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

The Tribunal held that the buy-back of shares before 1.6.2013 should not attract Dividend Distribution Tax (DDT) under Section 115QA or be considered as a ... Levying Dividend Distribution Tax (“DDT”) u/s 115-O - buy back of equity shares was treated as Distribution of Dividend under Section 2(22)(d) of the Act and consequently levy of Dividend Distribution Tax (‘DDT’) - Applicability of Section 115QA - amount remitted by the Appellant to its shareholders on account of buy-back of shares made in accordance with the provisions of section 77A of the Companies Act, 1956 - AO alleging that Appellant resorted to the use of colourable device to avoid payment of tax in India while distributing profits to its shareholders - HELD THAT:- There is no dispute that the holding company of the assessee based in Mauritius is holding more than 99.99% of the shares of the assessee. Therefore if any payment is made by the assessee to the holding company, the same would be treated and deemed as dividend in view of the provision of Section 2(22) of the Act however, in this case the payment in question has been made by the assessee to the holding company on account of buy back of shares. Therefore to the extent of the transaction of buy back of shares, the same cannot be classified as dividend as per the provisions of Section 2(22) when the exclusion clause (iv) of Section 2(22) has specifically excluded such a payment on purchase of its own shares from a shareholder in accordance with the provisions of Section 77A of the Companies Act from the definition of dividend. After the insertion of Section 115QA, the purchase of its own shares by the company in accordance with the provisions of section 77A of the Companies Act shall be charged to DDT. Since this transaction in the case of the assessee is prior to 1.6.2013 therefore the said provision of Section 115QA is not applicable in the case of the assessee as it is explained by the CBDT vide Circular No.3/16. CBDT has clarified that the consideration received on buy back of shares between the period 1.4.2000 to 31.5.2013 would be taxed as capital gain in the hands of the recipient in accordance with the provisions of Section 46A of the Act and no such amount shall be treated as dividend in view of the provisions of Section 2(22)(iv) - AO has accepted that the capital gain in the hand of the holding company is not chargeable to tax as per the provisions of Article 13(4) of Indo-Mauritius DTAA. Therefore on principle we are of the view that the transaction of buy back of shares prior to 1.6.2013 does not attract Section 115QA as well as Section 2(22) of the Act. Payment on account of buy back made by the assessee to its holding company to the extent of the fair market price of the share of the assessee company - same would be treated as capital gain in the hand of the holding company as per the provisions of Section 46A and in view of the provisions of Indo-Mauritius DTAA the capital gains on account of sale of share is not chargeable to tax in India. The payment in the name of buy back of shares made by the assessee over and above the fair market price of the share of the assessee would not be treated as part of the purchase price because the transaction is between the two closely related parties and therefore the payment which is in excess of fair market price of the share of the assessee company would certainly fall in the ambit of Section 2(22)(e) of the Act. There is no dispute regarding the other condition of the holding company having a voting power of not less than 10% as it holds the shares of the assessee to the extent of 99.99%. In case the buy back price is not based on the real valuation and it is artificially inflated by the parties then it is certainly a device for transfer of the reserves and surplus to the holding company by avoiding the payment of tax and therefore it will be treated as a colourable device. Buy back price paid by the assessee to its wholly owned holding company does not represent true fair market price of the share of the assessee then it is nothing but a dubious method of avoiding the tax in the garb of buy back. Thus if the buy back price paid to the holding company is unrealistic and highly inflated then to that extent the transaction of payment to the holding company has been given a colour of payment towards buy back. We find that neither the Assessing Officer nor the DRP has decided this issue of actual fair market price of the share of the assessee as on the date of buy back to ascertain whether the payment made by the assessee @ ₹ 2,85,108 per share is unrealistic and artificially inflated with the motive to avoid tax. Hence this issue of examination of the fair market price of the share vis-à-vis the buy back price of the assessee is set aside to the record of the Assessing Officer for adjudication as per law - Appeal of the assessee is partly allowed. 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.