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TMI Blog2025 (3) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... the underlying equity but it is a well-established principle that the derivative contract is a distinct and separate asset. Under the India-Ireland DTAA a derivative deriving its value from underlying equity would not be subject to tax in India u/Article 13(6). Likewise rights entitlement which is granted on account of shareholding cannot be regarded as being the same as shares especially since the rights shares are allotted, only on subscription. The rights entitlement, being a distinct asset, may be sold lapsed or subscribed and thus, akin to derivatives, ought to be not subject to tax under Article 13(6) of the India-Ireland DTAA. Similarly, the investor can either sell the rights entitlement option or exercise the option to get shares or decline the offer for shares. Hence, in our opinion, rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland. As per explanation given by the ld. Counsel and the view taken by the ld. DRP to hold that rights entitlement shares and the shares are closely related assets; we are in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed are that the assessee (in short VFEME) is a fund organized as a company in Ireland and is a tax resident of Ireland. It is registered with Securities and Exchange Board of India as a Foreign Portfolio Investor (FPI). VFEME invests in Indian capital markets in accordance with the SEBI resolutions and during the relevant Financial Year it has earned income from capital gain, dividend and interest. The ld. AO in his draft assessment order has noted that assessee has claimed short term capital gains of Rs. 6,53,28,217/-, which assessee has claimed as exempt under Article 13(6) of India-Ireland DTAA which provides that gains from transfer/alienation of any property other than those mentioned in Articles 13(1) to 13(5) shall be taxable only in Ireland. The case of the Assessing Officer that assessee has not set off the same against short term capital loss of Rs. (42,95,53,754)/- which has been carried forward to the next year. He held that as per the provision of Section 70 / 71 of the Act the current year capital losses are to be set off against current year capital gains as per the manner specified therein and as per the provision of Section 74 of the Act, the brought forward losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d meaning than 'equity' and stand for tradable securities related to the underlying company: * Differentiation between separate International Securities Identification Number (ISIN') assigned to rights entitlement is necessary because their base price is significantly different from the current market price of the equity shares. 5. We have heard both the parties at length and also perused the relevant finding given in the impugned order. The moot question before us is, whether capital gain earned from sale of "rights entitlement" can be claimed as exempt under Article 13(6) of India-Ireland DTAA which provides that gains from transfer / alienation of any property other than those mentioned in Articles 13(1) to 13(5) shall be taxable only in Ireland. For the sake of ready reference, the relevant Article 13 of India-Ireland DTAA prior to modification by the MLI which deals with the capital gains reads as under:- 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the offer Contracting State may also be taxed in that other State 2. Gains from the alienation of movable property formi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "62. Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares such shares shall be offered 1. (a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion. as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely (1) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days 1 for such lesser number of days as may be prescribed) and not exceeding thirty days from the date of the offer within which the offer if not accepted shall be deemed to have been declined, (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favours of any other person, and the notice referred to in clause (1) shall contain a statement of this right; (ii) after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and includes a teji, a mandi, a taji mandi, a galli, a put, a call or a put and call in securities. Accordingly, it has been submitted that rights entitlement is an option to purchase a security (which could be shares of an Indian company) in the future. Further, the prescribed rate of STT on purchase of equity shares is different, which clearly evidences that rights, entitlement is not the same as shares. 12. In support of the contention that rights entitlement are different from the shares, Ld. Counsel for the assessee had strongly placed reliance on the judgment of the Hon'ble Supreme Court in the case of Navin Jindal v. Assistant Commissioner of Income Tax[187 Taxmann 283 [2010], wherein it was held as under:- "The right to subscribe to additional offer of shares/debentures on right basis on the strength of existing shareholding in the company comes into existence when the company decides to come out with the rights offer. Prior to that, such right, though embedded in the original shareholding, yet remains inchoate. The same crystallizes only when the rights offer is announced by the company. The said right to subscribe to additional shares/debentures is a distinct, indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion were amended in 2017 to expand their scope to include "other comparable interests" apart from shares. However, Article 13(5) of India-Ireland DTAA does not contain the mention of "other comparable interest" either in para 4 or para 5 of Article 13. 19. Now pursuant to introduction of MLI, India-Ireland DTAA was amended in the year 2019 and reference to "comparable interest" was included in Article 13(4) and not in Article 13(5). For the sake of ready reference Article 13(4) and Article 13(5) before the introduction of MLI and post introduction of MLI is as under:- Before amendment in 2019. 