Cognizant Technology Solutions India Pvt. Ltd. Vs DCIT (Madras High Court)
Conclusion: Shares purchased pursuant to the order of Company Court would not amount to capital gain and rather to be treated as a dividend.Whenever a company distributes its profits to its shareholders, the profit so disbursed, will amount to dividend and Dividend Distribution Tax at 15% was required to be paid by assessee u/s 115O.
Held:
During the year 2016 under the Scheme of Arrangement and Compromise, assessee planned to purchase its own shares u/s 391 to 393. The gain arising to the shareholders in the course of buy-back was offered to taxation as capital gain as per the treaty relief and a total of Rs.898.01 Crores was paid as capital gain tunder Section 46A to the Department by assessee. Department held that the buy-back of share u/s 391 of the Indian Companies Act was nothing but the distribution of accumulated profit and it had to be treated as dividend u/s 2(22)(d) and Dividend Distribution Tax at 15% was required to be paid by assessee u/s 115O. Assessee alleged that during the year 2017, the I.T. Department attempted to tax the 2013 buy-back as an income from other sources in the hands of assessee’s shareholders and AO proceeded to pass a Draft Assessment Orders against its shareholders and the orders were under challenge in W.P.Nos.1244 & 1245 of 2018. In view of the same, assessee approached the Authority for Advance Rulings and filed an application under Section 245Q in relation to the buy-back of shares in the year 2016. AO was required to answer whether section 115 O mandated issuance of show-cause notice, enquiry before passing a final order, whether AO was prohibited from issuing the impugned order in the light of the bar prescribed in Section 245 RR and whether the writ petition was maintainable. It was held unless the law requires, AO need not issue notice before making a demand under Section 115 O. The parliament in its wisdom brought amendments to the Finance Act and inserted Section 115 O to 115 Q with effect from 01.06.1997 (Special Provisions) to achieve an object. If any other view is taken, then the Special Provisions under Chapter XIV would become redundant and it would be opening a pandor as box. It was not disputed that assessee approached the Authority for Advance Rulings only on 20.03.2018, when the issue was pending before AO. Section 245R of the Act makes it clear that if the enquiry is already pending before the Assessing Officer, the Authority for Advance Rulings has no jurisdiction to entertain the application. Hence, the impugned order did not stand in view of the bar under Section 245 RR. Also, it was relevant to note that in the Company Petition in C.P.No.102 of 2016, in Clauses 6.6 and 6.7, it was stated that the provisions of Section 2(22) or Section 115 O or Section 115QA were not applicable to the purchase of equity shares by the Company from its shareholders and the Scheme of Arrangement and Compromise should not be treated or considered as a “capital reduction” under the provisions of Section 100 of the Companies Act, or a “buy-back” under the provisions of Section 68 of the Companies Act. However, while approving the Scheme, as observed above, the Company Court had categorically held that “this order will no be construed as an order granting exemption from payment of stamp duty or, taxes or, any other charges, if any, payable, as per the relevant provisions of law”. Whenever a Company distributes its profits to its shareholders, the profit so disbursed, will amount to dividend.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
Assailing the order of the respondent dated 22.03.2018, whereby the petitioner was directed to remit tax at 15% of the total payment of Rs.19415,62,77,269/- along with interest under Section 115P of the Income Tax Act (in short “Act”), the present Writ Petition has been filed.
2. According to the petitioner,it is a Company incorporated under the Companies Act and is engaged in the business of development of computer software and related services and export. In the year 2013, the petitioner bought back its own shares under Section 77A of the Companies Act. Thereafter, during the year 2016 under the Scheme of Arrangement and Compromise, the petitioner planned to purchase its own shares under Sections 391 to 393 of the Companies Act for the following reasons:-
(i) to increase earnings per share and return on equity over a period of time and enhance long-term value creation;
(ii) to streamline ownership structure by purchasing its own shares from minority shareholders holding less than 25% of the issued, subscribed and paid up share capital;
(iii) to serve the shareholders more efficiently and optimize the overall capitalstructure; and
(iv) to reduce foreign currency fluctuation risk in respect of rupee funds in
3. The petitioner filed. No.102 of 2016 before this Court for approval of the Scheme to buy back a maximum of 94,00,534 equity shares from its shareholders for a total consideration of Rs.19,080.26 Crores and the Scheme got approved by an order dated 18.04.2016. It is a case of the petitioner that the consideration for such buy- back was paid to the shareholders in May 2016. The gain arising to the shareholders in the course of buy-back was offered to taxation as capital gain subject to applicability of treaty relief and a total of Rs.898.01 Crores was paid as capital gain to the respondent-Department by the petitioner.
