Mutual fund units are not shares under treaty law, so capital gains fall under the residence-state clause, not India tax.

Mutual fund units were treated as legally distinct from shares for purposes of the Indo-Swiss tax treaty. The reasoning applied the principle that a deeming fiction must be limited to the purpose for which it is created, and in the absence of a statutory rule equating units with shares, the treaty provision on alienation of shares could not be extended to mutual fund units. Relying on the Supreme Court principle that units are not shares, the analysis concluded that Article 13(5) did not apply. Capital gains from sale of the units therefore fell under Article 13(6) and were taxable only in the residence State, not in India.

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Issues: Whether capital gains arising from sale of mutual fund units by a non-resident were taxable in India under Article 13(5) of the Indo-Swiss tax treaty, or fell within Article 13(6) as gains from property other than shares.

Analysis: Mutual fund units were held to be legally distinct from shares of an Indian company. The reasoning rested on the principle that a deeming fiction must be confined to the purpose for which it is created, and that in the absence of any statutory provision treating units as shares, the treaty clause dealing with alienation of shares could not be extended to mutual fund units. The earlier Supreme Court ruling that units are not shares was applied as the governing principle for construing the character of the asset under the treaty.

Conclusion: Article 13(5) was held inapplicable and the capital gains from sale of mutual fund units were held taxable only under Article 13(6) in the residence State, not in India.

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