Article 13(4) and (5) of India-UAE DTAA – As Article 13(4) covered only gains from ‘share’, gains from ‘unit’ of mutual fund were subject to Article 13(5) under India-UAE DTAA

8. DCIT vs. K.E. Faizal ITA No.: 423/Coch/2018 A.Y.: 2012-13 Date of order: 8^th July, 2019

Article 13(4) and (5) of India-UAE DTAA –
As Article 13(4) covered only gains from ‘share’, gains from ‘unit’ of mutual
fund were subject to Article 13(5) under India-UAE DTAA

FACTS

The assessee was a
non-resident under the Act. He was located in UAE and qualified for benefit
under the India-UAE DTAA. During the relevant year he sold units of
equity-oriented mutual funds and derived short-term capital gain (STCG). The
assessee claimed that the STCG derived by him was not chargeable to tax in
India in terms of Article 13(5) of the India-UAE DTAA.

The AO noted that the underlying instrument of an equity-oriented mutual
fund was nothing but a ‘share’. Accordingly, the AO held that in terms of
Article 13(4) of the India-UAE DTAA, STCG was chargeable to tax in India.

The CIT(A) held
that the units were not ‘shares’. Hence, in terms of Article 13(5) of the
India-UAE DTAA, STCG from units was not chargeable to tax in India.

____________________________________________

3.  CIT vs. Tata Autocomp Systems Ltd. [2015] 56
taxmann.com 206/230 taxman 649/374 ITR 516; CIT vs. Great Eastern Shipping Co
Ltd. [2018] 301 CTR 642

HELD

(a)         Article 13(4) of the
India-UAE DTAA provides that income arising to a resident of the UAE from the
transfer of shares in an Indian company other than those specifically covered
within the ambit of other paragraphs of Article 13, may be taxed in India.
Article 13(5) provides that income arising to such a resident from transfer of
property, other than shares in an Indian company, is liable to tax only in the
UAE.

(b)   Article 13(4) covers within
its purview capital gains arising from transfer of ‘shares’ and not any other
property. Therefore, units of a mutual fund could be covered under Article
13(4) only if they could be considered as shares.

(c)   Since the DTAA does not define
‘share’ in terms of Article 3(2), the definition under the Companies Act, 2013
should be referred. Further, as per SEBI regulations, a mutual fund can be
established only as a ‘trust’. Therefore, the units issued by an Indian mutual
fund could not be considered a ‘share’.

(d)   Under the Securities Contract
(Regulation) Act, 1956 a ‘security’ is defined to include inter alia
shares, scrips, stocks, bonds, debentures, debenture stock or other body
corporate and units or any other such instrument issued to the investors under
any mutual fund scheme.

(e)   From the definition of
‘securities’, it is clear that ‘share’ and ‘unit of a mutual fund’ are two
separate types of securities. Hence, gains arising from transfer of units of a
mutual fund would not be covered within the ambit of Article 13(4).
Consequently, it would be covered under Article 13(5).

(f)    Therefore, the assessee was
not liable to tax in India in respect of STCG arising from the sale of units.  

ERRATA: In BCAJ September, 2019
issue in the feature TRIBUNAL AND AAR INTERNATIONAL TAX DECISIONS, on page 58
in the 2^nd paragraph under ‘HELD – PAYMENT FOR SIMULATOR’, the last
line should read as ‘Hence, the charges paid by the assessee for use of
simulator were not “royalty”. It may be noted that while the catch notes (page
57) correctly mentioned ‘not’, inadvertently the word ‘not’ was omitted in the
gist.