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Goldman Sachs (India) Securities Pvt. Ltd. Versus Income tax Officer- (Intl. Taxation) TDS-3, Mumbai

2016 (3) TMI 118 - ITAT MUMBAI

TDS u/s 195 - remittance of amount to a non-resident representing its income by way of dividend - 'assessee in default' - assessee argued that a transaction of buy back of shares referred to section2(22) (iv) of the Act was different from a transaction of capital reduction dealt by section 2(22)(d) of the Act, that the transaction in question was one of buy back of shares and not a case of capital reduction - colourable device - Held that:- There is no ambiguity about the provisions that would g .....

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per section 115-O of the Act. As per section 10(34) of the Act, any income by way of dividend referred to in section 115-O of the Act does not form part of total income in the hands of the recipient and company declaring dividend will be in default as per section 115Q. So, the provisions of TDs would not be applicable for dividend covered under section 2(22)(d) of the Act.

Transaction in question would not fall under the category of colourable device. If an assessee enters into a dea .....

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d of appeal in favour of the assessee. - ITA No. 3726/Mum/2015 - Dated:- 12-2-2016 - Sh. Rajendra, Accountant Member And Ram Lal Negi, Judicial Member For the Petitioner : Shri Percy Pardiwala/Smt. Aarti Sathe For the Respondent : Shri Jasbir Chauhan-DR ORDER Per Rajendra, AM Challenging the order dated 16. 3. 2014 of the CIT(A)-56, Mumbai the Assessee has filed the present appeal. Effective ground of appeal is about treating the appellant an Assessee in default(A-I-D)under section 201(1) of the .....

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buyback of shares scheme, whereby 4, 03, 93, 199/- equity shares having face value of ₹ 10 each were bought back from GS-M by the assessee @Rs. 46. 79/-per share. Taking into account the face value of ₹ 10 per share, the AO in his order, passed u/s. 201(1) and 201(1A) r. w. s. 195 of the Act, on 27. 01. 2014 held that the excess payment of ₹ 36. 79/-per equity share for 4, 03, 93, 199 shares bought back amounting to ₹ 1, 48, 60, 65, 791/-was nothing but its distribution .....

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the AO not to qualify for exemption u/s. 10(34) of the Act and therefore, was taxable in the hands of the recipient GS-M, namely. He further held that on remittance of such amount to a non-resident representing its income by way of dividend, tax deduction was required to be made u/s. 195 of the Act. As the assessee company had not deducted any tax while making such remittance, it was held to be an 'assessee in default' in terms of the provisions of section 201 of the Act. Further, the as .....

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from a transaction of capital reduction dealt by section 2(22)(d) of the Act, that the transaction in question was one of buy back of shares and not a case of capital reduction. After considering the submissions of the assessee and the order of the AO, the FAA held the AO had obtained the annual report of the assessee company for the five preceding years and from such annual reports he noticed that it had been earning profits after tax for each of those years, that the reserves and surplus incr .....

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not shown any such requirement or compulsion as a justification for the non-grant of dividend in the regular course, inspite of the continuous accumulation of profits in its books, that the AO had specifically required the assessee to explain the commercial reason, if any, for the non issue of dividend although the profits were being accumulated year after year, that it chose to remain silent on this show cause notice issued by the AO, that by permitting the profits to accumulate in its books it .....

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7-A of the Companies Act, 1956. The FAA further observed that the definition of dividend given in section 10(22) of the Act was an inclusive definition that sought to extend the scope of amounts chargeable to tax as deemed dividend but payments in the nature of dividend would always be coming within the ambit of the term dividend, that the commercial significance of a transaction of a buyback of equity shares was normally for the purposes of consolidating the share-holding of the remaining share .....

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y of GS-M, that the latter was in a position to ensure that the returns out of the profits of the assessee-company would be given to it not through dividend, that payment of dividend would have been liable to DDT, that the transaction of the receipt of its share of profits in the assessee company was given an artificial colour of capital gains, that capital gain on such transaction was exempt from tax in the hands of the recipient, that the non-distribution by way of dividend of the accumulated .....

