Income arising upon buy-back of shares by a whollyowned Indian subsidiary of a foreign company is taxable in accordance with section 46A and not section 47(iv).

Income arising upon buy-back of shares by a wholly-owned Indian subsidiary of a foreign company is taxable in accordance with section 46A and not section 47(iv).

The applicant, a German company (FCO), was a part of group of companies. FCO had a wholly-owned public limited subsidiary company in India (ICO). To comply with requirements of the Companies Act as regards the minimum number of members, one share each in ICO was held by six other companies as nominees of FCO. Also, FCO held shares in ICO as investment and not stock-in-trade. Subsequently, FCO received intimation from ICO for buy-back of shares at a price determinable in accordance with the RBI guidelines. FCO approached AAR on the issue whether transfer of shares in the course of the proposed buy-back by ICO was exempt u/s.47(iv) of the Income-tax Act. The Tax Department contended that upon buy-back, shares are extinguished and hence section 47(iv) has no application. Further, section 47 does not override section 46A. Also, section 46A was specifically introduced to deal with buy-back. Hence, the gain was taxable in India u/s.46A of the Income-tax Act or Article 13(4) of India-Germany DTAA. FCO contended that the charging section was section 45 and not section 46A. Section 46A was only clarificatory. Section 47(iv) and (v) apply generally to capital assets and to attract section 47(iv), it is enough if the share is a capital asset.

Ruling:

• The AAR rejected FCO’s contention and held that income arising upon buy-back of shares by ICO would be taxable u/s.46A for the following reasons: Even if six other members of ICO are nominees of FCO, it cannot be postulated that FCO was holding all the shares in ICO. Section 45 is a general provision whereas section 46A is a specific provision dealing with purchase of its own shares by a company and hence, it should prevail over section 45.
•  Speech of Finance Minister while introducing section 46A has made it clear that section 46A was enacted to deem that the amount received on buy-back was taxable as capital gain and not as dividend.
• Since income is chargeable to tax under section 46A, the payment made by ICO would be subject to withholding tax.