6.1 Aggrieved, the assessee is in appeal before us.

that the assessee is a Singapore based entity. It is undisputed that it is

eligible for tax treaty benefits and does not have a Permanent

Establishment in India. Accepted position by the Assessing Officer is

that there is no PE. It is submitted that considering trading business of

the assessee, "hedging transactions" are integral part and parcel of

business transaction and it is a well settled principle of law that any

transaction undertaken during the course of business, will take partake

the character of the same business and will not be considered as an

independent business activity.

co-ordinate bench at Mumbai in case of JCIT vs Merrill Lynch Capital

Market Espana SA SV (2019) 112 taxmann 119 and contended

vehemently that in the absence of PE of the assessee in India, the

washout charges are not taxable in India.

"Business Income" does not distinguish between speculation business

income and normal business income. While the Income Tax Act

distinguishes business income into normal business income and

speculative business income for the purpose of taxing the same under

Business Income but at different tax rates. Explanation 2 of section 28

treats speculation income as business income but to be taxed as

separate income. However, for the purpose of tax treaty, speculative

income is also taxed as part of business income governed by Article 7

read with Article 5 of the tax treaty.

case Louis Defrus TS 657-ITAT-2019 wherein washout charges are held

to be business expense in the hands of tax payer and submitted that

the transaction is nothing more than a business transaction.

transaction with Adani Wilmar which are washed out at later stage to

guard against loss through future price fluctuations in respect of the

contracts for actual delivery of goods sold by it. However, the

Assessing Officer, without appreciating that the washout transaction is

an integral part of the business transaction of the assessee, has held

income from such transactions to be in the nature of income from

speculative activities.

undertaken to guard against loss through future price fluctuations in

respect of his contracts for actual delivery of goods cannot be deemed

to be a speculative transaction. The ld AR relied on the circular by

CBDT in Circular No. 23 (XXXIX)D of 1960, dated 12 September 1960.

transactions entered into by the assessee with Adani Wilmar are few of

the contracts which are entered into to hedge its price risk on entire

sales portfolio of the assessee for the given shipment period. Hence,

these are related to the main business of the assessee and cannot be

held to be "speculative". The ld AR pointed out to Pg 251 of paper book

to show the details of actual underlying contracts of sales wherein

actual physical delivery was made and against which the assessee had

entered into hedge contract for hedging price risk.

does not arise even under Article 23 as per India-Singapore Tax Treaty

as the said Article is applicable only where income of a resident of a

contracting state is such that it is not expressly dealt with in the

preceding articles of the treaty. The washout charges have been

earned by the assessee pursuant to a business transaction of purchase

of refined palm oil. Hence, the said transaction is duly covered by

business income under Article 7 read with Article 5 of India-Singapore

DTAA and hence, in absence of PE of the assessee in India, the said

income is not taxable in India. Thus, once an income is covered by

Article 5 read with Article 7, Article 23 (residuary Article) cannot be

invoked. For this proposition, the ld. counsel for the assessee referred to the judgment co-ordinate bench at Mumbai in the case of JCIT vs Merrill Lynch Capital Market Espana SA SV [2019] 112 taxmann 119.

considered as squarely covered u/s 9(1)(i) of the Act on account that

the income is arising from an Indian Entity, viz., Adani Wilmar. It was

argued that the provision of Section 9(1)(i) of the Act are not satisfied as payer is not the source of income. For this contention, ld. counsel

for the assessee submitted that :  The term "source" has not been defined under the Act

Hence, one needs to determine what can constitute source of income.  Merely because the payer is in India, the same cannot

be the sole basis to state that the source in India. Had

that been so, the provisions of section 9 "Interest "Royalty, Rum "Fees for technical services" etc would

not have been introduced and would become redundant

as they deem income to be taxable in India based "situs

of the payer.

 Reliance is placed on the provisions of section 9(1)(vi) of the Act "Fees for technical services which deems FTS to be taxable in India based on situs of the payer.  In contrast, section 9(1)(i) of the Act deems income based on 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.

Officer. The ld DR submitted that the transaction are speculative as no

actual goods have been delivered. It is argued that the assessee is

trading in commodities and the “washout” charges would fall under

‘other income’ under para 6 of Article 23 of India-Singapore DTAA. The

ld DR argued that the case of the assessee is distinguishable from the

case of Louis Defrus TS as in that case washout charges was treated as

expense.

relevant material on record. Having heard the rival submission, we find

that the established facts are that the assessee is a Singapore based

entity and is eligible for tax treaty benefits and does not have a

Permanent Establishment in India. We find that the assessee is trading

in commodities and apart from actual sale purchase of commodities, it

also undertakes ‘hedging transaction’. We therefore, find force in the

contention of the ld. counsel for the assessee that considering trading

business of the assessee, "hedging transactions" are integral part and

parcel of business transaction and is not an independent business

activity.

