2012 (8) TMI 622 - AAR - Income Tax

India Mauritius DTAC - buy back of shares from Indian subsidiary/applicant by AWIL United Kingdom - taxability - Held that - No adequate material has been disclosed to justify a finding that the applicant or its principal has resorted to the devising of a scheme for avoidance of tax. It may be true that the applicant was incorporated in Mauritius and the investment made through it for acquiring shares of the Indian company to take advantage of the Indian Mauritius DTAC but that by itself is no ground to discard the claim of the applicant for benefit under the India Mauritius DTAC - . Once it is held that the applicant is entitled to invoke the India Mauritius DTAC, then it is clear that Article 13 of the said DTAC is attracted - the capital gains arising out of the proposed buyback of shares is not taxable in India in view of paragraph 4 of Article 13 of the DTAC between India and Mauritius. Applicability of Section 47 - Held that - Section 47 (iv) has to be read as conferring benefit in three situations, one, when the parent company holds the whole of the share capital of the subsidiary, two, when the nominees of the principal hold the whole of the share capital of the subsidiary and three, when the principal and the nominee together hold the whole of the share capital of the subsidiary - There appears to be no justification in reading or as and to hold that when a principal and its nominee hold the whole of the share capital, that case will also come within the ambit of the provision thus the proposed transaction is not exempt by virtue of section 47 (iv) Whether sections 92 to 92F will apply to the transaction ? - Held that - As the present is an international transaction between related parties, and income arises out of it. Hence, sections 92 to 92F of the Act are attracted.

Summary

Issues involved:
1. Tax liability on capital gains arising from the buyback of shares by the Indian subsidiary under the Income-tax Act and the Double Taxation Avoidance Convention (DTAC) between India and Mauritius.
2. Exemption from tax in India on the transfer of shares of the Indian subsidiary in the course of the proposed buyback in view of the provisions of section 47(iv) of the Income-tax Act.
3. Applicability of transfer pricing provisions of sections 92 to 92F of the Income-tax Act to the proposed buyback of shares.

Detailed Analysis:
1. The case involved the applicant, a subsidiary of Armstrong World Industries Limited, Mauritius, holding shares in Armstrong India. The applicant intended to buy back shares from the Indian subsidiary, leading to potential capital gains taxable under the Income-tax Act. The applicant sought the benefit of the India Mauritius DTAC, claiming that the capital gains should be taxed only in Mauritius. The Authority allowed the application and ruled that the capital gains from the buyback were not taxable in India under paragraph 4 of Article 13 of the DTAC between India and Mauritius.

2. The second issue revolved around whether the transfer of shares by the applicant to its Indian subsidiary during the buyback would be exempt from tax in India under section 47(iv) of the Income-tax Act. The Authority ruled that the transaction was not exempt under section 47(iv) based on the interpretation and precedent set by a previous ruling (Re RST, AAR No.1067 of 2011).

3. The third issue concerned the applicability of transfer pricing provisions (sections 92 to 92F) of the Income-tax Act to the proposed buyback of shares. The Authority ruled that these provisions were indeed attracted to the transaction as it involved an international transaction between related parties, resulting in income, thus falling under the purview of sections 92 to 92F.

In conclusion, the Authority's ruling addressed the tax liability on capital gains, exemption under section 47(iv) of the Income-tax Act, and the applicability of transfer pricing provisions to the proposed buyback of shares, providing a comprehensive analysis of each issue based on the facts and legal provisions presented during the proceedings.