Introduction

Recently, the Income Tax Appellate Tribunal (“ITAT”) adjudicated the matter of Huntsman Investment (Netherlands) holding that a buyback of shares can be held as a form of corporate restructuring or reorganisation, in the backdrop of a treaty benefit claimed by the parent company under sub-clause (5) of Article 13 (“Article”) of the India-Netherlands Double Taxation Avoidance Agreement (“DTAA”). The decision has been widely held to be a contrarian stance taken by the tribunal, which reveals the ambiguity of the interpretation of a “major alteration of rights and interests” vis the nature of the alteration referred to, and the reliance on varying definitions of the term “corporate re-organization” while deciding the issue of tax exemptions availed under the said article.

This piece mainly flags the interpretive hiccups observed in the ITAT’s comprehension. The focus is on the ambit of corporate reorganization and the position of a capital reduction or the ensuing capital reduction of a buyback in it, while determining the prevalence of object or the pursuit of a company, in light of an array of precedents. With the aid of foreign statute, the piece proposes a litmus test, as against definitions authored in alien context and dismiss statutory convenience.

Decoding the Law- The Ambiguity in Treaty Jurisprudence

Under the India-Netherlands DTAA, Article 13(5) states that the capital gain made from the alienation of shares issued by a company resident in the other State, whose shares form part of at least a 10 per cent interest in the capital stock of that company, may be taxed in that other State if the shares are alienated to a resident of that other State. However, the exception is that the gains are taxed only in the State of which the alienator is a resident if they are realized in the course of a corporate organisation, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other.

In the ruling of Huntsman Investments B.V v. ADIT (2026), the ITAT held that the buyback of shares held by the Dutch parent entity (“assessee”) in an Indian subsidiary amounted to an intra- group transfer of shares. This altered the financial structure as the shares sold constituted 24% of the total shares of the parent entity while the actual ownership in the subsidiary remained consistent, after the reduction of paid-up share capital. The gains arising on sale of shares were offered to tax by the assessee and going by the Article, the shares were liable to be taxed in India. This was claimed to have been defeated by the exception, with buyback bucketed in the category of corporate reorganisation, although the category per se remains undefined in the entire DTAA. To address the defect, the tribunal relied on an academic definition which read that a reorganization involved an acquisition or division of companies with a noticeable change in its capital structure. While this doesn’t provide closure on a buyback, the tribunal transitions to the view of the Bombay High Court in the matter of The Securities Exchange Board of India (SEBI) v. Sterlite Industries (2002) (“Sterlite Industries”) that a company could buy back its own shares as a part of a reorganization scheme. Furthermore, The ITAT rules out the argument that the manner and procedure adopted to carry out a buy-back determines a corporate re-organization and brushed off the other issues raised in the memo of appeal, confining the matter to selective metrics.

However, para 24 of the order highlights that there was no actual material change in the capital structure, shareholding pattern, financing structure, controlling interest, rights or obligations of the shareholders of the company. A buy-back cannot by way of a consequent reduction in paid-up share capital, be treated as resulting in a change in the capital structure of the company. Pursuant to the reduction of share capital, the assessee continued to remain a 99% owner of the Indian subsidiary, proving its unflinching rights and obligations and cannot be considered as a restructuring activity. This flows from the decision of the tribunal in the ruling of Dimexon Diamonds Ltd v. ACIT Mumbai (2024) which contemplates on the structurally distinct issue, of amalgamation as an “international transaction” under Section 92B of the Income Tax Act of 1961 and relies on the OECD Transfer Pricing Guidelines on business restructuring. The tribunal reasoned that restructuring is an organizational change in ownership/management structure, even without movement in financial assets or the risk profile of the parent entity, ‘merely’ qualifying a business reorganisation. The invocation of this decision is to highlight and adopt the regime neutral proposition it lends, a threshold the Huntsman ruling does not cross.  

Moving ahead, the object of the assessee in claiming the exemption after a long period of time was not taken into consideration, even after it was submitted that the assessee did not advance any claim for exemption under the Article before the Transfer Pricing Officer, nor in their tax return or during the course of initial proceedings before the Adjudicating Officer (‘AO’). The fact that there was no reference about any such scheme whatsoever in the minutes of the statutory meetings held by the subsidiary, reflects its apparent intention. It is noteworthy that in this matter, the claim for exemption was deprioritized as an additional ground before the Dispute Resolution Panel (“DRP”), leaving the primary agenda of the assessee in “pursuing” a reorganisation, and the expectation of a benefit from it, obscured.

The Stark Distinction- Accordis and its Ramifications

In the matter of Accordis Baheer B.V v. Director of Income Tax Officer (2016), a Dutch investor had exited its investments in an Indian company by way of a buyback post which, the shareholder had realized a capital gain. The tribunal negated the claim of benefit of Article 13(5) basis, that a shareholder cannot achieve an exemption when he is given an exit route. An aspect that was overlooked, is that the shareholder undertook a transaction for the sale of shares amounting to 30% of the total number of shares held by him (around 38%) in the company. This logically causes a major change in the financial structure of the entity (compared to the Huntsman case), by way of increase in the rate of shareholding held by other shareholders, and in the ownership of the Indian promoters due to the consequent reduction in share capital, the latter being acknowledged by the ITAT in para 13 of the decision and surprisingly, being disregarded as a change in rights and interests of the shareholders. Also, the ITAT undertook a narrow reading of Section 390 of the Companies Act 1956 to capture buybacks as a category that shields reorganisation as a class-based consolidation or division of shares.

