The Madras High Court on Tuesday dismissed as not maintainable a batch of writ petitions filed last year by software major Cognizant Technology Solutions (CTS) India Private Limited and its non-resident shareholders Cognizant (Mauritius) Limited and Cognizant Technology Solutions Corporation based in New Jersey with respect to alleged tax disputes to the tune of over ₹2,500 crore.
Justice K. Kalyanasundaram refused to entertain the cases on the ground of availability of an effective alternative remedy of filing statutory appeals before the authorities concerned. He granted liberty to CTS India to approach the Commissioner (Appeals) and its two foreign shareholders to approach the Dispute Resolution Panel (DRP) if they were aggrieved over the demand raised by the Assessing Officer.
Though a senior counsel representing all the firms contended that the country needs Foreign Direct Investment (FDI) for development activities and that making “unreasonable” demands from foreign investors would seriously affect the flow of investments into the nation, the judge brushed aside the contention and said: “Such situation does not arise here and I find no such harassment in the matter on hand.”
In their individual writ petitions, the two foreign shareholders claimed that CTS India had substantial cash surplus in 2013 and hence it decided to buyback its shares from them under Section 77A of the Companies Act of 1956. Accordingly, each share of the company was valued at ₹23,915 based on Discounted Free Cash Flow method and the entire buyback transaction was completed by May 22, 2013.
However, after a lengthy inquiry, the Assessing Officer in 2017 found that that the Fair Market Value of each share was only around ₹8,000 and therefore the share holders were liable to pay tax for the excess consideration received by them. Explaining the case, Additional Solicitor General G. Rajagopalan informed the court that CTS India had not declared any dividend since 2003 to avoid payment of Dividend Distribution Tax (DDT).
In 2013, a new provision (Section 115QA) was introduced in the Income Tax Act for imposing Buyback Distribution Tax (BBDT) from June 1, 2013. Therefore, in order to avoid DDT as well as BBDT, “the petitioners entered into a dubious transaction by fixing exorbitant amount for the shares so that they could take undue and unintended benefit of the India - Mauritius Tax Treaty and thereby indulge in treaty abuse,” the ASG alleged.
After recording his submissions, the judge said, the Assessing Officer had passed only a draft assessment order so that it could be taken on appeal to the DRP comprising of experts in the field. Since fixation of share value was a complex process, the DRP would be the appropriate authority to adjudicate, he said and pointed out that even after the passing of final orders on the basis of DRP’s conclusions, the matter could be taken on further appeal to higher forums.
Dismissing Cognizant India’s writ petition by way of a separate order, the judge pointed out that the dispute in this case related to the petitioner company having bought back 94,00,534 equity shares from its share holders for a consideration of ₹19,080.26 crore in April 2016. Though it had paid ₹898.01 crore towards capital gain tax, the Income Tax department had treated it as dividend and demanded DDT at the rate of 15% of the total payment along with interest.
