We are a US pension trust, exempt from tax at home, investing a small part of our fund in Indian securities. Can we claim the India-US treaty, and are our gains business income?
No on the treaty, and yes on business income - the trust lost. The Authority ruled that the profits arising to General Electric Pension Trust from the sale of its portfolio investments in India would be treated as its business income, given the continuous purchases and sales through Indian brokers. It then held that the trust was a resident of the United States for treaty purposes only so far as its income was subject to tax there; being tax-exempt, it was not a resident of a contracting State and could not claim the convention. The business income was therefore taxable in India under the Act. The ruling binds only that applicant.
Pronounced by the Authority for Advance Rulings (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member) on 2005-12-14. It bears on section 9(1)(i), section 115AD, section 5(2), section 196D, section 245Q, section DTAA art 4, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961, in Residence & Treaty Benefit and Capital Gains matters.
This ruling matters because of what has happened to it since. Its second limb - that a tax-exempt entity is not a treaty resident - runs against the Supreme Court's holding in Union of India v. Azadi Bachao Andolan that 'liable to taxation' means legal liability and not actual payment, and against the definition of 'liable to tax' now in section 2(29A), which expressly includes a person subsequently exempted from liability. Its first limb has been taken away by statute, section 2(14) now making securities held by an SEBI-registered Foreign Institutional Investor a capital asset. Read it, therefore, as the high-water mark of a position that has not held, and be ready to meet it when the Revenue cites it against a tax-exempt fund.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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General Electric Pension Trust was a United States resident pension trust, exempt from tax in the United States, managing about USD 43 billion worldwide, of which roughly USD 80 million - about 0.19 per cent - was invested in Indian securities. Its portfolio was managed in the United States by GE Asset Management, and it was registered with the Securities and Exchange Board of India as a sub-account of a Foreign Institutional Investor. Deutsche Bank in Mumbai acted as its domestic custodian. The trust bought and sold Indian securities continuously through brokers, and had no employees, offices or agents in India. Two questions were put: whether the profits arising to the trust from the sale of its portfolio investments in India would constitute business income; and whether, in the absence of a permanent establishment in India and having regard to articles 5 and 7 of the double taxation avoidance convention between India and the United States, such business income would be taxable in India.
On the first question the Authority held that the profits arising from the sale of portfolio investments in India would be treated as the applicant's business income. Whether a person is an investment company or a trading company, and whether a receipt is revenue or capital, is a mixed question of law and fact to be decided on the facts, and the facts here - continuous purchases and sales of Indian securities through brokers - pointed to trade. On the second question the Authority held that the business income would be taxable in India under the Act, because the applicant could not take the benefit of the convention at all. Being tax-exempt in the United States, the applicant could be treated as a tax resident of the United States for the purposes of the convention only to the extent that the income it derived was subject to tax there. On that footing the applicant was not a resident of a contracting State within the meaning of the convention and therefore could not avail itself of its terms, including the protection of articles 5 and 7.
The Authority dealt with characterisation first and briefly. It declined to lay down a formula, treating the question whether an entity is an investor or a trader as one of mixed law and fact, and drew the conclusion from the pattern of activity: a continuous programme of purchases and sales of Indian securities, run through professional managers and executed by brokers, is the conduct of a business rather than the holding of investments. The harder part was residence. Article 4 of the convention defines a resident of a contracting State by reference to liability to tax there under that State's law, and the Authority read that as a requirement of actual subjection to tax rather than of nominal fiscal domicile. A pension trust exempt from United States tax was, on that reading, a resident only so far as its income was in fact subject to tax there, and since none of it was, it fell outside the definition altogether. That conclusion disposed of the second question without any inquiry into a permanent establishment: articles 5 and 7 are available only to a resident of a contracting State, and the applicant was not one. The consequence was that the Act applied unrelieved, and the business income arising from the Indian portfolio was chargeable here, with the collection machinery for Foreign Institutional Investors in sections 115AD and 196D in the background.
The applicant is not a resident of the Contracting State (USA) and therefore it cannot avail of the benefit of the terms of the Treaty.
