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ITAT upholds Rs 3,300 crore tax demand on Cognizant

In the long-drawn tax dispute with Cognizant Technology Solutions India Pvt Ltd, the Chennai Income Tax Appellate Tribunal (ITAT) has upheld that the company is liable to pay dividend distribution tax (DDT) on buyback of shares made in the assessment year 2017-18.

The order implies that the company may have to fork out around Rs 2,800 crore out of the total tax demand of around Rs 3,300 crore as it had deposited 15% of the tax demanded when the matter was being heard in the Chennai High Court.

Cognizant had purchased 94,00,534 equity shares of face value Rs10/share from its non-resident shareholders based in the US and Mauritius at Rs 20,297/share for a consideration of Rs 19,080 crore.

Traditionally, the buyback has been an exception to the erstwhile DDT regime. “In this ruling, buyback was made pursuant to a scheme of arrangement approved by the jurisdictional High Court where Cognizant did not withhold tax on consideration paid to a Mauritius shareholder entity due to the exemption under the tax treaty and it was held that there is no bar on the tax authorities to look into the scheme from the income-tax standpoint,Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, said.

ITAT held that the purchase of its own shares through a scheme sanctioned by the jurisdictional HC in terms of provisions of Section 391-393 of the Companies Act, 1956 amounted to “distribution of accumulated profits which entails the release of all or part of assets of a company on reduction of capital which attracts provisions of Sec.2(22) of the Income Tax Act, 1961.

The assessee submitted that the tax department has erred in alleging that the “distribution of accumulated profits to shareholders and the ‘scheme of arrangement and compromise’ is a device designed by the assessee” for repatriation of accumulated profits outside the country without paying the due tax.

This ruling has very well expounded the difference between the terms “purchases of own shares” and “buy-back” since they are two different concepts in the Indian Companies Act and used for different purposes,” he said.

The term “buy-back” was used for transactions effected under the normal provisions of section 77A whereas the purchase of shares in this case was under the ‘Scheme of Arrangement & Compromise’ u/s.391 to 393 of the Companies Act, 1956. “It would be interesting to see the future course of action in this matter by Cognizant,” Maheshwari said.

The income tax department said the assessee’s impugned transaction of “purchase of its own shares” from its non-resident shareholders involved mandatory ‘capital reduction’ to the extent of reducing 54.7% of the total paid-up share capital.

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