TMI Blog2012 (4) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... will satisfy the definition of dividend under the Act, Article 10 of the DTAC between India and Mauritius and consequently taxable as such. Also, applicant is required to withhold tax on the proposed remittance of the proceeds to ‘A’ (M). - A.A.R. No. P of 2010 - - - Dated:- 22-3-2012 - Mr Justice P.K. Balasubramanyan, Mr. V.K.Shridhar, JJ. Present for the applicant : Mr. Ravi Sharma, Advocate Present for the Department : Mr. G.C. Srivastava, Advocate R U L I N G [By Justice P.K. Balasubramanyan] The applicant is a company incorporated in India in the year 1953 under the Companies Act of 1913. It is a closely held Public Limited Company. 48.87 % of its share are held by A (USA), 25.06% by A (Mauritius), 27.37% by company A (S), Singapore and 1.76% by the general public. On 15.6.2010, the Board of Directors of the applicant has passed a resolution proposing a scheme of buy-back of its shares from existing shareholders in accordance with Section 77A of the Indian Companies Act. 2. A (Mauritius) which holds 25.06% of shares in the applicant and incorporated on 6.4.2001 in Mauritius, proposes to accept the offer of buy-back. It acquired the shares in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of section 46A of the Income-tax Act, and the amendment of the definition of Dividend under that Act, there cannot be any doubt that what would be generated would be capital gains. Under paragraph 4 of the DTAC between India and Mauritius such gains are taxable only in Mauritius. It is, therefore, submitted that the questions may be ruled in favour of the applicant. It is argued on behalf of the Revenue that the hearing of the application is barred by clause (i) of the proviso to Section 245R(2) of the Act. It is submitted that there was an identical buy-back in the year 2008 and on an application being made by the applicant under section 195(2) of the Act it was directed that tax had to be withheld. The applicant had withheld the tax and remitted it. Subsequently, A (M) had filed a return of income claiming Nil liability and the question whether the income was taxable in India was pending before the Assessing Officer when the applicant filed the above application under section 245Q of the Act. The identical question was hence pending adjudication before an income-tax authority when this Authority was approached by the applicant. Senior counsel for the applicant met thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Taking advantage of legal and permissible means to arrange one s affairs cannot be characterized as a scheme for avoidance of tax. 8. We may observe some of the other relevant aspects. Though a buy-back was offered in the year 2008 and now, neither A (USA), nor A (S) accepted the offer. According to the Revenue, this was because the gain on buy-back would have been taxable at the hands of those entities under the India -USA DTAC and conditionally under the India-Singapore DTAC. The India-Mauritius DTAC did not make the gain taxable in India and it was not taxed in Mauritius. The acceptance of the offer by A (M) alone on both occasions, was therefore significant. The public held only 1.76% of the shares and even if some of them had accepted the offer, there was no significant change in the holdings. 9. A (Mauritius) is a wholly owned subsidiary of A (Hong Kong). It was established to undertake offshore business activities as a corporate investment vehicle. A (H) makes adequate funds available to it as and when investment directions for offshore business activities are taken. Until 14-3-2004, the immediate holding company of A (M) was A (UK) Limited, a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be held that the payment is taxable as dividend under the Income-tax Act read with the India-Mauritius DTAC. This Authority is reminded of the development of the law from Ramsay to Vodafone in this context. 12. On behalf of the applicant it is reiterated that the application having been allowed under section 245R(2) of the Act, inspite of an objection of similar nature being raised, it was no more open to the Revenue to raise this objection. Even otherwise, the applicant is entitled to arrange its affairs in such a manner that it lightens the burden, by choosing a legal means available to it and that arrangement cannot be characterized as scheme for avoidance of tax. In any event, in view of the amended definition of dividend under the Act, the receipt cannot be taxed as dividend. It is only capital gains attracting Section 46A of the Act and paragraph 4 of Article 12 of the India-Mauritius DTAC. 13. It is true that while allowing the application under section 245R(2) of the Act for giving a ruling, this Authority did not accept the plea of avoidance then put forward. At the same time, this Authority did not shut the door fully on the question. This Authority stated: Jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther A USA nor A (S) accepted the offer of buy-back, obviously because in the case of one it would have been taxable in India as capital gains and in the case of the other, its taxability would have depended on certain conditions being fulfilled, whereas under the India-Mauritius DTAC, capital gains is totally out of the Indian tax net. There was no proper explanation on the part of the applicant as to why no dividends were declared subsequent to the year 2003 when the company was regularly making profits and when dividends were being distributed before the introduction of Section 115-O of the Act in its present form. We are, therefore, satisfied that the proposal projected before us of buy-back is a scheme devised for avoidance of tax. In fact, it is a colorable device for avoiding tax on distributed profits as contemplated in Section 115-O of the Act. 16. It is true that if the receipt in the hands of A (M) is treated as capital gains, it would be Section 46A of the Act that will be attracted and by the force of paragraph 4 of Article 13 of the concerned DTAC, the receipt would not be taxable in India. But in view of our finding that the transaction of buy-back proposed t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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