Cognizant Technology Challenges ITAT Order Upholding Dividend Distribution Tax Demand On Buyback Of Rs 19,000-Crore Shares Before Madras High Court

The Cognizant Technology has challenged the order of the Income Tax Appellate Tribunal (ITAT) which upheld the dividend distribution tax demand on buyback of Rs. 19,000-crore shares before Madras High Court.

The issue relates to assessment year (AY) 2017–18, during which assessee, Cognizant acquired 94 lakh equity shares from its stockholders in the US and Mauritius for a face value of Rs. 10 apiece. A total of Rs 19,080.26 crore was paid for these shares, which were purchased at a price of Rs 20,297 per share. This transaction was completed in accordance with the scheme that the Madras High Court had approved.

The CIT(A) held that the transaction of purchase of own shares by the appellant company is the distribution of accumulated profits within the meaning of section 2(22) of the Income Tax Act, 1961.

The department contended that the Cognizant Mauritius business now holds 76.68 per cent of the company's shares, changing the company's shareholding arrangement.

The assessee contended that the tax department erred when it claimed that the distribution of accumulated profits to shareholders and the scheme of arrangement and compromise is a device designed by the assessee' for repatriating accumulated profits outside the country without paying the required tax.

The tribunal, while referring to the scheme document, said that the scheme's real intent was to shift the company's capital base to shareholders in Mauritius and distribute the company's accumulated profit to non-resident shareholders without falling under any tax provisions related to share purchases.

The ITAT held that the scheme was a "colourable device" created to evade legitimate tax payments, and such schemes without any genuine commercial purpose can be disregarded.