Cognizant gets HC relief in Rs 9,403 crore dividend distribution tax case

Madras High Court has stayed the tax demand of Rs 9,403.09 crore against tech giant Cognizant Technology in case of its share buy buyback of Rs 19,000 crore, subject to payment of Rs 1,500 crore.

A bench of Justices Mohammed Shaffiq and R Mahadevan has directed Cognizant Technology to pay Rs 1,500 crore within a period of four weeks and directed tax department to release title deeds pertaining to the property and remaining fixed deposits lying in the banks on the payment and deposit.

The bench said that the outstanding demand raised against Cognizant needs to be secured in the interest of the revenue. It also added that the financial difficulty cited on the part of the appellant has no merit, as their current assets as of March 31, 2022, are around Rs 21,644 crore.

The bench said that in the event of default on the part of the company in complying with the conditions, the order shall stand vacated automatically, without any further reference to the court.

“It is also open to the department to recover the tax liability from the appellant in the manner known to law,” the court said in its order.

The Buyback
In 2017-18, Cognizant bought back around 9.4 million equity shares from shareholders in the US and Mauritius at Rs 20,297 per share for a total consideration of Rs 19,080 crore.

The assessing officer (AO) categorised the consideration paid by Cognizant for the purchase of its own shares as a dividend under Section 2(22) of the Income Tax Act, 1961 and demanded dividend tax, which was further upheld by the Commissioner of Income Tax (Appeals).

The AO opined that the scheme formulated by Cognizant is similar to the distribution of accumulated profits by a company, whether capitalised or not. The company had them moved to ITAT, which held Cognizant’s Rs 19,000-crore buyback through a court-approved scheme as a “colourable device” to evade tax and said it will attract dividend distribution tax.

The Cognizant then moved the High court against the order passed by the Chennai bench of the Income Tax Appellate Tribunal, Chennai.

The Court said that whether this is liable for tax will be decided in the final hearing.