3 SIGMA GLOBAL FUND,EBENE, MAURITIUS V. ASSISTANT COMMISSIONER OF INCOME TAX, INT TAX CIRCLE 4(2)(1), MUMBAI

ITITA 1119/MUM/2025

AI Insights

The case involves M/s 3 Sigma Global Fund, a public limited company registered in Mauritius, which appealed against the assessment orders of the Assistant Commissioner of Income Tax (ACIT), Mumbai. The primary issue was the taxability of income from derivatives under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The ACIT had initially treated the income from derivatives as gains from the alienation of shares, taxable in India under Article 13(3A) of the DTAA. However, the Dispute Resolution Panel (DRP) later found that the assessee was entitled to treaty benefits, but did not accept the exemption claim under Article 13(4) for derivatives. The Tribunal, after examining the definitions and characteristics of shares and derivatives, and considering the clarifications by the Revenue Secretary and previous judicial decisions, concluded that derivatives are distinct from shares and thus the income from their alienation is not taxable in India.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 705772 (ITAT-MUMBAI)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 30-06-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2022-2023
• Other Referred Cases: Vanguard Emerging Markets Stock Index Funds vs. ACIT (IT), Satish Beharilal Raheja vs. ACIT, Apollo Tyres Ltd. v. CIT
• Laws Referred To: Income Tax Act, 1961, India-Mauritius DTAA, Companies Act, 2013, Securities Contracts (Regulation) Act, 1956
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KRISHNA KUMAR
• Assessee Lawyers: BHAUMIK GODA
• Keywords: Capital asset; Deemed dividend; Rule of consistency; Capital Gains; Double taxation relief; Permanent establishment
• Section: 143(3); 234B; 5(2)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE MS PADMAVATHY S, AM & SHRI RAJ KUMAR CHAUHAN, JM I.T.A. No. 1130/Mum/2025 (Assessment Year: 2022-23) M/s 3 Sigma Global Fund, C/o 605, Zee Nayak, M.G. Road, Vile Parle (E), Mumbai-400057. PAN: AABCZ3540L Vs. ACIT, International Circle-4(2)(1), 1708, 17th Floor, Air India Building, Nariman Point, Mumbai-400021. Appellant) : Respondent) I.T(IT) A. No. 1119/Mum/2025 (Assessment Year: 2022-23) M/s 3 Sigma Global Fund, 8th Floor, C/o Anex Management Services Ltd., Ebene Tower, 52 Cybercity, Ebena, Mauritius. PAN: AABCZ3540L Vs. ACIT, International Circle-4(2)(1), 1708, 17th Floor, Air India Building, Nariman Point, Mumbai-400021. Appellant) : Respondent) Appellant /Assessee by : Bhaumik Goda, AR Revenue / Respondent by : Shri Krishna Kumar, Sr. DR Date of Hearing : 19.06.2025 Date of Pronouncement : 26.06.2025 O R D E R Per Bench: These appeals by the assessee are against the final order of assessment of the Assistant Commissioner of Income Tax, International Circle-4(2)(1), Mumbai [In 2 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund short 'AO'] passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 16.01.2025 for AY 2022-23. 2. The ld. AR at the outset submitted that the assessee has filed appeal against the order of the AO both manually and through e-filing portal. The ld. AR further submitted that two ITA Numbers have been erroneously allotted and therefore the appeal in ITA No. 1119/Mum/2025 can be treated as withdrawn. We in this regard notice that the assessee vide letter dated 20.06.2025 has sought for withdrawal of appeal in ITA No. 1119/Mum/2025 for the reason that it is a duplicate 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 entitled for treaty benefits. The AO therefore brought to tax the income from 3 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund Derivatives and made additions in this regard while passing the draft assessment order. The assessee raised further objections before the DRP against the draft order of the assessee. The DRP held that the assessee is entitled for the treaty benefits and the relevant observations of the DRP in this regard are extracted as under: “Panel has examined the matter of denial of India-Mauritius DTAA benefits to the applicant on basis of Beneficial Ownership concept. It is noteworthy that the Assessing Officer has not examined the substance of the applicant company. There is no enquiry into the business transactions of the applicant. The Assessing Officer has not made any investigation into the situs of Board of Directors of the company, the location of AGMs, location of investment decisions, place of effective management, situs of decisions of the company etc. The Assessing Officer has only applied the \"beneficial ownership\" (BO) concept in a blanket manner. Even after applying the beneficial ownership principle, the Assessing Officer has not examined the eligibility of the claims of the Applicant in the hands of the beneficial owners, as per relevant Tax Treaties. Such an application of the beneficial ownership concept, and without enquiry into the substance of the Applicant Company (FPI) does not meet the standard for rejection of Treaty benefits. Panel is in complete