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TMI Blog2025 (5) TMI 1666X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Dispute Resolution Panel ('DRP"), erred in classifying the Rights Entitlement (RE) as akin to right shares and thereby taxing them under Article 13(5) of the India-Saudi Arabia DTAA. 1.2 The learned ACIT erred in not recognizing that RE represents rights granted to existing shareholders to subscribe to new shares, and are not shares per se 1.3. The learned ACIT erred in rejecting the classification of RE as a separate security, distinct from the shares of the company. 1.4. The learned ACIT failed to consider that the sale of RE is covered under this Article 13(6) of the of India-Saudi Arabia DTAA and should be taxable only in Saudi Arabia and not India. 1.5. The Appellant respectfully submits that the learned ACIT be directed to treat capital gains arising from the renunciation of RE as taxable only in the country of residence of the Appellant i.e. Saudi-Arabia, in accordance with the provisions of Article 13(6) of the India- Saudi Arabia DTAA. 2. Re.: Erred in granting short credit of advance tax paid amounting to Rs. 6,20,21,241/-: 2.1. The learned ACIT has erred in granting the Appellant short credit for advance tax paid by Rs. 6,20,21,241/-. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Article 13 of the India-Saudi Arabia DTAA. Accordingly, during the assessment proceedings, the assessee was asked to show cause as to why the said capital gains should not be brought to tax in India under the head "Income from Capital Gains". In response, the assessee submitted that as per the Companies Act, 2013, "share" means a share in the share capital of a company and includes stock. The assessee further submitted that rights entitlement is the right issued to buy additional shares in a company and is made to the company's existing shareholders, and the same is not shares per se. It is further submitted that such entitlement is allowed to be renounced to a third party for a consideration, and therefore, the rights entitlement is the right or any interest in a security. Thus, the assessee submitted that the rights entitlement is considered as a security separate from that of shares and cannot be construed to be the same as the shares of the company. By referring to the provisions of Article 13(6) of the India-Saudi Arabia DTAA, the assessee submitted that the sale of rights entitlement is taxable only in Saudi Arabia. 5. The Assessing Officer ("AO"), vide draft a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned DRP, the AO vide impugned final assessment order dated 24/12/2024, assessed the total income of the assessee after including the capital gains earned by the assessee on the sale of rights entitlement. Being aggrieved, the assessee is in appeal before us. 8. During the hearing, the learned Authorised Representative ("learned AR") submitted that rights entitlement may be inextricably linked to the shares held by the assessee in the company, but the same is not shares. Accordingly, it was submitted that gains accrued to the assessee from the sale of rights entitlement are only taxable in the resident country, i.e. Saudi Arabia. 9. On the other hand, the learned Departmental Representative ("learned DR"), by vehemently relying upon the order passed by the lower authorities, submitted that since rights entitlement is inextricably linked to the shares held in a company, they are akin to shares. Thus, the learned DR submitted that any gains arising to the assessee from the transfer of rights entitlement are taxable only in the country in which the company is resident. Therefore, it was submitted that as per the provisions of Article 13(4) and Article 13(5) of the India-Saudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of which the alienator is a resident. 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 then those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that 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." 12. From a plain reading of Article 13 of the India-Saudi Arabia DTAA, it is evident that the gains arising from the alienation of the following categories of assets fall within the ambit of this Article: - (a) Immovable property (Paragraph 1) (b) Movable property of a Permanent Establishment (Paragraph 2) (c) Ships or aircraft, or movable property pertaining to the operation of ships or aircraft (Paragraph 3) (d) Shares or interests based on immovable property (Paragraph 4) (e) Shares other than those mentioned in paragraph 4 (Paragraph 5) (f) Any propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Taxman 283 /320 ITR 708 (SC), 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case the assessee earned short-term capital gains from the sale of rights entitlement, the same are only taxable in the resident State, i.e. Saudi Arabia, as per the provisions of Article 13(6) of the India-Saudi Arabia DTAA. Accordingly, the impugned addition made on account of capital gains arising from the sale of rights entitlement is deleted. As a result, ground no.1 raised in assessee's appeal is allowed. 18. The issue arising in ground no. 2, raised in assessee's appeal, pertains to the short credit of the advance tax paid by the assessee. During the hearing, the learned AR submitted that the assessee has also filed a rectification application before the AO on 05/05/2025 in this regard, which is still pending consideration. Accordingly, we deem it appropriate to restore this issue to the file of the AO with the direction to grant credit of advance tax paid, in accordance with the law, after conducting the necessary verification. We order accordingly. As a result, ground no.2 raised in assessee's appeal is allowed for statistical purposes. 19. The issue arising in ground no.3, raised in assessee's appeal, pertains to the levy of interest under section 234C of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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