EM DELTA ONE,CYBER CITY EBENE, MAURITIUS vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INTERNATIONAL 1(2)(2), CIVIC CENTRE

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ITITA 84/DEL/2025Status: DisposedITAT Delhi22 April 2026AY 2023-248 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee is covered under Article 13(4) of the India-Mauritius DTAA, not Article 13(3A) as held by the AO. The reasoning was based on the distinct definitions of 'derivatives' and 'equity shares' in the Securities Contract Regulation Act, 1956, and the differential treatment under Section 43(5) of the Income Tax Act, 1961. The Tribunal found support in the decision of M/s Estee India Fund, which held that trading in stock derivatives is not the same as trading in shares, and gains from derivatives, even with underlying shares, cannot be treated as gains from trading in shares. Therefore, Article 13(3A) of the DTAA, which specifically refers to gains from the alienation of shares, is not attracted. Gains from trading in derivatives are covered by Article 13(4), making them taxable only in the country of residence. The assessee was granted consequential relief. The ground pertaining to interest under Sections 234A/B/C was not specifically adjudicated as it was consequential to the main finding. The stay application became infructuous as the quantum appeal was decided in favour of the assessee.

What were the facts?

The assessee, M/s EM Delta One, a Mauritius-resident Foreign Portfolio Investor, is in appeal before the Income Tax Appellate Tribunal (ITAT) against the order dated 27.11.2025 passed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961. This order incorporated the directions of the Dispute Resolution Panel (DRP) dated 29.10.2025. The dispute concerns the taxability of short-term capital gains (STCG) amounting to Rs. 3,93,63,55,924/- arising from trading in index-based derivatives. The assessee claimed exemption under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA), while the AO, following the DRP, taxed it under Article 13(3A) of the DTAA. The assessment year is 2023-24.

What were the issues?

1. Whether the Assessing Officer erred in assessing the appellant at a total income of Rs. 4,06,34,73,424/-, including a wrongful addition of Rs. 393,63,55,924/- as capital gains, contrary to the returned income of Rs. 12,71,17,500/-, pursuant to the order under Section 143(3) read with Section 144C(13) dated 27.11.2025, as per Ground 1 of appeal. 2. Whether the order passed under Sections 143/144C(13) of the Act is barred by limitation and therefore null and void, as per Ground 2 of appeal. 3. Whether the Assessing Officer erred in treating short-term capital gains on the sale of derivatives as the sale of equity shares liable to tax in India under Article 13(3A) of the India-Mauritius DTAA, and whether the AO and DRP erred in observing that gains from derivatives should be treated similarly to gains from the alienation of underlying shares, as per Grounds 3.1 and 3.2 of appeal. 4. Whether the Assessing Officer erred in not appreciating that index-based derivatives traded by the appellant are not shares and capital gains therefrom are not liable to tax in India under Article 13(4) of the DTAA, as per Ground 4 of appeal. 5. Whether the Assessing Officer erred in levying interest under Sections 234A, 234B, and 234C of the Act, as per Ground 5 of appeal. Assessee's Contentions: - Shares and index-based derivatives are distinct asset classes, as per definitions in the Securities Contract Regulation Act, 1956, and Section 43(5) of the Income Tax Act, 1961. - Gains from derivatives fall under Article 13(4) of the DTAA, taxable only in the country of residence (Mauritius). - Relied on Finance Ministry statements from 14.05.2016 indicating derivatives are outside the scope of revised DTAA provisions for shares. - Relied on precedents: 3 Sigma Global Fund, Vanguard Emerging Markets Stock Index Fund, and M/s Estee India Fund. Revenue's Contentions: - Relied on the DRP's findings, arguing that the term 'derivatives' is not defined in the DTAA, and a purposive reading is required. - Domestic definitions should not circumvent treaty taxing rights; a literal test ignoring economic reality undermines the treaty's purpose. - Government press statements are indicative, not determinative. - 'Alienation' can encompass disposal of economic ownership through instruments like derivatives that transfer benefits and burdens of shares. - Gains from derivatives should be treated similarly to gains from underlying shares due to derived value. - Legislative intent and dynamic interpretation of the treaty are important.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 234A,Section 234B,Section 234C,Section 43(5),Section 2(84),Section 2(ac),Section 2(4)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH “D” NEW DELHI

Before: SHRI YOGESH KUMAR US & SHRI SANJAY AWASTHI

For Appellant: Shri Ajay Vohra, Sr. Adv. With Shri Anil Chopra, CA, Shri Arush Sachdeva, CA & Shri Vikash Garg, Advocate
Hearing: 22.04.2026

PER SANJAY AWASTHI, ACCOUNTANT MEMBER:

1.

