FIDELITY BUSINESS SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. ASST.C.I.T., BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the assessment order

dt.29.01.2016 passed under Section 143(3) r.w.s. 144C of the Income Tax

Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute

2 IT(TP)A No.416/Bang/2016 Resolution Panel (in short ‘DRP’) dt.09.02.2015 for the Assessment Year

2011-12.

4 That on the facts and circumstances of the case and in law, the learned Dispute Resolution Panel (“DRP”) erred in not passing any directions on Grounds of Objections No. 1 to 3 (referred in ‘Appendix B’ to Form 35A) in relation to the proposed levy of DDT on the buy-back of shares.

5 That on the facts and circumstances of the case and in law, the learned DRP erred in not directing the AO to delete the levy of DDT on buy-back of shares as proposed in the draft assessment order passed under section 143(3) r.w.s 144C of the Act.

6 That on the facts and in the circumstances of the case and in law, the learned AO erred in holding that interest under section 115-P of the Act is leviable on the Appellant.

7 That the Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”

3 IT(TP)A No.416/Bang/2016 3. The only issue arises in this appeal of the assessee is regarding 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’) under Section 115(O) of the Act. The brief facts

leading to the controversy are that 99.99% of the shares of the assessee

are held by M/s. FIS Holding Muritian Ltd. which is incorporated in

Mauritius. During the year under consideration, the assessee has

bought back its own shares from its holding company to the extent of

2933 shares at a price of Rs.2,85,108 per share having face value of Rs.10

per share. The Assessing Officer found that the capital gains is not

taxable in India due to Double Taxation Avoidance Agreement (in short

‘DTAA’) between India and Mauritius which provides exemption to the

recipient of Mauritius. The Assessing Officer was of the view that since

FID Holding Mauritius is having 99.99% share holding, the amount lying

under Reserves & Surplus are not distributable to others. If the dividend

is being declared by the assessee-company, the Dividend Distribution Tax

would have been paid which will result into less profit for the share

holding company. Therefore the assessee and its holding company

4 IT(TP)A No.416/Bang/2016 adopted the other route to transfer reserves and surplus out of India

without being any single penny of tax. The Assessing Officer held that in

such manner, the offer is nothing but a colourable instrument to transfer

the accumulated profit without having tax impact in India in the hand of

recipient. Hence the Assessing Officer proposed to treat the payment by

the assessee to its holding company on account of buy back of shares as

dividend under Section 2(22)(d) of the Act and levied under DDT under

Section 115(O) of the Act. The Assessing Officer has computed the

dividend being the difference between the face value of the shares and

the amount paid by the assessee being the buy back price to the holding

company.

has submitted that prior to the amendment of Section 115QA by the

Finance Act, 2013 w.e.f. 1.6.2013 buy back of shares would result capital

gain in the hand of the share holder as per the provisions of Section 46A

of I T Act however, the capital gain on account of sale of shares is not

taxable in India as per the provisions of DTAA between the India and

Maritius. Therefore the Assessing Officer cannot reclassify the

5 IT(TP)A No.416/Bang/2016 transaction of buy back of shares into transaction of dividend distribution

for the assessment year under consideration. He has then referred to

the provisions of Section 2(22) and submitted that buy back of shares has

been excluded from the definition of dividend as per sub-clause (iv) of

the exclusion of clause of Section 2(22) of the Act. Hence the learned

Authorised Representative has contended that under no circumstances

the transaction of buy back can be brought into the definition of dividend

as per Section 2(22)(d) of the Act. In support of his contention, he has

relied upon the decision of the Mumbai Bench of this Tribunal in the case

of Goldman Sachs India Pvt. Ltd. Vs. ITO (International Taxation) 70

Taxmann.com 46 and submitted that an identical issue was considered

by the Tribunal in the said case and it was held that the transaction of

buy back would not fall under the category of colourable device or

distribution of dividend. Further the provisions of section 115QA are not

applicable for the assessment year prior to the amendment brought into

the statute. The learned Authorised Representative has then referred to

the Circular No.3/16 issued by the CBDT dt.26.2.2016 whereby it has

been clarified that consideration received on buy back of shares between

6 IT(TP)A No.416/Bang/2016 the period 1.4.2000 till 1.6.2013 would be taxed as capital gain in the

hand of the recipient in accordance with the Section 46A of the Act and

such amount shall not be treated as dividend in view of the provisions of

Section 2(22)(iv) of the Act. The learned Authorised Representative has

also relied upon the decision of the Hon'ble jurisdictional High Court in

the case of Bhoruka Engineering Industries Ltd. Vs. DCIT 356 ITR 25 (Kar)

