2012 (4) TMI 153 - AAR - Income Tax

DTAC between India & Mauritius - Buy back of shares proposed by A Ltd Co major shareholders are A (Mauritius company) - 25.06% shareholding, A (USA) - 48.87% shareholding and A (Singapore) - 27.37% - offer accepted by only A (M) both in year 2008 and 2010 Revenue contended that tax is sought to be evaded in guise of buy back of shares Held that - It is significant that offer of buy-back was accepted only by A (M) and not by A (USA) or A (Singapore) since only under the India-Mauritius DTAC, capital gains is totally not taxable in India. Had dividend being declared, company would have been obliged to pay tax on distribution of profits to shareholders. Instead, it allowed the reserves to grow and through proposed buy-back, considerable sums would be repatriated to A (M) in Mauritius without the tax on the distributed profits being paid. Hence, we are satisfied that scheme of buy back of shares is a colorable device for avoiding tax on distributed profits as contemplated in Section 115-O. On our finding that the proposed buy-back is colourable, the distribution in question will satisfy the definition of dividend under the Act, Article 10 of the DTAC between India and Mauritius and consequently taxable as such. Also, applicant is required to withhold tax on the proposed remittance of the proceeds to A (M).

Issues Involved:
1. Taxability of capital gains arising from the buy-back of shares under the India-Mauritius DTAC.
2. Obligation to withhold tax on the remittance of buy-back proceeds.
3. Whether the transaction is designed to avoid tax in India.
4. Consideration of the transaction as a colorable device for tax avoidance.

Issue-Wise Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue is whether the capital gains arising to 'A' (Mauritius) from the buy-back of shares by the applicant are exempt from taxation in India under the India-Mauritius Double Taxation Avoidance Convention (DTAC). The applicant argued that the buy-back transaction is a legally recognized transaction under Section 77A of the Companies Act and Section 46A of the Income-tax Act. Under paragraph 4 of Article 13 of the DTAC between India and Mauritius, such gains are taxable only in Mauritius. The Revenue contended that the question was pending adjudication before an income-tax authority due to a similar transaction in 2008, thus barring the application under clause (i) of the proviso to Section 245R(2) of the Act. The Authority overruled this objection, stating that the transaction in question was different and not barred.

2. Obligation to Withhold Tax:
The second issue concerns whether the applicant is required to withhold tax on the remittance of the buy-back proceeds to 'A' (Mauritius). The applicant maintained that since the capital gains are taxable only in Mauritius under the DTAC, there is no obligation to withhold tax. However, the Revenue argued that the transaction was designed to avoid tax in India, and thus tax should be withheld. The Authority ruled that if the transaction is found to be a colorable device for tax avoidance, the amount would be taxable as dividend under Section 2(22) of the Income-tax Act, necessitating withholding tax.

3. Transaction Designed to Avoid Tax:
The Revenue argued that the buy-back transaction was designed to avoid tax in India, pointing out that the applicant had not declared dividends since the introduction of Section 115-O of the Act in 2003, which imposes a tax on distributed profits. Instead, the applicant allowed its reserves to grow and proposed a buy-back to transfer funds to 'A' (Mauritius) without paying tax on distributed profits. The Authority observed that the major shareholders, 'A' (USA) and 'A' (Singapore), did not accept the buy-back offer, likely because the gains would be taxable in India or conditionally under the respective DTACs. Only 'A' (Mauritius) accepted the offer, indicating a scheme to avoid tax under the India-Mauritius DTAC.

4. Colorable Device for Tax Avoidance:
The Authority considered whether the proposed buy-back was a colorable device for tax avoidance. It noted that the applicant did not declare dividends after 2003, allowing reserves to accumulate significantly. The buy-back would result in substantial sums being repatriated to 'A' (Mauritius) without paying tax on distributed profits. The Authority concluded that the buy-back was a scheme devised for tax avoidance, characterizing it as a colorable device. Consequently, the transaction would be treated as a distribution of profits taxable as dividend under Section 2(22) of the Act and Article 10 of the DTAC between India and Mauritius.

Conclusion:
The Authority ruled that the capital gains arising from the buy-back of shares are taxable in India under Article 10 of the India-Mauritius DTAC. The applicant is required to withhold tax on the remittance of the buy-back proceeds to 'A' (Mauritius). The proposed buy-back was deemed a colorable device for avoiding tax on distributed profits, and the transaction would be treated as a taxable dividend. The ruling was pronounced on March 22, 2012.

← Previous Next →