On facts, buy-back of shares by an Indian Company treated as distribution of dividend.

The applicant is a public limited company incorporated in India (ICO). The major shareholders of ICO are three foreign companies incorporated in US (US Co), Mauritius (Mau Co) and Singapore (Sing Co).

• AAR noted that: (a) Mau Co was held by a USbased parent company; (b) Mau Co had acquired shares of ICO during the years 2001 to 2005; (c) ICO declared dividends to its shareholders till 2003 (i.e., till the year of introduction of DDT) and had thereafter accumulated reserves despite consistent profits; (d) ICO had offered to buyback its shares twice (in 2008 and 2010) but, only Mau Co agreed to transfer its shares under the buy-back offer to ICO.

• Before AAR, the Tax Department contended that the transaction was colourable and designed to avoid tax in India by non-declaration of dividend and acceptance of buy-back offer only by Mau Co was on account of capital gains exemption available to Mau Co.

• ICO claimed that buy-back was genuine and taking advantage of exemption provision of the Act or treaty was not tax avoidance.

• AAR rejected ICO’s contentions and held that the scheme of buy-back was a colourable device to avoid tax in order to take benefit under India- Mauritius DTAA. It supported its conclusion based on the finding that:

• There was no proper explanation on the part of ICO as to why dividends were not declared subsequent to year 2003 while it regularly distributed dividends before introduction of DDT.

• The offer of buy-back was accepted only by Mau Co which enjoyed treaty exemption while the other two shareholders did not enjoy such protection. AAR also held that:

• Though an identical issue was pending adjudication before the Tax Authority, the present application was maintainable since it related to a different transaction.

• The fact that Mau Co is owned by US Company would not ipso facto label the transaction to be prima facie designed for avoidance of tax.