Summary: The Delhi ITAT in the Huntsman Investment case ruled that intra-group share buy-backs can qualify as “corporate reorganisation” under Article 13(5) of the India-Netherlands DTAA, shielding capital gains from Indian taxation. The Tribunal emphasized substance over technicality, noting that Huntsman BV’s ownership percentage in its Indian subsidiary remained unchanged despite the buy-back. It relied on professional guidance and comparable treaty protocols to interpret “reorganisation.”
In a significant ruling that brings much-needed clarity to the intersection of share buy-backs and double taxation treaty benefits, the Delhi Income Tax Appellate Tribunal (“ITAT”) in Hunstman Investment (Netherlands BV)[1] has held, by a majority, that buy-back of shares by an Indian subsidiary from its Dutch holding company qualifies as “corporate reorganisation” under Article 13(5) of the India-Netherlands Double Taxation Avoidance Agreement (“DTAA”), thereby protecting the resulting capital gains from taxation in India.
Background
Huntsman Investment (Netherlands) BV (“Huntsman BV”), a company incorporated in the Netherlands, held 99.98% of Huntsman International (India) Private Limited (“HIIPL”). Huntsman BV tendered 21,400,000 equity shares of HIIPL pursuant to a buy-back offer made by HIIPL, at INR 23.10 per share for Rs 49,43,40,000.
The capital gains realised by Huntsman BV was originally reported for taxation purposes in its income tax return. During the assessment proceedings, the Transfer Pricing Officer (“TPO”) determined the arm’s length price of each share at Rs 80.77 and proposed an upward adjustment of Rs 1,23,41,38,000. Hunstman BV raised objections before the Dispute Resolution Panel (“DRP”), wherein it raised a new alternate plea that the buy-back should be considered as ‘reorganisation’, which is eligible for exemption under Article 13(5) of the India-Netherlands DTAA.
The DRP dismissed Hunstsman BV’s contentions, prompting an appeal to the ITAT. There, the verdict was split: the Accountant Member upheld Hunstman BV’s claim, stating that capital gains from the buy-back fell under Article 13(5) of the DTAA and should be taxed only in the Netherlands, as it results from a “corporate reorganisation”. In contrast, the Judicial Member differed, holding that the buy-back did not constitute a “corporate reorganisation” and, therefore, Article 13(5) of the DTAA did not apply.
Given the divergence of opinion, the matter was referred to a Third Member, the Vice President of the Delhi ITAT, for resolution.
Decision
The Third Member noted that Article 13(5) of the India-Netherlands DTAA allocates taxing rights of all kinds of capital gains, except those mentioned in paragraphs 1 to 4 of Article 13, to the resident state, i.e., the Netherlands in the present case. An “exception” to this general rule is that if the transferor holds 10% or more shares in a company incorporated in the source state, the source state (India) gets the taxation right. An “exception to this exception” is that if the capital gain arises during the course of a corporate organisation, reorganisation, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10% of the capital of the other, capital gains would be taxed only in the resident state, i.e., the Netherlands in the instant case.
What Constitutes a Reorganisation? Substance Over Technicality
The Third Member acknowledged that in the present case, due to the buy-back of shares, despite reduction in the quantum of shareholding (i.e., the number of shares held by Huntsman BV in HIIPL got reduced), the actual ownership in percentage terms remained the same (i.e., Huntsman BV continued to be the owner of HIIPL).
The Third Member referenced guidance from the Institute of Chartered Accountants of India (“ICAI”) and the Institute of Company Secretaries of India (“ICSI”), both of which define “Capital and Financial Restructuring” to include share buy-backs. Further, the Third Member pointed out that the Protocol to the Netherlands-Nigeria DTAA, which is pari materia to the expression used in the India-Netherlands DTAA, expressly provides that “it is understood that the terms corporate organisation, reorganisation, amalgamation, division or similar transaction refer to transfer of shares within a group of associated enterprises”. The Third Member noted that the phrase “it is understood” makes it amply clear that this stipulation in the Nigeria-Netherlands DTAA is merely clarificatory in nature and not a new concession agreed upon in the DTAA.
Significant Takeaways
The Huntsman ruling establishes that intra‑group share buy‑backs may qualify as “reorganisations” and thus be eligible for exemption under the India‑Netherlands DTAA. However, given the Supreme Court’s recent decision in Tiger Global[2] and the overarching GAAR provisions, tax authorities are likely to expect taxpayers to demonstrate genuine commercial substance behind such transactions. This makes it imperative for multinational groups to meticulously document the rationale, internal discussions and deliberations within the group, requisite corporate approvals, etc. underpinning the proposed reorganisations to sustain treaty exemptions.
Separately, interpretation of a term not expressly defined in the DTAA has long been a subject of debate. Section 159(7) of the Income‑tax Act, 2025 (“IT Act 2025”), provides a clear hierarchy for such cases: first, the definition in the treaty itself; if absent, then definition provided under the IT Act 2025; and if still absent, definitions from other central legislative statutes. Where it is not possible to derive meaning even after applying this hierarchy, the Huntsman ruling offers important guidance. It clarifies that the supplementary sources, such as protocols to comparable treaties, OECD commentary, and professional guidance notes (for instance, those issued by professional agencies like the ICAI, the ICSI, etc.) may legitimately be relied upon to interpret undefined treaty terms. This layered approach ensures both consistency and flexibility, aligning treaty interpretation with international practice and commercial realities.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] ITA No. 764/Del/2014 AY: 2009-10 dated March 25, 2026
[2] Civil Appeal No. 262-264 of 2026 dated January 15, 2026
