ITAT | Derivative Gains of Mauritius Resident Not Taxable in India

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Case Details: 3 Sigma Global Fund vs. ACIT, International - [2025] 176 taxmann.com 708 (Mumbai - Trib.) 

Judiciary and Counsel Details

• Ms. Padmavathy S., Accountant Member and
• Raj Kumar Chauhan, Judicial Member
• Bhaumik Goda, AR for the Appellant.
• Krishna Kumar, Sr. DR for the Respondent.

Fact of the Case

The assessee, a company incorporated in Mauritius, held a valid Global Business Licence and Tax Residency Certificate(TRC) issued by the Mauritius Revenue Authority. For the relevant assessment year, the assessee filed its return of income, declaring income from derivatives. The assessee claimed exemption under Article 13(4) of the India-Mauritius DTAA on income from derivatives.
Assessing Officer (AO) invoked article 13(3A) of the India-Mauritius DTAA, holding that derivatives were closely related to shares, denied the treaty benefit, and taxed the income in India. The Dispute Resolution Panel (DRP) upheld the taxation of derivative income in India under article 13(3A), treating it as akin to gains from shares.
The matter reached before the Mumbai Tribunal..

Tribunal Held

The Tribunal held that the term “shares” is defined under Section 2(84) of the Companies Act, which states that it is a share in the share capital of a company and includes stock. However, the term “derivatives” is not defined anywhere. The term “securities,” as defined under Section 2(81) of the Companies Act, includes derivatives. Therefore, it is clear that shares and derivatives are considered separate assets as per the Companies Act.
In general parlance, a derivative is a financial contract between parties whose value is derived from the changes in the value of underlying assets. The underlying assets can be in the form of shares, bonds, commodities like gold or silver, currencies, interest rates, and market indices.
A typical derivative contract involves an agreement between parties to buy/sell the underlying asset at a specific price on an agreed future date, thereby mitigating the risk of price fluctuations. It is a complex financial product that gets traded in the exchange or over the counter, and the investor earns profits or ends up making a loss without actually buying or selling the underlying asset.
The underlying asset can be anything, not just shares. To trade in derivatives, the investor need not own the underlying asset. The derivative contract, being a separate financial instrument, can be traded as is without buying or selling the underlying asset.
Therefore, it is clear that derivatives are assets that are different from shares. Accordingly, there is merit in the contention that gain from alienation of derivatives needs to be considered under Article 13(4) of the India-Mauritius DTAA. Thus, the gain arising from the transfer of derivatives was not taxable in India.

List Of Cases Reviewed

• Vanguard Emerging Markets Stock Index Fund v. Asstt. CIT (International Taxation) [2025] 172 taxmann.com 515 (Mum – Trib.) (para 12) followed.

List Of Cases Referred To

• Vanguard Emerging Markets Stock Index Fund v. Asstt. CIT (International Taxation) [2025] 172 taxmann.com 515 (Mum – Trib.) (para 7).