agreement with the Assessing Officer that the Tax Residence Certificate (TRC) issued by a low-tax jurisdiction is not the sole instrument for availment of Treaty benefits. However, it was incumbent on the Assessing Officer to undertake further enquiry to establish that the Applicant Company lacked substance and merely acted as a conduit to claim benefits of Treaty Shopping. The Assessing Officer has not been able to deny the benefit of India-Mauritius DTAA to the Applicant, but has chosen the short-cut of Beneficial Ownership, which has no place in the Treaty. Having not been able to dispel the Treaty immunity to the applicant assessee, the Assessing Officer is bound by the provisions of the Tax Treaty. Hence, the Panel has no alternative but to reject the simplistic approach of the Assessing Officer, adopted sans enquiry, and by merely using the Ultimate Beneficial Owner data (UBO data under Rule 9 of the Prevention of 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 4 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 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 arising from alienation of \"shares\" under Article 13(3A) of the India Mauritius DTAA 1.2. That the learned ACIT has erred, in law and on facts, in ignoring the appellant's contention of taxing the gains from derivative transactions under Article 13(4) of the India Mauritius DTAA, as gains arising from property not covered under paragraphs 1, 2, 3, or 3A of Article 13. 2. Ground No. 2 2.1. That the learned ACIT has erred, in law and on facts, in not following the Hon'ble DRP's directions under Section 144C(13) of the Income Tax Act, 1961, by applying 20% tax rate (plus cess and surcharge) on dividend income instead of the beneficial rate of 15% as per the DTAA 2.2. Without prejudice to Ground No 1, the learned ACIT has erred, in law and on facts, in treating the gains from derivative transactions as \"Income from Other Sources\" and taxing at 40% instead of short-term capital gains taxed at 30% under Section 115AD of the Income Tax Act, 1961 3. Ground No. 3 3.1. The Learned ACIT has erred, in law and on facts, in computing and levying excess interest under Section 234B of the Income Tax Act, 1961.” 5 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 5. The ld. AR submitted that the limited issue that needs to be adjudicated is with regard to whether Derivatives are instruments other than shares and would fall within Article 13(4) of India-Mauritius DTAA to be taxed in Mauritius. The ld. AR argued that Derivatives are separate instruments and just because the underlying asset can be in the form of shares cannot be the reason for denying the applicability of Article 13(4) of India-Mauritius DTAA. The ld. AR in this regard drew our attention to the Revenue Secretary's clarification in Media while amending the India-Mauritius DTAA where he has mentioned that the India-Mauritius DTAA has kept out Derivatives and non-share like securities, like debentures from levy of capital gain taxed in India as these are to be taxed only in Mauritius. The ld. AR further submitted that the Revenue Secretary has clearly stated that to tax or not to tax the income from Derivatives is the right of the host country i.e. Mauritius and it will not affect the fact that the same is not taxable in India. The ld. AR further drew our attention to section 2(84) of the Companies Act where shares are defined as \"a share in the share capital of a company and includes stock.\" The ld. AR further drew our attention to section 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 Derivatives are not issued by 6 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund and a share represent proportionate share in capital of company 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 by company. Derivative does not carry any benefit in corporate benefits and privileges announced by any of company represented by the particular derivative 5 By holding shares a person or group of persons can control companies. Holding of derivatives does not provide any control over any of company. 6 Shares can be held for short, medium or long term and indefinitely also. Derivatives have limited life and expiry on the predetermined expiry date. For example, presently derivatives in Nifty equities a series for any month expires on the last Thursday of that month. 7 Shares held in a company continue to be share in particular company, except changes due to schemes of arrangement of companies like amalgamation, merger, demerger etc. In case of derivatives composition of equities are changed from time to time depending on policies of stock exchange/SEBI, market conditions, volume of trading in shares of any company, changes in composition of indices at stock exchange and also perception of big investment houses and advisory houses 8 Shares can be considered as an asset having life in perpetuity, as the company issuing a particular share has. The life of shares goes along with life of company unless capital is reduced and/or shares are redeemed. As can be noted from definition of derivative a Derivative means a forward, future, option or any other hybrid contract of pre-determined fixed duration, Thus, the life of derivative is of fixed duration and has nothing to do with life of any company. 