Chennai ITAT Ruling in Cognizant's Shares Buyback: A Panoramic Analysis
Recently, the Chennai Income-tax Appellate Tribunal (ITAT or Tribunal) in the case of Cognizant Technology Solutions India Pvt. Ltd (Company or the assessee or the taxpayer)1 held that the purchase of own shares under a scheme of arrangement approved by the High Court was a colorable device devoid of commercial substance and was undertaken to evade taxes by resorting to treaty shopping. It further held that the Assessing Officer (AO) is empowered to adopt a “look through” approach rather than ‘look at’ approach. The ITAT has ruled that Dividend Distribution Tax (DDT) under section 115-O read with section 2(22)(d) of the Income-tax Act, 1961 (Act) was applicable to the said transaction by characterizing it as ‘Capital Reduction’.
Interestingly, it is pertinent to note that the taxpayer’s stand was that the Scheme for Purchase of its own shares was neither a ‘Buy-back’ nor a ‘Capital Reduction’ in a strict sense, but it was a contract between the Company and its shareholders for Purchase of shares against payment of consideration. It was pursuant to the legal mandate under the law that the shares so the purchase had to be canceled/extinguished, and such cancellation could not be considered as Capital Reduction, nor the payment of consideration out of profits could be considered as ‘distribution’ of accumulated profits to trigger the provisions of Section 2(22)(d) of the Act.
While the ruling pertains to AY 17-18 prior to the applicability of the GAAR provisions, this is an ideal case of invocation of judicial GAAR by the tax authorities by adopting a ‘look through’ approach. The ruling will act as a guiding force in structuring M&A deals, especially under the GAAR regime, considering the ‘look through’ approach adopted by the tax authorities. Accordingly, in this article, we have attempted to summarize some of the key facts and grounds that were the driving factors for the Tax Tribunal in holding that the Scheme was a colorable device to evade taxes.
