Is TRC a Fading Shield? Analytical Insights from ITAT’s Ruling in Emerging India Focus Funds

Emerging India Focus Funds Vs ACIT (ITAT Delhi)

Summary: The Delhi Bench of the Income Tax Appellate Tribunal examined the taxability of gains earned by Emerging India Focus Funds, a Mauritius-incorporated collective investment scheme and SEBI-registered foreign portfolio investor, on redemption of equity-oriented mutual fund units during AY 2023-24. The assessee reported gains of approximately ₹289.16 crore and claimed exemption under Article 13(4) of the India–Mauritius DTAA. The disputed additions aggregated to approximately ₹259.10 crore. The Revenue contended that equity-oriented mutual fund units were equivalent to shares covered by Article 13(3A) and questioned the fund’s treaty eligibility after the Mauritian regulator revoked the licence of its controlling management shareholder. Following its decision in the assessee’s own case for AY 2022-23, the Tribunal held that mutual fund units and corporate shares were legally distinct assets and that Article 13(3A) did not automatically cover redemption of mutual fund units. Nevertheless, applying the Supreme Court’s ruling in Authority for Advance Rulings (Income-tax) v. Tiger Global International II Holdings, the Tribunal held that a valid Tax Residence Certificate was not necessarily conclusive where relevant anti-abuse and commercial-substance questions arose. It also recognised that the Revenue could raise relevant factual arguments within the subject matter of the appeal, while respecting the limits on enhancing an assessment. The Tribunal found that the revocation of the management shareholder’s licence raised unresolved questions about who possessed authority to approve and implement investment and redemption decisions. It therefore restored treaty eligibility, Article 27A and related questions of management and substance to the Assessing Officer for fresh consideration after an adequate opportunity of hearing. The appeal was allowed for statistical purposes, without a final grant of treaty exemption.

1. Background of the Legal Framework & Treaty Ecosystem

The allocation of taxing rights between India and Mauritius underwent a monumental shift following the 2016 Protocol amendment to the Double Taxation Avoidance Agreement (DTAA). The amendment source-based the capital gains arising from the alienation of shares acquired on or after April 1, 2017. However, other financial instruments—such as mutual fund units, debt instruments, and derivatives—remained within the residual ambit of Article 13(4), granting exclusive taxing rights to the resident state (Mauritius).

Further, domestic tax landscape has long wrestled with the sanctity of the Tax Residence Certificate (TRC). While the landmark Supreme Court ruling in Azadi Bachao Andolan historically established the TRC as conclusive proof of residency and treaty eligibility, the recent Supreme court ruling in Authority for Advance Rulings (Income-tax) v. Tiger Global International II Holdings [2026] fundamentally pivoted this stance. The current judicial position mandates that while a TRC is a vital entry requirement, it does not bar the Revenue from piercing the corporate veil to unearth treaty shopping or lack of commercial substance if anti-abuse rules are triggered.

2. Summary of the Controversy

The Assessee, Emerging India Focus Funds, is a Mauritius-incorporated Collective Investment Scheme (CIS) holding a valid Global Business License (GBL) and registered with SEBI as a Category-1 Foreign Portfolio Investor (FPI). During the Assessment Year 2023-24, the Assessee realized capital gains worth ₹289.16 crores through the redemption of equity-oriented mutual fund units and claimed a complete tax exemption under Article 13(4) of the treaty.

The Revenue authorities (AO and DRP) denied this exemption via a two-pronged attack:

• Asset Reclassification: They reclassified the mutual fund units as “corporate shares” under Article 13(3A), arguing that because the underlying portfolio comprised over 65% equities, it was economically an indirect acquisition of shares.
• Treaty Disentitlement: They invoked Article 27A (Limitation of Benefits – LOB clause) to deny treaty access altogether. This invocation was triggered because the Financial Services Commission (FSC) Mauritius had revoked the license of the Assessee’s 100% management shareholder (Emerging India Fund Management Ltd.) due to money laundering infractions, leading SEBI to temporarily deem the Assessee as failing the “fit and proper person” criteria.

3. Critical Analysis of the ITAT Judgment & Interplay of Precedents

Reclassification of Mutual Funds vs. Shares

The Delhi ITAT firmly rejected the Revenue’s economic equivalence argument, relying on its coordinate bench precedent for AY 2022-23 and the Supreme Court’s celebrated ruling in Apollo Tyres Ltd. v. CIT [2002]. The Tribunal affirmed that under Indian jurisprudence (including the Companies Act, 2013 and SEBI Regulations, 1996), corporate shares and mutual fund units represent completely distinct asset classes. In the absence of a specific deeming fiction within the DTAA text, the 2016 Protocol’s focus on “shares” cannot be aggressively extended to encompass mutual fund units. Thus, the asset classification dispute was legally settled in favour of the Assessee.

Expansion of Tribunal Powers

A crucial procedural issue arose when the Departmental Representative introduced fresh factual pleas regarding the Assessee’s lack of local physical office, staff, and assets. The Assessee countered using Mohinder Singh Gill, arguing that an assessment order cannot be improved upon at the appellate stage by fresh reasoning.

However, the ITAT balanced this by invoking the Supreme Court’s ruling in Hukumchand Mills Ltd. v. CIT. The Tribunal held that its jurisdiction is bounded by the subject-matter of the appeal (which was treaty eligibility), rather than the narrow mechanics used by the lower authorities. Consequently, the Revenue as a respondent is legally permitted to adduce new evidence or draw alternate lines of inquiry from the existing record to defend its core case.

Deconstructing the Post-Tiger Global TRC Framework

The ITAT’s interpretation of the Tiger Global precedent bridges the gap between absolute treaty deference and aggressive tax enforcement:

Valid Mauritian TRC
│
▼
Mandatory Entry Gatekeeper ──► Does it block substance scrutiny? ──► NO.
│
▼
Revenue Seeks to Invoke Anti-Abuse/LOB
│
▼
Strict Burden of Proof ──► Revenue must concretely prove:

1. Control & decision-making lay elsewhere.

2. Structure constitutes an “impermissible arrangement”

The Tribunal clarified that Tiger Global does not establish a universal rule that the mere absence of physical offices or local employees automatically labels an entity a “paper conduit”. Because Collective Investment Schemes naturally outsource operational tasks to external Investment Managers (in this case, based in Singapore), a low local physical footprint is commercially logical.

However, the complete regulatory collapse of the Assessee’s management shareholder created a massive factual vacuum. The record failed to show who exercised the legal “controlling mind and will” or authorized multi-crore transactions while the manager’s license stood revoked. Citing Hareon Solar Singapore Pte. Ltd., the ITAT emphasized that substance must be actively demonstrated, leading it to remand the entire issue of treaty eligibility back to the Assessing Officer (AO) for a deep, factual inquiry.

4. Implications & The Way Forward for FPIs and CIS Structures

This ruling serves as an essential compliance blueprint for foreign funds operating in India:

• Substance is Continuous, Not Static: Holding regulatory licenses is no longer an absolute shield. Offshore funds must ensure that their management chains remain unbroken. If an outsourced manager faces regulatory action, contingency management shifts must be instantaneous and legally documented.
• Evidentiary Standard for Decision-Making: Funds must maintain meticulous corporate records within their jurisdiction of tax residence. This includes formal minutes of Board meetings, active local corporate resolutions, and distinct audit trails proving that key investment/redemption choices are debated and ratified by the resident board—not merely rubber-stamped from a third country.
• Drafting LOB Defense Defensively: When structure expenditures comfortably exceed minimum treaty thresholds, the active deployment of funds within the home jurisdiction must be clear, transparent, and legally attributable to operations.

