Treaty taxation of mutual fund units: Article 13(3A) could not be stretched to treat units as shares.

The India-Mauritius DTAA was construed as limiting Article 13(3A) to gains from alienation of shares, so redemption gains on equity-oriented mutual fund units were not brought within that clause and instead fell under Article 13(4); the treaty text could not be expanded by purposive construction or domestic-law exemptions. The protocol grandfathering also meant that gains attributable to units acquired before 1 April 2017 were outside the amended source-based taxing rule under Article 13(3A), subject to the acquisition date being established on record. On that reasoning, the addition treating mutual fund units as shares for treaty purposes was unsustainable.

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Issues: (i) Whether capital gains arising from redemption of equity-oriented mutual fund units were taxable in India under Article 13(3A) of the India-Mauritius DTAA as gains from alienation of shares, or fell under Article 13(4) as gains from alienation of property other than shares; (ii) Whether gains arising from mutual fund units acquired before 1 April 2017 were outside Article 13(3A) by virtue of the grandfathering arrangement.

Issue (i): Whether capital gains arising from redemption of equity-oriented mutual fund units were taxable in India under Article 13(3A) of the India-Mauritius DTAA as gains from alienation of shares, or fell under Article 13(4) as gains from alienation of property other than shares.

Analysis: The treaty language was held to be clear and confined Article 13(3A) to gains from alienation of shares. Mutual fund units, even equity-oriented units, were treated under domestic law as a distinct class of securities and not as shares of a company. The Panel's resort to purposive construction and to domestic tax exemptions applicable to equity-oriented funds was found inappropriate for enlarging the treaty text. Since the treaty did not expressly include mutual fund units within the expression "shares", the residuary rule in Article 13(4) governed such gains.

Conclusion: The gains from sale of equity-oriented mutual fund units were not taxable in India under Article 13(3A) and were covered by Article 13(4); the finding was in favour of the assessee.

Issue (ii): Whether gains arising from mutual fund units acquired before 1 April 2017 were outside Article 13(3A) by virtue of the grandfathering arrangement.

Analysis: The protocol amendment introduced source-state taxation only for shares acquired on or after 1 April 2017. On that footing, even assuming Article 13(3A) could otherwise apply, gains linked to units acquired before that date could not be brought within the amended charging rule. The assessee's claim to that extent was therefore required to be examined on the basis of acquisition dates and given effect where supported by the record.

Conclusion: Gains attributable to units acquired before 1 April 2017 were not liable to be taxed under Article 13(3A); the finding was in favour of the assessee.

Final Conclusion: The addition made on the premise that equity-oriented mutual fund units were equivalent to shares for treaty purposes was unsustainable, and the assessee's appeal succeeded.

Ratio Decidendi: For the purpose of a tax treaty, an expression conferring source-based taxation on "shares" cannot be expanded by analogy or purposive construction to include mutual fund units unless the treaty text expressly so provides; distinct domestic-law treatment of such units reinforces their exclusion from the charging provision.

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