India-Mauritius DTAA: ITAT Mumbai Confirms Derivative Gains Not Taxable in India for Mauritius Entities

The assessee, M/s 3 Sigma Global Fund, is a public limited company registered under the laws of the Republic of Mauritius and has a tax residence certificate issued by the Mauritius Revenue Authority. The assessee filed Income Tax Return (ITR) on 29.10.2022, where it declared the total income of Rs 18,04,89,140. This includes Short Term Capital Gains (STCG) of Rs 17,80,87,555, Derivative income of Rs 1,88,73,621, and Dividend Income of Rs 24,01,580.

The assessee claimed tax exemption against the income earned from Derivatives as per Article 13(4) of the India-Mauritius DTAA. The tax department selected the assessee’s case for scrutiny. The Assessing Officer issued a show cause notice (SCN) to verify the DTAA claim. After this, AO held that the assessee was not eligible for treaty benefits as he failed the Principal Purpose Test. Therefore, while passing the draft assessment order, the AO taxed the derivative income and made additions.

The assessee was not satisfied with this order and therefore, it raised this objection to the DRP. The DRP disagreed with the AO on the denial of treaty benefits. However, DRP did not accept that the derivatives income would be exempt as per Article 13(4) for the reason that Derivatives and shares are closely related. It held that the income must be taxed in India as per Article 13(3A) of the India-Mauritius DTAA. Therefore, the assessee approached the Income Tax Appellate Tribunal (ITAT).

Assessee’s Arguments

The assessee raised the following grounds:

Ground 1

• The tax officer wrongly treated derivatives income of Rs. 1,88,73,621 as gains from alienation of “shares” under Article 13(3A) of the India Mauritius DTAA.
• The tax officer did not consider the assessee’s claim that this income should be taxed under Article 13(4) of the treaty.

Ground 2

• The tax officer did not follow the DRP’s instruction by taxing dividend income at 20%, instead of the 15% as per the DTAA.
• The tax officer wrongly treated the gains from derivatives as income from other sources, if it was not treated as capital gains and taxed 40% instead of treating it as STCG and taxing it at 30% under Section 115AD of the Income Tax Act, 1961.

Ground 3: The officer wrongly calculated and charged excess interest under Section 234B of the Income Tax Act, 1961.

ITAT Decision

• The Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee and held that Derivatives are not the same as shares, even if shares are the underlying asset.
• The tribunal also noted that the AO raised the same query for AY 2023-24, and after considering the reply filed by the assessee, the AO did not make any additions.
• The tribunal stated that the gain from the alienation of Derivatives falls under Article 13(4) of the India-Mauritius DTAA and not under Article 13(3A). Therefore, such income is not taxable in India.
• The addition made by the AO was deleted by the ITAT.
• The ITAT allowed ground 1 of the assessee and for ground 2.1, the AR did not submit any arguments.
• Ground 2.2 is infructuous and Ground No. 3 about the interest u/s 234D is consequential and does not warrant separate adjudication.
• Therefore, the ITAT partly allowed the appeal of the assessee in ITA No. 1130/Mum/2025 and the appeal in ITA No. 1119/Mum/2025 is dismissed as it was a duplicate of the first appeal.