Income Tax Appellate Tribunal has upheld Cognizant’s ₹19,000 crore . buyback through a court-approved scheme as a ‘colourable device’. It will attract dividend distribution tax.
In the Income Tax parlance, colourable device intends to evade legitimate tax dues and such devices with no commercial purpose cannot be excluded as a fiscal nullity.
“In this case, on analysis of the scheme in light of relevant provisions of the Companies Act, 1956, and the Income Tax Act, 1961, with dates and events, it is clearly established that the scheme was implemented with a view to evade legitimate tax and thus, the judgment relied upon by the assessee cannot be applied to the facts of the present case,” Chennai bench of the ITAT said in a ruling delivered on September 13.
The assessee, Cognizanat Technology Solutions India Pvt. Ltd., was originally a wholly owned subsidiary of CTS, USA. Thereafter, in FY 2011-12, various businesses were restructuring directly or indirectly under the control of CTS, USA. Through a court-approved scheme, the Appellant Company was amalgamated with Cognizant India Pvt. Ltd. (CIPL) and MarketRx India Pvt. Ltd. (MIPL). CIPL was a wholly owned subsidiary of Cognizant (Mauritius) Ltd., whereas MIPL was a wholly owned subsidiary of MarketRx Inc. USA and, both of whom are wholly-owned subsidiaries of Cognizant Technology Solutions Corporation, USA.
During the FY 2016-17 relevant to AY 2017-18, the assessee had purchased over 94 lakh shares aggregating to Rs.19,080.26 Crs. The assessee deducted TDS on consideration paid to non-resident shareholders, Cognizant Technology Solutions Corporation, USA, MarketRx Inc. USA, and CSS Investments LLC, USA, because treaty benefit is unavailable to non-resident shareholders of USA. However, the assessee did not withhold tax on consideration paid to Cognizant (Mauritius) Ltd., because capital gain is not chargeable to tax in the hands of Mauritius shareholders in India under India Mauritius DTAA.
However, when it filed the AY 2017-18 return, it got a notice from the Income Tax Department for failure to pay tax in respect of consideration paid for the purchase of its shares. The issue went for litigation, and after not getting any relief, the matter reached ITAT.
After reviewing all the facts and arguments, ITAT rejected the assessee’s reliance on Gujarat HC ruling in Vodafone Essar. It also held that there is no dispute about the fact that the power of the Court in sanctioning any scheme and further, stakeholders involved in the said scheme are binding on the judgment but highlights that “when it comes to look into the scheme on taxation in light of provisions of Income Tax Act, 1961, there is no bar under the law for the AO to look into the scheme in light of relevant provisions of the Act and decide the taxability of the transaction,” the bench said.
It also remarked that the jurisdictional HC, while approving the scheme, stated that the sanctioning of the scheme was not to be construed as immunity granted to Cognizant for payment of taxes under any law for the time being in force. “We are of the considered view that there is no error in the reasons given by the Ld.CIT(A) to treat the transactions of the assessee as dividend,” the bench said and dismissed the appeal.
Commenting on the ruling, Cognizant said that it is reviewing the order and will pursue available legal remedies before the Appellate Authority. “Cognizant is committed to complying with the law in all jurisdictions where we operate” it said.