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Handle my notice → Ask a CA on WhatsAppNo on the treaty, and yes on business income - the trust lost. The Authority ruled that the profits arising to General Electric Pension Trust from the sale of its portfolio investments in India would be treated as its business income, given the continuous purchases and sales through Indian brokers. It then held that the trust was a resident of the United States for treaty purposes only so far as its income was subject to tax there; being tax-exempt, it was not a resident of a contracting State and could not claim the convention. The business income was therefore taxable in India under the Act. The ruling binds only that applicant. This was decided by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member) and bears on section 9(1)(i), section 115AD, section 5(2), section 196D, section 245Q, section DTAA art 4, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961. This ruling matters because of what has happened to it since. Its second limb - that a tax-exempt entity is not a treaty resident - runs against the Supreme Court's holding in Union of India v. Azadi Bachao Andolan that 'liable to taxation' means legal liability and not actual payment, and against the definition of 'liable to tax' now in section 2(29A), which expressly includes a person subsequently exempted from liability. Its first limb has been taken away by statute, section 2(14) now making securities held by an SEBI-registered Foreign Institutional Investor a capital asset. Read it, therefore, as the high-water mark of a position that has not held, and be ready to meet it when the Revenue cites it against a tax-exempt fund. If it applies to you, the first step is this: If the Revenue says your tax-exempt client is not a treaty resident, answer with Azadi Bachao Andolan and the definition of 'liable to tax' in section 2(29A).
General Electric Pension Trust was a United States resident pension trust, exempt from tax in the United States, managing about USD 43 billion worldwide, of which roughly USD 80 million - about 0.19 per cent - was invested in Indian securities. Its portfolio was managed in the United States by GE Asset Management, and it was registered with the Securities and Exchange Board of India as a sub-account of a Foreign Institutional Investor. Deutsche Bank in Mumbai acted as its domestic custodian. The trust bought and sold Indian securities continuously through brokers, and had no employees, offices or agents in India. Two questions were put: whether the profits arising to the trust from the sale of its portfolio investments in India would constitute business income; and whether, in the absence of a permanent establishment in India and having regard to articles 5 and 7 of the double taxation avoidance convention between India and the United States, such business income would be taxable in India. The matter was decided on 2005-12-14 by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member). On those facts the Advance Ruling held as follows. On the first question the Authority held that the profits arising from the sale of portfolio investments in India would be treated as the applicant's business income. Whether a person is an investment company or a trading company, and whether a receipt is revenue or capital, is a mixed question of law and fact to be decided on the facts, and the facts here - continuous purchases and sales of Indian securities through brokers - pointed to trade. On the second question the Authority held that the business income would be taxable in India under the Act, because the applicant could not take the benefit of the convention at all. Being tax-exempt in the United States, the applicant could be treated as a tax resident of the United States for the purposes of the convention only to the extent that the income it derived was subject to tax there. On that footing the applicant was not a resident of a contracting State within the meaning of the convention and therefore could not avail itself of its terms, including the protection of articles 5 and 7.
The Authority dealt with characterisation first and briefly. It declined to lay down a formula, treating the question whether an entity is an investor or a trader as one of mixed law and fact, and drew the conclusion from the pattern of activity: a continuous programme of purchases and sales of Indian securities, run through professional managers and executed by brokers, is the conduct of a business rather than the holding of investments. The harder part was residence. Article 4 of the convention defines a resident of a contracting State by reference to liability to tax there under that State's law, and the Authority read that as a requirement of actual subjection to tax rather than of nominal fiscal domicile. A pension trust exempt from United States tax was, on that reading, a resident only so far as its income was in fact subject to tax there, and since none of it was, it fell outside the definition altogether. That conclusion disposed of the second question without any inquiry into a permanent establishment: articles 5 and 7 are available only to a resident of a contracting State, and the applicant was not one. The consequence was that the Act applied unrelieved, and the business income arising from the Indian portfolio was chargeable here, with the collection machinery for Foreign Institutional Investors in sections 115AD and 196D in the background. In the words reproduced by the source cited on this page: "The applicant is not a resident of the Contracting State (USA) and therefore it cannot avail of the benefit of the terms of the Treaty."
