Delhi Tribunal ruling on whether share buy-back within corporate-group constitutes “reorganization” under India-Netherlands tax treaty

The Taxpayer, Huntsman Investment Netherlands BV ^[1] , was a company incorporated in The Netherlands and held 99.98% shares in its Indian subsidiary, Huntsman International [India] Pvt. Ltd. (I Co). In the relevant tax year, I Co undertook a buy-back of 24% of equity shares from the Taxpayer. The Taxpayer offered capital gains arising on sale (through buy-back) of shares were offered to tax in its return of income. On reference to the Transfer Pricing Officer (TPO), the TPO determined higher arm’s length price (ALP) for aforesaid transaction and proposed an upward adjustment. 

Before the Dispute Resolution Panel (DRP), the Taxpayer raised an additional ground and claimed that the capital gains is not taxable in India as per Article 13(5) of India-Netherlands Double Taxation Avoidance Agreement (tax treaty or DTAA ^[2] ). The Taxpayer contended that the transaction formed part of an internal corporate reorganization within the group satisfying 10% ownership threshold in view of which India as a source state did not have right to tax the transaction under Article 13(5). The DRP rejected the above contention of the Taxpayer.

Aggrieved, the Taxpayer appealed before the Delhi Income Tax Appellate Tribunal (Tribunal). The Accountant Member of the Delhi Tribunal accepted the Taxpayer’s position, holding that the buy-back constituted corporate reorganization. In this regard, reliance was placed on the Bombay HC ruling in the case of SEBI vs. Sterlite Industries^[3]  and the Andhra Pradesh High Court (HC) ruling in the case of Shareholders of TCI Industries^[4]  which support that scheme of buyback of shares by the company is recognized as scheme of reorganization. However, the Judicial Member disagreed, holding that the transaction did not qualify as corporate reorganisation since there was no significant change of financial structure, no alteration in rights and interest of security holders. Reliance was placed on the negative Mumbai Tribunal decision in the case of Accordis Beheer BV vs. DIT (International Tax)  dealing with interpretation of reorganization for Article 13 of India-Netherlands DTAA. Due to difference in opinion between the two members of the Tribunal, the case was referred to a Third Member.

The Third Member concluded that the buy-back transaction qualified as a “corporate reorganization” under Article 13(5) and accordingly, the capital gains arising therefrom was not taxable in India. The Third Member made following observations in this regard: 

• In the present facts, the buy-back resulted in a change in form of ownership in I Co on account of reduction in financial interest and change in the financial structure of I Co; even though effective ownership of I Co remained the same.
• Reliance was placed on P. Ramanatha Aiyar’s Law Lexicon which defines reorganization to include a substantial change in the capital structure of a company. 
• Reference was also made to guidance issued by Institute of Chartered Accountants of India (ICAI) and Institute of Company Secretaries of India (ICSI) which provides that buy-back of shares is part of corporate restructuring of a company.
• Support was also drawn from the protocol to Netherlands–Nigeria DTAA which clarifies that transfer of shares within a group of associated enterprises is covered within the scope of corporate organization or reorganization.

^{[1] TS-417-ITAT-2026(DEL)
[2] Article 13(5) of the India–Netherlands tax treaty allocates taxing rights to Resident State for gains realized in the course of corporate organization, reorganization, amalgamation, division or similar transaction, subject to a satisfaction of 10% ownership threshold.[2003] 53 CLA 41 (Bombay)
[3] (2004) 60 CLA 382
[4] [2016] 157 ITD 373 (Mumbai)}