5. Conclusion

The Delhi ITAT’s ruling is a balanced, legally sound interpretation that avoids two extremes: it stops the Revenue from rewording explicit treaty terms (arbitrarily turning mutual funds into shares), but refuses to let the Assessee hide behind a TRC when its core regulatory machinery has collapsed.

The era of relying purely on a TRC as a silver bullet against Indian tax assessments is officially over. Post-Tiger Global, international tax planning requires a proactive synthesis of legal form and operational substance. While the tax judiciary will respect legitimate asset distinctions and standard outsourced CIS frameworks, it will not tolerate a structural vacuum where the “controlling mind” cannot be identified. Moving forward, the ultimate test for any treaty claimant will be its ability to produce a robust, uncontaminated paper trail of local corporate governance.

Cases Discussed

• Authority for Advance Rulings (Income-tax) Vs Tiger Global International II Holdings (Supreme Court) — [2026] 485 ITR 214 (SC); 15/01/2026. Considered concerning the evidentiary effect of a TRC and the scrutiny of abusive arrangements.
• Hareon Solar Singapore Pte. Ltd. Vs DCIT (ITAT Delhi) — [2026] 183 taxmann.com 125; 30/01/2026. Discussed concerning evidence of operational substance and conduit-company allegations.
• Emerging India Focus Funds Vs ACIT (ITAT Delhi) — ITA No. 1963/Del/2025; 25/06/2025; AY 2022-23. Followed on the distinction between equity-oriented mutual fund units and shares under Article 13(3A).
• ACIT Vs Maven India Fund (ITAT Delhi) — [2024] 166 taxmann.com 198; 23/07/2024. Considered in light of the later Tiger Global judgment.
• Fidelity Business Services India (P.) Ltd. Vs ACIT (Karnataka High Court) — [2018] 257 Taxman 266. Discussed concerning the Tribunal’s power to examine aspects within the subject matter of an appeal.
• CIT Vs JSH (Mauritius) Ltd. (Bombay High Court) — [2017] 297 CTR 275. Cited by the assessee concerning cancellation of a global business licence and treaty eligibility.
• Sanmar Speciality Chemicals Ltd. Vs ITO (Madras High Court) — 256 Taxman 46. Cited regarding the limits on enhancement of assessment.
• Daimler India Commercial Vehicles (P.) Ltd. Vs DCIT (Madras High Court) — 416 ITR 343. Cited on the limits of appellate enhancement.
• PCIT Vs Symphony Marketing Solutions (P.) Ltd. (Delhi High Court) — [2019] 102 taxmann.com 680. Cited concerning the binding nature of DRP directions.
• ESPN Star Sports Mauritius S.N.C. ET Compagnie Vs Union of India (Delhi High Court) — 388 ITR 383. Cited regarding DRP directions.
• CIT Vs Hertz Chemicals Ltd. (Bombay High Court) — [2016] 386 ITR 39. Cited concerning the distinction between mutual fund units and shares.
• Indian Steel & Wire Products Ltd. Vs CIT (Calcutta High Court) — 208 ITR 740. Cited concerning additional pleas before the Tribunal.
• PCIT Vs Flextronics Technologies (India) (P.) Ltd. (Karnataka High Court) — [2023] 459 ITR 493. Cited regarding DRP directions.
• CIT Vs Sanmina SCI India (P.) Ltd. (Madras High Court) — 398 ITR 645. Cited regarding DRP directions.
• Mohinder Singh Gill Vs Chief Election Commissioner (Supreme Court) — (1978) 1 SCC 405. Cited by the assessee on the impermissibility of supplementing an administrative order’s reasons.
• MCorp Global (P.) Ltd. Vs CIT (Supreme Court) — 309 ITR 434. Cited on the Tribunal’s inability to enhance an assessment by taking away an existing benefit.
• Apollo Tyres Ltd. Vs CIT (Supreme Court) — [2002] 255 ITR 273. Cited concerning the distinct statutory treatment of units and shares.
• Hukumchand Mills Ltd. Vs CIT (Supreme Court) — [1967] 63 ITR 232. Applied for the Tribunal’s ability to consider relevant pleas within the subject matter of the appeal.
• Union of India Vs Azadi Bachao Andolan (Supreme Court) — [2003] 263 ITR 706. Discussed in the context of Mauritius treaty residence certificates and treaty benefits.

FULL TEXT OF THE ORIGINAL ORDER OF ITAT DELHI

The above captioned appeal is preferred by the assessee against the assessment order dated 16.01.2026, passed by Income Tax Department, Office of the Assistant Commissioner of Income Tax, Circle – International Tax 1(2)(2), Delhi (hereinafter referred to as ‘ld. AO), under section 143(3)/144C(13) of the Income Tax Act, 1961 (hereinafter ‘the Act’) in pursuance of directions of the ld. Dispute Resolution Panel-1, New Delhi (in short ‘ld. DRP’) dated 03.12.2025 pertaining to Assessment Year 2023-24.

2. Assessee has raised following grounds of appeal:

“1. That the impugned final assessment order, framed by the assessing officer (“AO”) in pursuance of the directions of the Dispute Resolution Panel (“DRP”) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 (“the Act”), is bad in law.

2. That the DRP/AO erred on facts and in law in not treating capital gains of Rs.134,13,14,625 earned on redemption of mutual funds to be exempt from tax in India in view of Article 13(4); instead the DRP/ AO erroneously held the same to be taxable in India under Article 13(3A) of the India Mauritius Double Tax Avoidance Agreement (“DTAA”) as capital gains derived from sale of shares.

3. That the DRP/ AO erred on facts and in law in not treating capital gains of Rs.124,96,96,492 earned on redemption of mutual funds to be exempt from tax in India in view of Article 13(4); instead the DRP/ AO erroneously invoked Article 27A to hold that assessee was ineligible to claim treaty benefits and that the capital gains so derived by the Assessee was taxable in India under Article 13(3A) of the DTAA.

4. Without prejudice to the above, in the final assessment order dated 16.01.2026 the AO made additions aggregating to Rs.259,10,11,117 as long term capital gains; however, in the computation sheet attached to the said order the AO erroneously taxed the capital gains at the higher rate of 15% – thereby wrongly treating entire capital gains as short term instead.

5. That the AO erred in facts and in law in incorrectly levying interest of Rs.14,42,98,584 under section 234B of the Act.

6. The Appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal.”

3. Brief facts of the case are that the assessee is a foreign company and tax resident of Mauritius. The Assessee, incorporated on 19.05.2008, is a company limited by shares having a valid Global Business License (‘GBL’) issued by Financial Services Commission Mauritius (‘FSC”) and is registered with SEBI as a Category 1 Foreign Portfolio Investor (FPI). The principal business of the Assessee is running of a Collective Investment Scheme (‘CIS’) which invests in a wide array of assets (i.e., equity, debt, mutual funds, other derivatives, etc.) in India to earn long-term capital appreciation. The investment activities of the Assessee are managed by its Investment Manager viz., 360 One Capital Pte Ltd. pursuant to an Investment Management Agreement dated 19.07.2019 [refer: Pgs.36 and 53 of the Doc. PB].

4. During the relevant AY, the Assessee earned capital gain of Rs.289.16 crores on redemption of units of equity-oriented mutual funds which were reported in the ITR and claimed to be exempt from tax in India as per Article 13(4) of the India-Mauritius DTAA [refer: Pg.67 of Doc. PB].

