Buy-back of shares will not lead to capital gains tax impost on Armstrong Mauritius, says a ruling of the Authority for Advance Rulings (AAR).
Armstrong Mauritius, a company incorporated in Mauritius, had approached AAR to seek a determination on the tax implications of a buy-back programme to be undertaken by Armstrong India.
Armstrong India is a subsidiary of Armstrong Mauritius, which is wholly-owned by Armstrong UK.
Armstrong Mauritius owns 99.97 per cent stake in Armstrong India and the balance 0.03 per cent in the Indian unit is directly held by Armstrong UK, which is wholly-owned by Armstrong US.
The capital gains arising from the proposed buy-back will be exempt from tax under Article 13 of the India-Mauritius tax treaty, the AAR has ruled.
For this ruling, the AAR followed the decision of the Supreme Court in the Azadi Bachao Andolan case.
This development follows a series of recent favourable rulings by AAR granting benefit of capital gains exemption under the India-Mauritius tax treaty.
Interestingly, AAR had, in a recent case, questioned a buy-back scheme as a tool of tax avoidance and re-characterised the income arising to the shareholder as dividend income.
In the Armstrong ruling, AAR has held that the transaction does not constitute tax avoidance and has instead ruled in favour of the applicant by treating the income as capital gains, granting tax exemption under the Mauritius treaty.
AAR rulings are binding only on the applicant and the Revenue Department. But, they could have persuasive value on other transactions, tax experts said.