CHENNAI: The Income Tax Appellate Tribunal – Chennai bench on Wednesday ordered that a Rs 19,000-crore share buyback undertaken by technology major Cognizant in 2017-18 attracts dividend distribution tax of Rs 4,853 crore. The ITAT‘s ruling dismissed an appeal filed by Cognizant.
Cognizant conducted a share buyback through a scheme approved by the Madras high court during assessment year 2017-18, whereby the company bought over 94 lakh equity shares from its shareholders in the US and Mauritius at a rate of Rs 20,297 per share.
The department noted that Cognizant is trying to position a dividend payout as a buyback to evade tax, and the high court’s approval of the scheme does not grant immunity to them from paying tax on it.
Tax practitioners TOI spoke to consider the decision to have a large implication for India Inc. S Vasudevan, executive partner, Lakshmikumaran & Sridharan attorneys, told TOI that taxation of buyback has historically been a contentious issue, and the court order will make companies seek more clarity around buybacks, especially those under a special scheme or arrangement.
“We have to watch how the case proceeds,” he added.
Cognizant argues that the transaction is in the nature of buyback of shares and hence not subject to any tax in their hands and only attracts capital gains in the hands of the shareholder. However, the tax authorities say it amounts to “distribution of accumulated profits” under Section 2(22) of the I-T Act and hence to be taxed as dividend.
“The assessee attempted treaty shopping by claiming exemption to the major Mauritius shareholder under DTAA, which is a colourable device and cannot be accepted at any stretch,” the Commissioner of Income Tax (Appeals), argued, the ITAT ruling passed on September 13 said.
Cognizant said in a statement that it is reviewing the order and will pursue available legal remedies. “Cognizant is committed to complying with the law in all jurisdictions where we operate,” it added.
Cognizant conducted a share buyback through a scheme approved by the Madras high court during assessment year 2017-18, whereby the company bought over 94 lakh equity shares from its shareholders in the US and Mauritius at a rate of Rs 20,297 per share.
The department noted that Cognizant is trying to position a dividend payout as a buyback to evade tax, and the high court’s approval of the scheme does not grant immunity to them from paying tax on it.
Tax practitioners TOI spoke to consider the decision to have a large implication for India Inc. S Vasudevan, executive partner, Lakshmikumaran & Sridharan attorneys, told TOI that taxation of buyback has historically been a contentious issue, and the court order will make companies seek more clarity around buybacks, especially those under a special scheme or arrangement.
“We have to watch how the case proceeds,” he added.
Cognizant argues that the transaction is in the nature of buyback of shares and hence not subject to any tax in their hands and only attracts capital gains in the hands of the shareholder. However, the tax authorities say it amounts to “distribution of accumulated profits” under Section 2(22) of the I-T Act and hence to be taxed as dividend.
“The assessee attempted treaty shopping by claiming exemption to the major Mauritius shareholder under DTAA, which is a colourable device and cannot be accepted at any stretch,” the Commissioner of Income Tax (Appeals), argued, the ITAT ruling passed on September 13 said.
Cognizant said in a statement that it is reviewing the order and will pursue available legal remedies. “Cognizant is committed to complying with the law in all jurisdictions where we operate,” it added.