ITAT Mumbai’s Prashant Kothari Ruling: DTAA Clarity Powers Tax Planning for NRIs in Singapore

A Deep Dive into How Article 13 and Article 24 of India-Singapore DTAA Transform NRI Investment Strategy

The Mumbai Income Tax Appellate Tribunal's ruling in Prashant Kothari v. Income Tax Ward (June 2025) has emerged as a watershed moment in international tax jurisprudence, fundamentally reshaping how we understand the interplay between capital gains taxation and treaty interpretation for Non-Resident Indians. This case, alongside the related Anushka Sanjay Shah ruling, establishes crucial legal precedents that distinguish between exemption provisions and taxability provisions under Double Taxation Avoidance Agreements (DTAAs).

The Legal Foundation: Understanding the Case Architecture

The Prashant Kothari case represents more than just a favorable taxpayer outcome—it crystallizes decades of judicial evolution in treaty interpretation. The Mumbai ITAT's decision specifically addressed two fundamental questions that have plagued international tax practitioners: first, whether mutual fund units can be classified as "shares" under Article 13 of the India-Singapore DTAA, and second, whether the Limitation of Relief (LoR) provision under Article 24 applies to capital gains taxation rights allocated by treaty provisions.

Case Facts and Procedural History

Mr. Prashant Kothari, a Singapore tax resident, earned capital gains from the sale of shares in Indian companies during Assessment Year 2016-17. He claimed exemption under Article 13(4) of the pre-amended India-Singapore DTAA, which provided that gains from alienation of shares acquired before April 1, 2017, shall be taxable only in the country of residence (Singapore). The Assessing Officer denied this benefit by invoking Article 24(1) of the DTAA, arguing that treaty benefits were restricted to income actually remitted to or received in Singapore.

The Tribunal's Revolutionary Analysis: Taxability vs. Exemption

Distinguishing Between Legal Concepts

The Mumbai ITAT's most significant contribution lies in its categorical distinction between "exemption provisions" and "taxability provisions" within treaty architecture. The Tribunal held that Article 13(4) of the India-Singapore DTAA is not an exemption provision that grants relief from otherwise taxable income in India. Instead, it is a taxability provision that allocates taxation rights between contracting states based on residence.

This distinction is legally profound because it determines the applicability of Article 24(1)'s Limitation of Relief clause. The Tribunal established that Article 24(1) applies only when:

1. Income is either exempt from tax or taxed at a reduced rate in India under the DTAA provisions

2. The income is subject to tax on remittance or receipt basis in Singapore

Since Article 13(4) operates as a taxability provision rather than an exemption, the first condition remains unfulfilled, rendering Article 24(1) inapplicable.

The Parallel Mutual Fund Units Analysis

The related Anushka Sanjay Shah case provides complementary jurisprudence on mutual fund units. The Mumbai ITAT ruled that mutual fund units are fundamentally different from shares under Indian law and DTAA provisions. This distinction operates on multiple legal levels:

Regulatory Framework: Mutual funds in India are established as trusts under the Indian Trusts Act, 1882, and regulated by SEBI (Mutual Funds) Regulations, 1996. In contrast, shares are governed by the Companies Act, 2013.

Legal Rights: Shareholders enjoy voting rights, dividend entitlements, and company ownership stakes. Mutual fund unit holders possess beneficial interests in trust property without direct company ownership.

Tax Treatment: The Income Tax Act itself recognizes shares and mutual fund units differently across various provisions including Sections 2(42A), 111A, 112, and 112A.

Article 13 of India-Singapore DTAA: The Capital Gains Architecture

Pre-Amendment vs. Post-Amendment Framework

Understanding the Prashant Kothari ruling requires comprehension of the evolutionary nature of Article 13. The pre-amended treaty (applicable to Mr. Kothari's case) contained Article 13(4), which provided that gains from alienation of any property other than immovable property, permanent establishment assets, or international transport equipment shall be taxable only in the contracting state of which the alienator is a resident.

The current Article 13 structure includes:

• Article 13(4A): Shares acquired before April 1, 2017, remain taxable only in the residence state

• Article 13(4B): Shares acquired on or after April 1, 2017, may be taxed in the source state

• Article 13(5): Residual clause covering all other property, taxable only in the residence state

The Residual Clause: Gateway for Mutual Fund Units

The residual clause under Article 13(5) has become the legal sanctuary for mutual fund units. Since mutual fund units do not qualify as "shares" under the Companies Act definition and are not explicitly covered by specific treaty provisions, they fall under this residual clause. This classification ensures that capital gains from mutual fund units remain taxable only in the country of residence for Singapore tax residents.

