Profits / losses on futures and options contracts (derivative transactions) would be in the nature of ‘Business Income’: AAR

Recently, the Authority for Advance Rulings (AAR) in the case of Royal Bank of Canada (A.A.R No. 816 of 2009) has held that the profits/ losses on futures and options contracts (derivative transactions) carried out by Canadian entity would be in the nature of ‘Business Income’. Further since the entity did not have a Permanent Establishment (PE) in India, as per Article 5 of the India-Canada tax treaty (the tax treaty), the Business Income of the applicant would not be taxable in India.

While pronouncing the ruling, the AAR has also made some important observations on the taxation of income earned by Foreign Institutional Investors (FII) in India.

Facts of the case

The applicant, a public company incorporated under the Bank Act of Canada, is engaged in the business of banking and other financial services. It also trades in securities (including derivatives) in various parts of the world including India. In India, the applicant is registered as a FII with the Securities and Exchange Board of India (SEBI) since March 2008 and is mainly dealing in the derivatives segment of the Indian Stock Exchanges, where stock / index futures and stock / index options are traded. The derivative transactions undertaken by the applicant are part of its trading activity.

Issue before the AAR

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