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The Tax Publishers Goldman Sachs (I) Securities (P) Ltd. v. ITO [ITA No. 3726/Mum/2015, dt. 12-2-2016] : 2016 TaxPub(DT) 1276 (Mum-Trib) Buyback of shares by a closely held company over and above its par value whether it can be read as deemed dividend under section 2(22(d) for assessment year 2011-12? *Facts:* The Assessee in the business of Merchant banking services was a 100% EOU global support center for the Goldman Sachs group. It had remitted INR 189 crores on 24-11-2010 for buy back of its shares by its group holding company Goldman Sachs - Mauritius. The buy back was at a price of INR 46.79 vis-a-vis its par value @ INR 10.00 per share. Assessing officer held the excess of buy back was a colourable transaction to avoid dividend distribution tax amount vis a vis the par value thus will need to be read as dividend taxable under section 2(22(d). Assessee was held to be in default for non-deduction of TDS under section 195 read with 201 and 201(1A). The dividend would have been not exempt under section 10(34) thus would be taxed under Indo Mauritius DTAA @ 5%. First appellate authority taking into cognizance the huge accumulated reserves affirmed the order of assessing officer as no dividend was declared in any of the early years thus postponement of dividend was the evasionary mechanism to overcome dividend which was overcome by buy back method. Assessee pleaded that buy back was done under section 77A of the Companies act, 1956 since capital gain was exempted under Indo Mauritius DTAA no tax is triggered due to conjoining reading of section 2(22)(iv) read with section 46A. On appeal the ITAT: Held that the buy back is not taxable and it cannot be read as deemed dividend under section 2(22(d) due to explicit sections 2(22)(iv) read with section 46A in the statute. Assessee was not liable to TDS or any capital gains tax hence. The decision will be applicable only for assessment year prior to 1-4-2013 due to insertion of section 115QA whereby buy back is taxed in the hands of the Company. For earlier assessment years before 1-4-2013 it may have to be seen whether buy back is done under section 77A of the companies act or under section 391 read with section 100-104 of the Companies act, 1956 to examine capital gains tax relevance or deemed dividend applicability. Section 115QA which shifted the tax on buy back in the hands of the company instead of shareholders vide finance act, 2013 would not apply to the case as the assessment year in question is 2011-12. Reference was made to finance bill and the CBDT circular explaining this change. Buy back under section 77A is separate vis a vis the provisions of reduction of share capital under section 100 to 104 of the Companies act. An assessee may pursue buy back under section 77A or under section 100-104 depending on the method in which the buy back is being done. The assessee here had done the buy back under section 77A of the Companies act. Section 100-104 requires court approval while section 77A does not require to do so. The two buy back methods operate in their own field neither overstepping the other. In Capgemini India Pvt. Ltd. (Company Scheme Petition No.434 of 2014, dated 28-4-2015) it was held that buy back may be done under either of the said sections 77A/100-104 of the Companies act, 1956 hence it is incorrect to read that a buyback effected under section 77A will need to be taxed under section 115QA of the income tax act and to overcome this resort to buy back under section 100-104 r/w section 391 of Companies act, 1956 was adopted to by Capgemini. The court had held that section 77A is a non-obstante clause and hence nothing in that section can override the rest of the provisions thus Capgemini can adopt buy back under section 391 through a court order as well if it does not go through section 77A as prior to section 77A buy back could have only been done via section 100-104 of Companies act, 1956. Section 2(22)(iv) exists parallel to section 2(22)(d) thus the only correct reading would be that buy back under section 77A can only be read into section 2(22)(vi) and not under section 2(22)(d) as deemed dividend and will necessary have to go through section 46A capital gains provision as any other reading will mean section 2(22)(iv) becomes otiose. Once section 2(22)(d) is found not applicable no TDS is required as no capital gains tax is read through DTAA provisions either. Assessee was held not to be in default under section 201/201(1A) hence. As for colourability of the transaction it was held that if an assessee enters into a deal without violation of any provisions of the income tax act which results in lesser or no payment of tax the same may not be read as tax evasion. The appeals of the assessee stood allowed thus.

