ESTEE INIDA FUND,MAURITIUS vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INT TAX 1(2)(2) , DELHI

आदेश /O R D E R

PER SANJAY AWASTHI, ACCOUNTANT MEMBER:

1.1 The assessee has ventilated its grievance through as many as 8 grounds of appeal, out of which grounds 1 to 4 are on the issue of treating the gain arising out of trading in derivatives as taxable in India under Article 13(3A) of the DTAA.

2.1 The Ld. DR pointed out the findings given by the Ld. DRP on pages 5 & 6 of that order, whereby it has been held that since the stock derivatives derived their value from underlying equity shares, hence the two are one and same and therefore eligible for taxation in India under Article 13(3A) of the DTAA.

 “The solitary issue for adjudication in the present appeal is whether gain arising on transactions of stock derivatives result in capital gains taxable under Article 13(JA) of India-Mauritius DTAA. Insofar as the tax residence status of the assessee, there is no dispute. The assessee is a registered Foreign Institution Investor. The assessee, during the period relating to assessment year under appeal, undertook transactions in currency derivatives and stock derivatives and claimed the gain on said transactions as not taxable in India. The Assessing Officer accepted that gain from currency derivatives is exempt under Clause 4 of Article 13 but held that gain on stock derivatives are covered by Clause 3A of Article 13, hence, taxable in India. [Para 6]  The Assessing Officer and the DRP have held trading in stock derivatives are the same as trading in shares, the underlying asset in trading of derivatives are the shares. The basic approach and understanding of the Assessing Officer and the DRP in treating transaction in stock derivatives akin to transaction of shares is faulty. The shares and derivatives having shares as underlying assets are two distinct assets. [Para 7]  In the case of Vanguard Funds Public Lad v. Asstt. CIT (International Taxation) [2025] 173 taxmann.com 321 (Mumbai Ink), where the assessee a Foreign Portfolio Investor earned short term capital gain on sale of rights entitlement (RE) of shares of Indian company claimed the same as not taxable under Article 13(6) of Indi Officer held that. RE and shares are closely related assets, hence any gain on transaction of RE would be taxable in India 13(6) of India Ireland DTAA, the Assessing under Article 13(5) of the DTAA. The issue travelled to the Tribunal. The Tribunal held that: “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 distinct and separate asset. Under the India-Ireland DTAA a derivative 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. 23. Hence, in our opinion, rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland.” The Tribunal concluded that shares and RE are separate and distinct assets. They fall under Articles 13(6) of India Ireland DTAA. Any gain on sale of RE would be taxable only in the state of residence. [Para 8]  A bare reading of clause JA of Article 13 dealing with 'Capital Gams' of India-Mauritius DTAA would show that it only refers to "shares". As explained above, Shares and Derivatives are two distinct and separate assets. Clause 4 makes it clear that any other property not mentioned in Clause 3A would be taxable in the State of residence. The provisions of Clause 31 and 4 of India Mauritius DTAA are pari materia to Clause 3 and 5 of India Ireland DTAA. [Para 9]  From the judicial precedent, 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 DIAA only refers to gains from alienation of shares. It does not in any manner include gain from trading of derivatives. The gains from trading of derivatives are covered by Clause 4 of Article 13, hence, taxable in the Country of residence. [Para 10]  Thus, in light of the facts discussed above, Tribunal finds merit in the submissions of the assessee. [Para 11].”

Considering the clear findings in favour of the assessee, indicating that stock derivatives and equity shares merit differential treatment, we respectfully follow that finding and decide the grounds 1 to 4 in favour of the assessee. The remaining grounds are consequential or general and thus, are not specifically adjudicated.

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: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI