TRC No Longer a Safe Harbour: ITAT Delhi's Ruling in Emerging India Focus Funds and Its Impact on FPI Treaty Claims

Overview

The Delhi Bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in the case of Emerging India Focus Funds Vs ACIT (ITAT Delhi) for Assessment Year 2023-24, touching upon two of the most contested areas in India's international tax landscape: the scope of Article 13(3A) of the India–Mauritius Double Taxation Avoidance Agreement (DTAA) as it applies to mutual fund units, and the continuing relevance—or limits—of a Tax Residence Certificate (TRC) as conclusive proof of treaty eligibility.

The decision navigates a careful path between two competing risks: allowing the Revenue to rewrite the plain language of treaty provisions on the one hand, and permitting an assessee to use procedural documentation to paper over genuine substance deficiencies on the other. The outcome has considerable practical significance for Foreign Portfolio Investors (FPIs) and Collective Investment Scheme (CIS) structures operating through Mauritius.

Background: The Treaty Framework and the Shifting Role of the TRC

The 2016 Protocol Amendment and Its Scope

India's taxation of capital gains arising to Mauritius-resident entities underwent a decisive transformation through the 2016 Protocol to the India–Mauritius DTAA. Following that amendment, gains from the alienation of shares acquired on or after April 1, 2017 became taxable in India under Article 13(3A). However, the Protocol left untouched the residuary provision under Article 13(4), which continues to vest exclusive taxing rights over other financial instruments—including mutual fund units, debt instruments, and derivatives—in the state of residence of the seller, i.e., Mauritius.

This demarcation has remained a persistent flashpoint in assessments of Mauritius-based FPIs that hold India-facing portfolios comprising equity-oriented mutual fund units alongside direct equity shares.

The Evolving Judicial Position on TRCs

Historically, the Supreme Court's ruling in Union of India Vs Azadi Bachao Andolan (Supreme Court) — [2003] 263 ITR 706, treated a valid TRC as effectively conclusive on the question of Mauritius residency and consequent treaty entitlement. That position has now been significantly qualified. The Supreme Court's ruling in Authority for Advance Rulings (Income-tax) Vs Tiger Global International II Holdings (Supreme Court) — [2026] 485 ITR 214 (SC); 15/01/2026, clarified that while a TRC remains an indispensable entry-level requirement for claiming treaty benefits, its existence does not foreclose the Revenue's ability to examine whether the arrangement constitutes an impermissible structure or lacks genuine commercial substance, particularly where anti-abuse or Limitation of Benefits (LOB) provisions are invoked.

The Delhi ITAT's ruling in the present case applies and elaborates upon the Tiger Global framework in a concrete factual setting involving regulatory collapse within an FPI's management chain.

The Assessee and the Dispute: Key Facts

Emerging India Focus Funds is a Mauritius-incorporated entity established on 19.05.2008, operating as a Collective Investment Scheme. It holds a valid Global Business License (GBL) issued by the Financial Services Commission, Mauritius (FSC) and is registered with SEBI as a Category-1 Foreign Portfolio Investor. Its investment activities are managed by 360 One Capital Pte Ltd., a Singapore-based entity, pursuant to an Investment Management Agreement dated 19.07.2019.

During AY 2023-24, the assessee earned capital gains of Rs. 289.16 crores from the redemption of units of equity-oriented mutual funds and declared these gains as exempt from Indian taxation under Article 13(4) of the India–Mauritius DTAA. The disputed additions aggregated to Rs. 259,10,11,117/-.

The Revenue's challenge to the exemption claim rested on two distinct grounds:

  1. Asset Reclassification: The Assessing Officer and the Dispute Resolution Panel held that because the underlying portfolio of the mutual funds consisted of at least 65% equities, the redemption of such units was economically equivalent to the alienation of shares and therefore fell within Article 13(3A) rather than Article 13(4).

  2. Treaty Disentitlement via Article 27A: The Revenue invoked the Limitation of Benefits clause under Article 27A of the DTAA on the basis that the FSC Mauritius had revoked the GBL of the assessee's 100% management shareholder, Emerging India Fund Management Ltd., with effect from 13.04.2022, following allegations of non-compliance with anti-money laundering regulations, accounting standards, and corporate governance norms. The revocation led SEBI to conclude that the assessee failed to meet the "fit and proper person" criteria under applicable regulations for the period from 13.10.2022 to 11.04.2023.

The final assessment order was passed on 16.01.2026 under Section 143(3)/144C(13) of the Income Tax Act, 1961, in pursuance of DRP directions dated 03.12.2025. The assessee also contested the erroneous application of a 15% rate on the additions (treating long-term gains as short-term), and the levy of interest of Rs. 14,42,98,584 under Section 234B of the Act.

ITAT's Analysis: Issue-Wise Examination

Issue 1 — Mutual Fund Units vs. Shares: The Reclassification Question

The Tribunal decisively rejected the Revenue's economic equivalence argument and affirmed that mutual fund units and corporate shares are legally distinct asset classes under Indian law. This conclusion was grounded in multiple layers of statutory analysis: