Vanguard Emerging Markets Stock Index Fund a Series of VISPLC Vs ACIT (ITAT Mumbai)
Conclusion: Gain on the transfer of rights entitlement would fall within the purview of Article 13(6) and not under Article 13(5) of the India-Ireland DTAA. Consequently, AO was not correct in denying the exemption under Article 13(6) of the India-Ireland DTAA to assessee and making an addition.
Held: Assessee, a company incorporated in Ireland, earned Short Term Capital Gains (STCG) from the sale of rights entitlement of shares of an Indian company. It claimed this STCG as exempt under Article 13(6) of the India-Ireland DTAA. AO however, held that STCG on the sale of rights entitlement was to be taxed as “sale of shares” under Article 13(5) of the India-Ireland DTAA, making an addition towards STCG as taxable in India. It was held that “rights entitlement” (the right to subscribe to shares) was a distinct financial instrument or right from the “shares” themselves. Since rights entitlement was not explicitly covered by the earlier specific clauses of Article 13 (including 13(5) for shares), it fell into the residual Article 13(6), meaning the gains were taxable only in the country of residence of the alienator (Ireland, in this case), and not in India. The decision was in favor of the assessee, confirming the exemption of STCG from the sale of rights entitlement in India.
