The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has ruled against Cognizant Technology Solutions India, stating that the company is liable to pay Dividend Distribution Tax (DDT) on a buyback of shares worth Rs 19,000 crore under a scheme of arrangement.
It has been held that the buyback will attract a Dividend Distribution Tax (DDT). The total tax liability on the buyback exercise, according to the ITAT order, is Rs 4,853 crore.
The Tribunal has held that the buyback, which had the prior sanction of the Madras High Court, was a ‘colourable device’. In this case, on analysis of the scheme in light of relevant provisions of the Companies Act, 1956, and the Income Tax Act, 1961. It is clearly established that the scheme was implemented with a view to evade legitimate tax.
The matter pertains to assessment year (AY) 2017-18, when Cognizant purchased 94 lakh equity shares with a face value of Rs 10 each from its shareholders in the US and Mauritius. These shares were bought at a price of Rs 20,297 per share, resulting in a total consideration of Rs 19,080.26 crore. This transaction was carried out in accordance with a scheme that had been approved by the Madras High Court.
The income tax department argued that this changed the company’s shareholding pattern, with the Cognizant Mauritius entity holding 76.68 percent of the shares.
Rejecting the appeal of Cognizant Technology Solutions India, the tribunal ruled that the consideration paid by the company for the purchase of its own shares in accordance with the scheme sanctioned by the Madras High Court amounts to the distribution of accumulated profits, which attracts provisions of Sec.2(22) of the Income Tax Act, 1961.
Case Title: M/s.Cognizant Technology- Solutions India Pvt. Ltd. v/s ACIT