Colourable buy-back treated as dividend, making the remittance taxable and triggering withholding tax obligations.

A proposed share buy-back to a Mauritius resident was treated as a colourable device rather than a genuine commercial restructuring because the company had accumulated reserves and the offer was selectively accepted. On that basis, the payment was characterised in substance as dividend, not capital gains, and was held taxable in India under Article 10 of the India-Mauritius DTAC and the domestic definition of dividend. As the remittance constituted taxable income in India, the company was also required to deduct tax at source on the buy-back proceeds.

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Issues: (i) Whether the proposed buy-back of shares and the resulting payment to a Mauritius resident were taxable in India under the India-Mauritius DTAC. (ii) Whether the applicant was required to withhold tax on the remittance of the buy-back proceeds.

Issue (i): Whether the proposed buy-back of shares and the resulting payment to a Mauritius resident were taxable in India under the India-Mauritius DTAC.

Analysis: The payment was examined in the context of the company's post-2003 non-distribution of dividends, substantial reserve accumulation, and the selective acceptance of the buy-back offer by the Mauritius shareholder alone. The Authority held that the proposed buy-back was not a genuine commercial restructuring but a colourable device devised to avoid tax on distributed profits. Once the transaction was treated as colourable, it could not be regarded as a genuine buy-back for the purpose of capital gains treatment under the treaty. The payment was consequently treated as dividend in substance, bringing it within the Indian taxing power under Article 10 of the India-Mauritius DTAC and the domestic definition of dividend.

Conclusion: The amount payable under the proposed buy-back was taxable in India as dividend under Article 10 of the India-Mauritius DTAC.

Issue (ii): Whether the applicant was required to withhold tax on the remittance of the buy-back proceeds.

Analysis: Having held that the proposed payment was taxable in India, the Authority proceeded on the basis that the remittance attracted withholding obligations under the Income-tax Act. The liability to deduct tax followed from the characterisation of the payment as taxable income in India.

Conclusion: The applicant was required to withhold tax on the proposed remittance.

Final Conclusion: The proposed arrangement was treated as an impermissible tax-avoidance device, the payment was held taxable in India as dividend, and the remitting company was held liable to deduct tax at source.

Ratio Decidendi: A transaction found on the facts to be a colourable device for avoiding tax is to be disregarded in substance, and its tax consequences must be determined according to its real character rather than its form.

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