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

The assessee explained that in the normal course of business, for 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 Assessing Officer, however, was not convinced and passed 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.

Before us, the ld. counsel for the assessee vehemently stated 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.

The ld. counsel for the assessee referred to the decision of the 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.

Further, the ld. counsel for the assessee submitted that Article 7 "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.

The ld. counsel for the assessee placed reliance on 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 and submitted that the transaction is nothing more than a business transaction.

Further, it was submitted that the assessee has undertaken 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.

It is the say of the ld. counsel for the assessee that transactions 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.

It is the say of the ld. counsel for the assessee that the 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.

The ld. counsel for the assessee has also contended that taxability 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.

The ld AR further stated that the said transactions are can not be 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

Accordingly, the ld. counsel for the assessee submitted that the payer, Adani Wilmar, is only source of money received and not source of income. The source of income is dependent on the activities with respect to where the activities, with respect to those transactions, take place. Reliance in this regard was placed on the following judicial precedents: • Asia Satellite Telecommunications Co. Ltd V DCIT (2011) 197 Taxmann 263 (Delhi) • Luftansa Cargo India (P) Ltd 91 ITD 133 (Del ITAT); • Havells India (2013) 352 ITR 376 (Del HC);

Per contra, the ld. DR relied upon the orders of the Assessing 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.

We have heard the rival submissions and have perused the 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.

We also find that Article 7 of the India-Singapore DTAA considers "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.

We find that the assessee has undertaken transaction with Adani 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.

We also find from the details filed in Pg 251 of paper book that 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.

We also find considerable force in the assessee submission that 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.

We are also agreeable with contention of the assessee that it is 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 of the view that the “washout” charges are in the nature 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.

Finally, it is pertinent to refer to section 43(5) of the Act, which was drawn to our attention by the ld. counsel for the assessee which reads as under:

Though we have already held that the said transactions are not 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.

In view of above discussion, considering the fact that there are 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.