ITAT Delhi – Cross border Buy-back may Qualify as Corporate Reorganisation whereby Capital Gains Not Taxable in India

 Recently, the Delhi Bench of the ITAT has held that a buy-back of shares within a corporate group can qualify as a “corporate reorganisation” under Article 13(5) of the India–Netherlands DTAA, thereby rendering the resultant capital gains taxable only in the Netherlands and not in India.

In the present case, the assessee, a Netherlands-based company, held 99.98% shares in its Indian subsidiary, Huntsman International India Pvt. Ltd. (HIIPL). During the relevant year, the assessee tendered a portion of shares pursuant to a buy-back offer by HIIPL and offered the resulting capital gains to tax in India. Subsequently, the assessee contended that such gains were exempt under Article 13(5) of the DTAA. The Assessing Officer, pursuant to TP adjustments, enhanced the capital gains and taxed the same in India. The DRP rejected the assessee’s DTAA claim, holding that buy-back does not qualify as “corporate reorganisation”.

Given the divergent view of the Second Member of the Delhi ITAT, who concluded that the buyback does not constitute a “corporate reorganisation” as it involved consideration and did not alter the rights of security holders, the issue was referred to a Third Member to examine the scope of Article 13(5).

It was noted by the Third member that while capital gains arising from transfer of shares may generally be taxed in the source country where shareholding exceeds the prescribed threshold (i.e., ≥10%), an exception exists where such gains arise in the course of corporate reorganisation. The Tribunal analysed the meaning of “reorganisation” with reference to judicial precedents, accounting guidance (ICAI), and international treaty interpretation principles, and observed that intra-group buy-back of shares forms part of capital restructuring and can constitute a reorganisation. It further noted that the transaction resulted in a change in financial structure without altering ultimate ownership within the group. Accordingly, the Tribunal held that the buy-back transaction qualified as a corporate reorganisation and the gains were taxable only in the Netherlands under Article 13(5), directing deletion of the addition.

This ruling provides significant clarity on the interpretation of “corporate reorganisation” under tax treaties and affirms that intra-group buy-back transactions may qualify for treaty protection where they form part of genuine restructuring. It also underscores the importance of interpreting treaty provisions purposively rather than adopting a narrow or mechanical approach.