Buy back of shares by an Indian Company from its Mauritius Parent is not a scheme designed for tax avoidance and Mauritius Parent is entitled to claim benefit of ‘no-taxation in India’ under the India- Mauritius DTAA. Under the IT Act, buy back is taxable and exemption u/s. 47 would be available only when either the holding company or the nominee holds the entire share capital and not otherwise. TP provisions under the IT Act would apply, even though the transaction may not be taxable in view o<

TP provisions under the IT Act would apply, even though the transaction may not be taxable in view of the DTAA.

The applicant (MCO), a tax resident of Mauritius holding a valid Tax Residency Certificate (TRC), is a wholly owned subsidiary (WOS) of a company incorporated in UK (UKCO). UKCO was, in turn, held by an US Company (USCO). Pursuant to the scheme of corporate reorganisation, one of the businesses of existing Indian company was demerged into another Indian company (ICO) which eventually came to be held by MCO.

ICO proposed to buyback certain number of shares from MCO in terms of the provisions of Indian Companies Act, 1956. Capital gains arising to MCO on buy-back was claimed to be tax exempt under DTAA. Tax Department resisted the claim by alleging that MCO was a shell company without any business purpose and buy-back was not a bonafide transaction.

AAR Ruling

Though MCO is incorporated in Mauritius and the investment was made through it for acquiring shares of ICO and such was the structure to take advantage of the beneficial provisions of the DTAA, this fact, by itself, is not sufficient to deny the benefits of the DTAA. This aspect had been laid down by the Supreme Court (SC) in the case of Azadi Bachao Andolan [263 ITR 706].

The Tax Authority had not disclosed adequate material to justify a finding that MCO or its parent resorted in devising a scheme for tax avoidance. Once MCO is eligible to claim the benefits of the Mauritius DTAA, capital gains arising out of the proposed buyback of shares of ICO is not taxable in India irrespective of its taxability in Mauritius.

As the proposed buyback is an international transaction and out of which income arises, same is subject to the Transfer Pricing (TP) provisions under the IT Act, even if same is exempt under DTAA. Based on its earlier ruling in the case of RST [AAR No. 1067 of 2011], the AAR held that exemption u/s.. 47 of the Act would be available only when either the holding company or the nominee holds the entire share capital and not otherwise.