This appeal arises from Ld. AO’s order dated 27.11.2025 passed u/s 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (hereafter as “the Act”). The impugned order itself is passed after incorporating the directions of Dispute Resolution Panel (DRP), dated 29.10.2025.

1.1 The assessee is aggrieved with the stand of Ld. AO whereby short- term capital gains (hereafter STCG) has been brought to tax, amounting to Rs.3,93,63,55,924/-. The facts in brief are that the assessee earned the impugned STCG by trading in index-based derivatives. The resultant STCG has been claimed exempt under Article 13(4) of the India-Mauritius DTAA (hereafter DTAA). On the other hand, the Ld. AO, following the DRP’s direction, taxed it under 13(3A) of the DTAA.

1.2 The assessee has approached the ITAT with the following grounds of appeal:

“1. That the Assessing Officer (AO') has erred on facts and in law in assessing the appellant at total income of Rs.4.06,34,73,424/- in order u/s 143(3) r.w.s.144C dated 27.11.2025 pursuant to directions of the Ld. Dispute Resolution Panel ('DRP’), as against returned income of Rs.12,71,17,500/- thereby making wrongful addition as capital gains of Rs.393,63,55,924/- 2. That on the facts and circumstances of the case the order passed under sections 143/144C(13) of the Act is barred by limitation and, therefore, null and void. 3.1 That the Assessing Officer has erred on facts and in law in treating short term capital gains on sale of derivatives as sale of equity shares liable to tax in India under Article 13(3A) of the India- Mauritius Double Tax Avoidance Agreement (DTAA'). 3.2 That the AO and DRP erred on facts and in law in observing that since the value of a derivative (like an equity future or option) is derived from an underlying share or a stock index, the gains from its alienation should be treated similarly to gains from the alienation of the underlying share itself.

4.

That the Assessing Officer has erred on facts and in law in not appreciating that the index based derivatives traded by the Appellant are not shares and capital gains earned therefrom are not liable to tax in India, in view of Article 13(4) of the DTAA 5. That the AO has erred on facts and in law in levying interest under section 234, section 2348 and section 2340 of the Act. That the appellant respectfully craves leave to add, amend, alter and/or forego any ground(s) at or before the time of hearing.”

1.3 The Ld. AR has stated at the Bar that they are not pressing GOAs 1 and 2, pertaining to limitation.

2.

Before us the Ld. AR argued that “shares” as envisaged in Article 13(3A) of the DTAA were entirely distinct from index based derivatives and thus could be considered only under Article 13(4) of the DTAA. The Ld. AR drew our attention to the relevant portions of Article 13 of the DTAA, which deserves to be extracted for reference:

“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. …………… 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.” It was further averred that the assessee was incorporated in Mauritius and is registered as a Foreign Portfolio Investor with SEBI. It was the submission that STCG on index-based derivatives would fall in the residuary category under Article 13(4) of the DTAA. It was averred that shares represent ownership in a company, with voting rights, etc. As per section 2(84) of the Companies Act, 2013, “share” means a share in the share capital of a Company and includes stock. Furthermore, under the Securities Contract Regulation Act, 1956, as per section 2(ac) “derivatives” would be a security derived from a debt instrument, share, loan, etc., or even a contract which derives its value from the prices, or index of prices, of underlying securities, etc. It was pressed by the Ld. AR that “securities” have been defined in section 2(4) of the Securities Contract Regulation Act, 1956, to include shares, scrips, stocks, bonds etc. It was the submission that the two classes of assets have been separately and distinctly defined in this Act. The Ld. AR also placed before us a statement from the Finance Ministry, as reported on 14.05.2016, that the revised DTAA provisions would apply only in case of share transactions in India, leaving out derivatives and non-share securities such as debentures from its purview. The Ld. AR also relied on the distinctive treatment u/s 43(5) of the Act given to stocks and shares, [section 43(5)(b) of the Act] as compared to trading in derivatives [section 43(5)(d) of the Act], to drive home the point that equity shares and derivatives are not one and the same. The Ld. AR relied on several cases in his support, some of which deserve to be mentioned:

i. 3 Sigma Global fund [176 taxmann.com 708 – Mum.], paras 10, 11 & 12 were underlined for their relevance in the present matter.

ii. Vanguard Emerging Markets Stock Index Fund [172 taxmann.com 515 (Mum.)]. This case was cited to stress the point that capital gain on sale of rights entitlement was distinct from any capital gains on sale of shares. iii. M/s Estee India Fund [ITA 1955/Del/2025, dated 12.03.2026 – (Delhi)]. The conclusion on page 9 (para 10) is that trading in shares and stock derivatives are not one and the same.

