TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1284
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....of the appeal in ITA No. 1130/Mum/2025. Accordingly appeal in ITA No. 1119/Mum/2025 is dismissed as withdrawn. ITA No. 1130/Mum/2025 3. The assessee is a public limited company registered under the laws of Republic of Mauritius and holds global business licence issued by Financial Service Commission in Mauritius. The assessee also holds a tax residence certificate issued by Mauritius Revenue Authority. The assessee for the year under consideration filed the return of income on 29.10.2022 declaring total income of Rs. 18,04,89,140/- consisting of Short Term Capital Gain (STCG) of Rs. 17,80,87,555/-, Income from Derivatives of Rs. 1,88,73,621/- and Dividend Income of Rs. 24,01,580/-. The assessee claimed exemption of income arising from Derivatives as per Article 13(4) of India-Mauritius DTAA. Assessee's case was selected for scrutiny and the statutory notices were duly served on the assessee. The AO issued a show-cause notice in order to verify the genuineness of the claim of the assessee for applying provisions of India-Mauritius DTAA. The AO after perusing the details filed by the assessee held that the assessee failed the Principle Purpose Test and accordingly is not entitl....
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.... Money Laundering (Maintenance of Records) Rules, 2005, and as specified in Table 5 of the Master Circular for Foreign Portfolio Investors, Designated Depository Participants, and Eligible Foreign Investors dated 19th December 2022) for assessment and invoking Beneficial Ownership Concept on basis of certain foreign jurisdiction case precedents. The Assessing Officer has made allegations which could have potentially been established, if at all, with proper enquiry. But any such enquiry is missing in this case. In light of the above, the objection of the applicant is allowed." 4. However, the DRP did not accept the contention of the assessee that the income from Derivatives would be exempt as per Article 13(4) for the reason that Derivatives and shares are closely related and therefore the income is to be taxed in India as per Article 13(3A) of India-Mauritius DTAA. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO as per the directions of the DRP. The assessee raised the following grounds: "1. Ground No. 1 1.1. That the learned ACIT has erred, in law and on facts, in treating derivative income of Rs. 1,88,73,621 as gains ari....
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....on 2(81) which defines the terms equality to mean that "the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956 (42 of 1956)". The ld. AR submitted that Derivatives would fall within the definition of section 2(81) and is a security and not share as defined in section 2(81). The ld. AR also brought out the difference between shares and Derivatives as tabulated below: Sr.No. Equity share of a company Derivative 1 Ownership shares in a company that represents a claim on the part of the company's assets and earnings. Financial contracts whose value is derived from the performance of an underlying asset, index, or rate. Derivative contract is a distinct and separate asset 2 Shares are issued by companies and a share represent proportionate share in capital of company Derivatives are not issued by companies and unit of derivatives does not represent proportionate share in any of company whose shares may be composed in the derivative 3 Shareholder has voting rights in company. Derivative held does not confer any voting rights in any company. 4 Shareholder has rights for corporate benefits and privileges announced b....
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....imed by the assessee under Article 13(4) of India-Mauritius DTAA. The ld. AR therefore, argued that the principle of consistency should be applied by the revenue and the revenue cannot take two different stands on the same issue. The ld. AR relied on the decision of the Cochin Bench of the Tribunal where a similar issue in the context of Capital Gains from sale of Mutual Funds has been considered and it is held that the same would be exempt as per Article 13(4) of India-UAE Treaty. 7. The ld. AR submitted that the Co-ordinate Bench in the case of Vanguard Emerging Markets Stock Index Funds vs. ACIT (IT) [2025] 172 taxmann.com 515 (Mum. Trib.) has held that Derivatives are distinct from shares while considering the issue of applicability of Article 13(6) of India-Ireland DTAA to sale of "Rights Entitlement" "21. To buttress this point of distinction, Id. Counsel for the assessee referred to clarification issued by the then Economic Affairs Secretary in respect of amendment to the India-Mauritius DTAA. In 2016, the India-Mauritius DTAA was amended which re-allocated the taxation rights in respect of sale of shares between India and Mauritius. Pursuant to the amendment, India gaine....
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....on alienation of securities other than shares would continue to be taxed in the resident country and not in India. The aforesaid clarification. clarifying the stand of the Government of India, if we look from the perspective of the distinction between the shares and other securities, then for the purpose of the present case, the rights entitlement which is distinct from shares can be taken as a guidance to see the intention of the Government while negotiating or amending the Articles of DTAA. 23. It is also a well settled proposition of law if any term has not been defined under the Act or treaty; the same is to be understood as per the domestic legislation in view of Section 90(3) of the Act as well as Article 3(2) of India9 Ireland DTAA, It states that where the term has not been defined under the treaty, the meaning under the domestic tax legislation is to be adopted. Further, where the term has not been defined in domestic tax legislation also it is a general meaning is to be adopted. We find that the definition of shares even in Section 2(84) of the Companies Act, 2013 provides a restrictive definition of shares to mean a share in the share capital of a company and includes ....
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....Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State. 3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated; 4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory ac....
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....initial investment since the investor may not actually buy or sell the underlying asset. This financial leverage comes with risk of significant gain or loss situation which makes Derivative high-risk, high rewarding instrument. The following key features of Derivative emanate from the above high level understanding - * That derivates are a financial contract different from the underlying asset * That the underlying asset can be anything and not only shares * That in order to trade in derivatives, the investor need not own the underlying asset * That the derivative contract being a separate financial instrument can be traded as it is without buying or selling the underlying asset (as explained in the above example) 12. A combined perusal of the above discussed nature of derivatives, the definitions of "shares" and "securities" under the Companies Act, and the relevant observations of the coordinate bench in the case of Vanguard Emerging Markets Stock Index Funds (supra) makes it clear that derivatives are assets that are different from shares and accordingly we see merit in the contention that gain from alienation of derivatives need to be considered under Article 13(4) of ....
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....the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base may be taxed in that other State. 3. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. 4. Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State may be taxed in that State. 5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 above shall be taxable only in the Contracting State of which the alienator is a resident." (Emphasis supplied) 6.1 As per Article 13(5) of the Tax Treaty, in....
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.... of units of mutual funds should not get covered within the ambit of Article 13(4) of the tax treaty, and should consequently be covered under Article 13(5) of the tax treaty. Therefore, the assessee, who is a resident of UAE for the purposes of the tax treaty, STCG arising from sale of units of equity oriented mutual funds and debt oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of the tax treaty. 6.4 Reliance is also placed on the decision of the Mumbai Bench of the Tribunal in the case of Satish Beharilal Raheja (supra)wherein on similar facts and in the context of the Treaty between India and Switzerland, the Tribunal held as under: "In our view in the absence of any specific provision under the Act to deem the unit as shares, it could not be considered as shares of companies and therefore, the provisions of Article 13(5)(b) (of the Indo-Swiss Treaty) cannot be applied in case of units. We agree with the findings of the Commissioner (Appeals) that provisions of Article 13(6) (of the Indo-Swiss Treaty) are applicable in case of units as per which capital gains cannot be taxed in India. " 6.5 The Mumbai Tribunal ....