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2019 (10) TMI 1437 - AAR - Income TaxCapital gain on Shares Buy-back u/s 45 - Whether transfer of share in PQR India Pvt. Ltd. (PQR India) by the applicant to wholly owned subsidiary, PQR India, in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the applicant, in view of the provisions of section 47(iv) - argument of AR is that section 46A of the Income-tax Act is not a charging section and that the buy-back should be read in the context of charging section 45 and section 47(iv) of the Income-tax Act and as the applicant and its nominees hold 100 per cent. of its shares in the Indian subsidiaries the buy-back would be covered under section 47(iv) and exempt from tax - HELD THAT - As the shares are destroyed after the buy-back, there is no capital asset remaining with the transferee company. Therefore there is no further capital gains tax that can be imposed as the capital asset itself ceases to exist after the buy-back, thus making sections 47A, 49 and 155(7B) redundant. This being so, the taxation of the shares subjected to a buy-back as per section 77A of the Companies Act, 1956 can never be covered as per section 47A as the shares cease to exist after the buy-back. Such impossibility of application of section 47A, section 49 and section 155 could never be the intention of Legislature. The intention of the Legislature can never be to render any provision of the Act otiose. In the instant case, the special provision under section 46A would prevail over the general provision of section 45 read with section 47(iv) of the Income-tax Act - without going into the controversy whether or is to be read as and in section 47(iv), it is seen that the non obstante clause in section 47 covers only section 45 and not section 46A. Section 46A is a special provision brought in with a specific objective to tax share buy-back transactions. Therefore, the discussion whether the buy-back transaction is a transfer and is covered under section 47 is not relevant. Thus we hold that on the facts and circumstances of the case, the share buy-back transaction is taxable under section 46A and exemption under section 47(iv) is not exigible. MAT applicability on capital gains arising to the applicant from the proposed buy-back of shares - As admitted by AR that for the assessment year 2012-13 when the buy-back has taken place, the applicant had a supervisory permanent establishment in India and that for the assessment year 2014-15 the Department has treated PQR India itself as permanent establishment in India. In view thereof and express provisions, the Assessing Officer is required to compute the book profits of the supervisory permanent establishment and the minimum alternate tax liability would be restricted to the profit attributable to permanent establishment for the relevant assessment year. We have already held that the capital gains is taxable under section 46A in the hands of the applicant under the normal provisions and thus the final liability would be lesser of two amounts, i.e., one under normal provision and other under section 115JB. Given that capital gains arising to the applicant as a result of the transfer of shares to its wholly owned subsidiary is held to be chargeable under section 46A of the Act, the provisions of section 195 of the Act would be applicable and we hold that PQR India is liable to withhold taxes on the consideration payable for the buy-back of shares. Ruling 1. On the facts and circumstances of the case, the share buy-back transaction is taxable under section 46A and exemption under section 47(iv) is not applicable. 2. As regards the minimum alternate tax liability under section 115JB, the Assessing Officer is required to compute the book profits of the supervisory permanent establishment and the minimum alternate tax liability would be restricted to the profit attributable to such supervisory permanent establishment for the relevant assessment year. 3. The provisions of section 195 of the Act would be applicable and hence PQR India is liable to withhold taxes on the consideration payable for the buy-back of shares.
Issues Involved:
1. Tax exemption on the transfer of shares during buy-back under section 47(iv) of the Income-tax Act, 1961. 2. Applicability of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961. 3. Requirement of tax deduction at source under section 195 of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Tax exemption on the transfer of shares during buy-back under section 47(iv) of the Income-tax Act, 1961: The applicant contended that the buy-back of shares by PQR India from the applicant should be exempt from tax under section 47(iv) of the Income-tax Act, 1961. Section 47(iv) exempts certain transfers from being regarded as "transfer" for the purpose of capital gains tax under section 45. The applicant argued that it met all conditions under section 47(iv) since it held the entire share capital of PQR India, an Indian company. However, the Department argued that section 46A, introduced along with section 77A of the Companies Act, 1956, specifically deals with capital gains arising from the buy-back of shares and overrides section 47(iv). Section 46A states that any consideration received by a shareholder from a company for the purchase of its own shares shall be deemed to be capital gains. The judgment concluded that section 46A is a special provision designed to tax buy-back transactions, and section 47(iv) does not apply to such transactions. The Authority for Advance Ruling (AAR) in the case of RST, In re, supported this view, holding that section 46A prevails over the general provisions of section 45 read with section 47(iv). 2. Applicability of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961: The applicant argued that section 115JB, which imposes MAT on book profits, should not apply to foreign companies. The applicant cited various sources, including Central Board of Direct Taxes (CBDT) circulars and Finance Minister speeches, indicating that MAT was intended for domestic companies. The Department countered that section 115JB applies to all companies, including foreign companies, as defined under section 2(17) of the Income-tax Act, 1961. The AAR in ZD, In re, supported this view, stating that section 115JB does not distinguish between resident and non-resident companies. The judgment noted that the Finance Act, 2016, with retrospective effect from April 1, 2001, clarified that MAT provisions do not apply to foreign companies without a permanent establishment (PE) in India. However, since the applicant had a PE in India during the relevant assessment year, MAT was applicable. The Assessing Officer must compute the book profits of the supervisory PE, and MAT liability would be restricted to the profit attributable to the PE. 3. Requirement of tax deduction at source under section 195 of the Income-tax Act, 1961: The applicant argued that since the transfer of shares was not taxable under section 47(iv), section 195, which mandates tax deduction at source on payments to non-residents, would not apply. The Department contended that since the capital gains from the buy-back were taxable under section 46A, section 195 was applicable, and PQR India was required to withhold taxes on the consideration payable for the buy-back. The judgment held that given the capital gains were chargeable under section 46A, section 195 was applicable, and PQR India was liable to withhold taxes on the consideration payable for the buy-back of shares. Conclusion: 1. The share buy-back transaction is taxable under section 46A, and exemption under section 47(iv) is not applicable. 2. MAT under section 115JB applies, and the Assessing Officer must compute the book profits of the supervisory PE, with MAT liability restricted to the profit attributable to the PE. 3. Section 195 applies, and PQR India must withhold taxes on the consideration payable for the buy-back of shares.
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