9 Shares of a company, even a company having several companies as subsidiary and associates cannot be equated with a unit of mutual Derivatives can be compared with units of a mutual fund. For example, derivative of Nifty bank can be compared with a banking 7 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund fund. sector mutual fund, but this is only to the extent of composition of investment by such mutual fund and composition of derivative. But other differences apply to derivative and unit of mutual fund. 6. The ld. AR submitted that for AY 2023-24 the AO issued a similar show- cause notice with regard to applicability of exemption under India-Mauritius DTAA to the assessee towards income from sale of Derivatives. The ld. AR further submitted that the assessee made a detailed reply in response to the show-cause notice and that the AO after considering the reply the AO allowed the exemption as claimed 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 gained rights to tax gains arising on sale of share of Indian companies. At the time some ambiguity was perceived with regards to applicability of the amended 8 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund provisions to gains arising on sale of other capital assets. The Government's stand was clarified by then Economic Affairs Secretary Mr. Shaktikanta Das to Business Standard news paper which has been quoted verbatim in an news article dated 21 August 2015, reproduced as under:- 'Derivatives and other forms of securities, such as compulsory convertible debentures (CCDs) and optionally convertible debentures (OCDs) will continue io be governed by the existing provision of being taxed in Mauritius, said economic affairs secretary Shaktikanla Das. He said India had gained a source based taxation right only for shares (equity) under the treaty Residence-based taxation will continue for derivatives under the Mauritius pact Meaning non-equity securities would be taxed in Mauritius if routed through there. But Mauritius does not have a short-term capital gains tax which would mean that investors using these instruments would continue to escape paying taxes in both countries. \"There are three categories of instruments which arise between two countries-shares, immovable assets, and other instruments, including derivatives,' he explained. 'Insofar as shares are concerned, they are covered by the new agreement. As regards immovable property, all along the right to taxation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right. With regard to other instruments, 'the right to tax is always in that country. There cannot be a change that is the position all over the world'. 'It is their country's decision The right to tax is with that country with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement), It is for that country to decide whether it wants to tax at 10, 20, or zero per cent (And) Just because some country has made it zero, I can't say I will tax, he further clarified\" 22. Accordingly, it has been argued before us that even the stand of Government of India (through its Secretary in press) is that shares would cover \"shares of Indian Company\" and not derivatives & other securities. Accordingly, gain 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 India- 9 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 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 stock. Otherwise also an asset, which may come into existence or derive its value from another underlying asset, cannot be regarded as being same as the original asset. An analogy may be drawn to a derivative', which may derive its value from the underlying equity but it is a well-established principle that the derivative contract is a deriving its value from underlying equity would not be subject to tax in India under Article 13(6). Likewise rights entitlement which is granted on account of shareholding cannot be regarded as being the same as shares especially since the rights shares are allotted, only on subscription. The rights entitlement, being a distinct asset may be sold lapsed or subscribed and thus, akin to derivatives, ought to be not subject to tax under Article 13(6) of the India-Ireland DTAA. Similarly, the investor can either sell the rights entitlement option or exercise the option to get shares or decline the offer for shares.” 8. The ld. DR on the other hand relied on the order of the DRP and the findings of the AO. 9. We heard the parties and perused the material on record. During the year under consideration, the assessee has earned an income of Rs. Rs. 1,88,73,621/- from sale of Derivatives. The assessee claimed the said income as not taxable in India under Article 13(4) of the India-Mauritius DTAA whereas the contention of the revenue is that the applicable Article is Article 13(3A) pertaining to alienation of shares as per which the income is taxable in India. Therefore before proceeding further we will look at the relevant Articles of India-Mauritius DTAA which read as under – ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated. 10 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 2. Gains from 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 a fixed base, may be taxed in that other State. 