|Rajendra (AM), Ram Lal Negi (JM)
|buyback of shares, reduction of capital
|Aarti Sathe, Percy Pardiwala
|February 12, 2016 (Date of pronouncement)
|February 13, 2016 (Date of publication)
|Click here to download the file in pdf format
|S. 2(22)(d)/ 46A: A buyback of shares u/s 77A of the Companies Act is not a reduction of capital u/s 100 - 104 of that Act. A buyback cannot be regarded as a "colourable transaction" and cannot be assessed as "deemed dividend" u/s 2(22)(d). The capital gains on buy-back are exempt under the India-Mauritius DTAA
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 Rs.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 Rs.10 each were bought back from GS-M by the assessee @Rs.46.79/-per share. Taking into account the face value of Rs.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 Rs.36.79/-per equity share for 4,03,93,199 shares bought back amounting to Rs.1,48,60,65,791/-was nothing but its distribution of its accumulated profits to its ultimate beneficiary and the only shareholder i.e. GS-M, that the buyback of equity shares by the assessee from its holding company was a colourable transaction to avoid the payment of dividend distribution tax (DDT). The excess payment of Rs.1,48,60,65,791/-was held by the AO to be in the nature of dividend as per provisions of section 2(22)(d) of the Act. As the assessee had not deducted any DDT u/s.115 of the Act, such dividend income was found by the AO not to qualify for exemption u/s.10(34) of the Act and therefore, was taxable in the hands of the recipient GS-M, namely. He further held that on remittance of such amount to a non-resident representing its income by way of dividend, tax deduction was required to be made u/s.195 of the Act. As the assessee company had not deducted any tax while making such remittance, it was held to be an ‘assessee in default’ in terms of the provisions of section 201 of the Act. Further, the assessee was also found to be liable to pay simple interest u/s.201 (1A) of the Act. Tax at the rate of 5% of the gross amount of such dividend was determined by the AO as payable by the assessee in terms of para 2(a) of Article 10 of the India Mauritius Tax-Treaty. This was confirmed by the CIT (A). On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) Section 100-105 r.w.s. 391of the CA deal with reduction of capital and obtaining permission of the Court. Clearly, both deal with different situations. The Hon’ble Jurisdictional High Court has dealt with the schemes of buyback of shares and reduction of capital in the case of Capgemini India Private Limited (Company Scheme Petition No.434 of 2014 dated 28.04.2015) where it was held that it is open to a company to buy back its own shares by following the procedure prescribed under section 77A/Section 68 or by following the procedure prescribed under section 391 read with Sections 100 to 104 of the 1956, Act. The observations of the Hon’ble Court does not leave any doubt that buyback of shares cannot be equated with reduction of capital.
(ii) While amending the CA, by introduction of section 77A of the Act, Legislature had made amendments to sections 2(22)(d) and 46A of the Income tax Act too. 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. This is also supported by the Speech of the Finance Minister while introducing the amendment to the Act with regard to the buyback of shares and Circular no.779 dated 14.09.2099 issued by the Central Board of Direct Taxes with regard to taxability arising out of the buyback of shares.
(iii) Section 115Q has been amended w.e.f.01.04.2013 and profit arising out of buyback of shares is to taxed at a particular tax rate. But, the AY, before 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.
(iv) As regards 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-ID. For invoking the provisions of section 201 of the Act, non deduction of taxes at source is a precondition. We also find force in the alternate argument raised by the assessee. Even if the payment to GSM is considered as dividend u/s 2(22)(d) of the Act, then the taxes on the same have to be charged by way of DDT as per section 115-O of the Act.As per section 10(34) of the Act, any income by way of dividend referred to in section 115-O of the Act does not form part of total income in the hands of the recipient and company declaring dividend will be in default as per section 115Q. So, the provisions of TDS would not be applicable for dividend covered under Section 2(22)(d) of the Act.
(v) As regards the issue of the alleged colourability of the transaction, in the matter of Capgemini India Private Limited (supra), the Hon’ble Bombay High Court has deliberated upon the almost identical facts and circumstances and has held that if the law permits a company to buy back back its shares in more than one way; the company cannot be compelled to follow only the method that results in payment of income tax. It is well settled that an assessee can always manage his affairs in a manner so as to avoid payment of tax. In the present case since it is legally permissible for the company to buy back its shares by following the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act, the fact that the same may not attract income tax will not amount to it being a device to evade tax. 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 non-payment or lesser payment of taxes in that 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. But, for that the assessee cannot be penalised.