Article 13 of India Mauritius DTAA – Buyback transaction cannot be treated as colorable device for avoidance of tax – Buyback results in capital gain and is exempt from taxes in India under Article 13 of India-Mauritius DTAA .
Facts
The Taxpayer, an Indian resident company, is a whollyowned subsidiary of a Mauritian company (FCo). The Taxpayer undertook a buyback on account of which shares were bought back at a value higher than its face value.
The Tax Authority contended that the buyback transaction was a colorable transaction to avoid payment of dividend distribution tax (DDT). Therefore, Tax authority regarded such buyback as capital reduction and considered the excess payment over face value of shares as distribution of accumulated profits to shareholders i.e., F Co. It was further held that, since the Taxpayer had not paid DDT, dividend received by FCo would not be eligible for exemption under the Act. Accordingly, Taxpayer was held liable to withhold taxes at the rate of 5% on gross payment to FCo under Article 10 of the DTAA. Since the Taxpayer had failed to withhold taxes, the Taxpayer was held to be an assessee in default and interest was also levied for such failure apart from recovery of tax.
The Taxpayer however contended that the amount remitted under the buyback transaction was in the nature of capital gains which was exempt from taxation in India under India-Mauritius DTAA. Accordingly, neither any tax was deductible nor was there any default in withholding of tax.
Held
Buyback of shares cannot be equated with capital reduction as they are two entirely different concepts as discussed and held in the Bombay High Court (HC) decision of Capgemini India Pvt. Ltd. (Company Scheme Petition No. 434 of 2014).
CBDT Circular No. 779 dated 14th September 1999 specifically states that shareholders would not be subjected to dividend tax but taxed under capital gains provisions upon buy back of shares.
It is true that buyback transactions are subject to Income distribution tax pursuant to amendment by the Finance Act 2013. However, as the transaction under consideration pertained to a period prior to this amendment, there is no ambiguity that those provisions will not apply for buyback under consideration. Hence, the said transaction could not be regarded as deemed dividend but should be subjected to tax as capital gains.
Since Article 13 of the DTAA specifically exempts such transaction from tax in India, the Taxpayer is not liable to withhold tax under the Act. Even if the payment was considered as dividend, the requirement to pay DDT would make the payment exempt in the hands of the shareholder. Accordingly, withholding tax provisions should not apply.
By placing reliance on the observations of the Bombay HC ruling of Capgemini (supra), the Tribunal ruled that if the Taxpayer entered into a transaction which did not violate any provision of the Act, the transaction cannot be termed as a colorable device just because it results in non-payment or lesser payment of taxes in that particular 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.