5. The DRP/AO, did not however, agree with the claim of exemption under Article 13(4) made by the Assessee and proceeded to tax said capital gains earned on redemption of units of mutual funds in the following manner:

a) Capital gain of Rs.134.13 crores earned from mutual funds acquired after 01.04.2017 (i.e., post amendment of DTAA) and hence, was liable to tax under Article 13(3A) of the DTAA [reasoning: identical disallowance made in previous AY, since the underlying asset of mutual fund was equity/ shares, the transaction would be covered by Art.13(3A) of DTAA] [refer: Pgs.19 and 45 of Apl. PB];

b) Capital gains of Rs.124.96 crores, although earned in respect of mutual funds acquired prior to 01.04.2017, were taxable under Article 13(3A) and could not be grandfathered under Article 13(4) and the limitation of benefits (‘LOB’) provision under Article 27A shall apply considering that GBL of Management Shareholder of the Assessee was cancelled w.e.f. 13.04.2022; the Assessee was effectively unmanaged and could not thus, have taken any management/business decisions] [refer: Pgs.22 and 46 pf Apl. PB).

6. Aggrieved the assessee is before us. The assessee has submitted a written arguments as follows:

Ground II-Units of Mutual funds are not ‘shares’: Art. 13(34) can not apply

(a) ‘Shares’ under Article 13(3A) cannot be equated with ‘units of mutual fund”. Issue squarely covered in favour of Assessee by judgment of this Tribunal in Assessee’s own case for immediately preceding AY (supra) which holds that under the DTAA ‘shares’ cannot be equated with ‘Mutual Funds’ case since:

(i) Article 13(3A) is confined to ‘shares’ which term is not defined in DTAA. Further Protocol to DTAA does not disturb allocation of taxing rights of other fiscal instruments like debentures, CCDs, hybrid instruments, etc.;

(ii) Meaning of ‘shares’ in DTAA would depend on Indian domestic law as a whole. U/s. 2(83) of Companies Act, 2013-shares’ represent the interest of a shareholder in the company measured for the purposes of rights/ liabilities connected with ownership;

(iii) ‘Securities’ is defined w/s. 2(h) of the Securities Contracts (Regulations) Act fo include shares, scrips, bonds, stocks, debentures, other marketable securities or a pooled investment vehicle’. S.2(da) of said Act, inter alia, defines ‘pooled investment vehicle to mean a fund established in the form of a trust (such as a Mutual Fund) and registered with SEBI, which raises/ collects monies from investors and invests the same as per the regulations prescribed by SEBI;

(iv) Thus, in Indian law while ‘shares’ are dealt extensively under Companies Act, 2013, Mutual Fund is established in the form of a trust and functions in accordance with (SEBI (Mutual Funds) Regulations, 1996; v) No possibility of rigging of price/ artificial appreciation of capital gains in Mutual Funds; whereas such a possibility cannot be ruled out in the case of shares;

(vi) In view thereof, under Indian law, ‘shares’ and ‘mutual funds are different types of securities having significant differences and implications;

(vii) Equity oriented Mutual Funds are merely a class of Mutual Funds. They may be treated at par with equity shares for grant of exemption or rate of taxations u/ss. 10(38) or 112 of the Act, but for the purposes of DTAA gains on sale of equity oriented mutual funds cannot be said to be ‘alienation of shares

(b) Argument that units of mutual funds cannot be equated with shares is duly supported by provisions of Explanation to section 73 of the Act as interpreted by Hon’ble apex Court in the case of Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC). S.73 of the Act provides for set off of losses in respect of speculation business; Explanation to said section 73, inter alia, provides that where any part of the business of a company consists of purchase/ sale of ‘shares’, then it shall be deemed that such company carries on speculation business. While interpreting whether the said deeming provision shall extend to sale and purchase of units of UTI, Hon’ble Supreme Court held that in the absence of any specific deeming provision considering units of UTI to be shares, section 73 of the Act cannot be applied to deem sale/purchase of units of UTI to be speculation business. Similar findings rendered by Hon’ble Bombay High Court in the case of CIT vs. Hertz Chemicals Ltd. [2016] 386 ITR 39 (Bom), viz., there is no specific provision deeming units of mutual funds to be shares under the Act or for any other purpose.

(c) There is a clear distinction between units of mutual funds and shares as emanating from section 94 of the Act which, inter alia, contains provisions with respect to dividend and bonus stripping. Section 94(7) applies to both ‘securities’ and ‘units’ and provides a separate applicable timeline of 3 months and 9 months, respectively in relation thereto. On the other hand, section 94(8) of the Act applied only in the context of units, prior to coming into effect of Finance Act, 2022, post which said provision was extended to securities as well. Further, even the Explanation to said section 94 provides for differing definitions of ‘securities’ [which includes ‘shares’] under clause (b) vis-à-vis ‘units’ as defined under clause (d) thereof.

(d) Although appeal has been filed by Department u/s. 260A of the Act against judgment of this Tribunal in Assessee’ own case for previous AY, the Hon’ble Delhi High Court has, vide order dated 03.12.2025, only issued notice and has not yet admitted said appeal.

Ground III – Article 27A has no application to present case

(e) There is no basis or warrant in law to bifurcate the taxability of mutual funds acquired prior to 01.04.2017 and post that date, once exemption under Article 13(4) of the DTAA applies with respect to capital gains on sale of units of mutual funds as a whole irrespective of the date of acquisition thereof.

(f) Though arguments made in support of ground II would mutatis-mutandis apply to this ground too, and entire capital gain on redemption of mutual fund of the Assessee would be exempt from tax in India under Article 13(4) of the DTAA, however, to controvert the averments of AO/DRP w.r.t. invocation of Article 27A of the DTAA, the Assessee on a without prejudice basis and strictly in the alternative submits as under:

(g) During relevant AY, the GBL of the Management Shareholder of the Assessee, i.e., EIFML was revoked by FSC, Mauritius w.e.f. 13.04.2022. Under the relevant SEBI regulations, the Assessee was required to intimate SEBI regarding disqualification of the Management Shareholder and change the Management Shareholder within 6 months.

(h) Admittedly, some delay occurred (which was purely incidental and unintentional owing to the time taken in obtaining requisite approvals at the local regulator level in Mauritius) in intimation of such disqualification and change of Management Shareholder by the Assessee due to which SEBI issued SCN calling upon the Assessee to show-cause why monetary penalty not be imposed with regard to such delay (from 13.04.2022 to 13.10.2022). Initially, the Assessee filed its reply to SCN but ultimately opted to compound the monetary penalty by filing a settlement application.

(i) The adjudicating officer appointed by SEBI was pleased to pass settlement order dated 18.11.2024 (refer Pgs. 107-109 of Doc. PB) whereby without adjudicating upon the guilt of the Assessee it was proposed that the case may be settled subject to deposit of Rs.64,35,000 by the Assessee, and the adjudication proceeding were disposed of. The settlement order merely settled the SCN issued for delay caused by the Assessee in intimating disqualification of as well as change of Management Shareholder by levying monetary penalty without adjudicating, one way or the other, the question whether the Assessee had defaulted and/or without restricting or prohibiting the Assessee from carrying out its business activities.

(j) Most importantly, at no point in the settlement and/ or regulatory proceedings by SEBI, any non-monetary penalty on the Assessee was proposed. Further, no restriction/ prohibition was imposed or even proposed against the Assessee (from dealing with or trading in securities/mutual funds/ etc.). Thus, the so-called SEBI proceedings relied upon by DRP/ AO are inconsequential and not determinative for the purposes of income tax treatment accorded to the Assessee and cannot extinguish its eligibility under the DTAA. It is pertinent to point out that GBL, FPI registration and TRC of the Assessee are all valid, operational and have not been revoked till date and that the Assessee continued to carry on its investment activities during the period in question.

