Cognizant Liable For Dividend Distribution Tax On Rs 19,000 Crore Buyback, Says ITAT

The Chennai Income Tax Appellate Tribunal has ruled that Cognizant Technology Solutions India Pvt. is liable for dividend distribution tax on a Rs 19,000 crore buyback.

The buyback was conducted through a scheme approved by the Madras High Court during the assessment year 2017–18. The assessee bought 94,00,534 equity shares from its shareholders in the U.S. and Mauritius at a rate of Rs 20,297 per share, totaling Rs 19,080.26 crore.

The ITAT determined that this buyback, carried out under a scheme approved by the High Court, amounted to the "distribution of accumulated profits" and was subject to provisions under Section 2(22) of the Income Tax Act, 1961.

The section says that when a company gives its shareholders any of its accumulated profits, whether in cash or assets, it's considered a dividend. For instance, if the company gives cash or assets like shares, then it's a dividend.

The ITAT rejected Cognizant’s argument that the scheme had High Court approval and concluded that it was implemented to evade legitimate taxes. It clarified that the court's power to approve the scheme did not grant immunity from tax payments under prevailing laws.

Additionally, the tribunal observed that the Madras High Court itself had stated that the sanctioning of the scheme would not mean that immunity is granted to the assessee for payment of taxes under any law.

On observing the scheme document, it 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.

In this case, the tribunal said it's clear that the scheme was a "colourable device" created to evade legitimate tax payments, and such schemes without any genuine commercial purpose can be disregarded. The assessing officer has the authority to see through these schemes and assess them accordingly.

This was further supported by the fact that there is no genuine business connection between the company's activities and Mauritius, as noted by the lower authorities.

As a result, the ITAT upheld the Commission of Income Tax (Appeals) decision to treat the company’s transactions as dividends.