The issue adjudicated by the Hon'ble Delhi Tribunal pertains to interpretation of word 'shares' in Article 13(3A) of India-Mauritius DTAA:
"Whether units of equity-oriented mutual funds are to be considered as 'shares' to fall under Article 13(3A) of the India- Mauritius DTAA or will the same fall under the residuary clause i.e. Article 13(4) of the India-Mauritius DTAA."
Assessee, a foreign company and tax resident of Mauritius earned capital gain income on account of sale of equity oriented mutual funds in India. It claimed exemption under Article 13(4) of India-Mauritius DTAA.
AO denied exemption by holding that major composition of equity oriented mutual funds is invested in equity shares of domestic companies, hence it partakes characteristics of shares. Therefore, the same is covered under Article 13(3A) of India-Mauritius DTAA and taxable in India.
Decision of Hon'ble Delhi Tribunal: –
The Tribunal observed in detail that shares and mutual funds are distinctive in nature. They differ significantly in terms of investor rights, regulatory framework, nature of returns, and tax treatment under Indian law.
Since the terms "shares" and "securities" are not defined in DTAA, its interpretation must be drawn from Indian domestic law and reference is to be made to the definition of "shares" provided under Section 2(84) of the Companies Act, 2013 and "securities" under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. All the aspect with regard to issuance of shares, their types, rights and liabilities of share-holders as contributory, right to dividend, transferability of shares and attendant rights are dealt extensively by the Companies Act of 2013.
A mutual fund on the other hand in India is established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.
The Hon'ble Delhi Tribunal concluded, for the purposes of DTAA, gains from the sale of equity mutual funds cannot be regarded as arising from the alienation of "shares".
For complete details, please refer to the ITAT order dated 25.06.2025 passed in the case of Emerging India Focus Funds Vs ACIT; ITA No. 1963/Del/2025
https://itat.gov.in/public/files/upload/1750852951-qBrmKC-1-TO.pdf
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