India: Capital gains from trading of stock derivatives not taxable under Mauritius treaty (tribunal decision); other direct and indirect tax developments
Recent direct and indirect tax developments in India
The Delhi Bench of the Income Tax Appellate Tribunal recently held that capital gains earned by a Mauritius resident from trading in stock derivatives were not taxable in India under the India-Mauritius income tax treaty.
The tax authority argued that the taxpayer’s trading gains were taxable in India because the stock derivatives must be treated as "shares" under Article 13(3A) of the treaty, which gives India the right to tax gains from the alienation of shares in an Indian company.
The tribunal disagreed, emphasizing that stock derivatives are financial contracts that do not confer ownership rights and thus cannot be treated as "shares" under the treaty.
The case is: Estee India Fund v. ACIT (ITA No. 1955/Del/2025)
Read an April 2026 report prepared by the KPMG member firm in India, which also includes summaries of the following indirect and indirect tax developments:
- No virtual service permanent establishment (PE) under India-UK treaty: The Delhi Tribunal held that a service PE cannot be constituted in India without the physical presence of the service provider's employees. It rejected the concept of a "virtual service PE," stating that it cannot be read into the India-UK income tax treaty.
- Underwriting commission not fees for technical services (FTS): The Mumbai Tribunal held that an underwriting commission for an American Depositary Receipt/ Global Depositary Receipt (ADR/GDR) issue, paid to a UK-based underwriter, is not taxable as FTS. The tribunal reasoned that the commission was for the assurance of purchasing unsubscribed shares, which does not involve rendering a technical service.
- Assessment barred by time limit: The Bombay High Court held that when an assessment issue is remanded by the tribunal to the tax officer and the officer fails to pass a fresh assessment order within the statutory time limit, the tax authority is barred from raising any tax demand on that issue, and the income returned by the taxpayer must be accepted.
- GST not leviable on assignment of leasehold rights: The Bombay High Court held that the complete assignment of leasehold rights, which extinguishes the assignor's rights in the property, is not a supply of services subject to GST. The court noted the transaction was a sale and also had no connection to the furtherance of the petitioner's business.
- State GST authorities lack jurisdiction in transit: The Andhra Pradesh High Court ruled that state GST authorities cannot detain, seize, or confiscate goods that are in inter-state transit (i.e., when both the origin and destination are outside that state), as the state has no claim to the integrated GST (IGST) revenue from the transaction.