Cognizant Technology-Solutions India Pvt. Ltd. Vs ACIT (ITAT Chennai)
ITAT Chennai held that transaction of purchase of own shares by the appellant company is distribution of accumulated profits within the meaning of section 2(22) of the Income Tax Act, 1961. Accordingly, it is treated as dividend u/s. 2(22)(a)/2(22)(d) read with section 115-O of the Act.
Facts- The assessee had filed its return of income for AY 2017-18 on 28.11.2017 declaring total income of Rs.5399,54,16,100/- and the ROI filed by the assessee has been processed u/s.143(1) of the Act, on 30.03.2019. The assessee had received a communication dated 22.03.2018 from the Office of the AO informing the assessee that it is deemed to be assessee in default u/s.115QA of the Act, for failure to pay tax u/s.115-O of the Act, in respect of consideration paid for purchase of its own shares. The AO in the said communication called upon the assessee to explain ‘as to why’ an order u/s.115-O of the Act, cannot be passed in respect of consideration paid for purchase of its own shares as deemed dividend u/s.2(22)(a) / 2(22)(d) of the Act.
AO after considering relevant submissions of the assessee held that consideration paid by the assessee to its shareholders for purchase of its own shares was liable to tax as deemed dividend u/s.2(22)(d) of the Act, and alternatively, u/s.2(22)(a) of the Act, and consequently, the assessee company was liable for payment of Dividend Distribution Tax u/s.115-O of the Act. AO held that consideration paid by the assessee to its shareholders for purchase of its own shares under the ‘Scheme of Arrangement & Compromise’ u/s.391 to 393 of the Companies Act, 1956, is nothing but dividend within the meaning of Sections 2(22)(a) / 2(22)(d) of the Act. Thus, held that assessee is liable to pay DDT u/s. 115-O of the Act.
Conclusion- Held that consideration paid by the assessee for purchase of its own shares in accordance with scheme sanctioned by the Hon’ble High Court of Madras in terms of provisions of Sec.391-393 of the Companies Act, 1956, amounts to distribution of accumulated profits which entails release of all or part of assets of a company on reduction of capital which attracts provisions of Sec.2(22) of the Income Tax Act, 1961. The Ld.CIT(A) has discussed the issue at length in light of plethora of judicial precedents and held the transaction of purchase of own shares by the appellant company is distribution of accumulated profits within the meaning of section 2(22) of the Income Tax Act, 1961. Therefore, 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 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 Ld.CIT(A) and dismiss appeal filed by the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-18, Chennai, dated 03.03.2022,and pertains to assessment year 2017-18.
2. The assessee has raised the following grounds of appeal:
1. The order under section 115-O of the Income-tax Act, 1961 (‘the Act’) as upheld by the learned CIT(A) is factually and legally without basis; is contrary to the facts of the case and the provisions of the Act; is violative of principles of equity and natural justice, and is prejudicial to the interest of the Appellant on the grounds, inter alia, set out below. The grounds of appeal listed below are without prejudice to each other.
2. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), treating the Scheme of Arrangement and Compromise (‘the Scheme’) approved by the Hon’ble Madras High Court in C.P. 102 of 2016 under section 391 to section 393 of the Companies Act, 1956 in the Appellant’s case for purchase of own shares, as a Scheme for ‘capital reduction’ is violative of the Scheme itself as also the order of the Hon’ble High Court.
3. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), erroneously treats the consideration paid by the Appellant for purchase of its own shares from its shareholders in accordance with the Scheme as dividend as per section 2(22) of the Act.
4. The learned CIT(A) has erred in holding that “what is excluded from the definition of dividend us 2(22) and brought into the purview of Sec. 46A is the 77A buy-back of shares and not any other ‘purchase of own shares”.
5. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), fails to appreciate that consideration paid by the Appellant for purchase of its own shares in accordance with the Scheme is taxable as capital gains in the hands of the shareholders under section 46A of the Act.
6. The learned CIT(A) has erred in alleging that the “distribution of accumulated profits to shareholders and the ‘scheme of arrangement and compromise’ is a device designed by the assessee” for repatriation of accumulated profits outside the country without paying the due tax.
