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TMI Blog2016 (4) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... cal issue had arisen in the earlier year as held that stock options of the parent company were offered to the employees of the assessee company that the assessee had made payment to the parent company that during the year FBT was paid. In our opinion once a stock option is granted to and exercised by the employee of an assessee the liability in that behalf is ascertained and cost is allowable in the year in which stock options are granted. We find that in the case of Novo Nordisk India Pvt. Ltd. (2013 (11) TMI 218 - ITAT BANGALORE ) it has been held that in terms of ESOP if an assessee offers shares of its parent company to its employees the difference between the FMV of the shares of the parent company on date of issue of shares and the price at which those shares were issued by the assessee to its employees had to be regarded as expenditure incurred for business purposes allowable u/s. 37(1) of the Act. - Decided in favour of assessee. Buy back of shares - colourable device for the purpose of avoiding dividend distribution tax - Held that:- Transaction in question would not fall under the category of colourable device. If an assessee enters into a deal which does not violate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar to salary cost which is allowable business expenditure. 2 The appellants crave leave to add alter amend or delete any of the above grounds of appeal. Grounds of appeal filed by the AO read as under: 1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing the appeal of the assessee without appreciating the fact that the assessee has indulged in the activity of buyback of shares as a colorable device only for the purpose to avoid dividend distribution tax. 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing the appeal of the assessee without appreciating the fact that the assessee has not declared any dividend inspite of making regular profit. 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was justified in allowing the appeal of the assessee without appreciating the decision of Authority of Advance Rulings (Income Tax) in the case of M/s. A Ltd. wherein it is held that where a Mauritan shareholder of an Indian Company accepted offer of buyback of shares given by Indian company the amount receivable would be taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. After considering the submission of the assessee and the assessment order the FAA held that no disallowance had been made under the head interest expenditure that making of investment out of own funds had no relevance that only other administrative expenses had been disallowed as per Rule 8D of the Rules. Referring to the judgment of Godrej Boyce Ltd. (328ITR81) the FAA upheld the order of the AO. 4. Before us the Authorised Representative (AR) stated that it had claimed an expenditure for earning the dividend income that the AO had mechanically applied the provisions of section 14A r. w. Rule 8D of the Rules. He relied upon the case of Om Prakash Khaitan (376ITR390) of Hon ble Delhi High Court. Departmental representative (DR) left the issue to the discretion of the Bench. 5. We have heard the rival submissions and perused the material before us. We find that the AO had not mentioned as to how much expenditure was incurred by the assessee for earning tax free income. We are of the opinion that if the assessee had not incurred any expenditure to earn tax free income then the AO cannot invoke the provisions of section 14A r. w. Rule 8D of the Rules. Firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs. 50. 65 lakhs)out of the total amount (Rs. 1. 07crores) was debited to P L A/c. was vested in employees that the balance amount would be vested in employees over a period of time that the assessee had not paid FBT on ₹ 56. 40 lakhs that liability could eventually increase or decrease in future that it had not produced any evidence as to the fact that amount in question was actually paid. Finally the AO made an addition of ₹ 56 40 195/- to the total income of the assessee. 7. Aggrieved by the order of the AO the assessee preferred an appeal before the FAA. Before him it was argued that allowability of ESOP expenses and payment of FBT for ESOP were two different concepts that the FBT would become payable upon vesting of the ESOP in the hands of the employees accordingly the assessee had paid FBT during the year that assessee had made full payment of ₹ 1. 07 crores to its parent company that it had claimed the cost of stock awarded to its employees entirely based on ESOP Scheme governed by the SEBI Guidelines that the ESOP expenditure was a measure in the nature of compensation cost and was fully deductible in computing the taxable income. The FAA in his or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter of Goldman Sachs(India) Securities Pvt. Ltd (ITA/3726/Mum/2015 AY. 2011- 12 dtd. 12. 02. 2016) that the Tribunal had decided the issue in favour of the assessee . We find that the Tribunal had deliberated upon the issue and had decided as under : The assessee is a wholly owned subsidiary of Goldman Sachs (Mauritius) LLC(GS-M). It was set up to undertake merchant banking and security business in India. Registered under the STPI scheme the it had set up a 100% export oriented unit in Bangalore to serve as a global support centre for the Goldman Sachs Group entities. On 24. 11. 2010 the assessee had remitted an amount ₹ 1 88 99 97 781/- to GS-M under a buyback of shares scheme whereby 4 03 93 199/- equity shares having face value of ₹ 10 each were bought back from GS-M by the assessee @Rs. 46. 79/-per share. Taking into account the face value of ₹ 10 per share the AO in his order passed u/s. 201(1) and 201(1A) r. w. s. 195 of the Act on 27. 01. 2014 held that the excess payment of ₹ 36. 79/-per equity share for 4 03 93 199 shares bought back amounting to ₹ 1 48 60 65 791/-was nothing but its distribution of its accumulated profits to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hancing future profits that the assessee had not shown any such requirement or compulsion as a justification for the non-grant of dividend in the regular course inspite of the continuous accumulation of profits in its books that the AO had specifically required the assessee to explain the commercial reason if any for the non issue of dividend although the profits were being accumulated year after year that it chose to remain silent on this show cause notice issued by the AO that by permitting the profits to accumulate in its books it had avoided the payment of DDT that would have been payable if such accumulated profits had been distributed to its share-holders that a portion of such accumulated profit was finally passed on to the sole shareholder on 24. 11. 2010 by way of payment on account of buy back of shares that it had claimed the exemption available u/s. 2(22)(iv) of the Act that excluded any payment made by a company on the purchase of its own shares from a shareholder in accordance with the provisions of section 77-A of the Companies Act 1956. The FAA further observed that the definition of dividend given in section 10(22) of the Act was an inclusive definition that sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reduction of capital that the annual accounts of the assessee showed that its share-capital actually got reduced and was so reflected in the books after the buy-back of the shares that buy-back of shares was one of the ways of capital reduction that reliance by the AO on the provisions of section 2(22)(d) of the Act dealing with capital reduction as including a transaction of buy-back of shares was justified that the provisions of section 10(34) would apply only if DDT had been paid u/s. 115-0 of the Act that no DDT was paid by the assessee that the recipient would not be entitled to any exemption u/s. 10(34) of the Act that the receipt in its hands would be chargeable to income tax that the treatment by the AO of the assessee as an A-I-D and the raising of demand u/s. 201(1) and 201(1A) r. w. s. 195 of the Act was justified. Finally he decided the issue against the assessee. 4. Before us the Authorised Representative(AR)argued that the assessee had bought back the shares as per the resolution passed in the general meeting in the Board of Directors on 4. 11. 2010 (Pg 14 of PB) that the offer for buy back opened on 5. 11. 2010 and closed on 20. 11. 2010 that the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the company authorising the buy-back Provided that nothing contained in this clause shall apply in any case where-(A) the buyback is or less than ten per cent. of the total paid-up equity capital and free reserves of the company ; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting : Provided further that Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back if any. Explanation - For the purposes of this clause the expression offer of buy-back means the offer of such buy-back made in pursuance of the resolution of the board referred to in the first proviso ; (c) the buy-back is of less than twenty-five per cent. of the total paid-up capital and free reserves of the company : Provided that the buy-back of equity shares in any financial year shall not exceed twentyfive per cent. of its total paid-up equity capital in that financial year ; (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back : Provided tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities do not raise any objection. It has been held that this is the duty and obligation of the Regional Director. In view of the aforesaid decision of this Court the objection of the Petitioner with regard to the locus of the Regional Director is untenable and deserves to be rejected. 6. The Petitioner has submitted that it is open to the Petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with Sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the Petitioner to follow only the procedure prescribed by Section 77 A/Section 68. In any event under Section 77 /Section 68 a company can buyback only 25% of the total paid up capital and free reserves of the company whereas under the Scheme the company proposes buyback of 30% of its paid up capital and free reserves which is not possible under Section 77 /Section 68. Consequently the only manner in which the company can buyback the said shares is by following the procedure under Section 391 read with Sections 100 - 104 of the 1956 Act. In support of its contentions the Petitioner has relied upon the decision of the Division Bench of this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 100 to 104 or section 77A to indicate that the jurisdiction of the court under section 391 or 394 has taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court should not readily be inferred such exclusion should be explicitly or clearly implied. There is nothing in the language of section 77 that gives rise to such an inference. We are therefore inclined to hold that section 77 A is merely an enabling provision and the courts powers under sections 100 to 104 and section 391 are not in any way affected. The conditions provided in section 77A are applicable only to buy-back of shares under section 77A. the conditions applicable to sections 100 to 104 and section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly the conditions for a buy-back under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields . 4. However it is necessary to note that the above was the position in law under the1956 Act in view of the language of the provisions of Section 391 and Section 77 A of that Act. In the 2013 Act Sub-section 10 of Section 230 provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which such shares or other specified securities were purchased by the company. Explanation. -For the purposes of this section specified securities shall have the meaning assigned to it in Explanation to section 77A of the Companies Act 1956 (1 of 1956). The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts that buyback of shares of a corporate entity cannot to be characterised as deemed dividend that profit arising out of the buyback schemes had to taxed under the head capital gains. Here it would be useful to take notice of the Speech of the Finance Minister while introducing the amendment to the Act with regard to the buyback of shares. Relevant part of the speech of the FM reads as follow: 95. Very recently the Companies Act 1956 has been amended to permit transactions relating to buy-back of shares. There is some ambiguity in the interpretation of the law as to whether such transactions would be treated as subject to dividend tax in addition to capital gains. In view of this I propose to amend the law to put it beyond doubt that on buy-b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us is prior to the April 1st 2013. Therefore we have to decide the issue as per the prevailing law applicable on the date of the transaction in question. 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. 5. 2. Now we would deal with the issue of treating the assessee as A-I-D for not deducting tax at source. Once it has been decided that the profit arising out of buyback would be taxed as capital gains the next step is to determine as to whether the capital gains are taxable in the hands of parent company of the assessee in light the Indo-Mauritius Tax Treaty. Article 13 of the said DTAA provides that capital gains would not be taxable in the hands of GS-M. If the assessee was not liable to deduct taxes as per the provisions of section 195 of the Act it cannot be held A-I-D. For invoking the provisions of section 201 of the Act non deduction of taxes at source is a pre-condition. We also find force in the alternate argument raised by the assessee. Even if the payment to GSM is considered as div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by a Chartered Accountant or a SEBl registered Merchant Banker as per the DCF method. In the present case the transfer price has been arrived at in accordance with the aforesaid circular of the RBI. The Regional Director has not disputed the fair market value of the shares so determined. In these circumstances it is clear that the buyback of shares under the Scheme is in accordance with the RBI Guidelines and that being so there is no question of there being any draining away of foreign exchange. 8. in view of the above and particularly the fact that in law the Petitioner is entitled to buy back its own shares by means of a scheme under Section 391 read with sections 100-104 of the 1956 Act the scheme cannot be said to be a colorable device to evade income tax. It is a legally permissible procedure which the Petitioner is entitled to follow to buy back its shares. Following the above order we hold that 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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