TaxTMI 
TaxTMI 
2025 (5) TMI 1870
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....International) Circle- 4(3)(1), Mumbai (In short 'the AO) for AY 2022-23. The issues contended by these assessee's through various grounds are tabulated as under: ITA No. 1277/Mum/2025 2. The assessee is a company incorporated in Ireland and is registered with Securities & Exchange Board of India (SEBI) as a Foreign Portfolio Investor (FTI). The assessee filed the return of income for AY 2022-23 on 21.10.2022 declaring a total income of Rs. 1,38,36,63,719/-. The return was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration the assessee has earned a Short Term Capital Gain (STCG) amounting to Rs. 5,88,31,056/- from the sale of rights entitlement of shares of Bharti Airtel Limited (BIL). The assessee has claimed the same as exempt under Article 13(6) of the India-Ireland DTAA. The Assessing Officer (AO) did not accept the exemption claimed by the assessee and held that the STCG on sale of rights entitlement is to be taxed as sale of shares under Article 13(5) of the India-Ireland DTAA. Accordingly, the AO made an addition towards the STCG as taxable in India. 3. The assessee during the year under consideration ....
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....ew of Article 13(5) of the Double Taxation Avoidance Agreement (DTAA) between India and Ireland (Treaty) and thereby chargeable to tax in India under the provisions of the Act, instead of the same being exempt under Article 13(6) of the Treaty, by virtue of being taxable only in Ireland." 3. The brief facts qua the issue involved 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 R....
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....the MLI since rights entitlement are linked to shares in origin and also in final conversion upon exercise of subscription. * Shareholder's eligibility to apply for the rights issue are closer to 'shares' under a broad interpretation of Article 13(5) than other property as per Article 13(6) - Shares have broader connotation and 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- Ire....
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.... whether can it be taxed in source state, that is, India. It has been argued before us on behalf of the assessee that there is a distinction between shares and rights entitlement under the companies and SEBI law. 7. First of all, our attention was drawn to Section 62 of the Companies Act, 2013 which for the sake of ready reference is reproduced hereunder:- "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, t....
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....at as per the Finance Act, 2004 "option in securities" has been defined to have the same meaning assigned to it in clause (d) of section 2 of the Securities Contracts (Regulation) Act. 1956 (SCRA). Clause (d) of section 2 of the SCRA defines "option in securities to mean purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, 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 existin....
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....es Article 13, paragraph 5, of the OECD Model Convention with a drafting adjustment replacing the words "in paragraphs 1 2 3 and 4" with "in paragraphs 1 2 3, 4 and 5 The Commentary on Article 13, paragraph 5 of the 2010 OECD Model Convention is therefore relevant mutatis mutandis, to paragraph 6." 18. However, it is seen that Article 13(4) & 13(5) of UN Model convention 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 Sta....
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....vertible debentures (OCDs) will continue to be governed by the existing provision of being taxed in Mauritius, said economic affairs secretary Shaktikanla Das. He said India had gained a source13 based taxation right only for shares (equity) under the treaty Residence-based taxation will continue for derivatives under the Mauritius pact Meaning nonequity securities would be 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 worl....
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....holding 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. 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 ....
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....egard, reliance is placed on decision of the Hon'ble Supreme Court of India in the case of Navin Jindal v. Assistant Commissioner of Income Tax[187 Taxmann 283 [2010], wherein it was held that" 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, 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 o....
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.... Companies Act, 2013, 'share' means a share in the share capital of a company and includes stock. Further, in terms of section 43 of the Companies Act, 2013, equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital. Accordingly, it can be appreciated that shares are the means through which equity capital is obtained, so shares 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 tradin....
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....n, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. Thus, these losses were therefore computed under the provisions of the Act, as in those earlier years, the assessee chose not to be governed by provisions of the treaty for those years but by the provisions of the Act. These provisions included the provisions of section 74 which deal with 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 ....
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.... to the orders of the authorities below. It is true that different rates of taxes have been provided u/s 115AD and 111A of the Act in respect of gains on non STT paid shares and STT paid shares but it is also a fact that u/s 70 of the Act, no chronology has been mentioned in respect of set off of losses nor there is any provision in the Act that losses of non-STT paid shares cannot be set off against the gains on STT paid shares. The decision of the Hon'ble High Court of Calcutta, is on this issue in ITA No. 812 of 2008; judgment dated 19/12/2008, wherein the Hon'ble High Court held as under:- "In Ground Nos.5 and 6 the assessee has objected to the mode of set off adopted by the Assessing Officer in assessing income from short term capital cases. During the year under consideration the assessee earned short term capital gain of Rs. 7,29,584/- in transaction in shares where security transaction tax was not paid and income was subject to tax at normal rate. The assessee also earned short term capital gain of Rs. 2,27,564/- in transaction in shares where security transaction tax was paid and income was eligible for concessional rate of tax under section 111A. The assessee also suffe....
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....ourt and the Circular of the Board dated 7.7.1955 since the principles laid down therein appeared to be fully applicable." The Commissioner of Income Tax (Appeals) therefore came to the conclusion in favour of the assessee. He further came to the conclusion that the disallowance has been made on presumption. In these circumstances, the order passed by the Commissioner of Income Tax and subsequent thereto, the Commissioner of Income Tax (Appeals) had already considered the case of the department and upheld the order passed by it. We have carefully considered the said question and in our considered opinion, there is no illegality or irregularity in respect of the order so passed by the learned Tribunal. We, accordingly, find that there is no reason to interfere with the order so passed by the learned Tribunal and further the order so passed by the learned Tribunal does not suffer from any illegality or irregularity and we find that no substantial question of law is involved in this appeal. Hence, we dismiss the appeal. 10. This view has been followed by the Co-ordinate Benches in JS Capital LLC in ITA No. 3396/Mum/2023, East Bridge capital Master Fund I Ltd. in ITA No. 2976/Mum....