VANGUARD EMERGING MARKETS STOCK INDEX FUND A SERIES OF VIEF,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)-4(3)(1), MUMBAI

We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee's own case has considered the similar issue where it has been held that “2. The only issue which has been argued before us is with respect to ground No.5, i.e., taxation of short term capital gain on sale of „rights entitlement‟. For the sake of ready reference ground of appeal

However, the ld. DRP held that rights entitlement (RE) and shares (equity) are closely related assets. In sum and substance, the directions and the observations / finding of the ld. DRP can be summarized in the following manner:-  Rights entitlement are a discount on equity shares;  Shares represent ownership in the company whilst right entitlements are the rights given to existing shareholders to buy new shares in a right issue. By exercising their right entitlements, shareholders can subscribe to the new shares and increase their ownership in the company.  Right entitlement are like bonus for existing shareholders;  The assessee has the option to buy the equity shares at a discounted price or sell the rights entitlement:  Rights entitlement by virtue of it being able to be used to `purchase shares at a discount, is a part equity share. Further, rights entitlement can only be used to buy the company's shares at a discounted price and hence, source and application are for shares only.  Merely because the holder of rights entitlement is not entitled to receive dividend does not have any bearing on its nature being that of a share since the dividend entitlement is available only when shares are fully subscribed. Shares and rights entitlements are exactly similar assets and the rights embedded therein may be slightly different.  Shares as per Article 13(5) can be given a broad interpretation to include similar or comparable interest in light of Article 13(4) as amended by 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.

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:-

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 forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or with the whole enterprise) or of such fired base, may also be taxed in that other State. 3. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State 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 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. 6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident." 6. Para 5 of Article 13 provides that taxability of gains from alienation of shares in a company which is resident of that contracting state may be taxed in that contracting state. For example, if a resident of Ireland State sells shares of a Company in India then it may be taxed in India, that is, the source state. Article 13(6) on the contrary is applicable to the gains from the alienation of any property other than those referred to in para 1 to para 5 of the Article 13, which is taxable only in the resident state. The issue before is, whether rights entitlement is akin to shares and whether shares and rights entitlements are exactly similar assets? And if they are not in nature of shares then 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.

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, independent and separate right, capable of being transferred independently of the existing shareholding, on the strength of which such rights are offered.”

Our attention was also drawn to para 30 of OECD Model Tax Convention on Income & on Capital, 2017 wherein, it has been brought that gains from alienation of capital assets not covered elsewhere are taxable in the country of residence. The relevant extract of para 30 reads as under:- “30. The Article does not contain special rules for gains from the alienation of shares in a company (other than shares of a company dealt with in paragraph 4) or of securities bonds debentures and the like. Such gains are therefore taxable only in the State of which the alienator is a resident.” Similarly, para 17 of UN Model Double Taxation Convention, 2017 had reiterated the same OECD commentary in the following manner:- 17. This paragraph reproduces 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.”

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.

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.

Thus, the two contracting states even while making the amendment post introduction of MLI have not included “comparable interest” in Article 13(5) which clearly indicate that Article 13(5) of India-Ireland DTAA only reference to share of a company and even Article 13(4) specifically defined “comparable interest” to include interest in partnership or trust. Thus, the rights entitlements are not included in Article 13(5) even after its amendment in 2019 post MLI. Accordingly, we are in tandem with the arguments of the ld. Counsel that rights entitlement does not fall within the ambit of alienation of shares.

To buttress this point of distinction, ld. Counsel for the assessee referred to clarification issued by the then Economic Affairs Secretary in respect of amendment to the India-Mauritius DTAA. In 2016, the India-Mauritius DTAA was amended which re-allocated the taxation rights in respect of sale of shares between India and Mauritius. Pursuant to the amendment, India gained rights to tax gains arising on sale of share of Indian companies. At the time some ambiguity was perceived with regards to applicability of the amended provisions to gains arising on sale of other capital assets. The Government's stand was clarified by then Economic Affairs Secretary Mr. Shaktikanta Das to ‘Business Standard’ news paper which has been quoted verbatim in an news article dated 21 August 2015, reproduced as under:- "Derivatives and other forms of securities, such as compulsory convertible debentures (CCDs) and optionally convertible 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 source- 13 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors based taxation right only for shares (equity) under the treaty Residence-based taxation will continue for derivatives under the Mauritius pact Meaning non- equity 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 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 further clarified"

Accordingly, it has been argued before us that even the stand of Government of India (through its Secretary in press) is that shares would cover “shares of Indian Company” and not derivatives & other securities. Accordingly, gain on alienation of securities other than shares would continue to be taxed in the resident country and not in India. The aforesaid clarification, clarifying the stand of the Government of India, if we look from the perspective of the distinction between the shares and other securities, then for the purpose of the present case, the rights entitlement which is distinct from shares can be taken as a guidance to see the intention of the Government while negotiating or amending the Articles of DTAA.