(k) Moreover, in the FAO the DRP/AO misconstrued the role of Management Shareholder (who is akin to promoter shareholder) of the Assessee vis-à-vis the Investment Manager of the Assessee who advises/ assists in all investment-related decisions and had all requisite licenses/ registrations/ etc. In lieu of these management services, the Assessee pays considerable amount of management fees to the Investment Manager to secure its objective of long-term capital appreciation of its holdings [refer: Pg.33 of Doc. PB].

(l) Lastly, provisions of Article 27A of the DTAA do not apply in the present case inasmuch as – (i) Assessee has not claimed any benefit under Article 13(3B), rather has claimed entire capital gains to be exempt under Article 13(4); and (ii) Assessee has incurred operational expenditure in Mauritius which is much in excess of the minimum threshold requirements contemplated under (3) thereto, as is evident from Pg.33 of Doc. PB which clearly ousts invocation of Article 27A of the DTAA.

Ground IV-Capital Gain in the nature of long term (not short term)

(m) Once it is established (as demonstrated above) that the capital gain earned by the Assessee is exempt under Article 13(4) of the DTAA, then it is inconsequential whether such gain was long-term or short-term as both are exempt from tax in India under the DTAA.

(n) In any case, the defect of treating said capital gains as short term instead of long term, with respect to date(s) of acquisition and redemption of mutual funds, was pointed out by Assessee before the Assessing Officer by moving a rectification application under section 154 of the Act which continues to be pending till date.

7. Per contra, the Revenue has made written submissions as follows:

2. Ground no. 2 to 4 of the grounds of appeal of the assessee are related to non-taxability of capital gain of Rs. 259,10,11,347/-.

3. Assessee is in the appeal against final assessment order framed in pursuance of directions of DRP for treating capital gain of Rs. 134,13,14,625/- and Rs. 124,96,96,492/- arising from redemption of equity oriented mutual funds as taxable under Article 13(3A) against claim of assessee that the same is exempt under Article 13(4). Assessee has also appealed against invoking of Article 27A of India Mauritius DTAA to deny treaty benefit. Further, assessee has appealed against tax on Rs. 259,10,11,347/- as short-term capital gain instead of long-term capital gain.

4. Assessee is a foreign company and is a tax residence of Mauritius. During the year, it carried out investment activity in India in shares/debentures. It has filed ITR declaring income of Rs. 230/- and claiming exemption of Rs.259,10,11,347/-. Assessee is registered as FII with SEBI. In response to query during assessment proceedings, on page 2 of the assessment order, assessee submitted that it had earned non STT paid (special cases) short term capital gain of Rs. 259,10,11,347/- from investment in mutual funds. Assessee claimed that in view of section 115AD(1)(ii) of the I.T. Act and Article 13(4) the same was exempt from taxation.

5. AO observed that since assessee has made investment in equity oriented mutual funds, in which minimum equity investment was 65%, it was akin to investment in share market, although as an indirect instrument. AO contended that since assessee is acquiring equity based mutual funds it is effectively acquiring shares which fall under purview of Article 13A and hence is taxable and intent of the assessee was to take benefit from share market movement. Accordingly, AO added Rs. 385,76,35,779/- in hands of the assessee under Article 13(3A).

6. The matter travelled to DRP. DRP adjudicated the matter on the basis of legacy issue for AY 2022-23. In the order DRP quoted its AY 2022-23 order. DRP referred to explanation to Section 10(38) of the Act wherein equity-oriented funds are defined. DRP invoked doctrine of purposive construction to confirm the nature of equity-oriented funds having characteristics of equity shares. DRP made observations relating to SEBI order in case of the assessee dated 18.11.2024, in which it is mentioned that both business and investment license of immediate shareholder of the assessee, Emerging India Fund Management Ltd., had been revoked from 13.04.2022 on the allegations of non-compliance with regulations related to money laundering, and accounting/accounting standards, corporate governance and maintaining records of the clients and transactions. Assessee had 6 months’ time from 13.04.2022, date of revocation of license, to ensure that such person did not exercise any voting right and that such person divested their shareholding. However, However, Emerging India Fund Management Ltd. continued to be 100% shareholder and sole management shareholder of the assessee till April, 2023. Since, the shareholding company of the assessee was also 100% management shareholder of the assessee during the period, it was deduced by SEBI that during the period 13.10.2022, after lapse of stipulated 6 months, to 31.03.2022, management shareholder of the assessee was not allowed to invest or conduct any business. Emerging India Fund Management Ltd. is beneficial owner of the assessee. Before DRP Assessee informed that in May, 2022, Financial Services Commissions, Mauritius, had revoked the global business license of Emerging India Fund Management Ltd., the shareholder and management shareholder of the assessee, w.e.f. 13.04.2022. Assessee submitted that on account of time- consuming process of replacing management shareholder including approval Mauritius Regulatory Authorities, assessee could appoint a new management shareholder only on 11.04.2023, as against appointing it by 13.10.2022.Assessee further contended that regulatory proceedings before SEBI did not affect tax treatment and that assessee remained eligible for benefit under India Mauritius DTAA by the virtue of being tax resident of Mauritius and having a TRC. Assessee also submitted that, it went into a settlement agreement with SEBI, which imposed monetary penalty of Rs. 64,35,000/- but did not impose any non-monetary penalty such as restraining from accessing security market directly or indirectly for a specified period etc. It submitted that Article 27A did not apply to it as it does not apply to Article 13(3A) and 13(4), it only applies to Article 13(3B) of India Mauritius DTAA. On this issue, DRP held that assessee’s arguments mischaracterized the relationship between regulatory compliance, business operations and tax treaty eligibility. It observed that management shareholder is not just an administrative formality but represents controlling mind and will of the fund management entity. It had lost legal authority to conduct fund management activities, assessee became effectively unmanaged from a regulatory perspective and fund structure violated the fundamental requirements for lawful operations in the security market. It further observed that no legitimate business operations could not have been conducted without proper management over site because assessee failed the ‘fit & proper’ person criteria under SEBI regulations. The claim of assessee that paying settlement amount regularises the case, therefore there could be no tax implication is without merit. The SEBI settlement allows assessee to avoid ongoing penalties and future prosecution, but it does not retrospectively validate the non-compliance period. In other words, it did not restore business legitimacy for the period 13.10.2022 to 31.03.2023. It was further observed by the DRP that India Mauritius DTAA amendment vide Protocol of 2016 was specifically designed to prevent treaty shopping through Mauritius route and/or round tripping of Indian capital by shell entities. DRP held that capital gain of Rs. 259,10,11,347/-derived from alienation of shares were rightly added to the income of the assessee by the AO.

7. The most crucial evidence emerging from assessment order and DRP order in the case is revocation of Global Business License of holding company of the assessee, Emerging India Fund Management Ltd., by Govt. of Mauritius w.e.f. 13.04.2022, show cause notice of SEBI to the assessee dated 29.02.2024 and settlement order of SEBI dated 18.11.2024. In show cause notice of SEBI, it is mentioned that SEBI was in receipt of a news article dated 16.09.2023 which showed that Emerging India Focus Management Ltd. was the controlling shareholder of the assessee. It further stated that its business and investment license had been cancelled for allegations related to money laundering, accounting and auditing standards, corporate governance and maintaining records of clients and transactions. As per declaration of beneficial ownership to Designated Depository Participant (DDP), DBS India Ltd. assessee had declared Emerging India Focus Management Ltd. as its sole management shareholder (i.e. Beneficial Owner by control) having 100% shares. Vide e-mail dt. 14.04.2023 assessee had informed DDP that its management shareholding has changed w.ef. 11.04.2023.

