2012 (3) TMI 516 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of capital gains arising from the buy-back of shares under the India-Mauritius Tax Treaty.
2. Obligation to withhold tax on the remittance of buy-back proceeds u/s 195 of the Indian Income-tax Act.

Summary:

Issue 1: Taxability of Capital Gains
The applicant, an Indian company, proposed a buy-back of shares held by XYZ (Mauritius), a tax resident of Mauritius. The applicant sought an advance ruling on whether the capital gains arising from this buy-back would be exempt from taxation in India under paragraph 4 of Article 13 of the India-Mauritius Tax Treaty. The Revenue argued that the transaction was designed to avoid tax in India, as the applicant had not declared dividends since the introduction of Section 115-O of the Income-tax Act in 2003, which imposed a tax on distributed profits. The Revenue contended that the buy-back was a scheme to repatriate funds to XYZ (Mauritius) without paying tax on distributed profits.

The Authority found that the buy-back was a colorable device for avoiding tax on distributed profits. It concluded that the transaction should be treated as a distribution of profits, taxable as dividends under Section 2(22) of the Income-tax Act. Consequently, the amount payable to XYZ (Mauritius) would be taxable in India under Article 10 of the India-Mauritius Tax Treaty.

Issue 2: Obligation to Withhold Tax
Given the ruling on the taxability of the buy-back proceeds as dividends, the Authority held that the applicant is required to withhold tax on the remittance of the buy-back proceeds to XYZ (Mauritius) u/s 195 of the Indian Income-tax Act.

Conclusion:
The Authority ruled that the capital gains arising from the buy-back of shares by XYZ (Mauritius) would be taxable in India as dividends under Article 10 of the India-Mauritius Tax Treaty. Consequently, the applicant is required to withhold tax on the remittance of the buy-back proceeds to XYZ (Mauritius).