4. The petitioner would allege that during the year 2017, the I.T. Department attempted to tax the 2013 buy-back as an income from other sources in the hands of the petitioner’s shareholders and the Assessing Officer overruling the findings of the Transfer Pricing Officer, proceeded to pass a Draft Assessment Orders against its shareholders and the orders are under challenge in W.P.Nos.1244 & 1245 of 2018. In view of the stand taken by the Department in the 2013 buy-back, the petitioner approached the Authority for Advance Rulings and filed an application under Section 245Q of the Act in relation to the buy-back of shares in the year 2016.
5. The petitioner would claim that when the application filed under 245Q of the Act is pending and when there is an express bar contained in 245 RR of the Act, the impugned order shall not Further, it came to be passed in violation of principles of natural justice. According to the petitioner, the shares bought back in pursuance to the order of this Court under Sections 391 and 393 of the Companies Act is covered under Section 46A of the Act and it would not come under the definition of dividend as per Section 2(22) of the Act.
6. In the counter filed by the respondent, it has been stated that the petitioner remitted about Rs.19,415 Crores to its non-resident shareholders in May 2016, without paying Dividend Distribution Tax (DDT) under Section 115 O of the Act. The issue of non-payment of DDT was identified and a notice dated 21.11.2017 was issued to the asssessee calling for details of the tax paid on those remittances. Thereafter, a serious of meetings were held with Tax Team of CTS between November 2017 and March 2018 in the Chamber of Commissioner of Income Tax (LTU), where apart from CIT (LTU), Joint Commissioner of Income Tax (LTU) and the Deputy Commissioner of Income Tax (LTU-I) were present. On two occasions Shri. R. Chandrasekharan, Executive Vice Chairman / MD of the Company appeared before the Department along with the Competent Tax Team and they were explained about the liability of its remittances to tax under Section 115O of the Act. On two more occasions, Shri.Gym, Head, Global Taxation (CTS) was also present along with Tax Team. They assured that they will look into the scheme once again and tax liability, if any will be paid, for which, they sought time. Since no proper response was forthcoming from the Company, the final show-cause notice dated 22.03.2018 was issued. It is stated that the Department has clearly explained and communicated to the assessee regarding the tax liability under Section 115 O of the Act, provided ample opportunity, and proceeded with necessary action, by observing requisite formalities.
7. It is further stated in the counter that a letter dated 21.11.2017 was issued to the assessee calling for various details regarding remittances made to the shareholders of the petitioner Company during FY 2015-16 and 2016-17 and their tax payment. It is a case of the respondent that by virtue of first proviso to Section 245R (2) of the Act, the Authority for Advance Rulings shall not take cognizance on the application filed under Section 245Q of the Act as the issue raised in the application is already pending before the Income Tax Authority and the application was filed only to circumvent the proceedings.
8. The respondent has further stated that the buy-back of share under Section 391 of the Indian Companies Act is nothing but the distribution of accumulated profit and it has to be treated as dividend under Section 2(22)(d) of the Act and Dividend Distribution Tax at 15% is required to be paid by the petitioner under Section 115O of the Act. Though the petitioner deposited a sum of 898,01,63,318/- byway of withholding tax, it has not deposited the remaining tax to the extent of 2500 Crores.
9. It is further stated that unlike the Regular Assessment Proceedings under Section 143 (3) of the Act, etc., the provisions of Section 115 O of the Act do not prescribe any specific order to be passed as it is equivalent to self declaration and under Section 115 O of the Act, the tax payer is required to remit the taxes within a period of 14 days from the date of distribution of dividends and any failure in remitting the taxes within the time will automatically makes the taxpayer, “assessee deemed to be in default” and the Department can proceed with all recovery measures.
