2026 (3) TMI 1486 - AT - Income Tax

Treaty reorganisation exception applies to group-level share buy-backs forming part of corporate restructuring under the India-Netherlands DTAA.

Buy-back of shares by an Indian subsidiary can fall within the treaty phrase 'corporate organisation, reorganisation, amalgamation, division or similar ... Gains arising to the assessee from the buy-back of shares by its Indian subsidiary - Income taxable in India or Netherland - Buy-back of shares - Corporate reorganisation - Capital gains under DTAA - Article 13(5) of India-Netherlands DTAA - assessee is a company incorporated in Netherlands - difference of o[inion - matter referred to third member Whether or not the gains arising to the assessee company in the instant case from the buy-back of shares by ‘HIIPL’ is covered by Article 13(5) of the DTAA between India and Netherland? - HELD THAT: - As a result of the buy back shares, while there is a reduction in quantum of shareholding (i.e., the number of shares held by the assessee in HHIIPL gets reduce), the actual ownership in percentage terms remains the same (i.e., the assessee continues to be the owner of HIIPL). That is, the form of assessee’s ownership in HIIPL gets changed by : (i) reduction in the financial interest, and (ii) there being a major change (-24.15%) in the financial structure of HIIPL. However, the actual ownership of HIIPL remained the same. The guidance issued by ICAI to its fellow members, which states that the definition of “Capital and Financial Restructuring” includes buy-back of shares. Similarly, the guidance issued by the Institute of Company Secretaries of India (ICSI) for its fellow also provides that buy back is a part of corporate restructuring of a company. The intention of the contracting parties i.e., India and the Netherlands with respect to Article 13(5) of the India-Netherlands DTAA is to provide taxation rights to the home country in relation to gains arising in the course of a corporate reorganization wherein there is a transfer of shares within the same corporate group. In the present case as well, since the transaction of buy back by HIIPL from the assessee results in transfer of shares within the same corporate group, this transaction of buy back should qualify as a corporate reorganisastion that is eligible to claim the benefit of Article 13(5) of the India Netherlands DTAAA. Accordingly, agree with the view taken by Ld Accountant Member that transaction of buy-back of shares by HIIPL from the assessee results in transfer of shares within the same corporate group and hence, qualifies as a corporate reorganization and is eligible to claim the benefit under Article 13(5) of the India Netherlands DTAA. Final Conclusion: By majority, the Tribunal held that the gains arising to the assessee on buy-back of shares by its Indian subsidiary were covered by Article 13(5) of the India-Netherlands DTAA and were not taxable in India. The assessee's appeal was accordingly allowed. Issues: Whether gains arising to the assessee from the buy-back of shares by its Indian subsidiary were covered by Article 13(5) of the India-Netherlands DTAA and consequently taxable only in the Netherlands.Analysis: The expression 'corporate organisation, reorganization, amalgamation, division or similar transaction' was held to have to be understood in its ordinary legal sense, read in the context of the treaty and the applicable domestic law. Buy-back of shares was treated as capable of constituting corporate reorganisation where it formed part of a transaction within the same corporate group and resulted in a material change in the financial structure of the company. The reasoning relied on recognised legal meanings of reorganisation, guidance materials on corporate restructuring, and the view that a narrow interpretation would defeat the purpose of Article 13(5). On the facts, the buy-back was accepted as a group-level transaction falling within the treaty exception.Conclusion: The gains from the buy-back were held to fall within Article 13(5) and were not taxable in India; the assessee succeeded.