13(4). Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. 13(5). Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State. After amendment in 2019: 13(4). Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed in Mauritius if routed through there. But Mauritius does not have a short-term capital gains tax which would mean that investors using these instruments would continue to escape paying taxes in both countries. "There are three categories of instruments which arise between two countries-shares, immovable assets, and other instruments, including derivatives," he explained. "Insofar as shares are concerned, they are covered by the new agreement. As regards immovable property, all along the right to taxation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right. With regard to other instruments, "the right to tax is always in that country. There cannot be a change that is the position all over the world". "It is their country's decision The right to tax is with that country with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement), It is for that country to decide whether it wants to tax at 10, 20, or zero per cent (And) Just because some country has made it zero, I can't say I will tax, he furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option or exercise the option to get shares or decline the offer for shares. 24. Hence, in our opinion, rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland. 25. In so far as various observations of the ld.DRP to hold that rights entitlement is share only, point-wise rebuttal has been given by the ld. Counsel before us which for the sake of ready reference is reproduced herein below:- Sr. No. Revenue's Arguments Appellant's rebuttal 1 Rights entitlement and shares are closely related assets. It has been alleged that shares and rights entitlement pertain to share capital on the basis that the rights entitlements are securities that gives existing shareholders the right to buy additional company shares and increase their ownership in the company and therefore, a rights entitlement is a security that gives existing shareholders the right to buy additional company shares at a discounted price which is bonus for shareholders. The lower authorities have failed to appreciate that Section 62 of the Companies Act, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffer. Prior to that, such right, though embedded in the original shareholding, yet remains inchoate. The same crystallizes only when the rights offer is announced by the company. ..... The said right to subscribe to additional shares/debentures is a distinct, independent and separate right, capable of being transferred independently of the existing shareholding, on the strength of which such rights are offered." Based on the above decision, it is clear that rights entitlement is an asset distinct from shares of an Indian company, notwithstanding that the rights entitlement stems from shareholding of an Indian company. The allegation of the learned AO that rights entitlement is not an asset 'other than' a share is without merit. Reliance is also placed on the Commentary on Article 13 of the Model Tax Convention on Income and on Capital 2017, issued by the OECD. Relevant extract is provided below: "Paragraph 5 29. As regards gains from the alienation of any property other than referred to in paragraphs 1, 2, 3, and 4, paragraph 5 provides that they are only taxable in the State in which the alienator is resident. History Amended when the 1977 Model Convention was adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be broader than equity capital. Equity capital refers to the total amount invested in the company through the issuance of shares, while shares are the units of ownership that represent this investment. Further, the lower authorities have failed to appreciate that the SEBI Circular provides that "REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date". Thus, it is clear that what is credited to the demat account of the investor is an asset, being rights entitlement, which is different from shares of the company. Further, the learned AO has not taken cognizance of the NSE circular referred by the Appellant which specifically clarifies that trading in dematerialized rights entitlements on the stock exchanges shall be chargeable to STT at the rate specified in Finance (No.2) Act, 2004, in respect of 'Sale of an option in securities' (i.e. payable by the seller at the rate of 0.05% of the value at which such rights entitlements are traded). Further, the prescribed rate of STT on purchase of equity shares is different, which clearly evidences tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry forward and set-off of these losses. The capital gain as per the Indian Mauritius DTAA is taxable in the resident country and the source country has given up its rights to tax the income. The Question of computation in the source country does not therefore arise. Accordingly, the income from capital gains is not taxable in India as per article 13(4) DTAA and accordingly, the mode of computation income in India as the source country will not arise. If the particular income is not to be taxed at all, the question of including the same under the total income and determining the taxability on the same will not arise and the contention of revenue that the total income as per Act is to be calculated to determine the tax liability and thereafter, the benefit is to be given cannot upheld. Accordingly, it is held that the tosses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in Question for the reason that once the assessee has chosen the benefit of DTAA. then the capital gain is not at all taxable in India and therefore, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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