The Tax Publishers

Goldman Sachs (I) Securities (P) Ltd. v. ITO [ITA No. 3726/Mum/2015, dt. 12-2-2016] : 2016 TaxPub(DT) 1276 (Mum-Trib)

Buyback of shares by a closely held company over and above its par value whether it can be read as deemed dividend under section 2(22(d) for assessment year 2011-12?

Facts:

The Assessee in the business of Merchant banking services was a 100% EOU global support center for the Goldman Sachs group. It had remitted INR 189 crores on 24-11-2010 for buy back of its shares by its group holding company Goldman Sachs - Mauritius. The buy back was at a price of INR 46.79 vis-a-vis its par value @ INR 10.00 per share. Assessing officer held the excess of buy back was a colourable transaction to avoid dividend distribution tax amount vis a vis the par value thus will need to be read as dividend taxable under section 2(22(d). Assessee was held to be in default for non-deduction of TDS under section 195 read with 201 and 201(1A). The dividend would have been not exempt under section 10(34) thus would be taxed under Indo Mauritius DTAA @ 5%. First appellate authority taking into cognizance the huge accumulated reserves affirmed the order of assessing officer as no dividend was declared in any of the early years thus postponement of dividend was the evasionary mechanism to overcome dividend which was overcome by buy back method. Assessee pleaded that buy back was done under section 77A of the Companies act, 1956 since capital gain was exempted under Indo Mauritius DTAA no tax is triggered due to conjoining reading of section 2(22)(iv) read with section 46A. On appeal the ITAT:

Held that the buy back is not taxable and it cannot be read as deemed dividend under section 2(22(d) due to explicit sections 2(22)(iv) read with section 46A in the statute. Assessee was not liable to TDS or any capital gains tax hence. The decision will be applicable only for assessment year prior to 1-4-2013 due to insertion of section 115QA whereby buy back is taxed in the hands of the Company. For earlier assessment years before 1-4-2013 it may have to be seen whether buy back is done under section 77A of the companies act or under section 391 read with section 100-104 of the Companies act, 1956 to examine capital gains tax relevance or deemed dividend applicability.

Section 115QA which shifted the tax on buy back in the hands of the company instead of shareholders vide finance act, 2013 would not apply to the case as the assessment year in question is 2011-12. Reference was made to finance bill and the CBDT circular explaining this change.

Buy back under section 77A is separate vis a vis the provisions of reduction of share capital under section 100 to 104 of the Companies act. An assessee may pursue buy back under section 77A or under section 100-104 depending on the method in which the buy back is being done. The assessee here had done the buy back under section 77A of the Companies act. Section 100-104 requires court approval while section 77A does not require to do so. The two buy back methods operate in their own field neither overstepping the other.

In Capgemini India Pvt. Ltd. (Company Scheme Petition No.434 of 2014, dated 28-4-2015) it was held that buy back may be done under either of the said sections 77A/100-104 of the Companies act, 1956 hence it is incorrect to read that a buyback effected under section 77A will need to be taxed under section 115QA of the income tax act and to overcome this resort to buy back under section 100-104 r/w section 391 of Companies act, 1956 was adopted to by Capgemini. The court had held that section 77A is a non-obstante clause and hence nothing in that section can override the rest of the provisions thus Capgemini can adopt buy back under section 391 through a court order as well if it does not go through section 77A as prior to section 77A buy back could have only been done via section 100-104 of Companies act, 1956.

Section 2(22)(iv) exists parallel to section 2(22)(d) thus the only correct reading would be that buy back under section 77A can only be read into section 2(22)(vi) and not under section 2(22)(d) as deemed dividend and will necessary have to go through section 46A capital gains provision as any other reading will mean section 2(22)(iv) becomes otiose.

Once section 2(22)(d) is found not applicable no TDS is required as no capital gains tax is read through DTAA provisions either. Assessee was held not to be in default under section 201/201(1A) hence.

As for colourability of the transaction it was held that if an assessee enters into a deal without violation of any provisions of the income tax act which results in lesser or no payment of tax the same may not be read as tax evasion. The appeals of the assessee stood allowed thus.