Share buy-back transactions taxable under section 46A despite exemption claims under section 47(iv)

AAR Mumbai ruled that share buy-back transactions are taxable under section 46A, rejecting exemption claims under section 47(iv). The authority held that special provision 46A prevails over general provisions, as shares cease to exist post buy-back making other sections redundant. For non-resident companies, MAT liability under section 115JB applies only to profits attributable to permanent establishment. The resident company must withhold taxes under section 195 on buy-back consideration paid to non-residents.

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Issues Involved:
1. Tax exemption on the transfer of shares during buy-back under section 47(iv) of the Income-tax Act, 1961.
2. Applicability of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961.
3. Requirement of tax deduction at source under section 195 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Tax exemption on the transfer of shares during buy-back under section 47(iv) of the Income-tax Act, 1961:

The applicant contended that the buy-back of shares by PQR India from the applicant should be exempt from tax under section 47(iv) of the Income-tax Act, 1961. Section 47(iv) exempts certain transfers from being regarded as "transfer" for the purpose of capital gains tax under section 45. The applicant argued that it met all conditions under section 47(iv) since it held the entire share capital of PQR India, an Indian company.

However, the Department argued that section 46A, introduced along with section 77A of the Companies Act, 1956, specifically deals with capital gains arising from the buy-back of shares and overrides section 47(iv). Section 46A states that any consideration received by a shareholder from a company for the purchase of its own shares shall be deemed to be capital gains.

The judgment concluded that section 46A is a special provision designed to tax buy-back transactions, and section 47(iv) does not apply to such transactions. The Authority for Advance Ruling (AAR) in the case of RST, In re, supported this view, holding that section 46A prevails over the general provisions of section 45 read with section 47(iv).

2. Applicability of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961:

The applicant argued that section 115JB, which imposes MAT on book profits, should not apply to foreign companies. The applicant cited various sources, including Central Board of Direct Taxes (CBDT) circulars and Finance Minister speeches, indicating that MAT was intended for domestic companies.

The Department countered that section 115JB applies to all companies, including foreign companies, as defined under section 2(17) of the Income-tax Act, 1961. The AAR in ZD, In re, supported this view, stating that section 115JB does not distinguish between resident and non-resident companies.

The judgment noted that the Finance Act, 2016, with retrospective effect from April 1, 2001, clarified that MAT provisions do not apply to foreign companies without a permanent establishment (PE) in India. However, since the applicant had a PE in India during the relevant assessment year, MAT was applicable. The Assessing Officer must compute the book profits of the supervisory PE, and MAT liability would be restricted to the profit attributable to the PE.

3. Requirement of tax deduction at source under section 195 of the Income-tax Act, 1961:

The applicant argued that since the transfer of shares was not taxable under section 47(iv), section 195, which mandates tax deduction at source on payments to non-residents, would not apply.

The Department contended that since the capital gains from the buy-back were taxable under section 46A, section 195 was applicable, and PQR India was required to withhold taxes on the consideration payable for the buy-back.

The judgment held that given the capital gains were chargeable under section 46A, section 195 was applicable, and PQR India was liable to withhold taxes on the consideration payable for the buy-back of shares.

Conclusion:

1. The share buy-back transaction is taxable under section 46A, and exemption under section 47(iv) is not applicable.
2. MAT under section 115JB applies, and the Assessing Officer must compute the book profits of the supervisory PE, with MAT liability restricted to the profit attributable to the PE.
3. Section 195 applies, and PQR India must withhold taxes on the consideration payable for the buy-back of shares.

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