8. The other crucial evidence is corrigendum to settlement order no. SO/BM/JR/2024-25/7916 of SEBI dated 19.11.2024 wherein it has been mentioned that para 3 of the settlement order will be read as follows-

“3. A show Cause Notice dated February 29, 2024 (hereinafter referred to as “SCN”) was issued to the Applicant in terms of the provisions of Rule 4(1) of the Adjudication Rules, calling upon the Applicant to show cause why an inquiry should not be held and penalty not be imposed, under sections 15(A)(b) and 15HB of the SEBI Act. The said SCN was issued to the Applicant on account of revocation of license of its controlling shareholder, viz., Emerging India Fund Management Limited, by Financial Services Commission, Mauritius, pursuant to which the Applicant was not in compliance with the ‘fit and proper’ criteria for the period from October 13, 2022 to April 11, 2023. Further, the Applicant failed to forthwith inform SEBI and the Designated Depository Participant about the aforesaid change in its eligibility status.”

9. It is seen that as per this order assessee was not fit and proper for conducting any business from 13.10.2022 to 31.03.2023. Even before this period from 13.04.2022 onwards assessec was not fit and proper for conducting business due to revocation of license of its management shareholder by Mauritius Govt. and order of Mauritius Govt. for replacing management shareholder, which was not complied by the assessee for the financial year under consideration. Since Emerging India Fund Management Pvt. Ltd. was the sole management shareholder of the assessee, and was under suspension for serious financial crimes, there was no authority to manage affairs of the assessee.

10. During physical hearing in the Hon’ble Court, assessee had first chance of presenting its case before the Hon’ble Bench and relied upon certain documents from the paper book to plead its case, which were not part of the assessment order. The same papers from the paper book were referred by the undersigned in her arguments during physical hearing. However, in written submissions dated 08.07.2026, assessee has claimed that undersigned introduced new allegations so as to mount a better case at appellant stage. This is factually incorrect since such documents, in open court, were first cited by the assessee, whereas undersigned only presented her rebuttal. The documents under reference here, as presented to the Hon’ble Bench during physical hearing as a rebuttal, are mentioned below:

(i) Page 25 of PB- It is seen that registered office of the assessee in Mauritius is the same as that of Administrator and Company Secretary of the assessee i.e. Apex House, Bank Street, Twenty-eight Cyber City, Ebene, 72201, Mauritius. Investment Manager of the assessee is 360 One Capital Pte Ltd., which is resident of Singapore and appears in annual report of 360 One group head quarter in Mumbai. Therefore, Assessee does not have its own office in Mauritius despite huge investments resulting in capital gain of Rs. 259,10,11,347/-. It is using office premise of its administrator and company secretary. The other entities mentioned here are also related to the assesee and are discussed in subsequent paras, which clearly shows that affairs of the assessee were closely held between group companies, ultimately leading to allegation related to money laundering etc. mentioned above in case of holding company of the assessee by Mauritius Govt.

(ii) Page 32 & 33 of PB – From Balance Sheet of the Assessee, as on 31.03.2023 it is seen that it does not have any physical assets, such as office space, furniture, computer and peripherals, vehicles etc. The only assets it possesses are financial assets. From P&L A/c of the assessee dated 31.03.2023, it is seen that the only expenses shown are management fee, legal and professional fee, bank charges, audit fee and brokerage fee. The total expenses are USD 244,876. There are no expenses related to office establishment such as salary, staff welfare expenses, electricity, rent, depreciation, local/international travel, hotel etc.

Assessee does not have any employee to whom salary is being paid. When read with page 53 of PB it is seen that expenses related to management fees have been paid to 360 One Capital Pte, related party of the assessee. It shows that assessee did not have genuine business establishment in Mauritius and control and management of the company did not lie with the company. In latest case of Hareon Solar Singapore (PE) Ltd. (2026) in para 9.6 Hon’ble ITAT, Delhi has dealt with this type of business establishment and held it to be a conduit company.

(iii) Page 38 of PB- Under head management of credit risk it is mentioned that “The Fund’s policy over credit risk is to minimise its exposure to counterparties with perceived higher risk of default by dealing only with counterparties meeting the credit risk standards set out in the Fund’s Private Placement Memorandum (‘PPM’).”

11. On page 2 of the DRP order there is mention of private placement memorandum. Private placements are investment offerings limited to a small pool of investors, and not open to the general investing public. A private placement differs from a public offering primarily in who can invest, regulatory oversight, and cost. Private Placements are generally Exempt from strict regulations by securities regulators (like the SEC and SEBI). In such cases Private Placement Memorandum are used for disclosures instead of a government-vetted prospectus while Public Offerings requires strict, extensive registration and approval and companies must file a comprehensive prospectus and publish regular audited financial statements. Thus not just the legal structure of the company closely held by sister concerns, but its investment structure is also such that there are no checks and balances.

(iv) Page 53 of PB- These are details of related party transactions and management agreement and other key contracts of the assessee. Here it is seen that, as mentioned above, investment manager and administrator are both related parties of the assessee. Investment manager is the front office which manages investment whereas administrator carries out back-office operations such as accounting.

12. From the above discussion, it is seen that the documents pointed out by the assessee from the paper book do not support its case, rather it supports case of the Department. It shows that assessee is a conduit entity, which has faced further troubles due to revocation of GBL license of its shareholder cum management shareholder by Govt. of Mauritius and corrigendum order of SEBI. As last fact finding authority, Hon’ble ITAT is well within its power to take all relevant documents into consideration for upholding law as well as justice.

13. To sum up, for the purpose of financial year under consideration, assessee is-

(i) A conduit entity as it does not have physical presence in Mauritius by way of office, employees, employee expenses for board meeting, travelling of board members, establishment expenses such as depreciation, computers &peripherals, employee welfare expenses etc. It is brought to kind notice that in case ofClifford Chance Pte Ltd. Hon’ble Delhi HC [2025] and Hon’ble ITAT in case of Ernst & Young (EMEIA) Services Ltd. [2026] has been held that there is no concept of virtual service PE in India is not possible under DTAAS. Going by the ratio decidendi in these cases, it is argued that a virtual office, without any physical presence in Mauritius, a known tax haven, is not possible under DTAA.

(ii) Its management and control does not lie in Mauritius.

(iii) During the year its management shareholder was not a legal person to manage its affairs from 13.04.2022 onwards, since its license had been suspended by Govt. of Mauritius on serious allegation of money laundering etc.

(iv) Assessee was not a ‘fit and proper’ person for conducting business from 13.10.2022 onwards.

14. In view of the above discussions and facts pointed out, as Hon’ble ITAT is the last fact-finding authority, it is humbly prayed that appeal of assessee may be dismissed on the basis of facts that merit denial of treaty benefits to the assessee.

15. In the assessment order and in submissions before AO, Assessee has taken recourse to its TRC from Mauritius Govt. for establishing eligibility under DTAA. In this regard, landmark judgement of Tiger Global International II Holdings passed by Hon’ble SC in January 2026, may kindly be taken note of which fundamentally alters the way TRC is required to be treated. It reverses the judgments of Hon’ble SC in in its own case of Azadi Bachao Andolan (2003) and Vodafone (2012). Hon’ble SC has ruled that IT Act had been amended to clarify that while a TRC is a necessary condition for claiming treaty benefits, it is not by itself conclusive. It has held that substance over form is to be taken into consideration in cases of double non taxation to prevent misuse of treaty benefits. Mauritius does not have capital gains tax. Any capital gains derived by individuals or corporations on the sale of assets (such as shares, securities, or cryptocurrency) are completely tax-exempt. It is humbly prayed that this may also be taken into account by the Hon’ble Bench at the time of adjudicating the case.

