India: A - Authority For Advance Ruling (AAR), New Delhi

Last Updated: 13 November 2012

A – Authority for Advance Ruling (AAR), New Delhi

Applicant, a tax resident of India, is a public limited company with 25.06% of its shares held by a Mauritian company. Applicant proposed a scheme of share buy-back from all its shareholders which was accepted by the Mauritian company only. Thus, applicant approached AAR on the question whether capital gains arising in the hands of Mauritian company on account of such share buyback is chargeable to capital gains tax in India under India-Mauritius DTAA and whether applicant is liable to withhold Income-tax under section 195 of the Income-tax Act, 1961 (IT Act).

Applicant argued that the proposed share buy-back is strictly in terms of Indian corporate laws & tax laws and any gains arising on account of such buyback are liable to tax as capital gains in India under the IT Act. However, India-Mauritius DTAA provides a beneficial treatment and such gains are taxable only in Mauritius and not in India. Indian tax authorities highlighted that applicant had not declared or paid any dividends to its shareholders till date and has allowed its reserves to grow substantially to build value in the company. The tax authorities further contended that share buy-back scheme was adopted to avail the beneficial capital gains tax treatment under India-Mauritius DTAA and is designed only to avoid payment of tax in India.

AAR observed that other shareholders of the applicant namely the US company and the Singaporean company did not accept the share buy-back scheme as income arising from such transactions would have been taxable in India in the absence of beneficial treatment under respective tax treaties. Thus, AAR held that the primary purpose of share buy-back scheme is avoidance of tax in India and considered such buyback as distribution of dividend subject to tax in India under Article 10(2) of the India-Mauritius DTAA. AAR also held that applicant is liable to withhold tax on such payments under section 195 of the IT Act. It seems that AAR has effectively applied the principles of general anti-avoidance rules (GAAR) introduced in the Finance Bill, 2012 by re-characterizing the share buy-back scheme as distribution of dividend even before such provisions could come into force.

A.A.R. No. P of 2010. Ruling delivered on March 22, 2012

Z – AAR, New Delhi

Applicant, a Mauritian tax resident, was holding equity shares and compulsory convertible debentures (CCDs) in an Indian company. It approached AAR on the question whether gains arising on sale of such shares and CCDs will be exempt from capital gains tax in India under India- Mauritius DTAA. Applicant argued that consideration received was for the sale of shares and CCDs. However, the Indian tax authorities argued that CCDs are external commercial borrowings i.e. a debt carrying a fixed rate of return and the present transaction is a sham and a mere design to avoid payment of tax by presenting 'interest income' as capital gains.

AAR observed that CCD creates or recognizes existence of a debt and remains a debt till it is repaid or discharged. AAR lifted the corporate veil after going through various terms of the CCDs and other terms of the shareholder agreement. AAR held that the applicant and shareholder are parent and subsidiary only on paper and actually they are one and the same entity. AAR accepted the contentions of the tax authorities and held that appreciation in the value of CCDs is clearly a payment of "interest" and taxable in India under Article 11 of the India-Mauritius DTAA.

AAR relied heavily on the recent ruling by the Supreme Court in the matter of Vodafone International Holdings [341 ITR 1] where it was held that one has to 'look at' entire transaction as a whole and not to adopt a dissecting approach to ascertain the true legal nature of the transaction. It appears that AAR has again applied the principles of GAAR while re-characterizing the 'capital gains' as 'interest income' in the present matter even such provisions could come into force.

AAR No. 1048 of 2011. Ruling delivered on March 21, 2012

Linde AG, Linde Engineering Division, Germany – AAR, New Delhi

Applicant, a German tax resident, and Samsung Engineering Company Limited, Korea (SEC) (collectively as Consortium Members) entered into a Consortium Agreement (Consortium Agreement) for bidding and taking up the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis (Works) to ONGC Petro Additions Limited (ONGC Petro).

Applicant approached AAR on the question whether Consortium is taxable as an association of persons (AOP) and whether payments receivable/received for Works are subject to Income-tax in India under Income-tax Act, 1961 (IT Act) or India-Germany double tax avoidance agreement (India-Germany DTAA).

