Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2017 (2) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2017 (2) TMI 1504 - ITAT BANGALORELevying 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.
|