Issue of short-term capital gain versus long term capital gain

16. Ground of appeal no. 4 of the assessee is that AO has added the amount as long term capital gain, however, he has calculated it at 15% as short term capital gain. On page 67 of the PB, assessee has claimed short- term capital gain u/s 111A of Rs. 289,16,50,046/- as exempt under Article

13. However, from page 68 to 87 of PB, it is seen that the purchase date varies between May, 2015 to March, 2019. The total amount is Rs. 289,16,50,046/-. Had the assessee earned short-term capital gain, as claimed in the ITR, the shares would have been purchased within period of 12 months from the date of sale, which is not the case here. The supporting documents submitted by the assessee do not supports its claim made in the ITR, therefore, it is humbly prayed that this ground of appeal of the assessee may also be dismissed.

Issue of the case being a covered matter

17. The case of the assessee for AY 2022-23 was adjudicated upon and order was pronounced by Hon’ble ITAT, Delhi on 25.06.2025. Assesee has claimed that its case for present AY is squarely covered by this case. However, as discussed above the facts of the case for AY 2023-24 are different and assessee cannot claim it to be a covered matter.

8. Arguments of the Assessee in Rejoinder:

(a) Firstly, the legality/ validity of an assessment order has to be adjudged on the basis of the order passed by the AO and the reasoning assigned therein. The order of DRP/ AO cannot be improved upon by the Ld. D/R by introducing new allegations (which do not find mention in the FAO) so as to mount a better case at the appellate stage. In this regard reliance may be placed on Hon’ble Supreme Court judgment in the case of Mohinder Singh Gill vs. Chief Election Commissioner (1978) 1 SCC 405 wherein it was held that “when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of an affidavit or otherwise. Otherwise an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. Orders are not like old wine becoming better as they grow older” (emphasis supplied)

(b) The new/ revised argument sought to be made by the Ld. D/R viz. – DTAA does not apply and Revenue is empowered to question/ examine substance of Assessee’s existence in Mauritius to invoke the provisions of the Act (rather than the DTAA) was not the case set up by DRP/AO; thus, such a case/ argument cannot now be entertained/ adjudicated upon at the appellate stage by the Tribunal merely on the insistence of the Ld. D/R.

(c) The DRP/AO accepted the Assessee to be tax resident of Mauritius and entitled to Treaty benefits. The DRP/AO only sought to deny the exemption claimed under Article 13(4) and tax the same invoking Article 13(3A) in respect of mutual funds acquired post 01.04.2017. Insofar as capital gains on sale of mutual funds prior to 01.04.2017 (artificially bifurcated by the Revenue) are concerned, the DRP/ AO denied the exemption claimed in respect thereof under Article 13(4) and brought the same to tax under Article 13(3A) read with Article 27A of the DTAA.

(d) It is trite law that the Tribunal cannot take back the benefit granted by the AO (i.e., accepting the Assessee as tax resident of Mauritius and entitled to DTAA) or alter the entire complexion of the case on a ground/ reason which was not set up by the authorities below. In this regard, reliance is placed on Hon’ble Supreme Court judgments in the case of MCorp Global (P) Ltd vs CIT: 309 ITR 434 (SC) and Hukamchand Mills Ltd. vs. CIT: 63 ITR 232 (SC). Similarly, Hon’ble Madras High Court in the cases of Sanmar Speciality Chemicals Ltd vs ITO: 256 Taxman 46 (Mad) and Daimler India Commercial Vehicles (P) Ltd vs DCIT: 416 ITR 343 (Mad) held that the Tribunal has no power to enhance the assessment and take back benefits granted to the assessee by the AO. Reference may also be made to Hon’ble Calcutta High Court decision in Indian Steel & Wire Products Ltd. v. CIT: 208 ITR 740 (Cal), which held that an additional plea which altogether changes the complexion of the case as originally brought out by AO/ CIT(A) is not permissible to be raised at the appellate stage.

(e) It may be appreciated that the reliance placed by the Ld. D/R on Hon’ble Karnataka High Court judgment in Fidelity Business Services India (P.) Ltd. vs. ACIT [2018] 257 ITR 266 (Kar) is wholly misplaced as the said judgment is distinguishable/ not applicable to present case inasmuch as:

(i) In that case the subject matter of appeal before the Tribunal was “whether the transaction of buy-back of shares at an abnormally high price between related parties was taxable under the Act”. While adjudicating the said issue, Tribunal held that since the transaction took place before 01.06.2013, the DDT provisions inserted in section 115-QA of the Act would not apply;

(ii) However, the Tribunal (in that case) pointed out another aspect of the issue, which was subject matter of appeal, i.e., the buy-back transaction was between related parties, and it was at an abnormally high price not being the ALP; since this aspect was not examined by the lower authorities, the said aspect (of the issue subject matter of appeal before the Tribunal) was remanded back to the AO for examination;

(iii) While upholding the order of the Tribunal, Hon’ble Karnataka High Court specifically held that computation of FMV of shares bought back by the Assessee from its holding company was the subject matter of appeal, and therefore, the Tribunal could have directed the AO to analyze if the share price was artificially inflated beyond the FMV;

(iv) In the present case, the DRP/ AO though accepting that the Assessee was tax resident of Mauritius and entitled to the treaty benefit, did not however, agree with the claim of exemption under Article 13(4) made by the Assessee. Thus, the subject matter of the present appeal is limited to the issue “whether capital gain earned by Assessee on redemption of units of equity oriented mutual funds is taxable in India under the DTAA?”;

(v) What is sought to be done by the Ld. D/R at the appellate stage is to enlarge the scope of appeal way beyond the case set up by the DRP/AO. Further, such a plea advanced by the Respondent-Revenue seeks to completely change the complexion of the case. In that view of the matter, the attempt of the Respondent-Revenue is to seek directions from the Tribunal into aspects which are NOT the subject matter of the appeal filed by the Assessee.

(vi) For the aforesaid reasons, the judgment in Fidelity Business Services (supra), which categorically provides that fresh enquiry may be directed only qua aspects which are subject matter of appeal before the Tribunal is distinguishable and not applicable to the present case.

(f) Secondly, it is a well settled position of law that in terms of S.144(10) of the Act the DRP directions are binding on the AO [refer: ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India: 388 ITR 383(Del); PCIT v. Symphony Marketing Solutions (P.) Ltd.: [2019] 102 taxmann.com 680 (Del.); PCIT vs Flextronics Technologies (India) (P.) Ltd.: [2023] 459 ITR 493 (Kar.); CIT vs. Sanmina SCI India (P.) Ltd.: 398 ITR 645 (Mad)]. Admittedly, the arguments made by Ld. D/R before this Hon’ble Tribunal do not emanate from the directions issued by DRP. In fact, the DRP did not deny treaty eligibility, rather negatived the claim of exemption made by the Assessee under Article 13(4) and taxed capital gains under Article 13(3A) of the DTAA. In view of the above, the new and revised allegation of the Ld. D/R raised before the Tribunal for the first time, contrary to the binding directions of the DRP ought not to be considered by the Tribunal at the appellate stage.