It is also a well settled proposition of law if any term has not been defined under the Act or treaty; the same is to be understood as per the domestic legislation in view of Section 90(3) of the Act as well as Article 3(2) of India-Ireland DTAA. It states that where the term has not been defined under the treaty, the meaning under the domestic tax legislation is to be adopted. Further, where the term has not been defined in domestic tax legislation also it is a general meaning is to be adopted. We find that the definition of shares even in Section 2(84) of the Companies Act, 2013 provides a restrictive definition of shares to mean a share in the share capital of a company and includes stock. Otherwise also an asset, which may come into existence or derive its value from another underlying asset, cannot be regarded as being same as the original asset. An analogy may be drawn to a ‘derivative’, which may derive its value from 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 14 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors India under 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.

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 Appellant’s rebuttal Arguments 1 Rights entitlement It has been alleged that shares and rights and shares are entitlement pertain to share capital on the basis closely related that the rights entitlements are securities that assets. 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, 2013 provides that "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 favour of any other person." It is evident that a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian company. In terms of section 62 of the Companies Act, 2013, a shareholder obtains an exercisable right to subscribe to shares which is different from 15 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors shares in the Indian company. 2 Shares as per Article 13(6) of the India-Ireland DTAA between Paragraph 5 of India and Ireland refers to property 'any Article 13 can be property other than that referred to in given a broad paragraphs 1, 2, 3, 4 and 5'. interpretation to We submit that clauses (1) to (5) of Article 13 is include similar or not applicable: 'comparable 13(1) - Not applicable as it deals with interests' [in light alienation of immoveable property. of Article 13(4)]. 13(2) - Not applicable as it deals with alienation Rights of movable property forming part of the business entitlements are property of a permanent establishment. linked to shares 13(3) - Not applicable as it deals with alienation in origin and also of ships or aircraft operated in international in final traffic or movable property pertaining to the conversion upon operation of such ships or aircraft. exercise of 13(4) - Not applicable as it deals with alienation subscription. of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property 13(5)- Not applicable as it deals with alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State (i.e., India). The AO has sought to allege that rights entitlement is similar to shares of an Indian company and therefore should fall within the purview of Article 13(5). In this regard, 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 16 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors 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 adopted by the OECD Council on 11 April 1977. Until the adoption of the 1977 Model Convention, paragraph 5 read as follows: "5. The Article does not give a detailed definition of capital gains. This is not necessary for the reasons mentioned above. The words "alienation of property" are used to cover in particular capital gains resulting from the sale or exchange of property and also from partial alienation, the expropriation, the transfer to a company in exchange for stock, the sale of a right, the alienation free of charge and even the passing of property on death." OECD Model Tax Convention on Income & on Capital, 2017-Paragraph 30: "30. The Article does not contain special rules 17 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors for gains from the alienation of shares in a company (other than shares of a company dealt with in paragraph 4) or of securities, bonds, debentures and the like. Such gains are, therefore, taxable only in the State of which the alienator is a resident." Further, in 2017, it was decided to adopt the updated provision from the OECD Model Tax Convention , as the concept of a "comparable interests" is broadly equivalent to what was previously covered by paragraph 4 of the United Nations Model Tax Convention. Accordingly, the relevant changes made to the OECD Model Convention made it more aligned with the UN Model Convention. Thereafter the India- Ireland DTAA was amended in 2019 and the reference to comparable interest was only given at Article 13(4) and not at Article 13(5) in the India- Ireland DTAA. Thus, is clear that no reference to comparable interest was made in Article 13(5} of the India- Ireland DTAA, evidencing that it only refers to share of a company. 3. 'Shares' have In terms of section 2(84) of the Companies Act, broader 2013, 'share' means a share in the share capital connotation and of a company and includes stock. meaning than Further, in terms of section 43 of the Companies 'equity' capital' Act, 2013, equity share capital, with reference to and stand for any company limited by shares, means all share tradable capital which is not preference share capital. securities related Accordingly, it can be appreciated that shares to the underlying are the means through which equity capital is company. obtained, so shares cannot be broader than Further, separate equity capital. Equity capital refers to the total ISIN is assigned amount invested in the company through the to rights issuance of shares, while shares are the units of entitlements to ownership that represent this investment. distinguish it from Further, the lower authorities have failed to the normal equity appreciate that the SEBI Circular provides that shares traded in "REs with a separate ISIN shall be credited to the market. the demat account of the shareholders before the date of opening of the issue, against the 18 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors 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 that rights entitlement is not the same as shares and is instead, an 'option in securities'.

