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The Madras High Court on Tuesday dismissed writ petitions filed by Cognizant Technology Solutions India Private Limited (Cognizant) and two of its foreign shareholders – Cognizant (Mauritius) Limited and New Jersey-based Cognizant Technology Solutions Corporation – over tax disputes relating to the buy-back of shares.
Justice K Kalyanasundaram dismissed the petitions on grounds of maintainability, while observing that,
“…the Hon’ble Apex Court and the High Courts have consistently held that the assessees before approaching the High Court by way of filing Writ Petitions invoking Article 226 of the Constitution of India, have to exhaust the remedies provided under the IT Act…”
The dispute at hand emanated from the buy back of shares by Cognizant from its foreign shareholders. The petitioners submitted that the subsidiary company had decided to buy back the shares since it had substantial cash surplus in 2013, for which there was no immediate requirement in the company. Consequently, Cognizant identified buy-back of shares under Section 77A of the Companies Act, 1956.
The value of the shares determined using the Discounted Free Cash Flow (DCF) method stood at Rs 23,915.10 per share. The process of buy back of shares at this price was completed by May 2013.
However, the Income Tax (IT) authorities subsequently estimated the price per share at Rs 8,512, based on a Fair Market Value estimation, citing 11UA of the Rules of Income Tax Act, 1961 (IT Act). A show-cause notice was eventually issued in December 2017 as to why the excess consideration over the said value should not to be assessed to tax under Section 56(1) of the IT Act. On December 31, the IT authorities also passed their draft assessment order based on this valuation.
This prompted the two shareholders to approach the High Court invoking its Article 226 writ jurisdiction. The petitioners contended that passage of the draft assessment order involved a violation of the principles of natural justice and that the draft order was passed in contravening Section 92CA(4) of the IT Act.
Specifically, it was highlighted that the Transfer Pricing Officer who was assigned to determine the Arms Length Price for the buy-back of shares had concluded in October 2017 that “no adverse inference is drawn” on the Cogniznant’s transactions. While this is the case, it was argued that the assessing officer was bound to pass order in conformity with the valuation arrived by the Transfer Pricing Officer.
In response, the IT department contended that the case involved a dubious transaction devised by the petitioners to pay exorbitant amounts for the shares only to avoid paying Dividend Distribution Tax (DDT) and Buyback Distribution Tax (BBDT), and to take undue and unintended benefits from a tax treaty between India and Mauritius.
The Court, however, did not delve too deeply into the merits of the matter since the petitioners had not approached the alternate grievance redressal forums prescribed in the Income Tax Act itself. Noting that the Income Tax Act provided for a Dispute Resolution Panel consisting of experts in the field, the Court held,
“The Dispute Resolution Panel is empowered by the Act to consider the objections, and pass suitable orders, viz., may confirm, reduce or enhance the variations proposed in the draft order. The Assessing Officer is bound to pass final Assessment Orders in tune with the order of the Dispute Resolution Panel.
Against the final order, the First Appeal lies before the Commissioner of Income Tax (Appeals) under Section 246 of the IT Act and Second Appeal lies before the Appellate Tribunal under Section 253 of the IT Act. Thereafter, an appeal lies to the High Court under Section 260A of the IT Act on the substantial questions of law…
… A plain reading of the Sub-section 6 of Section 144 C of the IT Act would make it clear that the Dispute Resolution Panel has wide power to consider all the materials and pass appropriate orders under sub-section 7 of the Act.”
The Court, therefore, dismissed the writ petitions and directed the petitioners to approach the Dispute Resolution Panel within two weeks.
“… in my opinion, these Writ Petitions are not maintainable at this stage. In that view, these Writ Petitions fail and they are accordingly dismissed.
However, with liberty to the petitioners raise all the issues before the Dispute Resolution Panel within two weeks from the date on which the judgment / order is made ready. It is needless to mention, if objections are made within the time, the Dispute Resolution Panel shall consider the same on merits and in accordance with law.“
In a separate order passed the same day, Justice Kalyanasundaram also dismissed a plea filed by Cognizant India challenging a March 2018 order passed by the IT department, which had directed Cognizant to remit tax at 15% of the total payment of about Rs.19,415 crore along with interest under Section 115P of the IT Act.
According to the IT Department, the said amount was remitted by Cognizant to its non-residential shareholders without paying Dividend Distribution Tax (DDT) under Section 115 O of the Act. The High Court, however declined to entertain Cognizant’s challenge to the same while observing,
“ … the Hon’ble Supreme Court and various High Courts have held that the assessee has an appeal remedy under Section 246 of the Act. In this case, an unsuccessful attempt has been made by the petitioner to bypass the appeal remedy, but, I find no valid ground to entertain the Writ Petition. In that view, the Writ Petition is dismissed as not maintainable at this stage.”
Instead, Cognizant was given liberty to approach the appropriate appellate authority within four weeks. The judge ordered,
“If such an appeal is filed within the stipulated time, the Appellate Authority shall dispose of the same on merits, after providing sufficient opportunity of hearing to the petitioner. It is needless to mention that the above observations have been made only to reach a prima facie conclusion.”
Senior Advocates Gopal Subramaniam and Srinath Sridevan appeared for Cognizant and its shareholders. Additional Solicitor General G Rajagopalan and Karthik Ranganathan, senior standing counsel, appeared for the IT Department.