By TIOL News Service

BENGALURU, JULY 24, 2018: THE issue before the Special Bench is - Whether the Tribunal can direct an inquiry by AO into the buy-back at an abnormally high price by assessee from its foreign holding company, even though, the issue is not raised by either party to the appeal. And the verdict is YES.

Facts of the case

The assessee-company bought back its own shares from its Holding Company at Mauritius to the extent of 2,933 Shares having face value of Rs. 10/- per share at a hugely high price of Rs. 2,85,108/- per share during the relevant previous year. The said Mauritius Company M/s. FIS Holding Muritian Ltd. holding 99.99% of the entire Share Capital of the assessee Indian Company and the said buy-back of shares was paid out of the 'Reserves and Surplus' of the assessee. However, the AO taxed such amount of Rs. 83,61,92,434/- as Dividend u/s 115-O.

Since the said Assessment Order was passed in pursuance of the directions of the Dispute Resolution Panel (DRP) u/s 144 C (5), the assessee preferred an appeal before the Tribunal, who upheld the decision of the AO. It was held by the Tribunal that after insertion of Section 115-QA of the Act with effect from June 1, 2013, the purchase of its own shares by the Company in accordance with the provisions of Section 77-A of the Companies Act, 1956 is chargeable to income tax as Dividend Distribution Tax (DDT) but since the transaction in the present case of buy-back of shares took place prior to such date, said buy-back of the shares between the period April 1, 2000 to May 31, 2013 would be taxed as 'Capital Gains' in the hands of the recipient in accordance with the provisions of Section 46-A and no such amount would be treated as dividend in view of exclusion part of Section 2 (22)(iv). The AO also held that the Capital Gains in the hands of the Holding Company (Mauritius Company) was also not chargeable to tax in India as per the provisions of Article 13(4) of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).

It was also observed by the Tribunal that there was another aspect of this transaction of buy-back at an abnormally high price of Rs. 2,85,108/- per share having face value of only Rs. 10/- per share and therefore the payment made by the assessee over and above the fair market price of the shares of the assessee would not be treated as part of the purchase price because, the transaction was between the two closely related parties and not at the Arm's Length Price (ALP) and therefore the payment for buy-back in excess of the fair market price of shares of the assessee, would certainly fall within the ambit of Section 2(22)(e) and could be taxed as Dividends, in the hands of the assessee. According to the Tribunal, since that aspect of the matter was not examined by the assessing authorities, and it could be treated as a device for transfer of substantial 'Reserves and Surpluses' by the Indian Company to the Holding Company at Mauritius BEPS -Base Erosion and Profit Shifting and it could be a colourable device and a dubious method of avoiding tax in the garb of buying back of shares at a highly unrealistic and inflated price, therefore, the matter deserved to be examined again by the AO on the said issue of fair market price of shares, vis-à-vis buy-back price of the shares by the assessee Indian Subsidiary Company.

The High Court held that,

++ the directions of the Tribunal for holding an inquiry into the matter by the Assessing Authority into the aspect of fair market price of the shares bought back by the Assessee from its major share holding Mauritius Holding Company is not beyond the jurisdiction of the Tribunal and the said remand direction of the Tribunal to hold such an enquiry not only falls within the ambit and scope of the "subject matter" of the appeal filed by the Assessee by which he claimed that the remittance by the Assessee Company to its Mauritius Holding Company could not be taxed as dividend, forgetting the aspects relating to Clause (e) of Section 2(22) of the Act and therefore the said directions were within the subject matter or the issues raised by the Assessee and making a direction to hold an enquiry into the aspect of fair market value of shares cannot be said to be beyond the subject matter of the appeal. The said directions cannot be said to be per se amounting to taxability of the said pay-out by the Assessee as 'Dividend' but the same would depend upon the nature of enquiry to be conducted by the Assessing Authority and findings arrived at in pursuance of the said direction. The power to remand including for conducting an enquiry in the aspect of the matter which was not earlier adjudicated upon by the lower Authorities, cannot be questioned by the Assessee or the Revenue;