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ares sought to give the colour to this transaction as not being in the nature of a receipt of dividend but a capital gain of the concerned share holder, that the arrangement was made to use of the provisions of section 46A of the Act and to claim exemption from tax in India on the basis of Article 13(4) of the India Mauritius Tax Treaty. The FAA referred to the case of a Indian Company that was decided by the AAR in Case No. P of 2010 vide its order dated 22. 03. 2012 and held that it had persua .....

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that the provisions of section 10(34) would apply only if DDT had been paid u/s. 115-0 of the Act, that no DDT was paid by the assessee, that the recipient would not be entitled to any exemption u/s. 10(34) of the Act, that the receipt in its hands would be chargeable to income tax, that the treatment by the AO of the assessee as an A-ID and the raising of demand u/s. 201(1) and 201(1A) r. w. s. 195 of the Act was justified. Finally, he decided the issue against the assessee. 4. Before us, the A .....

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hat a certain limit, that correspondingly provisions of sec. 2(22)(d) of the Act were amended w. e. f 1. 6. 2001, that sub clause of (iv) of Section 2(22)(d) of the Act dealt with the dividends, that the amount in question was to be assessed under the head capital gains, that even after amendment to section 115QA of the Act burden of payment of tax has not been shifted to shareholders , that the AAR had not considered the provisions of sub clause (iv) of section 2(22) of the Act while deciding t .....

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. We have heard the rival submissions and perused the material before us. We are of the opinion that for deciding the issue before us, it would be useful to consider the provisions of section 77A and100-105 of the Companies Act(CA) and section 2(22) and 46A of the Act. Section 77A of the CA deals with buying back of shares in following manner: (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purcha .....

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ified securities under sub-section (1) unless- (a) the buy-back is authorised by its articles ; (b) a special resolution has been passed in general meeting of the company authorising the buy-back Provided that nothing contained in this clause shall apply in any case where-(A) the buy-back is or less than ten per cent. of the total paid-up equity capital and free reserves of the company ; and (B) such buy-back has been authorised by the board by means of a resolution passed at its meeting : Provi .....

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rves of the company : Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent. of its total paid-up equity capital in that financial year ; (d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back : Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies. XXXXXXX (5) The buy-back under sub .....

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CA deal with reduction of capital and obtaining permission of the Court. Clearly, both deal with different situations. The Hon ble Jurisdictional High Court has dealt with the schemes of buyback of shares and reduction of capital in the case of Capgemini India Private Limited (Company Scheme Petition No. 434 of 2014 dated 28. 04. 2015) as under: 4. The entire case of the Regional Director revolves around his contention that the buyback of shares must be effected only under Section 77 A of the Co .....

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Income tax Act. According to the Regional Director by this colourable device the company is evading its liability to pay tax. 5. One of the contentions raised by the petitioner is that a view of the Circular dated 15th January 2014, the Regional Director has no locus in respect of tax matters, particularly when the Income tax Authorities have not raised any objection. This aspect has been considered in detail by this Court in the case of Casby CFS Pvt. Ltd. and it has-been held that the Regiona .....

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hat it is open to the Petitioner to follow either the procedure under section 77A/section 68 or the procedure under section 391 read with Sections 100 to 104 to effectuate the buyback of shares and there is no compulsion for the Petitioner to follow only the procedure prescribed by Section 77 A/Section 68. In any event, under Section 77 /Section 68 a company can buyback only 25% of the total paid up capital and free reserves of the company whereas under the Scheme the company proposes buyback of .....

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lite Industries (supra) has held that a Company may either follow the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act or the procedure under Section 77A (now Section 68). It is not mandatory for a company to buy back its shares only by following the procedure prescribed by Section 77 A. In this regard paragraphs 22 and 23 of the Sterilite decision are relevant and the same are reproduced below for convenience: "22. The opening words of Section 77A, viz. "notwi .....

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, the only manner in which a company could buy-back its shares was by following the procedure set out under sections 100 to 104 and section 391 which required the calling of separate meetings of each class of shareholders and creditors as well as (if required by the court) the drawing up of a list of creditors of the company and obtaining of their consent to the scheme for reduction. The legislative intention behind the introduction of section 77 A is to provide an alternative method by which a .....

