Cognizant’s Rs. 19,000 Crores Buyback via Court-approved Scheme is a Colourable Device; DDT Leviable | ITAT

Case Details: M/s. Cognizant Technology-Solutions India Pvt. Ltd., Vs. ACIT - [2023] 154 taxmann.com 309 (Chennai-Trib.)

Judiciary and Counsel Details

• • Mahavir Singh, Vice-president & Manjunatha G., Accountant Member
  • Ajay Vohra, Sr. Counsel, N.V. Balaji, Adv. for the Appellant.
  • R. Shankaranarayanan, Additional Solicitor General of India, A.P. Srinivas, Sr. Standing Counsel for the Respondent.

Facts of the Case

Assessee-Cognizant Technology had purchased its own shares from non-resident shareholders in a ‘Scheme of Arrangement & Compromise’ sanctioned by the High Court of Madras in terms of provisions of Section 391-393 of the Companies Act, 1956.

In accordance with the scheme, the assessee purchased 94,00,534 equity shares from its shareholder at the price of Rs.20,297/- per share and paid a total consideration of Rs.19,080.26 crores.

The share capital of the assessee company was held by four non-resident shareholders, out of which three shareholders are residents of the USA, and one shareholder is a tax resident of Mauritius. The net effect of the scheme was that post-sanction of the scheme, the only shareholder left was Cognizant Mauritius Ltd.

Assessing Officer (AO) held that consideration paid by the assessee to its shareholders for the purchase of its own shares was liable to tax as deemed dividend under section 2(22)(d). Consequently, the assessee was liable to pay Dividend Distribution Tax (DDT) under section 115-O.

On the other hand, the assessee submits that ‘Scheme of Arrangement & Compromise’ was sanctioned by the High Court of Madras in terms of Sections 391 to 393 of the Companies Act, 1956. It cannot be considered as buyback of shares in terms of provisions of Section 77A or reduction of capital in terms of Sections 100-104/402 of the Companies Act, 1956.

On appeal, the CIT(A) upheld the findings of AO. The matter reached before the Tribunal.

ITAT Held

A. Applicability of section 2(22)(d)

Two essential prerequisites must be satisfied in order to come within the ambit of section 2(22)(d), i.e., there must be a distribution to the shareholders on the reduction of the capital and further, it must be to the extent that the company possess accumulated profits.

In the present case, it was evident from the audited financial statement that the share capital has been reduced by around Rs.9.4 Crs. equivalent to 54.70% of the total paid-up share capital.

The Supreme Court, in CIT v. G. Narasihan 236 ITR 327, has clarified that Section 2(22)(d) is automatically attracted once these parameters are satisfied. Further, Clause 7 of the scheme clarifies that the distribution of money will be out of the general reserves and accumulated credit balance in the profit and loss account. Thus, both conditions are satisfied to treat the transaction within Section 2(22)(d).

B. Purchase through offer and acceptance is also “distribution”

Assessee also argued that the scheme of purchase of own shares was made through offer and acceptance. This involves an element of quid pro quo, and thus, there was no ‘distribution of the purpose of section 2(22)(d).

The Tribunal held that the definition of ‘distribution’ does not contain any aspect of quid pro quo or lack thereof. The prerequisites for distribution are that there must be payment, and the disbursal must be made to more than one person. Section 2(22)(d) does not distinguish whether the reduction of share capital is the intended result of the resultant consequence of the scheme.

C. Purchase of own shares would be “reduction of capital” if it is not buyback

The assessee’s transaction would either fall under section 391-393 r.w.s. 77 and Sec.100 of the Companies Act, 1956 or sections 391- 393 r.w.s. 77A of the Companies Act, 1956. The scheme clearly states that it is not a buyback under section 77A.

Therefore, once the assessee states it is not buyback under section 77A, it should automatically fall back to section 77 r.w.s sections 100-104 of the Companies Act, 1956. If said sections are applied, then said transaction was nothing but the reduction of capital and distribution of accumulated profits.

D. Reduction of capital vs. Buy Back

The assessee also contended that Section 115QA was amended in 2016, and the present transaction would only be taxable per the amended provisions.

The arguments of the assessee were not accepted for two reasons. Firstly, there is a distinction between the purchase of own shares upon reduction of share capital and buyback. Buyback’ is a term used only in respect of transactions covered u/s 77A. If all conditions of Section 115-O r.w.s. 2(22) are satisfied; the same cannot be impliedly excluded based on the amendment to Section 115QA.

E. Scheme was a colourable device to try to avoid payment of tax

The assessee claims to have implemented the scheme to rationalize its shareholding and capital structure. The four reasons given were that:

(i) To increase earnings per share;

(ii) To streamline corporate ownership;

(iii) To optimize the overall capital structure and

(iv) To reduce the risk in terms of foreign currency fluctuations in respect of rupee funds.

On closer examination of the scheme’s true purpose, it becomes evident that it primarily serves two objectives: (i) transferring the capital base of the company to shareholders based in Mauritius and (ii) distribution of the company’s accumulated profits to non-resident shareholders, all while avoiding the scope of any provisions related to the taxation of payments made for the purchase of its own shares.

It was undoubtedly clear that the scheme was only a colourable device intended to evade legitimate tax dues.