AAR observed that the main contract between ONGC and Consortium was a composite contract for the Work and could not be divided into two contracts to be entered into with each Consortium Members individually. AAR ruled that the Consortium acquires an AOP status when the Consortium Members come together to bid for the Works and their bid is accepted for the completion of Works. Merely because the Consortium Members first entered into a memorandum of understanding between themselves and then into a Consortium Agreement to separate their area of operations does not alter the AOP status of the Consortium. AAR further ruled that the separate payments payable to the Consortium Members for their respective work also does not affect the AOP status of the Consortium.

AAR observed that the internal division of responsibility by the Consortium Members between themselves and recognition of such division by ONGC Petro will also not affect the AOP exposure. Accordingly, the Consortium is subject to tax as AOP and payments receivable/received for Works are subject to tax in India under the IT Act.

A.A.R. No. 962 of 2010. Ruling delivered on March 20, 2012

SREI Infrastructure Finance Ltd vs Income-tax Settlement Commission – Delhi High Court

Taxpayer, an Indian tax resident, is a public limited company engaged in project financing through term loans and leasing in specific sectors. During tax year 2008-2009, taxpayer transferred its project finance business and asset based financing business to its subsidiary namely SREI Infrastructure Development Finance Limited (SIDFL) (Transaction) in consideration of INR 37.5 million under a scheme of arrangement sanctioned by the jurisdictional High Court under the relevant provisions of the Companies Act, 1956.

Settlement Commission ordered that the consideration received for the Transaction was taxable as capital gains under section 50B of the IT Act. Section 50B of the IT Act is a special provision for computation of capital gains in case of a 'slump sale'. Taxpayer filed a writ petition against the order claiming that a transfer under a scheme of arrangement approved by High Court is not a sale and thus not liable to be taxed as 'slump sale' under section 50B of the IT Act.

Delhi High Court refused to read the provisions relating to slump sale in a narrow manner and held that any type of 'transfer' which is in the nature of 'slump sale' comes under the purview of section 2(42C) of the IT Act. Delhi High Court further held that use of the word 'sale' in the term 'slump sale' does not and is not intended to narrow down the concept of 'transfer' as defined and understood under IT Act. Accordingly, all transfers in the nature of 'sales' i.e. 'slump sales' including High Court approved business transfers are covered by the definition on section 2(42C) of the IT Act and taxable as 'slump sale'.

Writ Petition (Civil) No. 1592/2012. Judgment delivered on March 30, 2012

Commissioner of Income-tax vs Career Launcher India Limited – Delhi High Court

Taxpayer, an Indian tax resident, is engaged in the business of providing education and training for various preparatory examinations held by educational institutions such as Indian Institute of Management, Indian Institute of Technology etc. The education and training facilities were provided across the country through education centres run either by the taxpayer itself or by its franchises.

Under a Franchisee Agreement, the taxpayer allowed the franchisees to use the trade name, trade mark and course material belonging to it. However, other arrangements such as finding suitable premises, enrolling students, collecting fees etc. were made by the franchisees. The fees collected by the franchisees from the students were deposited in the taxpayer's bank account and subsequently 75% of such fees were shared with the franchisees. Taxpayer claimed such payments as tax deductible revenue expenditure while computing its taxable income.

Tax Officer rejected the said claim on account of non-withholding of Income-tax from the franchisee payments for carrying out the work in pursuance of a contract which is subject to tax withholding under section 194C of the IT Act. Section 194C of the IT Act provides that any person responsible for paying any sum to any contractor for carrying out any 'work' in pursuance of a contract is liable to withhold Income-tax at 2%.

Delhi High Court observed that the franchise agreement is not a simple case under which a person is engaged to carry out any work for the other. Essence of the agreement appears to be one under which the trade name or reputation or knowhow belonging to the taxpayer in the business of running learning centres is permitted to be used by the franchisees across India for a monetary consideration. The Delhi High Court further observed that a franchisee agreement cannot be broken up into several parts to bring it within the withholding tax provisions and that the dominant intention of the parties to the agreement should be respected and given effect to, as gathered from the composite agreement. Accordingly, the Delhi High Court held that the arrangement between the taxpayer and its franchisees did not fall within the purview of the term "work" under section 194C of the IT Act. Accordingly, taxpayer was not liable to withhold Income-tax on such payments and claim of tax deductibility of such expenditure could not be rejected.

ITA No. 939/2010, 911/2011 and 926/2011. Judgment delivered on April 19, 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.