"Business Income" and does not make any distinction between

speculation business income and normal business income. The Income

Tax Act, however, distinguishes business income into normal business

income and speculative business income for the purpose of taxing the

same under Business Income but at different tax rates. Explanation 2

of section 28 treats speculation income as business income but to be

taxed as separate income. Further, we find that Article 7 read with

Article 5 of India-Singapore DTAA, provides for taxation of speculative

income as part of business income. Therefore, even if the said

transaction be treated as speculative transaction under the Income Tax

of India, it will be considered as business income under the DTAA.

Wilmar resulting in receipt of washout charges after being washed out

at later stage, to guard against loss through future price fluctuations in

respect of the contracts for actual delivery of goods sold by it. We are

of the considered view that the income arising out of washout

transaction is not in the nature of income from speculative activities.

This view is supported by the circular by CBDT in Circular No. 23

(XXXIX)D of 1960, dated 12 September 1960.

the transactions entered into by the assessee with Adani Wilmar which

were washed out, are few of the contracts which are entered into to

hedge its price risk on entire sales portfolio of the assessee for the

given shipment period. The details show many contracts of sales

undertaken by the assessee involves actual physical delivery of

commodities. There are some cases of sales contract against which the

assessee had entered into hedge contract for hedging price risk.

Hedging thus, are related to the main business of the assessee and

cannot be held to be "speculative".

taxability of washout charges does not arise even under Article 23 of

India-Singapore Tax Treaty as the said Article is applicable only where

income of a resident of a contracting state is such that it is not

expressly dealt with in the preceding articles of the treaty. We find

that washout charges have been earned by the assessee pursuant to a

business transaction of purchase of refined palm oil. We are therefore,

of the view that the said transaction is duly covered by business

income under Article 7 read with Article 5 of India-Singapore DTAA and

hence, in absence of PE of the assessee in India, the said income is not

taxable in India. Thus, once an income is covered by Article 7 read

with Article 5, Article 23 (residuary Article) cannot be invoked. The

view is supported by the decision of the co-ordinate bench at Mumbai

in the case of JCIT vs Merrill Lynch Capital Market Espana SA SV

[2019] 112 taxmann 119.

not covered u/s 9(1)(i) of the Act on account that the receipt is arising

from an Indian Entity. viz., Adani Wilmar. Adani Wilmar, being the

payer, is only source of money received and not the source of income

as no business activity of the assessee exists in India. The source of

income is dependent on the situs of activities with respect to the

transactions. The hon’ble Delhi High Court in the case of Asia Satellite

Telecommunications Co. Ltd V DCIT (supra) held as much as follows :

"We are agreeable that the source does not refer to the person who makes the payment but it refers to the activities which give rise to the income:”

of business transaction and therefore credit of “washout” charges will

be business income of the assessee. We find support from the decision

of Delhi ITAT in case Louis Defrus TS 657-ITAT-2019 wherein

“washout charges” are held to be business expense in the hands of tax

payer. The nature of transaction is nothing more than a business

transaction and where it is credited, it will be business income and

where it is debited, it will be revenue expense.

was drawn to our attention by the ld. counsel for the assessee which

reads as under:

“Section 43(5): speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him, or (b) …… (c) …. (d) ….. (e) …. shall not be deemed to be a speculative transaction.”

speculative in nature, but hedging transactions entered to protect the

price risk fluctuation, let us examine the result of the Assessing

Officer's contention that transactions being entered into by the

assessee are in the nature of speculative activities u/s 43(5) of the

Act. We find that the income from the same would still be covered

under business income as the proviso (a) of section 43(5) excludes

hedging transaction from being speculative. Further, even if the

contention of AO is accepted that the transaction is speculative

income, the same will still be considered as part of business income

governed by Article 7 read with Article 5 of the India-Singapore DTAA.

The assessee having no Permanent Establishment (PE) in India, in terms

of Article 5 of the India-Singapore tax treaty, the said washout

receipts, being in nature of business income of the assessee, would

still be not taxable in India.

no business activities of the assessee, namely entering of contract,

receipts of money etc. is performed in India and the fact that assessee

does not have any PE in India to carry out any business activities, there

is no source for the assessee in India resulting in any income. We,

consequently, direct the AO to delete the addition on account of

“washout” charges. Accordingly, the sole issue raised by the assessee

vide several grounds of appeal, is allowed.

2358/DEL/2023 is allowed.

The order is pronounced in the open court on 18.12.2024.

Sd/- Sd/-

[SAKTIJIT DEY] [NAVEEN CHANDRA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 18th December, 2024.

VL/