10. A rejoinder affidavit has been filed by the petitioner contending that the notice dated 21.11.2017 does not refer to any provision / Section of the Act and there is no mention about the Distribution Dividend Tax in the letter dated 21.11.2017. The letter was duly replied on 04.12.2017 and 06.12.2017. In paragraph9,the meeting and discussions held by the respondent has not been specifically denied, however it is stated that the informal discussions cannot be a substitute to a proper show-cause notice with a chance of reply and an opportunity of hearing.
11. Gopal Subramanium, learned Senior Counsel appearing on behalf of the petitioner would urge that Chapter XII DA was inserted by an amendment to Finance Act, 2013 with effect from 01.06.2013. Prior to the insertion of the said Sections, the Companies are entitled to the benefits under Double Taxation Avoidance Agreement in respect of buy-back of shares under Section 77A of the Companies Act. Before 2013 Amendment, the petitioner purchased its shares under Section 77A of the Companies Act and filed the Income Tax Returns. It is the submission of the learned Senior Counsel that in view of Double Taxation Avoidance Agreement between the Indian Government and Mauritius Government, the Cognizant (Mauritius) Limited is entitled to exemption of payment of income tax and the Cognizant Technology Solutions Corporation, United States remitted the tax liability of about Rs.898 Crores and after receipt of the huge sum, the present demand cannot be made. The explanation to Section 115QA of the Act was amended with effect from 01.06.2016. Post amendment, the Companies, which purchase their own share are liable to pay the additional income tax at the rate of 20% on the distributed income. It is urged by the learned Senior Counsel that prior to the amendment, the petitioner bought back its own shares under the Scheme of arrangement and Compromise under Sections 391 to 393 of the Companies Act. As per Section 46A of the Act, the buy-back of shares shall be deemed to be capital gain and the shares purchased by the petitioner would not come under Distribution of Dividend under Section 2(22) of the Act. Hence, the demand of tax under Section 115QA of the Act retrospectively is not permissible in law.
12. It is next contended that admittedly the petitioner filed an application under Section 245Q of the Act before the Authority for Advance Rulings for quantitative judicial pronouncement and during the pendency of the application, the respondent is barred from issuing the impugned notice in view of Section 245 RR of the Act. It is further contended that the impugned order was passed without any notice and enquiry and in gross violation of principles of natural justice.
13. per contra G.Rajagopalan, learned Additional Solicitor General appearing on behalf of the Revenue raised a preliminary objection to the maintainability of the Writ Petition contending that the petitioner is having an effective alternative remedy; He adds that as per explanation 2(22) (d) / 2(22)(a) of the Act, anyreduction of share would amount to distribution of dividend and under Section 115 O of the Act, the domestic company is liable to deduct the tax at source and remit the amount to the Government within 14 days and that if the amount is not deposited within the stipulated time, the company shall be deemed to be an “assessee in default”. It is the submission of the learned Additional Solicitor General, this is a special provision, where there is no requirement to issue notice, conducting enquiry before passing orders.
14. The learned Additional Solicitor General further submitted that the Assessing Officer having entertained doubt over the remittance of huge amount of about Rs.19,415 Crores, issued a notice to the petitioner, dated 21.11.2017 calling for informations with regard to the dates and amount of remittance made to the non-residents during FY 2015-16 and 2016-2017 and the nature and purpose of the said remittance. Even though no provisions of law is mentioned, but a perusal of the notice shows that the respondent had called for particulars from the petitioner to ascertain the tax liability. Since the enquiry was pending, the bar referred in Section 245 RR would not apply in view of Section 245 Q of the Act. It is further submitted that even though no enquiry is necessitated, the petitioner was put on notice and only after enquiry, the impugned order came to be passed and hence, there is no breach of principles of natural justice.
15. It is further contended that when the Scheme was sanctioned by this Court, taking note of the objection raised by the Regional Director, it has been observed in the order that the said order will not be construed as an order granting exemption from payment of statutory So, the order of the Company Court would not help the petitioner. Reference is made in this regard to the decision of the Bombay High Court in the case of Casby CFS (P.) Ltd [(2015) 56 taxmann.com 262 (Bombay)].
