Cognizant Technology Liable For Dividend Distribution Tax On Buyback Of Rs 19,000-Crore Shares: ITAT

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that Cognizant Technology is liable to pay dividend distribution tax on the buyback of Rs. 19,000 crore shares.

The bench of Mahavir Singh (Vice President) and Shrimanjunatha. G (Accountant Member) has observed 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 the 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 Section 2(22) of the Income Tax Act, 1961.

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.

“There is no error in the reasons given by the Ld.CIT(A) to treat the transactions of the assessee as dividend u/s.2(22)(a)/2(22)(d) r.w.s.115-O of the Income Tax Act, 1961, and thus, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the assessee,” the ITAT said.

Case Title: M/s.Cognizant Technology- Solutions India Pvt. Ltd. Versus ACIT

Case No.: ITA No.269/Chny/2022

Date: 13.09.2023

Counsel For Appellant: Ajay Vohra

Counsel For Respondent: R.Shankaranarayanan

Click Here To Read The Order