and submitted that the Hon'ble High Court has held that a tax planning

even with the motive for such a transaction is to avoid tax does not

invalidate it unless a particular enactment so provides.

relied upon the order of the Assessing Officer and submitted that the

assessee has adopted a dubious method and modus to make the

payment out of the reserves and surplus to its holding company in the

garb of buy back of shares at a very exorbitant high price. The Assessing

Officer has held that the buyback price is very exorbitant and therefore

the assessee has adopted this colourable device to transfer the money

from the reserves and surplus to this holding company.

7 IT(TP)A No.416/Bang/2016 6. We have considered the rival submissions as well as the relevant

material on record. 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. For ready reference, we quote clause (iv) of Section 2(22) as

under :

“ Section 2(22) (iv) : Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956).”

8 IT(TP)A No.416/Bang/2016 We further note that Section 115QA has been introduced in the statute

by Finance Act, 2013 w.e.f. 1.6.2013. Therefore any payment on account

of purchase of its own shares by the company prior to 1.6.2013 cannot

be termed as dividend as per the provisions of Section 115QA. We quote

Section 115QA as under :

“ 115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income. Explanation.—For the purposes of this section,— (i) "buy-back" means purchase by a company of its own shares in accordance with the provisions of [any law for the time being in force relating to companies]; (ii) "distributed income" means the consideration paid by the company on buy-back of shares as reduced by [the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed]. (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company. (3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1). (4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”

9 IT(TP)A No.416/Bang/2016 Thus 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. We quote the relevant

para Nos.1, 4 and 5 of the Circular :

“1. As per provisions of Section 46A of the Income Tax Act, 1961, applicable with effect from 1.4.2000, any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares/other specified securities shall be, subject to provisions contained in Section 48, deemed to be capital gains. Further, sub-clause (iv) of clause (22) of Section 2 of the Act excludes any payment made by a company on purchase of its own shares in accordance with the provisions contained in Section 77A of the Companies Act from the ambit of ‘dividend’. Finance Act, 2013 subsequently introduced section 115QA (w.e.f. 1.6.2013) to provide that any amount of distributed income by a company on buyback of unlisted shares shall be charged to tax and the company so distributing its income shall be liable to pay additional income tax at the rate of twenty percent of the distributed income. 2…… 3…….. 4. Accordingly, the CBDT hereby clarifies that consideration received on buyback of shares between the period 1.4.2000 till 31.5.2013 would be taxed as capital gains in the hands of the recipient in accordance with section 46A of the Act and no such

10 IT(TP)A No.416/Bang/2016 amount shall be treated as dividend in view of provisions of Section 2(22)(iv).

In the beginning of para 1, the 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) of the Act. The Assessing Officer 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.

11 IT(TP)A No.416/Bang/2016 7. However, there is another aspect in this transaction relating to the

buy back price of Rs.2,85,108 per share having face value of Rs.10. So far

as the 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 is concerned, the 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

12 IT(TP)A No.416/Bang/2016 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. There are two aspects in this transaction -

(i) it is a simple and plain transaction of buy back of shares without

having any dispute of price then the same is beyond the scope of the

provisions of Section 2(22) as well as Section 115QA of the Act and

therefore cannot be treated as a colourable device.

(ii) The second aspect is 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 @ Rs.2,85,108 per share is

unrealistic and artificially inflated with the motive to avoid tax. Hence

13 IT(TP)A No.416/Bang/2016 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.

Order pronounced in the open court on the 22nd day of Feb., 2017.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt. 22.02.2017.

*Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore