The tax on other income for Cognizant Mauritius, which was a major shareholder of Cognizant Technology Solutions India Pvt Ltd (CTSIPL) during 2013-14, was ₹440 crore, while for CTSIPL it was ₹124 crore.
The IT department said Cognizant Mauritius filed the return of income for assessment year 2014-15 in September 2014 declaring NIL income. CTSIL bought back 9.16 lakh shares from Cognizant Mauritius for ₹23,915 per share and paid a consideration of ₹2,190 crore. The income arising out of this transaction was stated to be not taxable under provisions of the Companies Act 1956 with Article 13 of Double Taxation Avoidance Agreement (DTAA) entered between India and Mauritius.
However, the department said CTSIPL was using buyback as a vehicle to divert accumulated profits to associated enterprises outside India, taking undue and undeserved treaty benefits. “The assessee adapted a colourable device to repatriate cash without paying dividend distribution tax. Therefore, the treaty benefits of the above income is denied. The facts mentioned in the order clearly proves the intention of the assessee to evade taxes through a sham arrangement,” the department said in an order for both the companies.
The department said CTS in its return of income for assessment year 2014-15 in August 2014 declared a total income of ₹619 crore. CTS was a shareholder of CTSIL during 2013-14. During 2014-15, CTSIL bought back 2.59 lakh shares from the assessee for ₹23,915 per share and paid a consideration of ₹620 crore.
CTS said the income arising from this transaction (capital gains pursuant to buyback of shares) was not taxable under the provisions of DTAA entered between India and the US. It also said there was no income chargeable to tax as per the Central Board of Direct Tax instruction No 2/2015.
But the IT Department denied the treaty benefits for similar reasons attributed to CTSIPL. . It said the “The value of the share above Fair Market Value is treated as income from other sources under Section 56(1).”
The department said the draft order was forwarded to the assessees as a proposed assessment order for accounting year 2014-15. The assessee is required to file its acceptance or objections before the Dispute Resolution Panel at Bengaluru and to Assessing Officer within 30 days of receipt of the order.
A Cognizant spokesperson said to The Hindu : “In the normal course of business and from time to time, we review and discuss certain large transactions with the relevant tax authorities and, as always, will respond appropriately to any inquiries. Cognizant is committed to compliance with the law in all jurisdictions in which it operates.”