2016 (3) TMI 118 - AT - Income Tax

TDS u/s 195 - remittance of amount to a non-resident representing its income by way of dividend - assessee in default - assessee argued that a transaction of buy back of shares referred to section2(22) (iv) of the Act was different from a transaction of capital reduction dealt by section 2(22)(d) of the Act, that the transaction in question was one of buy back of shares and not a case of capital reduction - colourable device - Held that - There is no ambiguity about the provisions that would govern the buyback of shares. Section 2(22)(d)(iv)r. w. s. 46A of the Act would be applicable to the buyback scheme. Accordingly, the transaction cannot be treated deemed dividend. Article 13 of the said DTAA provides that capital gains would not be taxable in the hands of GS-M. We also find force in the alternate argument raised by the assessee. Even if the payment to GSM is considered as dividend u/s. 2(22)(d) of the Act, then the taxes on the same have to be charged by way of DDT as per section 115-O of the Act. As per section 10(34) of the Act, any income by way of dividend referred to in section 115-O of the Act does not form part of total income in the hands of the recipient and company declaring dividend will be in default as per section 115Q. So, the provisions of TDs would not be applicable for dividend covered under section 2(22)(d) of the Act. Transaction in question would not fall under the category of colourable device. If an assessee enters into a deal which does not violate any provision of the Act of applicable to a particular AY. the deal cannot be termed a colourable device, if it result in non-payment or lesser payment of taxes in that year. The whole exercise should not lead to tax evasion. Non-payment of taxes by an assessee in given circumstances could be a moral or ethical issue. But, for that the assessee cannot be penalised. In light of the above discussion, we are reversing the decision of the FAA and deciding the effective ground of appeal in favour of the assessee.

Summary

Issues Involved:
1. Treatment of the appellant as an Assessee in Default (A-I-D) under section 201(1) of the Income Tax Act.
2. Charging of interest under section 201(1A) of the Income Tax Act.
3. Classification of the buyback transaction under section 2(22)(d) versus section 2(22)(iv) of the Income Tax Act.
4. Applicability of Dividend Distribution Tax (DDT) versus Capital Gains Tax.
5. Allegation of the buyback transaction being a colorable device to evade tax.

Detailed Analysis:

1. Treatment of the appellant as an Assessee in Default (A-I-D) under section 201(1) of the Income Tax Act:
The Assessing Officer (AO) held that the excess payment made by the assessee to its parent company, GS-M, under the buyback of shares scheme was in the nature of a dividend. As the assessee did not deduct tax at source while making this remittance, it was deemed an Assessee in Default under section 201(1) of the Act. The First Appellate Authority (FAA) upheld this view, noting that the buyback was a means to distribute accumulated profits without paying DDT, thus justifying the AO's treatment of the assessee as an A-I-D.

2. Charging of interest under section 201(1A) of the Income Tax Act:
The AO also charged interest under section 201(1A) due to the non-deduction of tax at source. This was upheld by the FAA, who found that the assessee had avoided paying DDT by accumulating profits and then distributing them through a buyback, thus necessitating the interest charge.

3. Classification of the buyback transaction under section 2(22)(d) versus section 2(22)(iv) of the Income Tax Act:
The assessee argued that the buyback of shares should be classified under section 2(22)(iv) and not under section 2(22)(d), which deals with capital reduction. The FAA, however, held that the buyback was effectively a distribution of profits and thus fell under section 2(22)(d). The Tribunal, after considering the relevant sections and the legislative intent, concluded that buyback and capital reduction are different concepts and that the profits from the buyback should be taxed as capital gains under section 46A, not as deemed dividends under section 2(22)(d).

4. Applicability of Dividend Distribution Tax (DDT) versus Capital Gains Tax:
The Tribunal noted that according to the Finance Minister's speech and CBDT Circular No. 779, the intent of the law was to tax buyback transactions as capital gains and not as dividends subject to DDT. The Tribunal found that for the assessment year in question, the law applicable was clear that buyback transactions should be treated under section 46A, leading to capital gains tax and not DDT.

5. Allegation of the buyback transaction being a colorable device to evade tax:
The FAA and the AO had considered the buyback a colorable device to avoid DDT. However, the Tribunal, referencing the Bombay High Court's decision in Capgemini India Private Limited, held that if a transaction is legally permissible and does not violate any provisions of the Act, it cannot be termed a colorable device. The Tribunal concluded that the buyback was not a colorable device as it was a legally permissible method to return profits to shareholders.

Conclusion:
The Tribunal reversed the FAA's decision, holding that the buyback transaction should be treated under section 46A of the Act, leading to capital gains tax, and not as a deemed dividend under section 2(22)(d). Consequently, the assessee was not liable to deduct tax at source under section 195, and thus could not be treated as an Assessee in Default under section 201(1). The appeal filed by the assessee was allowed.