16. Heard both and perused the materials placed on record.
17. In view of the above said rival contentions, the following points arise for consideration:-
(i) Whether Section 115 O of the Act mandates issuance of show-cause notice, enquiry before passing a final order?
(ii) Whether there is any breach of principles of natural justice?
(iii) Whether the Assessing Officer is prohibited from issuing the impugned order in the light of the bar prescribed in Section 245 RR of the Act?
(iv) Whether the Writ Petition is maintainable?
Point No.(i)
18. This is purely a question of law and for better appreciation, the relevant provisions are extracted here under:-
Section 115-O – Tax on distributed profits of domestic companies.
“[(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of [fifteen] per cent.]
[Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of Section 2, this sub-section shall have effect as if for the words “fifteen per cent”, the words “thirty per cent” had been substituted]
[(1A) The amount referred to in sub-section (1) shall be reduced by,—
[(i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,—
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend: or
Provided that the same amount of dividend shall not be taken into account for reduction more than once;]
(ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on distributed profits under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax on distributed profits to the credit of the Central Government within fourteen days from the date of—
(a) declaration of any dividend; or
(b) distribution of any dividend; or
(c) payment of any dividend,
whichever is earliest.
……………”
Section 115 P – Interest payable for non-payment of tax by domestic companies.
“ Where the principal officer of a domestic company and the company fails to pay the whole or any part of the tax on distributed profits referred to in sub-section (1) of section 115-O, within the time allowed under sub-section (3) of that section, he or it shall be liable to pay simple interest at the rate of [one] per cent for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.”
Section 115 Q – When company is deemed to be in default. ” If any principal officer of a domestic company and the company does not pay tax on distributed profits in accordance with the provisions of section 115-O, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.”
Section 115QA – Tax on distributed income to shareholders:-
“(1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income. “
19. From a plain reading of the above provisions, it is seen that Section 115 O is a charging section on its own. These Sections are self contained codes in themselves and they do not demand for issuing any show-cause notice and then passing any order. Chapter XIV of the Act prescribes procedure for assessment. Section 139 deals with filing of returns of income. Section 142 describes procedure for conducting enquiry before assessment and under Section 143, the Assessment Order can be passed, based on the Returns filed under Section 139, or in response to a notice under Section 142 (1) of the Act. Section 148 deals with issue of notice where income has escaped assessment and a notice of demand issued under Section 156.
20. The only difference between the regular assessment and Special Provisions is that under the regular assessment, the Authorities are required to verify the Returns submitted by the assessee and the materials to ascertain the income escaped from assessment. However, under the Special Provisions, there is no dispute with regardto quantum of distribution of profit made by the Company. Hence, in my opinion there is no need for issuance of notice before making a demand under Section 115 O of the It is to be noted that unless the law requires, the Assessing Officer need not issue notice before making a demand under Section 115 O of the Act. The parliament in its wisdom brought amendments to the Finance Act and inserted Section 115 O to 115 Q with effect from 01.06.1997 (Special Provisions) to achieve an object. If any other view is taken, then the Special Provisions under Chapter XIV would become redundant and it would be opening a pandor as box.
21. Regarding point No.(ii), this Court while answering first point held that the law does not require issuance of notice to make a demand under Section 115 O of the Act. Despite the same, admittedly, a notice dated 21.11.2017 was issued to the petitioner calling for details and meetings were convened, in which, indisputably, the officials of the petitioner Company participated and a detailed note explaining the various provisions of the Act have been given to them. It is pertinent to note that the object and purpose of issuing show cause notice is to put on notice to the proposed action to be initiated by the Officials and nothing else. But, a curious stand is taken by the petitioner that the letter dated 21.11.2017 cannot be construed as a show-cause notice and the informal discussion cannot be substituted for a proper show-cause notice with a chance of reply and an opportunity of hearing, hence, I find no substance in the said submission.