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is misconceived. The non obstante clause in section 77 A namely "notwithstanding anything contained in this Act . . . . " Only means that notwithstanding the provisions of section 77 and sections with the conditions mentioned in that section without approaching the court under sections 100 to 104 or section 77A to indicate that the jurisdiction of the court under section 391 or 394 has taken away or substituted. It is well settled that the exclusion of the jurisdiction of the court sh .....

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nd section 391 cannot be imported into or made applicable to a buy-back under section 77A. Similarly the conditions for a buy-back under section 77A cannot be applied to a scheme under sections 100 to 104 and section 391. The two operate in independent fields . 4. However, it is necessary to note that the above was the position in law under the1956 Act in view of the language of the provisions of Section 391 and Section 77 A of that Act. In the 2013 Act Sub-section 10 of Section 230 provides as .....

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hence the same need not to be considered. At present the law as laid down in Sterilite Industries prevails and will be applicable to the present case. 5. In the circumstances it is open to a company to buy back its own shares by following the procedure prescribed under section 77A/Section 68 or by following the procedure prescribed under section 391 read with Sections 100 to 104 of the 1956, Act. The contentions of the Regional Director are therefore clearly contrary to the prevailing lega1 pos .....

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ibution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; 46A. Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or hol .....

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e purposes of this section, "specified securities" shall have the meaning assigned to it in Explanation to section 77A of the Companies Act, 1956 (1 of 1956). The reasonable conclusions that can be drawn from the scrutiny of the above sections are that buy back of shares and reduction of share-capital are different concepts, that buyback of shares of a corporate entity cannot to be characterised as deemed dividend, that profit arising out of the buyback schemes had to taxed under the h .....

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tal gains. In view of this, I propose to amend the law to put it beyond doubt that on buy-back of shares, the shareholders will not be subject to dividend tax, and would only be liable to capital gains tax. Central Board of Direct Taxes had issued a circular(Circular no. 779, dated 14. 09. 2099) with regard to taxability arising out of the buyback of shares and circular reads as under: 28 Clarification of tax issues arising out of the provision to allow buy-back of shares by the companies 28. 1 .....

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p certain issues in relation to the existing provisions of the Income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2(22) of the Income-tax Act and whether any capital gains would arise in the hands of the shareholder. The legal position on both the issues were far from clear and settled and there was apprehension that there will be unnecessary litigation unless the issues are clarified with finality. 28. 3 The Act, therefore, has amended claus .....

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ied securities shall be, subject to provisions contained in section 48, deemed to be the capital gains. 28. 4 This amendment will take effect from 1st day of April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years. It is worth mentioning that provisions of section 115Q have been amended w. e. f. 01. 04. 2013 and profit arising out of buyback of shares is to taxed at a particular tax rate. But, the AY. , before us, is prior to the April, 1st, 201 .....

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rofit arising out of buyback would be taxed as capital gains the next step is to determine as to whether the capital gains are taxable in the hands of parent company of the assessee in light the Indo-Mauritius Tax Treaty. Article 13 of the said DTAA provides that capital gains would not be taxable in the hands of GS-M. If the assessee was not liable to deduct taxes as per the provisions of section 195 of the Act, it cannot be held A-ID. For invoking the provisions of section 201 of the Act, non .....

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default as per section 115Q. So, the provisions of TDs would not be applicable for dividend covered under section 2(22)(d) of the Act. 5. 3. We would also like to discuss the issue of the alleged colourability of the transaction. We find that in the matter of Capgemini India Private Limited(supra), the Hon ble Bombay High Court has deliberated upon the almost identical facts and circumstances and has held as under: 6. According to the Regional Director if the Scheme is sanctioned it will amount .....

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affairs in a manner so as to avoid payment of tax. In the present case since it is legally permissible for the company to buy back its shares by following the procedure under Section 391 read with Sections 100 to 104 of the 1956 Act, the fact that the same may not attract income tax will not amount to it being a device to evade tax. 7. Even the argument of the Regional Director that foreign exchange amounting to ₹ 248 crores will be drained away if the Scheme is sanctioned, is of no avail .....

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