(g) Thirdly and most importantly, even on merits, the case made out/ sought to be made out on behalf of Revenue is unsustainable since:

(i) Mere cancellation of GBL of the Management Shareholder of the Assessee is inconsequential and would not, in any way or shape, have any bearing on the treaty eligibility of the Assessee, more so when the Assessee continues to have a valid TRC, GBL and SEBI registration demonstrating that it was a genuine tax resident of Mauritius. Simply owing to some information regarding initiation of regulatory proceedings in the case of the Assessee premised on the cancellation of GBL of its management shareholder, which as a matter of record, was confined to imposition of monetary penalty and having no non-monetary implications, it cannot be concluded that treaty eligibility is to be denied to the Assessee. Moreover, there was no other adverse material on record justifying denial of benefits under the DTAA to the Assessee. In this regard, reliance may be placed on ACIT vs. Maven India Fund [2024] 166 taxmann.com 198 (Del Trib.) wherein it was held that a genuine tax resident of Mauritius cannot be denied treaty benefits simply on the basis of some inconclusive SEBI information;

(ii) The Hon’ble Bench had appreciated this submission of the Assessee during the course of hearing and had orally remarked that this argument/ issue is covered in favour of Assessee and against the Revenue by the judgment of Hon’ble Bombay High Court in CIT vs. JSH (Mauritius) Ltd. [2017] 297 CTR 275 (Bom) wherein it was, inter alia, held that mere cancellation of GBL will not disentitle an Assessee to claim benefits under the DTAA. Admittedly and undisputedly, the present case is not one where the GBL of the Assessee has been cancelled/ revoked, rather the GBL of the Management Shareholder of the Assessee was revoked which cannot determine Assessee’s eligibility under the DTAA and/ or the tax treatment of gains earned on redemption of units of mutual funds which is otherwise exempt under Article 13(4) of the DTAA.

(iii) Insofar as argument of Ld. D/R relating to no expenditure incurred on electricity, employee cost, infrastructure, etc. is concerned, the Assessee submits that such an argument is beyond jurisdiction and has been made without appreciating that the Assessee functions as a CIS wherein its primary function is to collect/ pool investments of various investors and utilize/ invest the same to earn long term capital appreciation. For the aforesaid purpose it has engaged the investment manager to whom considerable amount of management fees is paid. All employee cost, office related costs, electricity expenses, etc. are incurred not by the Assessee but by the Investment Manager. Thus, any argument of the Ld. D/R on the nature of expenses incurred/claimed by the Assessee being cited to deny treaty benefit is beyond jurisdiction, erroneous and without merit.

(iv) Similarly, the reliance placed by Ld. D/R on Hareon Solar Singapore (P.) Ltd. vs. DCIT [2026] 183 taxmann.com 125 (Del Trib.) is unmerited for that case decided the availability of treaty benefit, which is not in issue in the present case. Further, the said decision is wholly distinguishable on facts since in that case in addition to the fact that no conventional operational expenses were being incurred by the Assessee in Singapore, it was noted by the Tribunal that entire funding utilized by the Assessee to purchase CCDs was sourced from its parent entity having 100% shareholding of the Assessee (therein). In the present case, substantial funds were utilized by the Assessee to purchase equity oriented mutual funds, whereas the total share capital investment made by the Management Shareholder of the Assessee (who is alleged to be the beneficial owner) is only USD 100 [refer: Pg.32 of Doc. PB];

(v) It may also be appreciated that by no stretch of imagination/ argument can the Management shareholder of the Assessee be alleged to the beneficial owner for it is holding 100 management shares of USD 1 each of the Assessee since its inception in 2008; the Management Shareholder does not have the right to redeem such management shares and does not have any right to receive any dividends or participate in the profits/assets of the Assessee [refer: Pg.50 of Doc. PB]. Lastly, the right to receive profit share vests only with the holders of the redeemable participating shares who are the various investors contributing to the CIS of the Assessee [refer: Pg/32 of the Doc. PB]. It is the redeemable participating shareholders who hold the right to receive dividends, rights of redemption and right to receive capital on the occasion of winding up;

(h) Lastly, an inherently contradictory stand is adopted by the Ld. D/R by arguing that during the period when GBL of Management Shareholder of the Assessee was cancelled, though it could have purchased more units of mutual funds, it could not have taken the decision to sell/redeem the same.

8. In view of the aforesaid, the additions made by the DRP/ AO in the FAO are without merit and deserve to be deleted and the claim made by Assessee under Art. 13(4) of the DTAA deserved to be upheld/allowed in line with the judgment of this Hon’ble Tribunal in Assessee’s own case for the immediately preceding AY.

9. We have heard the rival submissions and have perused the materials on record. The admitted fact is that the assessee, M/s Emerging India Focus Funds (EIFF) is incorporated in Mauritius on 19.05.2008, holds a Tax Residence Certificate (TRC) of Mauritius dated 01.10.2022, valid from 05.06.2022 to 04.06.2023. The Assessee, was granted a category 1 Global Business Licence (‘GBL’) u/s 72(6) of the Financial Service Act 2007 of Mauritius issued by Financial Services Commission Mauritius (‘FSC”) which would remain valid unless suspended or revoked pursuant to section 74(6) or 74(5) of the Financial Service Act 2007. The assessee is also registered with SEBI as a Category 1 Foreign Portfolio Investor (FPI). Another undisputed fact is that the Financial Service Commission (FSC) had revoked the Licence of Emerging India Fund Management Ltd (EIFML), the controlling shareholder of the assessee, w.e.f. 13.04.2022. EIFML was also sole management shareholder and beneficial owner of the assessee holding 100% stake in the assessee. With effect from 11.04.2023, 90% of the management shareholding of the assessee were transferred to 360 One Capital Pte Ltd. and 10% of management shareholding of the assessee were held by EIFML.

10. The license of the controlling shareholder EIFML of the assessee was revoked with effect from April 13, 2022 and it had 6 months’ time to ensure that such person does not exercise any voting rights and that such person divests their holding within six months, a time period which was not availed. It was only on 14.04.2023, the assessee informed the Designated Depository Participant (DDP) that 90% management shareholding of the assessee are held by 360 One Capital Pte. Ltd and 10% management shareholding are held by EIFML. SEBI accordingly initiated penalty proceedings for not being in compliance with the ‘fit and proper person’ criteria and violations of regulation 22(1)(h) of FPI Regulations and clause 6 read with 3(b)(iii) of Schedule II and Regulation 7 of Intermediaries Regulations and clause 6 of the Third Schedule of Code of Conduct of Regulation 23 of FPI Regulations by assessee. Ultimately, the assessee settled the SEBI proceedings by paying a settlement amount of Rs 64,35,000/-

11. In such factual matrix, the issue for our adjudication is: i) whether the units of equity-oriented mutual funds and ‘shares’ are same for the purposes of taxation under Article 13(3A) of the DTAA or is exempt from taxation under Article 13(4) of DTAA; ii) whether the limitation of benefits (‘LOB’) provision under Article 27A apply considering that GBL of Management Shareholder of the Assessee was cancelled w.e.f. 13.04.2022 and the Assessee was effectively unmanaged and could not thus, have taken any management/business decisions, and iii) what is the effect of TRC and Article 27A of DTAA in terms of the decision of the hon’ble Supreme Court in the case of Authority for Advance Rulings (Income-tax) vs. Tiger Global International II Holdings [2026] 485 ITR 214 (SC)[15-01-2026]

12. The assessee has argued that it has redeemed units of mutual funds which are different from ‘shares’ as appearing in Article 13(3A) of DTAA and therefore Article 13(4) is applicable in its case and the entire capital gains is exempt. On the invocation of Article 27A of DTAA, the stand of the assessee is that the revocation of GBL of EIFML and settlement by SEBI are inconsequential and non-determinative for the purposes of Income Tax and can not extinguish its eligibility under the DTAA.

13. The assessee has further argued that during the proceedings before the ITAT, the Revenue is seeking to improve upon the case built up by the AO/DRP. The assessee argues that the Revenue arguments at this stage that DTAA does not apply and Revenue is empowered to question/examine substance of Assessee’s existence in Mauritius to invoke the provisions of the Act (rather than the DTAA), cannot now be entertained/adjudicated. It is the claim of the assessee that the DRP/AO accepted the Assessee to be tax resident of Mauritius and entitled to Treaty benefits. The DRP/AO only sought to deny the exemption claimed under Article 13(4) and tax the same invoking Article 13(3A) in respect of mutual funds acquired post 01.04.2017. Insofar as capital gains on sale of mutual funds prior to 01.04.2017 (artificially bifurcated by the Revenue) are concerned, the DRP/ AO denied the exemption claimed in respect thereof under Article 13(4) and brought the same to tax under Article 13(3A) read with Article 27A of the DTAA.