It was decided by the Advance Ruling on 2005-12-14. Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 9(1)(i), section 115AD, section 5(2), section 196D, section 245Q, section DTAA art 4, section DTAA art 7, section DTAA art 13, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. On the first question the Authority held that the profits arising from the sale of portfolio investments in India would be treated as the applicant's business income. Whether a person is an investment company or a trading company, and whether a receipt is revenue or capital, is a mixed question of law and fact to be decided on the facts, and the facts here - continuous purchases and sales of Indian securities through brokers - pointed to trade. On the second question the Authority held that the business income would be taxable in India under the Act, because the applicant could not take the benefit of the convention at all. Being tax-exempt in the United States, the applicant could be treated as a tax resident of the United States for the purposes of the convention only to the extent that the income it derived was subject to tax there. On that footing the applicant was not a resident of a contracting State within the meaning of the convention and therefore could not avail itself of its terms, including the protection of articles 5 and 7. It arises in Residence & Treaty Benefit and Capital Gains matters, on section 9(1)(i), section 115AD, section 5(2), section 196D, section 245Q, section DTAA art 4, section DTAA art 7, section DTAA art 13 of the Income Tax Act 1961, and was decided by Syed Shah Mohammed Quadri, J. (Chairman) and A. S. Narang, Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the specific residence article of the treaty in question - some, including the India-US convention, deal with trusts and exempt entities expressly. For an FII or FPI, start from section 2(14) and section 115AD rather than arguing trading versus investment. Produce a tax residency certificate and the documents section 90(4) and (5) require before the residence argument begins.
Superseded by amendment. Both limbs have been overtaken. On characterisation, section 2(14) as published at incometaxindia.gov.in now includes in the definition of capital asset any securities held by a Foreign Institutional Investor which has invested in accordance with the SEBI regulations, so the trading-versus-investment question the Authority decided no longer arises for an FII or FPI. On residence, section 2(29A) defines 'liable to tax' in relation to a person and a country as meaning that there is an income-tax liability on that person under the law of that country and expressly includes a person who has subsequently been exempted from such liability - which is the opposite of the reading the Authority adopted; and the Supreme Court in Union of India v. Azadi Bachao Andolan had already held that liability to taxation means legal liability, not actual payment. The Authority itself was replaced by the Board for Advance Rulings from 1 September 2021 (Finance Act 2021; Notification 96/2021), whose rulings are appealable to the High Court under section 245W, and the Income-tax Act 1961 was replaced by the Income-tax Act 2025 from 1 April 2026. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
No ITR citation appears in the Indian Kanoon text, so the reported field is left blank. The Authority relied on the specific wording of article 4 of the India-US convention as it applies to trusts, and the full text of that article was not read here, so how far the residence holding was treaty-specific rather than general could not be settled. The footnote identifying the Finance Act that inserted clause (b) of section 2(14) could not be read reliably from the departmental site. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
On the first question the Authority held that the profits arising from the sale of portfolio investments in India would be treated as the applicant's business income. Whether a person is an investment company or a trading company, and whether a receipt is revenue or capital, is a mixed question of law and fact to be decided on the facts, and the facts here - continuous purchases and sales of Indian securities through brokers - pointed to trade. On the second question the Authority held that the business income would be taxable in India under the Act, because the applicant could not take the benefit of the convention at all. Being tax-exempt in the United States, the applicant could be treated as a tax resident of the United States for the purposes of the convention only to the extent that the income it derived was subject to tax there. On that footing the applicant was not a resident of a contracting State within the meaning of the convention and therefore could not avail itself of its terms, including the protection of articles 5 and 7.
TaxSphere, “In re General Electric Pension Trust”, https://taxnotice.vittsphere.com/caselaw/case/general-electric-pension-trust-vs-unknown-aar-2005/ (validity last checked 2026-09-02)
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