BACKGROUND
- The Assessee1 is a foreign company and a tax resident of Mauritius, carrying on investment activity in India and registered as Foreign Institutional Investor with SEBI.
- During AY 2022-23, the Assessee earned long-term capital gains of INR 593.48 crores on account of sale of equity oriented mutual funds2 in India. Such capital gains were claimed as exempt under Article 13(4)3 of the IndiaMauritius DTAA ('the Treaty') by Assessee.
- The case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 ('the Act') was issued.
- Rejecting the Assessee's claim, AO contented that:
a) Equity oriented mutual fund clearly reflects that the primary asset of investment is equity / shares only with minimum investment in equity of 65% out of total investments.
b) Assessee is the beneficiary of the capital gains income arising from the alienation of the underlying assets of the investment, i.e., shares/equity.
c) Out of the total capital gain of INR 593.48 crores, the capital gains of INR 385.76 crores [being 65% equity portion of INR 593.48 crores) would be covered under Article 13(3A)3 of the Treaty and hence added it to the total income for the relevant AY.
- Aggrieved with the order of the AO, the Assessee filed objections before the Hon'ble Dispute Resolution Panel ('DRP').
- Contentions of Hon'ble DRP:
a) Referred to section 10(38) and 112A of the Act to treat the units of equity oriented mutual funds as equity shares and therefore, all the exemptions as available for equity shares have been extended to the units of equity oriented mutual funds also.
b) Relied on the Hon'ble Supreme Court judgement in case of Workmen of Dimakuchi Tea Estate vs. Management of Dimakuchi Tea Estate (1958) AIR 353 which had relied on the "Doctrine of Purposive Construction" i.e. whenever there is a doubt about meaning of words, it has to be understood in the sense in which they best harmonious with the subjects of enactment and the object which the legislature has in its view. Therefore, units of equity oriented mutual funds are in nature of equity shares and hence, provisions of Article 13(3A) of the Treaty should be applicable.
c) Distinguished the AO's order by holding that once the units of equity oriented mutual funds were held to be equity/shares, the entire capital gains of INR 593.48 crores was liable to be taxed as per the Article 13(3A) of the Treaty.
TRIBUNAL'S OBSERVATIONS
- Analyzed the signing of Protocol of India and Mauritius and highlighted that although the Protocol confines itself to the issue of taxability of shares, no definition of 'shares' has been drawn in the Treaty and that the Protocol doesn't disturb the allocation of taxing rights in respect of other fiscal instruments.
- The definition of 'shares' is dependent on the definition drawn in domestic laws4 as a whole and not restricted only to the Tax Statute.
- Observed that mutual funds and shares both are different forms of securities and investment, with significant differences in terms of rights of investors, regulation, nature of return, and taxability
- Further remarked that for the purpose of taxing an income earned from selling a security, the Treaty should be strictly interpreted and where any security is not specifically mentioned then by any fiction or way of purposive interpretation, a distinct nature of security cannot be considered akin to one giving rise to taxable income.
- Relied on various judicial decisions5 and concluded that even though mutual funds receive similar treatment as equity shares during their claim of exemption u/s 10(38) or 112A under the domestic tax laws, the gains arising from sale of equity mutual funds cannot be termed as 'alienation of shares', under the Treaty.
- Held that sale of equity oriented mutual funds is not identical to alienation of shares and therefore not covered under Article 13(3A) of the Treaty; thereby allowed the appeal of the Assessee.
AURTUS COMMENTS
- This ruling reinforces the principle that the provisions of a Double Taxation Avoidance Agreement should be interpreted considering the intent, spirit and objectives of relevant jurisdictions while entering into the agreement. This judgement reiterates that units of equity oriented mutual funds are not akin to equity shares and hence, protocol entered into India and Mauritius should have no bearing on such transactions.
Footnotes
1. Emerging India Focus Funds, Apex Financial Services (Mauritius) Ltd [TS-829-ITAT-2025(DEL)]
2. Defined under Section 10(38) of the Income Tax Act, 1961
3. Article 13(3A) of the Treaty gives taxing rights to India in case of sale of shares which were acquired on or after 1 st April, 2017 whereas Article 13(4) gives taxing rights to the Mauritius from the sale of any property other than referred to in forgoing paragraphs.
4. Securities Contracts (Regulation) Act, 1956 Companies Act, 2013
5. Apollo Tyres Ltd Vs. CIT (2002) 255 ITR 273/122 Taxman 562/174 CTR 521 (SC) Hon'ble Bombay High Court in the case of CIT Vs. Hertz Chemicals Ltd (2016) 386 ITR 39 (Bom) Vanguard Emerging Markets Stock Markets Stock India Fund Vs. ACIT (2025) 172 taxmann.com 515 (Mum-Tribunal)
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