Justice P.K. Balasubramanyan, Chairman - The applicant is a company incorporated in Germany with limited liability. It is a part of a Group of companies. The applicant files income-tax returns in India as a non-resident. According to it, it has a wholly owned subsidiary in India, which is a public limited company incorporated under the Indian Companies Act (hereinafter, 'Companies Act').

2. The applicant holds 43,83,994 shares in the Indian company being 99.99986% of the shareholding. One share each is held by 6 other companies, each constituting 0.00002% of the shares of the Indian company. According to the applicant, the six other companies holding shares are its nominees. The shares are held by them for complying with the requirements of the Companies Act with regard to the minimum number of members for a public limited company, fixed at seven by the Act.

3. The applicant submits that the shares in the Indian company are held by it as an investment and not as stock in trade. It has now received intimation from the Indian company that it is proposing a buy back of shares from the applicant. The buy back would result in transfer of shares of the Indian company from the applicant to the Indian company. The consideration for the proposed transfer is to be determined on the basis of pricing guidelines prescribed by the Reserve Bank of India as applicable for transfer of shares by a non-resident to a resident. Since the applicant wants to ascertain whether, based on the proposed transaction, the applicant would be liable to be taxed in India, it is approaching this Authority for a Ruling.

4. This Authority allowed the application for a Ruling under section 245R(2) of the Income-tax Act (hereinafter referred to as 'the Act') and raised the following questions for a ruling.

1. Whether, in the facts and circumstances of the case, would the transfer of shares of UVW India by the applicant to its wholly owned subsidiary UVW India, in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the applicant, in view of the provisions of section 47(iv)?

2. Without prejudice to Question 1, whether the applicant would not be liable to tax under the provisions of section 115JB of the Act, in the absence of any business presence or permanent establishment ('PE') in India?

3. Where, on the facts and circumstances of the case, the gains arising to the applicant on account of the proposed transfer of shares, in the course of buy-back of shares by UVW India, is not taxable in India under the Act, whether UVW Germany is entitled to receive the amount on buy-back of shares without any deduction of tax at source?

In its submission, the Revenue has taken up the position that the gain is taxable in India as capital gains, going either by Section 46A of the Act or by Article 13.4 of the Convention between India and Germany. It is submitted that in a case like the present one, where the shares get extinguished on buyback, Section 47(iv) of the Act has no application. Section 47 also does not override Section 46A of the Act. Hence, the gain as postulated by Section 46A of the Act would be taxable in India.

5. In its reply, the applicant has reiterated that Section 46A is not a charging section and that buyback of shares would be chargeable to tax under section 45(1) of the Act read with Section 46A for computation thereof. The liability to be taxed was under section 45 and section 47(iv) of the Act would be attracted and hence, the transaction was not taxable in India.

6. At the hearing, it was submitted on behalf of the applicant, that the applicant and its nominees together held 100% of the shares in the Indian subsidiary and in the case of a buyback, the transfer would stand exempted from taxation under section 47 (iv) of the Act. In the context of Section 77A of the Companies Act, the proposed buyback was a valid transaction and the proceeds will not be dividend in view of the amendment to the definition of dividend unde