2.1 Per contra, the Ld. DR relied on the findings given in the DRP’s order (supra). He pointed out the following findings therein:

“4.4.1 Rival submissions have been considered. The Panel observes that the term 'derivatives’ is not defined in the India-Mauritius DTAA. Article 3(2) gives domestic law a role when treaty terms are undefined. However, the Panel is of the view that a purposive reading of the said Agreement, in the context of its objects and purpose, is a more suitable approach to adopt. The object and purpose of the India-Mauritius DTAA as laid down in the Agreement is "the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains”. From a purposive reading of the Agreement then, using a single domestic definition of the term ‘derivative’ to circumvent a treaty's taxing right is methodologically weak. Article 13(3A) of the said DTAA is aimed at covering gains from capital-market transactions tied to Indian share ownership: a literal domestic-form test that ignores the economic reality of modern financial instruments undermines the treaty’s ‘prevention of fiscal evasion’ purpose. 4.4.2 The assessee and the judicial precedents relied upon, make a reference to the Government press statements made at the time of the signing of the protocol to support their argument. However, such statements are indicative and do not determine the legal position on the matter. Such statements are contextual and should not be interpreted as excluding derivatives that in substance effect an alienation of shares. There is a scope for a dynamic interpretation of the treaty in the context of evolving market Instruments Freezing of the treaty's scope to time context conceptions can lead to a defeat of its objects and purpose. 5 4.4.3 Further, the assessee has claimed that in its case there has been no "alienation of shares and thus such transactions cannot be considered to be covered under Article 13(3A) of the Agreement. The assessee has further contended that he has not acquired shares in Indian companies. He has merely traded in index-based derivatives. Trading in Index-based derivatives cannot be akin to acquiring shares. 4.4.4 However, the term "alienation" is not limited to legal transfer of share certificates -It can encompass disposal of economic ownership through Instruments that lead to transfer of the benefits and burdens of shares. Where contractual arrangements, such as transactions in derivatives of stocks, transfer the economic ownership (beneficial ownership) of shares, the alienation may be treated as a transfer of shares. Furthermore, since the value of a derivative (like an equity future or option) is derived from an underlying share or a stock index, the gains from its alienation should be treated similarly to gains from the alienation of the underlying share itself.” The Ld. DR concluded his arguments by saying that the legislative intent needed to be of concern instead of a narrow interpretation of the definition of “shares” and “derivatives”.

3.

We have heard the Ld. AR/DR at length and have gone through the documents before us including the cases relied upon by the Ld. AR. It is evident from a reading of the definitions in the Securities Contract Regulations, 1956 that derivatives are a distinct asset class as compared to equity shares. This distinction gets further strengthened by the description of these two categories of assets in section 43(5) of the Act [section 43(5)(b) and (d) of the Act]. Furthermore, it is seen that in the case of M/s Estee India Fund (supra), there is a clear finding on page 9 of the order, which we wholeheartedly support. For reference the relevant portions from this order deserve to be extracted as under: - “From the decisions referred above, it would be evident that trading in stock derivatives and trading in shares is not one and the same. Gain from trading in derivatives, even though the underlying asset may be shares, cannot be treated as gain from trading in shares. Therefore, the provisions of Article 13(3A) would not get attracted. Article 13(3A) of India-Mauritius DTAA only refers to gain from alienation of shares. It does not in any manner include gain from trading of derivatives. The gain from trading of derivates are covered by Clause 4 of Article 13, hence, taxable in the Country of residence.” In light of this discussion, it is held that the assessee is covered under Article 13(4) of the DTAA and not Article 13(3A) of the DTAA, as has been done by the Ld. AO. The assessee gets consequential relief.

3.1 The ground pertaining to levy of interest u/s 234A/B/C of the Act is consequential to the main finding and is thus not specifically adjudicated.

4.

In the result, this appeal is allowed.

5.

Furthermore, regarding the stay application [29/Del/2026], since the quantum appeal has been decided in favour of the assessee, hence, the stay application has now become infructuous.

Order pronounced in the open court on 22.04.2026

Sd/- Sd/- (YOGESH KUMAR US) (SANJAY AWASTHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 22.04.2026 *Kavita Arora, Sr. P.S. Copy forwarded to: 7

1.

Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT, NEW DELHI

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