Selective buy-back of shares in lieu of dividend is a “colourable transaction”

In re A Mauritus (AAR)

The Applicant’s shares were held 48.87 % by a US company & 25.06% by a Mauritius company. The rest was held by a Singapore company and the public. The Mauritius company was ultimately held by another US company. Since 1.4.2003, when s. 115-O was introduced, the Applicant did not (to avoid DDT) distribute dividend. Instead, it let its reserves grow and offered a buy-back in the year 2008. The buy-back was accepted only by the Mauritius company, in whose hands the capital gains u/s 46A, were not assessable under the India-Mauritius DTAA. The other shareholders did not accept the offer. A second offer was proposed which also was accepted only by the Mauritius company and not by the other shareholders. The Applicant sought a ruling on whether the gains as a result of the buy-back would be capital gains u/s 46A in the hands of the Mauritius company and exempt under Article 13 of the India-Mauritius DTAA. HELD by the AAR;