3. 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 acquisition thereof under any law in force in the respective Contracting States. 10. Accordingly the moot question before us is whether Derivatives are shares the alienation of which is taxable under Article 13(3A) or whether Derivatives are other than shares to be taxed as per Article 13(4) of the India-Mauritius DTAA. Section 2(84) of the Companies Act defines shares as \"a share in the share capital of a company and includes stock.\". The owner of the shares has various rights including voting right. Though the term Derivatives is not defined anywhere, the term \"securities\" defined under section 2(81) of the Companies Act as per clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956 (42 of 1956) includes derivatives. Therefore it is clear that as per the Companies Act, shares and 11 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund derivatives are considered as separate assets. Before deciding whether shares and derivatives are difference, we will first examine what is a derivative and its salient features. 11. In general parlance Derivative is a financial contract between parties whose value is derived from the changes in the value of underlying assets. The underlying assets can be in the form of shares, bonds, commodities like gold or silver, currencies, interest rates and market indices. In layman language a typical derivative contracts is where the parties involved enter into contract to buy/sell the underlying asset at a particular price at an agreed future date in order to mitigate the risk of price fluctuation of the underlying asset. The derivative contract is a complex financial product that gets traded in the exchange or over the counter and the investor earns profits or ends up in making loss without actually buying or selling the underlying asset. For example in order to avoid the risk of movement in fuel price a contract would be entered into between parties to buy / sell the fuel at a fixed price at a future date in order to protect the risk of fuel price fluctuation. This contract is a derivate whose price would move up or down depending on the movement in the fuel price and is traded in the market as it is. The investor of the derivative would end up in making profit or loss without actually buying or selling fuel depending on the price movement of the fuel. Derivative trade offers leverage to the investor to have control over a large asset portion with a relatively small 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 12 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund  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 the India-Mauritius DTAA. This view is supported by the observations of the Revenue Secretary's clarification in Media while amending the India-Mauritius DTAA with regard to taxability of the assets other than shares and immovable property under the Treaty. Further we are of the view that the following observations of the Cochin Bench of the Tribunal are pertinent while considering the impugned issue before us – 6. We have heard the rival submissions and perused the material on record. The assessee admittedly is a non-resident Indian for the relevant assessment year. The tax residency certificate issued to the assessee stating he has a valid residency in UAE is on record (pages 27 to 29 of the paper book filed by the assessee). The Assessing Officer also admits that the assessee is a NRI during the relevant assessment year. For the relevant assessment year the assessee sold equity linked mutual funds and derived STCG. As per section 5(2) r.w.s. 9(1)(i) of the I.T.Act, transfer of a capital asset situated in India shall be deemed to accrue or arise in India. The income from transfer of units of an equity-oriented mutual funds situated in India is deemed to accrue or arrive in India and therefore is taxable in India even in the case of a non-resident. However, taxation in the case of non-resident is subject to the provisions of the relevant Treaty between India and the State of residency of the assessee. In the instant case, the provisions of India-UAE Treaty would be applicable. Section 90(2) of the I.T.Act states that the provisions of the Treaty shall apply to the extent they are more beneficial to the assessee as compared to the corresponding provisions of the Act. The Assessing Officer also does not state that the assessee is not entitled to the beneficial provisions of the DTAA entered between India and UAE. The 13 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund Assessing Officer negated the assessee's contention by holding Article 13(4) of the Treaty would apply and