14. On the other hand, the Revenue has laid great emphasis on the fact that the Management Shareholder of the assessee i.e., EIFML, who held 100% of its share capital, had its GBL revoked on 13.04.2022 on the allegations of non-compliance with regulations related to money laundering, and accounting/accounting standards, corporate governance and maintaining records of the clients and transactions. Further, EIFML was not found in compliance with “fit and proper” criteria of SEBI regulations from 13.10.2022 to 11.04.2023 which led to penalty being levied on the assessee by the SEBI. All these activities rendered the Assessee unmanaged from a regulatory standpoint during the FY 2022-23.

15. The Revenue has further argued that the documents produced by the assessee during the course of arguments before the ITAT, such as page 25 of the paperbook itself, shows that the administrator, company secretary, investment manager of the Assessee are related parties and have same address which means that the assessee had no office in Mauritius. The balance sheet, as on 31.03.2023, of the assessee at Page 32 & 33 of paperbook showed no physical assets, such as office space, furniture, computer and peripherals, vehicles etc except financial assets. The P&L A/c of the assessee dated 31.03.2023, does not reflect any expenses related to office establishment such as salary, staff welfare expenses, electricity, rent, depreciation, local/international travel, hotel etc. Assessee does not have any employee to whom salary is being paid. The only expenses shown are management fee, legal and professional fee, bank charges, audit fee and brokerage fee, paid to 360 One Capital Pte, related party of the assessee. The Revenue stand is that such affairs of the company casts doubt as to the genuineness and substance of the Assessee in Mauritius and control and management of the company did not lie with the company and the company is a conduit company under Article 27A of the DTAA. The Revenue relied on Hareon Solar Singapore (PE) Ltd. (2026) in para 9.6 Hon’ble ITAT, Delhi has dealt with this type of business establishment and held it to be a conduit company. The Revenue further relied on Hon’ble Karnataka High Court judgment in Fidelity Business Services India (P.) Ltd. vs. ACIT [2018] 257 Taxman 266 (Kar) for the proposition that the issue regarding substance and existence of Assessee in Mauritius and availability of Treaty benefits, raised by the Revenue for the first time before the Tribunal, can be adjudicated by the Tribunal.

16. As far as the issue whether the gains from equity-oriented mutual-fund units fall within Article 13(3A) of the India-Mauritius DTAA is concerned, we respectfully follow the ITAT decision in the assessee’s own case in the AY 2022-23 wherein it has held in ITA No. 1963/Del/2025, order dated 25 June 2025 that units of equity oriented mutual-fund and shares are two separate type of securities; they are legally distinct instruments and the sale of units of equity oriented mutual fund is not alienation of shares for the purposes of Article 13(3A) the DTAA.

17. In so far as the reliance of Revenue on the decision of Supreme Court’s in AAR v. Tiger Global International II Holdings, [2026] 485 ITR 214 (SC) dated 15 January 2026, for the proposition that the assessee failed to meet the substance requirement in Mauritius, we are of the considered view that the Revenue cannot be precluded from applying the ratio of the said decision at this stage. The hon’ble Supreme Court inter alia held in Tiger Global that section 90(4) makes a TRC an eligibility condition but a TRC is not by itself conclusive evidence of residence and the Revenue authorities/courts can independently examine the relevant facts and examine abuse and substance where the statutory anti-abuse framework is attracted. Therefore, the Revenue is entitled, after Tiger Global, to contend that production of a Mauritian TRC is not the end of the inquiry. It must however be noted that the Court reiterated that the Revenue bears the burden of identifying and establishing abuse before resorting to substance-over-form/piercing the structure.

18. Though Tiger Global does not say that every Mauritius entity without employees or an independently leased office is a conduit nor does it hold that Article 27A automatically applies whenever physical presence is limited, it is incumbent upon the Revenue to show that absence of genuine residence/business substance brings the assessee under the ambit of Article 27A of DTAA. The Revenue has to provide evidence to show that the control or decision-making lied elsewhere and there was in existence of an impermissible arrangement which would deny the treaty relief. Before us, the Revenue, from the documents furnished by the assessee itself, has raised the issue of registered office shared with administrator/company secretary; no physical assets; management/legal/professional/audit/brokerage expenses; no salary or employee expenses; management fees paid to the related investment manager. These to our mind are relevant evidence as held by Hareon Solar Singapore Pte. Ltd. v. DCIT, Delhi ITAT, 30 January 2026 but they do not on their own establish a universal proposition that physical office is indispensable to treaty residence.

19. The assessee’s reliance on the decision in ACIT v. Maven India Fund, Delhi ITAT, 23 July 2024, predates Tiger Global and therefore must now be read alongside the Supreme Court’s 2026 ruling on the evidentiary significance of a TRC. The assessee has further relied on Mohinder Singh Gill for the proposition that an administrative/statutory order must stand or fall on the reasons contained in the order and cannot be retrospectively supplemented by fresh reasons, and further relied on MCorp Global, Hukumchand Mills and related authorities to say that ld DR cannot change the complexion of the assessment. In the factual matrix of the instant case, we are of the considered view however, that the Revenue before the Tribunal is not always confined to the precise reasoning adopted by the lower authority. The Supreme Court in Hukumchand Mills Ltd. v. CIT, 63 ITR 232, recognised substantial Tribunal power to consider a fresh plea raised by the Department as respondent, provided the Tribunal does not enhance the assessment and remains within the subject-matter of the appeal. The scope of the Tribunal is determined by the subject- matter of the appeal, not merely by the particular reasoning adopted below.

20. We find, in the instant case, that the DRP itself discussed the cancellation of the management shareholder’s GBL; loss of effective management; the regulatory consequences; treaty-shopping/LOB considerations and held that the assessee “having failed to maintain the substance requirements and regulatory compliance necessary for treaty benefit eligibility, the said capital gains are liable to be taxed in India under the Income Tax Act”. So the factual theme of treaty eligibility/management was already present. What is materially new is the ld DR’s reliance upon additional paper-book material such as absence of office/staff and the Tiger Global decision of Supreme Court. However, the case that assessee was sham/conduit, relying on Paper book documents furnished by the assessee, requires scrutiny. We further find that the licence of Emerging India Fund Management Ltd (EIFML), the controlling shareholder of the assessee as also sole management shareholder and beneficial owner of the assessee, was revoked w.e.f. 13.04.2022 and yet there is there is no clarity who possessed the legal authority to make, approve and implement investment/redemption decisions; whether there were Board approval; whether the Board actually met and approved investments/redemptions etc.

21. Nevertheless, the principle of natural justice requires that the assessee must be given an effective opportunity to meet and rebut the factual proposition; the documents relied upon; the legal provision invoked; the applicability of GAAR; the alleged tax-avoidance arrangement; the alleged absence of commercial substance. We accordingly set aside the issue of availing Treaty benefit; not falling within the ambit of Article 27A of DTAA and the relevance of materials produced before us as above, to the file of the AO for a fresh adjudication. The AO is directed to accord the assessee effective and adequate opportunity to explain its position. The grounds of appeal is decided in aforesaid terms.

22. In the result, the appeal in ITA(IT)A no 148/Del/2026 is allowed for statistical purposes.

Order pronounced in the open court on 29.09.2026