2019 (7) TMI 598 - AT - Income Tax

Short term capital gain - Assessee 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 - taxable in India or UAE as per Article 13(4)/13(5) of DTAA - transfer of a capital asset situated in India shall be deemed to accrue or arise in India - Assessee sold equity linked mutual funds and derived STCG - HELD THAT - The term share is not defined under the tax treaty. As per Article 3(2) of the tax treaty, any term not defined under the tax treaty shall, unless the context otherwise requires, have the meaning which it has under the laws of the country whose tax is being applied. Therefore, the term share would carry the meaning ascribed to it under Act, and if no meaning is provided under the Act, then the meaning that the term carries under other allied Indian laws would need to be applied. The Act does not define the term share . Section 2(84) of the Indian Companies Act, 2013 defines the term share to mean a share in the share capital of a company and includes stock . Further, the term company has been defined to mean a company incorporated under the Companies Act, 2013 or under any previous company law . Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995, mutual funds, in India can be established only in the form of trusts , and not companies . Therefore, the units issued by Indian mutual funds will not qualify as shares for the purpose of Companies Act, 2013. From the above definition of securities , it is clear that shares and units of a mutual fund are two separate types of securities. Applying the above meaning to the provisions of the tax treaty, the gains arising from transfer 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. We are of the view that the CIT(A) is justified in deleting the addition as short term capital gain - Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Interpretation of Article 13(4) and Article 13(5) of the India-UAE Tax Treaty.
2. Taxability of short term capital gains derived from the sale of units of equity-oriented mutual funds by a non-resident individual.
3. Application of the provisions of the tax treaty in determining the tax liability of the non-resident individual.
4. Consideration of whether units of mutual funds qualify as "shares" for the purposes of the tax treaty.

Analysis:
1. The case involved a dispute regarding the taxability of short term capital gains (STCG) derived from the sale of units of equity-oriented mutual funds by a non-resident individual for the assessment year 2012-2013. The Assessing Officer contended that as per Article 13(4) of the India-UAE Tax Treaty, the STCG should be taxable in India. However, the CIT(A) ruled in favor of the assessee, stating that the gains were not taxable in India under Article 13(5) of the Treaty.

2. The non-resident individual claimed exemption from tax in India based on Article 13(5) of the Tax Treaty, which states that gains from the transfer of property other than shares in an Indian company are taxable only in the resident country (UAE in this case). The CIT(A) supported this argument, emphasizing that the units of mutual funds did not qualify as "shares" under the Treaty.

3. The Tribunal analyzed the provisions of the Tax Treaty and held that the gains from the transfer of units of mutual funds should be covered under Article 13(5) rather than Article 13(4) of the Treaty. It was emphasized that the tax liability of the non-resident individual should be determined in accordance with the beneficial provisions of the Treaty as per Section 90(2) of the Income Tax Act.

4. The Tribunal considered the definition of "share" under the Tax Treaty and Indian laws to determine whether units of mutual funds could be classified as shares. It was noted that under Indian laws, mutual funds are established as trusts, not companies, and the units issued by mutual funds do not qualify as shares under the Companies Act, 2013. Therefore, the gains from the sale of mutual fund units should not be taxed in India under Article 13(4) of the Treaty.

5. The Tribunal relied on precedents and judicial pronouncements to support its decision, including the Mumbai Tribunal's ruling in a similar case involving the India-Switzerland Treaty. The judgment highlighted that the units of mutual funds should not be considered as shares unless specifically deemed so under the relevant provisions, consistent with the principles outlined by the Supreme Court in previous cases.

6. Ultimately, the Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decision to delete the addition of the short term capital gain from the sale of units of mutual funds. The judgment was delivered on July 8, 2019, by the Tribunal comprising Shri Chandra Poojari, AM, and Shri George George K, JM.