Treaty classification of index derivative gains: linked share values do not make derivatives share alienation income.

Gains from trading in index-based derivatives by a Mauritius resident were treated as distinct from gains on alienation of shares under the India-Mauritius DTAA. The distinction between equity shares and derivatives was considered material, as derivatives are a separate asset class under domestic securities law and the Income-tax Act treats derivative transactions separately. On that basis, derivative gains could not be equated with share gains merely because they were linked to an underlying share or index. Article 13(3A) was confined to shares, while Article 13(4) applied to property not otherwise covered, so the gains fell under Article 13(4).

---

---

Issues: Whether gains arising from trading in index-based derivatives by a Mauritius resident were taxable under Article 13(3A) of the India-Mauritius DTAA as gains from alienation of shares, or fell under the residuary provision in Article 13(4).

Analysis: The distinction between equity shares and derivatives was treated as material. Derivatives were recognised as a separate asset class under domestic securities law, and the treatment accorded to speculative and derivative transactions in the Income-tax Act reinforced that separation. On that basis, gains from derivative trading could not be equated with gains from alienation of shares merely because the derivative value was linked to an underlying share or index. Article 13(3A) was confined to shares, while Article 13(4) applied to property not specifically covered by the earlier paragraphs.

Conclusion: The gains from index-based derivatives were held to fall under Article 13(4) of the India-Mauritius DTAA and not under Article 13(3A), and the assessee succeeded.

---