Capital Gains Exemption Under India-Singapore DTAA: A Landmark ITAT Mumbai Ruling
In a significant development, a Mumbai-based woman, classified as a tax resident of Singapore, sold her debt and equity mutual fund investments in India. She sought tax exemption on capital gains under Article 13 of the India-Singapore Double Taxation Avoidance Agreement (DTAA). However, her claim was initially rejected by the Indian tax department.
Challenge Before Dispute Resolution Panel
Undeterred, she escalated her case to the Dispute Resolution Panel (DRP), which upheld the tax department’s decision. This led her to further contest the ruling before the Income Tax Appellate Tribunal (ITAT) in Mumbai. The taxpayer’s legal argument highlighted a comparable case under the India-UAE DTAA, where ITAT Cochin granted capital gains relief to an Indian resident of the UAE. The taxpayer contended that a similar principle should apply to her situation.
ITAT Mumbai’s Favorable Ruling
The ITAT Mumbai meticulously examined the provisions of the India-Singapore DTAA and ultimately ruled in favor of the taxpayer, granting her the capital gains exemption. The esteemed legal representation included Dr. K Shivaram and Mr. Rahul Hakani, who effectively articulated her stance.
Chartered Accountant Suresh Surana provided insights to ET Wealth Online regarding this pertinent case (No. 174/MUM/2025, March 26, 2025). He noted that the taxpayer, during the assessment year 2022-23, earned short-term capital gains from the sale of Indian mutual fund units.
The Claim for Tax Exemption
In filing her income tax return in India, the taxpayer invoked Article 13 of the India-Singapore DTAA, arguing that her capital gains should only be taxable in Singapore. However, the Assessing Officer disagreed, asserting that the gains were subject to Indian tax due to the substantial value derived from Indian assets associated with the mutual fund units.
Legal Argument and Core Issue
The core issue before the ITAT was whether the capital gains for a Singapore tax resident, arising from the redemption of Indian mutual fund units, could be taxed in India or if they fell under the residuary clause of Article 13(5) of the India-Singapore DTAA. Surana clarified that Article 13(4) pertains specifically to gains from the transfer of shares, whereas Article 13(5) serves as a residuary provision encompassing gains from transactions not specifically addressed.
Distinction Between Mutual Funds and Shares
The ITAT Mumbai emphasized that mutual fund units should be understood as distinct from shares in a company. According to Indian law, mutual funds are established as trusts under SEBI regulations, not as corporations. Therefore, their units do not equate to shares under treaty definitions.
The Tribunal’s ruling also relied on established judicial precedents, referencing earlier decisions concerning similarly worded treaties, such as the India-Switzerland and India-UAE DTAAs, which consistently uphold that mutual fund units are not classified as “shares” for tax treaty purposes.
Conclusion
This landmark decision by ITAT Mumbai not only clarifies the tax implications for Singapore tax residents with Indian mutual fund investments but also strengthens the interpretation of the India-Singapore DTAA. The ruling, backed by thorough legal analysis and precedent, sets a vital precedent for future cases involving cross-border taxation of capital gains.