The varying stances of the tribunal is concerning, when it considered the objective of the scheme in this case. It held that an exit route provided to non-resident shareholders cannot be formatted as a reorganization, albeit the subsequent major cancellation of shares. It also frowned upon the reliance on the decision in Sterlite Industries by stating that the emphasis was placed on the scope of sec. 391 of the Companies Act of 1956 rather than determining the actual meaning of the term “reorganization”. The tribunal dismissed it as a legally deficient tool to interpret the term substantially. 

Diminution of Capital- A Dearth of Clarity

The tribunal has reservations in its decisions particularly, when there is a pure capital reduction pursuant to a scheme approved by the National Company Law Tribunal (“NCLT”) In the matter of Legrand Nederland B.V v. ACIT, Mumbai. (2023), a Dutch company held half of the shares in an Indian company, which undertook an NCLT-approved capital reduction. The former’s shares were cancelled while the latter treated the receipt as capital gains, and naturally claimed treaty protection. Para 52 of the ruling expresses that capital reduction by way of an NCLT order cannot be reckoned as alienation of shares in the course of corporate organization, though the entire holding of the Dutch entity was cancelled, that significantly alters the financial and corporate structure of both entities. If this rationale were to be preferred, then it would dissolve the fabric of the Accordis case, in which a buyback was made, without the NCLT’s intervention. Moreover, the surprising facet of this ruling is the lack of attention to the complete cancellation of shares of an entity (and not just an individual shareholder), in contrast to the ITAT’s approach to a similar partial cancellation in the Huntsman ruling.

Furthermore, in the matter of RBS AA Holdings B.V v. DCIT, New Delhi (2025), the tribunal did not touch upon the matter of treaty benefits. It held that owing to commercial exigencies, the group entities decided to reduce capital requirement (by cancellation of 60% shares) in the Indian subsidiary, as the latter had surrendered its banking license and obtained the NCLT’s approval to repatriate funds at a fair market value because of which, “there is no arrangement”. This was held so, albeit recognising that the reduction was a group-level business decision about capital allocation in the Indian subsidiary, and not merely a shareholder cash-out. These decisions understate the credibility of the decisions of another competent authority, needlessly hindering lucid interpretation and questions the very construct of treaty clauses.

Recommendations- Comparative Experience and a Three-Fold Test

For curing the interpretive differences, a scientific examination of specific circumstances must be undertaken. 

Firstly, a continuity test to evaluate the ultimate beneficial ownership of an entity is proposed wherein, the party initiating a buyback or a capital reduction owns a substantial part of the target entity post the process. For instance, a cancellation of the entire holding of the entity in the Legrand matter satisfies a pre- meditated restructuring, as against unchanged ownership in the Huntsman matter.

Secondly, a materiality test to assess a ‘major’ change of interests. The target group must include every shareholder, irrespective of the class of shares or the capacity of shareholding (promoter/non-promoter). A specific percentage must be set, the breach of which qualifies a material change and its implications must be scaled seriously.

Thirdly, an objective test, whose criteria must be developed carefully. The intent of the parties must be picked up, only when there is an indication of a treaty abuse by the ITAT, without accounting in any other extraneous factors. This necessitates a substantial framework, aligned with provisions under Article 7 of the OECD Multilateral Convention to Implement Tax Treaty Measures (MLI)  (“OECD Guidance”) that deem an arrangement as an abuse, for which definite conditions must be charted out that requires periodic deliberation by the government from time to time. The evidence should include board minutes, scheme documents, NCLT filings, valuation reports, accounting treatment, group restructuring papers, tax return disclosure, timing of the claim, and whether the same result could have been achieved through a simpler cash extraction.

If the conflict between a pure capital reduction and reduction post buyback remains unredressed, then the definition of reorganisation provided by the UK’s Taxation of Chargeable Gains Act, 1992  can fill this void. It includes the reduction of a company’s share capital while confining the term to bonus issues, rights issues and certain capital reductions. Surprisingly, reorganization as a term has been limited to include a merger or a divisive reorganization under Article 8 of the OECD Guidance. This side-lines buybacks and paves way for a singular interpretation for simplicity.

Way Forward

An evidently, unsettled part of these decisions is the oversight of a practical interpretation of the law. The missing definition of reorganisation fuels the tendency to take support of academic substance and the impression of another authority, giving rise to differing interpretations. In para 26 of the Huntsman ruling, the tribunal acknowledges the resulting reduction in quantum of shareholding (i.e., the number of shares held by the assessee in the subsidiary gets depleted) post a buyout, followed by a major change in the financial structure of the assessee and a reduction in financial interest. But, a percentage differential of promoter shareholding did not qualify an alteration as per the ITAT, a decade ago. The objective of similarly-placed parties was heeded with an otherwise unjustified discretion.

These divergent opinions act to the detriment of foreign corporations hampering relations with home entities. The significance of a reorganisation is underscored by the import and purpose of the transaction, either a buyback or a capital reduction and merits the adoption of the suggested measures by adjudicatory authorities. This approach maintains the essence of a DTAA, ensuring that it is retained in judicial reasoning.