The Income Tax Appellate Tribunal, Delhi Bench, in Emerging India Focus Funds, Apex Financial Services (Mauritius) Ltd. v. Assistant Commissioner of Income-tax (International Tax) (ITA No. 1963/Del/2025), examined the taxability in India of capital gains arising from the sale of equity-oriented mutual fund units by a tax resident of Mauritius under the India–Mauritius Double Taxation Avoidance Agreement (DTAA).

The assessee, a Foreign Institutional Investor registered with SEBI and a tax resident of Mauritius, earned substantial capital gains during Assessment Year 2022-23 from the redemption of units of equity-oriented mutual funds in India. The assessee claimed exemption under Article 13(4) of the India–Mauritius DTAA, contending that gains from alienation of mutual fund units are not gains from alienation of “shares” and therefore remain taxable only in the State of residence.

The Assessing Officer held that equity-oriented mutual fund units are akin to shares, since a minimum of 65% of the underlying assets are invested in equity, and accordingly brought a portion of the gains to tax in India under Article 13(3A) of the DTAA. The Dispute Resolution Panel not only upheld this view but directed taxation of the entire capital gains, subject to grandfathering for units acquired prior to 1 April 2017.

On appeal, the Tribunal undertook a detailed analysis of the scope and intent of Article 13 of the India–Mauritius DTAA, the 2016 Protocol, and the settled principles governing interpretation of tax treaties. Relying on the Supreme Court decision in Union of India v. Azadi Bachao Andolan (263 ITR 706), the Tribunal reiterated that treaty provisions must be interpreted on their plain language and in a manner consistent with their object, without importing purposive interpretation applicable to domestic statutes.

The Tribunal held that Article 13(3A) expressly applies only to gains from alienation of “shares” acquired on or after 1 April 2017. Units of mutual funds, including equity-oriented mutual funds, are distinct securities under Indian law and cannot be equated with shares of a company. In this regard, the Tribunal relied upon Apollo Tyres Ltd. v. CIT (255 ITR 273), CIT v. Hertz Chemicals Ltd. (386 ITR 39), DCIT v. K.E. Faizal (108 taxmann.com 545), and ITO v. Satish Beharilal Raheja (37 taxmann.com 296), which consistently recognize that mutual fund units are not shares.

The Tribunal rejected the Revenue’s attempt to tax gains by looking through to the underlying equity investments of the mutual funds, holding that neither the DTAA nor the Protocol contains language extending taxation to indirect or underlying share exposure, unlike other treaties where such intent is expressly provided.

Accordingly, the Tribunal held that gains from redemption of equity-oriented mutual fund units fall under the residuary clause in Article 13(4) of the India–Mauritius DTAA and are taxable only in Mauritius. The additions made by the Assessing Officer were deleted, and the appeal of the assessee was allowed.

Source- https://itat.gov.in/public/files/upload/1750852951-qBrmKC-1-TO.pdf

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