Article 24: The Limitation of Relief Provision Decoded

Legal Structure and Conditions

Article 24(1) of the India-Singapore DTAA reads: "Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State".

The Two-Pronged Test

The Mumbai ITAT established a two-pronged cumulative test for Article 24(1) applicability:

1. Exemption/Reduced Rate Condition: The income must be exempt or taxed at a reduced rate in India under DTAA provisions

2. Receipt/Remittance Condition: The income must be subject to tax on a receipt or remittance basis in Singapore

Why Article 24 Failed in Prashant Kothari

The Tribunal's analysis revealed that Article 13(4) allocates taxation rights rather than providing exemptions. When a treaty provision states that gains "shall be taxable only in" the residence state, it creates a positive taxation right in Singapore while negating India's taxation authority. This differs fundamentally from exemption provisions that provide relief from otherwise applicable Indian taxation.

The Bombay High Court, in a related 2023 decision, reinforced this interpretation by holding that when Singapore authorities certify that capital gains would be taxed "without reference to the amount remitted or received in Singapore," Article 24(1) becomes inapplicable.

Comparative Jurisprudence: Building the Legal Edifice

Precedential Support

The Prashant Kothari decision builds upon established jurisprudence, including:

1. Citicorp Investment Bank (Singapore) Ltd: The Mumbai ITAT previously held that Article 24 limitations do not apply to capital gains taxable under Article 13(4)

2. D.B. International (Asia) Ltd: Established that capital gains provisions allocate taxation rights rather than provide exemptions

3. Various High Court decisions: Consistently supporting the distinction between taxability and exemption provisions

International Implications

The ruling's significance extends beyond India-Singapore relations. The legal principles established apply to DTAAs with multiple countries including UAE, Mauritius, Netherlands, Spain, and Portugal, where similar residual clauses exist.

Strategic Implications for NRI Investment Planning

Tax Planning Opportunities

The ruling creates significant tax arbitrage opportunities for NRIs in Singapore and other treaty countries. Since Singapore does not impose capital gains tax, Singapore residents investing in Indian mutual funds can achieve complete tax exemption on capital gains.

Compliance Considerations

NRIs seeking to benefit from these provisions must ensure:

1. Tax Residency Certificate (TRC) from Singapore authorities

2. Proper documentation of residence status

3. Strategic timing of investments and disposals

4. Treaty shopping compliance with anti-avoidance provisions

Future Legal and Policy Implications

Regulatory Response Expectations

The ruling may prompt legislative or administrative responses:

1. CBDT clarifications on treaty interpretation methodology

2. Potential treaty renegotiations to address perceived revenue losses

3. Enhanced scrutiny of NRI mutual fund investments

Judicial Evolution

The decision establishes interpretative principles that will influence future treaty cases:

1. Primacy of legal form over substance in treaty interpretation

2. Strict construction of limitation of relief provisions

3. Allocation-based approach to taxation rights

Conclusion: A New Paradigm in International Tax Law

The Prashant Kothari case represents a paradigm shift in international tax jurisprudence, establishing clear boundaries between exemption and taxability provisions while providing NRIs with significant tax planning opportunities. The decision's impact extends far beyond individual cases, influencing how courts interpret DTAAs and how tax administrators approach international taxation.

For tax practitioners, the ruling provides a roadmap for treaty interpretation that prioritizes legal precision over revenue protection. For NRIs, it opens new avenues for tax-efficient investment structures that comply with both domestic law and international treaties.

The case ultimately demonstrates that in international taxation, technical precision in treaty drafting and interpretation can create outcomes that favor taxpayers who understand and properly apply complex legal frameworks. As India continues to negotiate and renegotiate its tax treaties, the Prashant Kothari precedent will likely serve as a crucial reference point for balancing revenue protection with treaty obligation compliance.

This landmark ruling stands as a testament to the importance of meticulous legal analysis in international tax matters, where the interplay between domestic law and treaty provisions can create significant opportunities for informed taxpayers while challenging tax administrators to develop more sophisticated approaches to cross-border taxation.