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AAR Holds ‘Buy-Back of Shares’ to be Dividend

11 Apr 2012

The Authority of Advance Ruling in a recent ruling has held that a proposed buy-back of shares held by a Mauritian shareholder in an Indian company is a 'colourable' transaction and further held that the proposed arrangement of buy-back is essentially a manner of distribution of dividends by the Indian company and should be taxed accordingly. Taxand India examines the issue of buy-back of shares in light of this ruling.

Facts of the case

  • The Applicant is a closely held public limited company incorporated in India. The shareholders of the Applicant include 'A' US, holding 48.87 percent of the shares, 'A' Mauritius, holding 25.06 percent shares, 'A' Singapore, holding 27.37 percent and the balance 1.76 percent is held by general public.
  • On 15 June 2010, the board of directors of the Applicant passed a resolution for buy-back of shares in accordance with section 77A of the Companies Act, 1956. 'A' Mauritius proposed to accept the offer of buy-back.
  • Given the above facts, the Applicant approached the AAR to determine whether the gain arising to 'A' Mauritius on the proposed buy-back of shares would be exempt from tax in India having regard to paragraph 4 of Article 13 of the India-Mauritius Tax Treaty and whether the applicant would be required to withhold tax on the remittance of the buy-back proceeds.

Taxand India provides a more in depth look at this issue and discusses the ruling of the AAR

Taxand's Take

This is a significant ruling, it is for the first time that a 're-characterisation' of income arising from a buy-back of shares carried out under section 77A of the Companies Act, 1956 is sought to be made. After considering the deeming provision contained under section 46A of the Act and the settled position that buy-back should result in a 'transfer' triggering a capital gain event, the AAR preferred to 'ignore" the transaction and to treat the same as a transaction of distribution of profits by a company.

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Mukesh Butani
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Taxand's Take Author