Key takeaways
The story
Perfetti Van Melle Holding B.V., a Dutch company with a valid Netherlands tax residency certificate, owned 99.9% of Perfetti Van Melle India Private Limited, the maker of confectionery brands sold across India. It had bought its Indian shares in 2002 from an Italian group company at their face value of ₹10 each.
In the year 2019-20 (assessment year 2020-21), the Indian company bought back 92,91,300 of those shares from its parent at ₹10 each and paid ₹9,29,13,000. Because the parent's cost was also ₹10 a share, it made no gain; and because the company paid back exactly what it had received when it issued the shares, there was no distributed income, so no buyback tax was payable under section 115QA. The parent returned an income of ₹26,34,39,310 for the year.
The tax officer saw it differently. A chartered accountant's certificate, prepared for foreign exchange rules, valued the Indian company's shares at ₹298.30 each. Buying back shares at ₹10 when they were worth ₹298.30, the officer reasoned, raised the value of the shares the parent still held, and that rise was a gain the parent had received.
The officer treated the shares bought back as sold at their fair market value under section 50CA: 92,91,300 shares × ₹298.30 = ₹2,77,15,94,790. Put another way, the parent received ₹9,29,13,000 in cash and, in the officer's view, an accrued gain of ₹2,67,86,81,790 through the higher value of its remaining 2,78,73,800 shares. The assessed income came to ₹2,94,21,21,100 against ₹26,34,39,310 returned. The parent's own valuer had put the value, under the income-tax valuation rules, at ₹164.08 a share; the officer used the ₹298.30 FEMA value instead.
The parent's four answers
- 1There is no tax on mere appreciation
Income accrues only when someone becomes liable to pay it. The Supreme Court has held so in Shoorji Vallabhdas (1962), Excel Industries (2013), Balbir Singh Maini (2017) and Jindal Equipment Leasing (2026). Nothing in the Act taxes the rise in value of shares that were never sold.
- 2The shareholder's buyback income was exempt
From 1 June 2013, section 115QA put the tax on a buyback on the company, as a final tax, and section 10(34A) exempted the shareholder's income from it. So section 46A, and with it section 50CA's deemed value, could not be used to tax the shareholder.
- 3Parent to wholly owned subsidiary is not a taxable transfer
The buyback extinguished the shares, which is a transfer; but section 47(iv) exempts a transfer by a holding company to its wholly owned Indian subsidiary, and section 46A does not override it.
- 4The treaty keeps it out of India
Under Article 13(5) of the India-Netherlands treaty, as the Delhi Tribunal held in Huntsman Investment (Netherlands) BV (2026), after a Third Member's opinion, a buyback within the same group qualifies as a corporate reorganisation and the gain is not taxable in India.
The department argued that the full value of consideration includes what accrues, not only what is received; that the parent, holding almost all the shares, gained ₹267.87 crore in the value of its remaining holding; that section 50CA's fiction applied regardless of section 115QA; and that section 10(34A) exempts only income that was taxed in the company's hands, which this was not.
The conclusion
The Tribunal (Shri Anubhav Sharma, Judicial Member, and Shri Krinwant Sahay, Accountant Member) held that, despite the department's forceful arguments, it had not answered the parent's case that the shareholder's income from the buyback was exempt under section 10(34A), nor that section 47(iv) exempted a transfer to a wholly owned subsidiary, nor the treaty position under Article 13(5) as decided in Huntsman Investment. Following that decision, it allowed the appeal on 7 October 2026 and the capital gains addition fell away.
Because the addition failed on these grounds, the Tribunal did not need to decide the parent's fallback argument that the value should have been ₹164.08 under Rule 11UAA read with Rule 11UA(1)(c)(b), or its challenge to the Dispute Resolution Panel's directions for lacking a document identification number. The department may appeal to the High Court.
What has changed since
This order is about assessment year 2020-21. The Finance (No. 2) Act, 2024 changed the scheme for buybacks on or after 1 October 2024: the amount a shareholder receives is taxed in its hands as a dividend, the company no longer pays buyback tax under section 115QA, and the cost of the shares bought back is treated as a capital loss the shareholder can set off. The Income-tax Act, 2025, in force from 1 April 2026, carries this forward under new section numbers. So a buyback today is assessed very differently, and the exemption at the heart of this case no longer exists in the same form.
| Buyback in AY 2020-21 (this case) | Buyback from 1 October 2024 | |
|---|---|---|
| Who pays tax | The company, on distributed income (section 115QA) | The shareholder, on the amount received, as a dividend |
| Shareholder's position | Income exempt under section 10(34A) | Dividend income; cost of the shares as a capital loss |
| A non-resident parent | Treaty capital gains article (here Article 13(5)) | Treaty dividend article and withholding rate |
What it means for your group
- If an assessment for an earlier year taxes notional gains on a buyback or capital reduction, this order and Huntsman Investment support the challenge.
- Keep valuations under the income-tax rules (Rule 11UA) alongside any FEMA valuation; officers may pick whichever is higher.
- For a foreign parent, check the treaty's capital gains and dividend articles and keep the tax residency certificate and Form 41 current.
- Plan new buybacks under the post-October 2024 rules: the tax now falls on the shareholder as dividend, with withholding.
Does this mean any buyback at face value is safe?
No. It decided an assessment year under the old buyback scheme, on these facts, following a co-ordinate bench. Buybacks from 1 October 2024 are taxed differently, and the department can appeal.
Why did the officer use ₹298.30 rather than ₹164.08?
₹298.30 came from a valuation for foreign exchange regulations, obtained from the Indian company; ₹164.08 was the parent's valuation under the income-tax rules. The Tribunal did not need to decide which was right.
What is section 47(iv)?
It exempts a transfer of a capital asset by a company to its subsidiary, where the parent holds the whole of the subsidiary's share capital and the subsidiary is an Indian company.
Which tribunal and when?
ITAT Delhi, 'D' Bench, ITA No. 1804/Del/2023 for assessment year 2020-21, heard on 22 July 2026 and pronounced on 7 October 2026.
Planning a buyback or facing a notional-gains addition?
Aypa can model the tax for the company and the shareholders under the current rules and review earlier-year assessments.
Comments
No comments yet. Ask a question or share what you think.