not Article 13(5) of the Treaty. To understand the issue in controversy, it is necessary to reproduce Article 13 of the India-UAE Tax Treaty and the same reads as follow:- \"ARTICLE 13 : CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph (2) of Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from 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, income arising to a resident of UAE from transfer of property other than shares in an Indian company, are liable to tax only in UAE. On the other hand, Article 13(4) of the Tax Treaty provides that income arising to a resident of UAE from transfer of shares in an Indian company other than those specifically covered within the ambit of provisions of other paragraph of Article 13 may be taxed in India. Article 13(4) of the Tax Treaty covers within its purview capital gains arising from transfer of 'shares' and not any of the property. Therefore, Article 13(4) of the Tax Treaty cannot be applied in the instant case unless the units of mutual funds transferred by the assessee qualify as shares for the purpose of Tax Treaty. 14 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 6.2 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\". However, 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. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia - (a) shares, scrips, stocks, bonds, debentures, debenture stock or other body corporate; and (b) units or any other such instrument issued to the investors under any mutual fund scheme. 6.3 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. 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. \" 15 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund 6.5 The Mumbai Tribunal came to above conclusion by relying on the judgment of the Hon'ble Supreme Court (\"SC\") in the case of Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC), wherein the Hon'ble Apex Court held as under: \"Even though the said section (Section 32(3) of the UTI Act, creates a fiction to make UTI as a deemed company and distribution of the income received by the unitholder as deemed dividend, by virtue of these deeming provisions it cannot be said that it a/so makes the unit of UTI a deemed share. A deeming provision of this nature, as found in Section 32(3) (of the UTI Act) should be applied for the purposes for which the said deeming provision is specifically enacted, which in the instant case was confined only to deeming the UTI as a company, and the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the unit as also a deemed share, then it would have stated so. In the absence of any such specific deeming in regards to units as shares, it would be erroneous to extend the provisions of Section 32(3) of units of UTI for the purpose of holding that the unit is a share.\" 6.6 In view of the aforesaid reasoning and the judicial pronouncement cited supra, we are of the view that the CIT(A) is justified in deleting the addition of Rs.1,34,99,407 as short term capital gain. It is ordered accordingly. 13. The coordinate bench in the above case has considered the different definition of shares and securities under the Companies Act while holding that Mutual Funds are different from Shares. It would not be out of place to mention here that in Mutual Funds the underlying assets are shares and therefore ratio laid down in the above case reinforces our view that derivatives cannot be equated to shares merely for the reason that one of the underlying assets can be shares. We have also taken into consideration the various differences brought out by the ld. AR between shares and derivatives as tabulated in the earlier part of this order. We also notice that in assessee’s own case for AY 2023-24, the AO has raised query on identical issue and after considering the reply filed by the assessee did not make any addition towards denying applicability of Article 13(4). In view of these discussions and considering the judicial precedence in this regard we have no hesitation in holding that Derivatives are assets distinct from shares and the gain from the alienation of 16 ITA No. 1130 & IT (IT)A No. 1119/Mum/2025 M/s Sigma Global Fund Derivatives would fall within the purview of Article 13(4) of the India-Mauritius DTAA and cannot be considered under Article 13(3A). Accordingly we hold that the gain arising from the transfer of Derivatives cannot be taxed in India and the addition made in this regard stands deleted. Ground No. 1 raised by the assessee is hereby allowed. During the course of hearing the ld. AR did not present any arguments with regard to Ground No. 2.1. Ground No. 2.2 has become infructuous in view of our decision on Ground No.1. Ground No. 3 with regard to interest u/s 234D is consequential and does not warrant separate adjudication. 14. In result the appeal of the assessee in ITA No. 1130/Mum/2025 is partly allowed. The appeal in ITA No. 1119/Mum/2025 is dismissed as withdrawn. Order pronounced in the open court on 26-06-2025. Sd/- Sd/- (RAJ KUMAR CHAUHAN) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai "