In a recent development, the Supreme Court has intervened in the ongoing legal saga between tech giant Cognizant Technology Solutions and the income tax department. The apex court has directed the Madras High Court to expedite its decision on Cognizant’s appeal against a substantial income tax demand of Rs 9,400 crore within the next six weeks, as revealed in the official order released on January 10.
Cognizant finds itself entangled in a legal dispute over a Dividend Distribution Tax (DDT) related to a significant buyback of shares totaling Rs 19,000 crore under a scheme of arrangement during the assessment year (AY) 2017-18. The transaction involved the purchase of 94 lakh equity shares with a face value of Rs 10 each from its shareholders in the US and Mauritius at a price of Rs 20,297 per share, culminating in a total consideration of Rs 19,080.26 crore. Notably, this transaction had received prior approval from the Madras High Court.
In a favorable move for Cognizant, the Supreme Court has set aside the direction of the Madras High Court, instructing it to reach a decision swiftly. However, the court has mandated Cognizant to provide security for a penalty amounting to Rs 3,301 crore, emphasizing the significance of adhering to the legal process. Cognizant argues that no penalty has been imposed thus far, highlighting its ongoing contestation of the tax demand.
The legal proceedings took a turn in December 2023 when a division bench of the Madras High Court granted an interim stay against the income tax department’s formidable demand. To secure the stay, the court required Cognizant to deposit Rs 1,500 crore and provide property security for the remaining tax liability, including interest and penalty. Cognizant, in a bid to safeguard its business activities, also sought a stay on the encashment of Rs 2956 crore from fixed deposits in its bank accounts.
The intricacies of this legal battle further unfolded in September 2023 when the Chennai bench of the Income Tax Appellate Tribunal (ITAT) ruled in favor of the income tax department. The ITAT held that Cognizant is liable to pay DDT on the buyback of shares, altering the company’s shareholding pattern significantly, with the Cognizant Mauritius entity now holding 76.68 percent of the shares.
As Cognizant awaits the Madras High Court’s decision, the tech major remains steadfast in its defense against the substantial income tax demand, shaping this legal dispute as a critical juncture in the intersection of corporate and taxation law.