7. The learned CIT(A) has erred in holding that the provisions of section 46A of the Act are applicable only to purchase of own shares undertaken in accordance with section 77A or section 391 read with section 77A of the Companies Act, 1956 and is not applicable to purchase of own shares under section 391 of the Companies Act, 1956 which is contrary to the clear and unambiguous language of section 46A of the Act, where no such distinction is provided for.
8. The order under section 115-O of the Act passed by the learned AO, and upheld by the learned CIT(A), fails to appreciate that subsequent amendment in section 115QA of the Act with effect from June 1, 2016, clearly indicates the legislative intent and taxation framework that purchase of its own shares under the Scheme by the Appellant, was covered under section 46A of the Act and not under section 2(22) of the Act.
9. The learned CIT(A) erred in rejecting the submission of Appellant on applicability of section 46A (to purchase of own shares up to 31 May 2016) and section 115QA (to purchase of own shares after 1 June 2016), by artificially dissecting the term “buy-back” into (a) Buy-back, and (b) Purchase of own shares not amounting to buy-back, which is contrary to law, besides being illogical.
10. The learned CIT(A) erred in confirming the findings of the learned AO, which were on points not covered by the Show Cause Notice dated 22 March 2018.
11. The learned CIT(A) has failed to appreciate that the order passed under section 115-O of the Act and the consequent demand raised by the learned AO are in contravention to the provisions of the Double Taxation Avoidance Agreement (‘DTAA’) entered by India with USA and Mauritius and the principles laid down by the Hon’ble Supreme Court in UOI vs Azadi Bachao Andolan [2003] 263 ITR 706 (SC).
12. Without prejudice, the learned CIT(A) has erred in stating that the credit for INR495 crores deposited under protest during the pendency of the proceedings shall be given effect to only from April 2020 whereas the amount was moved to the regular account (Head of Account No. 106) of the Income-tax department in March 2019 itself.
3. The brief facts of the case are that the assessee, M/s.Cognizanat Technology Solutions India Pvt. Ltd., (in short “M/s.CTS India Pvt. Ltd.”) is a Private Ltd. Co., and is engaged in the business of software development and related services/solutions. The assessee is operating in India since 1994 and has grown to be one of the largest Software Development Company in India. The assessee clients predominantly are in the USA. The assessee was originally a wholly owned subsidiary of CTS, USA. Thereafter, in FY 2011-12, there was a restructuring of various businesses directly or indirectly under the control of CTS, USA. Through a Court approved scheme, the Appellant Company was amalgamated with M/s.Cognizant India Pvt. Ltd. (M/s.CIPL) and M/s.MarketRx India Pvt. Ltd. (M/s.MIPL). M/s.CIPL was a wholly owned subsidiary M/s.Cognizant (Mauritius) Ltd., whereas M/s.MIPL was a wholly owned subsidiary of M/s.MarketRx Inc. USA and both of whom are wholly owned subsidiaries of M/s.Cognizant Technology Solutions Corporation, USA. During the FY 2016-17 relevant to AY 2017-18, the assessee had purchased 94,00,534 equity shares of face value of Rs. 10 each at Rs.20,297/- per share aggregating to Rs.19,080.26 Crs. from its shareholders in terms of Scheme of Arrangement and Compromise (the Scheme) u/s.391 to 393 of the Companies Act, 1956, approved by the Hon’ble High Court of judicature at Madras vide in Company Petition No.102 of 2016 dated 18.04.2016. The purpose and manner in which purchase of shares from shareholders has been specified in Scheme document approved by the Hon’ble High Court of Madras. In accordance with the Scheme as sanctioned by the Hon’ble High Court of Madras, the assessee purchased 94,00,534 equity shares (representing 54.70 % of the outstanding number of equity shares) from its shareholders and paid a total consideration of Rs.19,080.26 Crs.The shareholding pattern of the assessee prior to and after purchase of shares in accordance with the Scheme is tabulated below:
