Analysis of Mumbai Tribunal decision in the case of Vanguard Emerging Markets Stock Index Fund A Series of VISPLC v. ACIT [[2025] 174 taxmann.com 1066 (Mum. Trib.)]
The Mumbai Tribunal in the case of Vanguard Emerging Markets Stock Index Fund A Series of VISPLC v. ACIT [2025-TII-184-ITAT-MUM-INTL / [2025] 174 taxmann.com 1066 (Mum. Trib.)] was dealing with set-off for short-term capital gains on shares, regardless of whether securities transaction tax has been paid and gains from rights entitlement transfers, which differ from shares, are exempt under Article 13(6) of the India-Ireland DTAA.
An Ireland-based company registered as an FII with SEBI reported Short Term Capital Gain (STCG) from selling rights entitlements of Bharti Airtel shares, seeking exemption under Article 13(6) of the India-Ireland DTAA. The Assessing Officer denied this exemption, treating the gain as taxable STCG under Article 13(5) and ruling that STCG from non-STT paid shares could not offset losses from STT paid shares. The DRP upheld this decision.
The AO rejected the assessee’s set-off order, claiming S. 70 only allows losses and income from similar computations to be offset. However, the Act does not prohibit setting off STCL from STT-paid shares against STCG from non-STT paid shares, nor does it prescribe a specific order for set-offs. Therefore, the assessee can choose the most advantageous chronology for set-off [pls see Vanguard Total International Stock Index Fund v. ACIT [2025] 172 taxmann.com 515 (Mum. Trib.); JS Capital LLC (ITA No. 3396/Mum/2023 = 2024-TII-72-ITAT-MUM-INTL); East Bridge capital Master Fund I Ltd.( ITA No. 2976/Mum/2023 = 2024-TII-91-ITAT-MUM-INTL); DWS India Equity Fund (ITA No. 5055/Mum/2010 = 2012-TIOL-218-ITAT-MUM); T. Rowe Price International Discovery Fund (ITA No. 7627/Mum/2011)]. There is no prohibition under the Act regarding 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 because as per S. 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off.
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.
Article 13(5) stipulates that gains from the alienation of shares in a company resident in one contracting state may be taxed in that state. For instance, if an Irish resident sells shares of a company in India, the resulting gains can be taxed in India, which is considered the source state. In contrast, Article 13(6) pertains to gains from the alienation of properties not mentioned in Articles 13(1) to (5), which are taxable only in the state of residence. There is a distinction between shares and rights entitlement as outlined in S. 62 of the Companies Act and SEBI Circular dated 22/01/2020 regarding “Streamlining the Process of Rights Issue” (SEBI Circular). S. 62 of the Companies Act indicates that “rights entitlements” are not equity shares, as it allows shareholders to accept, renounce, or transfer the offer to subscribe to shares. SEBI Circular of 22/01/2020 clarifies that rights entitlements credited to an investor’s demat account are classified as assets distinct from company shares and are therefore assigned a separate ISIN.
Under the Finance Act, 2004, “option in securities” uses the definition from S. 2(d) of the Securities Contracts (Regulation) Act, 1956, which refers to buying or selling rights for future transactions in securities, including various traditional forms such as puts and calls. Rights entitlements are options to purchase securities in the future, distinct from shares, as shown by different STT rates and judicial interpretation [Navin Jindal v. ACIT (2010) 187 Taxmann 283 (SC)– 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.”].
Sections 2(42A) and 55(2)(aa) also treat rights entitlements separately: the holding period is calculated from the date of offer for renounced rights, and if the entitlement is renounced, its cost is considered NIL.
Article 13(4) and 13(5) of the UN Model Convention were amended in 2017 to broaden their application to include “other comparable interests” in addition to shares. Article 13(5) of the India-Ireland DTAA does not reference “other comparable interest” in either paragraph 4 or 5 of Article 13. Following the introduction of the MLI, India-Ireland DTAA was amended in 2019 to include “comparable interest” in Article 13(4), but not in Article 13(5). The versions of Article 13(4) and Article 13(5) before and after the implementation of the MLI are provided below:
Before the 2019 amendment:
13(4). Gains from the alienation of shares of the capital stock of a company whose property 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 the 2019 amendment:
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, may be taxed in the other Contracting State if at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting 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.
The two contracting states, even after amending Article 13(5) post-MLI, have not included “comparable interest” in the India-Ireland DTAA; Article 13(5) only refers to company shares, while Article 13(4) defines “comparable interest” to include interests in partnerships or trusts. Thus, rights entitlements are still excluded after the 2019 amendment. To highlight this distinction, the assessee cited clarification from the former Economic Affairs Secretary regarding the India-Mauritius DTAA amendment, which in 2016 allowed India to tax gains from share sales of Indian companies. There was initial uncertainty about whether these changes applied to other capital assets, but the Government clarified through Mr. Shaktikanta Das in a news article dated August 21, 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- 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”
If a term is undefined in an Act or treaty, its meaning should be derived from domestic law according to S. 90(3) of the Act and Article 3(2) of the India-Ireland DTAA; if not defined in domestic law, a general meaning applies. S. 2(84) of the Companies Act defines “shares” narrowly as shares in a company’s capital, including stock. Assets like derivatives, which derive value from other assets, are considered distinct and separate. Under the India-Ireland DTAA, derivatives based on equity and rights entitlements arising from shareholding—since they are separate assets that may be sold, lapsed, or subscribed—should not be taxed under Article 13(6). Investors can sell, exercise, or decline rights entitlements. The Mumbai tribunal in J.P. Morgan India Investment Company Mauritius Ltd. (2022) 143 taxmann.com 82 (Mum) held 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. Hence, rights entitlement would also be covered under Article 13(6) of India Ireland DTAA and would not be subjected to tax in India but in the resident state, i.e., Ireland.
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