Case Law Details
DCIT (International Taxation) Vs K.E. Faizal (ITAT Cochin)
Introduction: The case of DCIT (International Taxation) vs K.E. Faizal, adjudicated by the ITAT Cochin, revolves around the taxation of short-term capital gains (STCG) derived from the sale of units of equity-oriented mutual funds by a non-resident Indian (NRI) during the assessment year 2012-2013. The dispute primarily hinges on the interpretation of the India-UAE Double Taxation Avoidance Agreement (DTAA) regarding the taxability of such gains in India.
Detailed Analysis: The crux of the matter lies in determining whether the units of equity-oriented mutual funds can be considered as “shares” for the purpose of taxation under the provisions of Article 13 of the India-UAE Tax Treaty. The Tax Tribunal examined the relevant clauses of the treaty and scrutinized the definition of “shares” under Indian laws to ascertain the applicability of Article 13(4) or Article 13(5) to the case.
Article 13(4) of the Tax Treaty pertains to the taxation of gains from the alienation of shares in Indian companies, while Article 13(5) stipulates that gains from the sale of any property other than shares shall be taxable only in the contracting state of the alienator’s residence. The crucial question before the tribunal was whether units of mutual funds fall under the category of “shares” as defined by the treaty.
The tribunal relied on legal precedents and definitions provided under Indian laws, particularly the Companies Act, 2013, to discern the nature of mutual fund units. It concluded that mutual fund units do not qualify as “shares” under the Companies Act, as mutual funds are established as trusts, not companies. Additionally, the definition of “securities” under Indian regulations distinguishes between “shares” and “units of mutual funds,” further supporting the argument that they are distinct entities.
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