2017 (2) TMI 1504 - AT - Income Tax

Tribunal rules on buy-back shares tax treatment

M/s. Fidelity Business Services India Pvt. Ltd. Versus Asst. Commissioner of Income Tax, Circle 3 (1) (1), Bangalore

M/s. Fidelity Business Services India Pvt. Ltd. Versus Asst. Commissioner of Income Tax, Circle 3 (1) (1), Bangalore - TMI Issues Involved:1. Levy of Dividend Distribution Tax (DDT) on buy-back of shares.2. Jurisdiction of the Assessing Officer (AO) in levying DDT.3. Allegation of using a colorable device to avoid tax.4. Re-characterization of buy-back as dividend distribution.5. Directions or lack thereof from the Dispute Resolution Panel (DRP).6. Levy of interest under Section 115-P of the Income Tax Act.Detailed Analysis:1. Levy of Dividend Distribution Tax (DDT) on Buy-back of Shares:The primary issue in this appeal is whether the buy-back of equity shares by the assessee should be treated as a distribution of dividend under Section 2(22)(d) of the Income Tax Act, 1961, thereby attracting DDT under Section 115-O. The assessee argued that the buy-back of shares should be treated as capital gains in the hands of the shareholders, as per Section 46A, and not as a dividend. The AO, however, treated the transaction as a colorable device to avoid tax and levied DDT, arguing that the reserves and surplus were transferred out of India without tax impact.2. Jurisdiction of the Assessing Officer in Levying DDT:The assessee contended that the AO exceeded his jurisdiction by levying DDT under Section 115-O during the proceedings under Section 143(2)/(3) of the Act. The AO's jurisdiction to reclassify the transaction of buy-back into dividend distribution was challenged, emphasizing that such reclassification is not permissible under the law.3. Allegation of Using a Colorable Device to Avoid Tax:The AO alleged that the assessee used a colorable device to avoid paying tax in India by distributing profits to its shareholders. The assessee countered that the buy-back of shares was a legitimate transaction and not a device to evade taxes. The Tribunal noted that if the buy-back price is realistic and represents the fair market value, it cannot be considered a colorable device.4. Re-characterization of Buy-back as Dividend Distribution:The AO re-characterized the buy-back of shares as a distribution of dividend under Section 2(22)(d). The Tribunal referred to Section 2(22)(iv), which excludes buy-back of shares from the definition of dividend if conducted in accordance with Section 77A of the Companies Act. The Tribunal held that the buy-back transaction, in this case, should not be treated as a dividend, especially since Section 115QA, which taxes such transactions, was introduced only from 1.6.2013 and is not applicable to the assessment year in question.5. Directions or Lack Thereof from the Dispute Resolution Panel (DRP):The assessee argued that the DRP failed to pass directions on the objections related to the levy of DDT on the buy-back of shares. The Tribunal noted that the DRP did not address these specific objections, which contributed to the controversy.6. Levy of Interest under Section 115-P:The AO held that interest under Section 115-P is leviable on the assessee. The Tribunal's decision on this matter was not explicitly detailed in the provided text, but it is implied that the interest issue is contingent on the resolution of the primary issue regarding the classification of the buy-back transaction.Conclusion:The Tribunal concluded that the buy-back of shares prior to 1.6.2013 should not attract DDT under Section 115QA or be treated as a dividend under Section 2(22). However, the Tribunal remanded the issue of determining the fair market price of the shares back to the AO to ascertain whether the buy-back price was realistic or artificially inflated. If the buy-back price is found to be inflated, the excess amount could be treated as a colorable device to avoid tax. The appeal was partly allowed, and the case was sent back to the AO for further examination of the fair market value of the shares.