++section 254(1) of the Act clearly stipulates that the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such Orders thereon as it thinks fit. The emphasis on the word 'thereon' sought to be placed by the counsel for the Assessee on the basis of case laws relied upon by him as against the words 'as it thinks fit' is slightly misplaced. The emphasis while analyzing the powers of the Tribunal should be on the words 'as it thinks fit' rather than on the word 'thereon'. The word 'thereon' only relates to the 'subject matter' of the appeal in first part of the Sub-section (1) and therefore while the Tribunal is dealing with the subject matter of the appeal, it can pass any such relevant Order as it thinks fit, which would be rational, germane, reasonable, appropriate, necessary and expedient in the opinion of the Tribunal subject to the requirement that it gives an opportunity of hearing to both the parties to the appeal, viz., the Assessee and the Revenue. Neither the powers are restricted nor the power to allow the fresh and new ground to be raised before it is restricted nor the powers to enhance an assessment or tax liability or reduce the tax especially enumerated in the Proviso to Sub-section (2) of Section 254 of the Act also is restricted;

++ the powers under Section 254 of the Act with the Tribunal to pass such Orders 'as it thinks fit' cannot be lesser than the powers conferred upon the lower and first Appellate Authority, viz., the Commissioner of Income Tax(Appeals) who under Section 251(1)(a) of the Act has power to dispose of an appeal against the Order of assessment and he may confirm or reduce or enhance or annul the assessment. The higher and final Appellate Authority under the Act cannot be intended by the Parliament to have lesser power than the first Appellate Authority as is well settled that the powers of the Appellate Authorities are always co-extensive with that of the Assessing Authority and therefore what the Assessing Authority or the first Appellate Authority could do in the matter of assessment, the Tribunal cannot be said to have any lesser power to do so;

++ section 254 of the Act does not have any narrower scope to put fetters on the powers of the Tribunal as is sought to be canvassed before us that the Tribunal could not have exceeded the grounds raised before it by the Appellant Assessee. The Appellant may be either Assessee or Revenue before the Tribunal and the Tribunal has also powers to allow fresh ground of appeal or allow the other party to the appeal to file its cross objections and even suo motu pass appropriate Orders 'thereon' and therefore the words 'as it thinks fit' confer wide powers upon the Income Tax Appellate Tribunal to pass such Orders on the subject matter of appeal 'as it thinks fit' whether the issue is raised by either party to the appeal or not. The Tribunal is not bound to decide the appeal in a particular or narrower manner or limited to the grounds raised in the appeal before it. The confines or boundary limit is only "subject matter" of the appeal;

++ what the Tribunal has done is merely to ask the Assessing Authority to hold an enquiry as to whether the abnormally high price paid for buy-back of shares from almost a single shareholder only, viz., the Mauritius Company, a Holding Company which held 99.99% of the share holding of the Assessee Indian Company so as to ascertain the fair market value of the shares which can certainly be determined with the relevant data and evidence available with the Assessing Authority. Since the shares are not listed on the Stock Exchange, therefore, fair market value of the shares on a particular date of transaction was not ascertainable otherwise readily and the said aspect of the matter was not admittedly looked into by the Authorities before the appeal was decided by the Tribunal. Therefore, even though the some findings were given by the Tribunal in favour of the Assessee that the said pay-out for buy-back of the shares at an abnormally high price was not taxable under Section 115-O or Section 115-QA read with its Explanation and Section 2(22)(d) of the Act as per the contention raised by the Assessee before the Tribunal, the Tribunal was perfectly justified in directing an enquiry into the fair market price of the share of the Assessee Company which could have an implication of taxability under Section 2(22)(e) of the Act or otherwise.

(See 2018-TIOL-1436-HC-KAR-IT)