The aforesaid 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 agreement with the contention raised by the ld. Counsel that these are separate assets and it distinct of the shares of the Indian Government. Accordingly, we hold that rights entitlements is not covered under Article 13(4) and Article 13(5) so as to be taxed in the country of source i.e. in India, albeit, it falls under Article 13(6) whereby, gain on alienation of any property which are not covered in para 1 to 5 is taxable only in the resident state i.e. Ireland.

In so far as adjustment of short term capital gain arising on sale of rights entitlement from which the assessee had claimed benefit of Article 13(6) of India Ireland DTAA against the short term capital loss arising on sale of shares which is taxable in India in terms of Article 13(5) of the DTAA, it has been submitted that this issue stands covered by the decision of this Tribunal in the case of J.P. Morgan India Investment Company Mauritius Ltd. reported in 143 taxmann.com 82 wherein it has been held as under:- "Thus, the application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of article 13(4) of the India-Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before setoff of brought forward losses) will go out of the taxing provisions if assessee has chosen to be assessed as per treaty.

Thus, this principle has been followed in catena of other judgments by this Tribunal. Accordingly, we hold that the capital loss incurred under the provisions of the Act r.w. Article 13(5) of India-Ireland DTAA cannot be set off against short term capital gain derived from sale of rights of entitlement because such case is not subjected to tax in India as per Article 13(6) of DTAA and therefore, assessee has rightly excluded from the computation of total income, accordingly, this issue is decided in favour of the assessee.”

The ratio as laid down in the above decision is that the rights entitlement is not same as shares and therefore the gain on transfer of rights entitlement would fall within the purview of Article 13(6) and not under Article 13(5) of India-Ireland DTAA. For the year under consideration the assessee has earned a STCG from the sale of rights entitlement to the tune of Rs. 588,31,088/- and this fact is identical to the issue considered by the coordinate bench in the above case. Therefore in our 20 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors considered view the ratio laid down by the Co-ordinate Bench is applicable for the year under consideration also. Accordingly we hold that the AO is not correct in denying the exemption under Article 13(6) of the India-Ireland DTAA to the assessee. The addition made in this regard is hereby deleted.

Ground No.3 to 6 is with regard to rejecting the set off of STCG of non-STT paid shares against the STCL of STT paid shares on the ground that as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off. In this regard we notice that the Co-ordinate Bench in the case of one of the group companies of the assessee Vanguard Total International Stock Index Fund Vs. ACIT (ITA No. 4656/Mum/2023 dated 13.12.2024) has considered a similar issue where it has been held that “9. We have given a thoughtful consideration 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 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 suffered short term capital loss of Rs.7,17,660/- in transactions in shares involving payment of security transaction tax. In the impugned order the A.O. computed the capital gain in the following manner without discussing any reasons for adopting such mode of computation.

Considering the facts of the case in totality, in light of the decisions of the Hon’ble Calcutta High Court (supra), we do not find any merits in the computation done by the AO. We accordingly direct the AO to accept the computation of the assessee. Ground No. 5 is allowed.”

The ratio as laid down in the above decision is that there is no prohibition under the Act with regard to the hierarchy of set off of STCL arising out of STT paid shares against the STCG arising out of non-STT paid shares. In absence of any prohibition or any specific chronology for set off prescribed under the Act, the assessee is entitled to choose the chronology of set off that is most beneficial to the assessee. In assessee's case, the AO rejected the hierarchy of set off done by the assessee for the reason that as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off. Therefore respectfully applying the ratio laid down by the coordinate bench we hold that the AO is not correct in denying the benefit of set off of STCG arising out of non-STT paid shares to the assessee against the STCL of STT paid shared. Accordingly, we direct the AO to delete the addition made in this regard.

Ground No. 9 & 10 the assessee is contending the issue of short grant of refund to the assessee and non-consideration of rectification application filed by the assessee in this regard. We direct the AO to consider the claim of the assessee by disposing of the rectification petition filed by the assessee in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

The issues contended by the other assessees through various grounds are tabulated in the earlier part of this order. From the perusal of the said table, it is noticed that the issues contended are identical to the issues contended in the case of Vanguard Emerging Markets Stock Index Fund A Series of VISPLC in ITA No. 1277/Mum/2025. Therefore our decision in the case of the said assessee is mutatis mutandis applicable to the similar issues contended by the other assessees. Therefore we direct the AO to delete the additions made in the case of other assessees also. In and the respective assessee's have raised legal ground (Ground No.1) with regard to issue of 24 ITA 1277 to 1283/ Mum/2025 Vanguard Emerging Markets Stock Index Fund A Series of VISPLC & Ors notice under section 143(2) by NFAC instead of jurisdictional AO. In view of our decision with regard to the issues contended on the basis of merits, the legal contention raised has become academic and left open accordingly. In the assessee has raised a ground (Ground No.7) with respect to calculation error and in this regard we direct the AO to examine the issue and decide in accordance with law.