Point No.(iii)
22. It is not disputed that the respondent by the letter dated 11.2017 sought for furnishing informations with regard to remittance made to the shareholders of the petitioner-Company during the financial year 2015-16 and 2016-2017. It is an admitted fact that no provision of law has been quoted in the letter particularly Section 2(22) of the Act, but a cursory perusal of the letter would show that the respondent had sought for payment details to ascertain the tax liability of the petitioner.
23. It is equally not disputed that the petitioner approached the Authority for Advance Rulings only on 20.03.2018, when the issue was pending before the Assessing Officer. It can be reasonably presumed that the multinational company like the petitioner is not expected to plead ignorance in regard to the purpose of the notice dated 21.11.2017. Otherwise, there was no necessity for the top officials of the petitioner to attend the meetings conducted by the respondent. Section 245R of the Act makes it clear that if the enquiry is already pending before the Assessing Officer, the Authority for Advance Rulings has no jurisdiction to entertain the application. Hence, I find no force in the argument of the learned Senior Counsel for the petitioner that the impugned order does not stand in view of the bar under Section 245 RR of the Act.
Point No.(iv)
24. The impugned order is questioned in this Writ Petition on the ground that gain on buy-back of shares cannot be categorized as a dividend and it is a capital gain as per Section 46 A of the Act. It is a case of the respondent that there was no dispute and necessity to file the petition under Sections 391 to 393 of the Companies Act and it was filed only to avoid payment of Dividend Distribution Tax. It is relevant to note that in the Company Petition in C.P.No.102 of 2016, in Clauses 6.6 and 6.7, it is stated that the provisions of Section 2(22) or Section 115 O or Section 115QA of the Act are not applicable to the purchase of Equity Shares by the Company from its shareholders and the Scheme of Arrangement and Compromise shall not be treated or considered as a “capital reduction” under the provisions of Section 100 of the Companies Act, or a “buy-back” under the provisions of Section 68 of the Companies Act. However, while approving the Scheme, as observed above, the Company Court has categorically held that “this order will no be construed as an order granting exemption from payment of stamp duty or, taxes or, any other charges, if any, payable, as per the relevant provisions of law”.
25. Whenever a Company distributes its profits to its shareholders, the profit so disbursed, will amount to dividend. Clause (d) to Section 2 (22) of the Act, demonstrates that if any distribution to his shareholders by a Company on the reduction of his capital, would be a dividend. Clause (a) and (d) to Section 2(22) of the Act is extracted below for ready reference:-
“ 2 (22) dividend” includes-
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933 , whether such accumulated profits have been capitalised or not;”
26. In Casby CFS (P.) Ltd (supra) the company sought sanction of the proposed Scheme of amalgamation. A notice was issued to the Regional Director under Section 394 and he objected approval of the Scheme contending that the Scheme would circumvent the provisions of Income Tax Act. The High Court of Bombay held that the Regional Director is entitled to object approval of the Scheme and it was his duty to do so. After considering the objections, the Scheme was approved. Relevant paras have been extracted here under:-
“7. As more particularly set out hereinafter, since it was argued on behalf of the Regional Director that the idea of the petitioners behind propounding the above scheme is inter alia to obtain sanction of this Court to the Scheme with the appointed date of 1st April, 2008, and thereafter to file revised Income Tax Returns in violation of Section 139(5) of the Income Tax Act and the whole purpose of fixing a retrospective appointed date is to defeat the income tax demands and assessment proceedings either in progress or completed and the retrospective appointed date is nothing but a device to defeat the provisions of the Income Tax Act, particularly Section 139 (5), and the scheme therefore needs to be rejected, this Court directed the Regional Director to contact the Income Tax Department and to seek their views on the objections of the Regional Director. The Income Tax Department by its letters dated 03.12.2014 addressed to the Regional Director informed the Regional Director that they were supporting the views / stand taken by the Regional Director. The said letters received from the Income Tax Department were placed before this Court by the Regional Director along with another further affidavit dated 04.12.2014 (“third affidavit”). This affidavit was filed after the hearing had commenced. The petitioners did not file an affidavit in reply to the third affidavit.”
“57. In the circumstances, I pass the following order;-
