2016 (3) TMI 118 - AT - Income Tax

Tribunal reclassifies buyback as capital gains, not dividend, saving appellant from tax obligations.

Goldman Sachs (India) Securities Pvt. Ltd. Versus Income tax Officer- (Intl. Taxation) TDS-3, Mumbai

Goldman Sachs (India) Securities Pvt. Ltd. Versus Income tax Officer- (Intl. Taxation) TDS-3, Mumbai - TMI Issues Involved:1. Treatment of the appellant as an Assessee in Default (A-I-D) under section 201(1) of the Income Tax Act.2. Charging of interest under section 201(1A) of the Income Tax Act.3. Classification of the buyback transaction under section 2(22)(d) versus section 2(22)(iv) of the Income Tax Act.4. Applicability of Dividend Distribution Tax (DDT) versus Capital Gains Tax.5. Allegation of the buyback transaction being a colorable device to evade tax.Detailed Analysis:1. Treatment of the appellant as an Assessee in Default (A-I-D) under section 201(1) of the Income Tax Act:The Assessing Officer (AO) held that the excess payment made by the assessee to its parent company, GS-M, under the buyback of shares scheme was in the nature of a dividend. As the assessee did not deduct tax at source while making this remittance, it was deemed an Assessee in Default under section 201(1) of the Act. The First Appellate Authority (FAA) upheld this view, noting that the buyback was a means to distribute accumulated profits without paying DDT, thus justifying the AO's treatment of the assessee as an A-I-D.2. Charging of interest under section 201(1A) of the Income Tax Act:The AO also charged interest under section 201(1A) due to the non-deduction of tax at source. This was upheld by the FAA, who found that the assessee had avoided paying DDT by accumulating profits and then distributing them through a buyback, thus necessitating the interest charge.3. Classification of the buyback transaction under section 2(22)(d) versus section 2(22)(iv) of the Income Tax Act:The assessee argued that the buyback of shares should be classified under section 2(22)(iv) and not under section 2(22)(d), which deals with capital reduction. The FAA, however, held that the buyback was effectively a distribution of profits and thus fell under section 2(22)(d). The Tribunal, after considering the relevant sections and the legislative intent, concluded that buyback and capital reduction are different concepts and that the profits from the buyback should be taxed as capital gains under section 46A, not as deemed dividends under section 2(22)(d).4. Applicability of Dividend Distribution Tax (DDT) versus Capital Gains Tax:The Tribunal noted that according to the Finance Minister's speech and CBDT Circular No. 779, the intent of the law was to tax buyback transactions as capital gains and not as dividends subject to DDT. The Tribunal found that for the assessment year in question, the law applicable was clear that buyback transactions should be treated under section 46A, leading to capital gains tax and not DDT.5. Allegation of the buyback transaction being a colorable device to evade tax:The FAA and the AO had considered the buyback a colorable device to avoid DDT. However, the Tribunal, referencing the Bombay High Court's decision in Capgemini India Private Limited, held that if a transaction is legally permissible and does not violate any provisions of the Act, it cannot be termed a colorable device. The Tribunal concluded that the buyback was not a colorable device as it was a legally permissible method to return profits to shareholders.Conclusion:The Tribunal reversed the FAA's decision, holding that the buyback transaction should be treated under section 46A of the Act, leading to capital gains tax, and not as a deemed dividend under section 2(22)(d). Consequently, the assessee was not liable to deduct tax at source under section 195, and thus could not be treated as an Assessee in Default under section 201(1). The appeal filed by the assessee was allowed.