HC upholds order against CTS

The Madras High Court on Friday upheld its order dismissing a plea moved by information technology major Cognizant Technology Solutions (CTS), challenging the recovery proceedings initiated by the Income-Tax (I-T) department for non-payment of Rs 2,912.25 crore as dividend distribution tax (DDT).

A division bench of justices M M Sundresh and M Nirmal Kumar also upheld the interim order of a single-judge bench, directing the company to deposit Rs 490 crore, 15 per cent of the total tax demand to be kept in a suspense account by the department pending the disposal of the appeal to be moved by the company before the appellate authority.

"We do not find any error in the order of the single judge with respect to the deposit made during the pendency of the interim order. It is only an interim arrangement directed to be made pending the appeal," the bench said.

The court, however, set aside the findings of the single judge on the nature of transaction and the scope under section 115-O of the Income Tax Act.

The issues as to whether the tax demand order should be preceded by a procedure involving adjudication and the requirement of violation of principles of natural justice were also left open to be decided in the appeal, the bench said.

The bench, in its order, while referring to the order of the single judge, said he had given two findings against the appellant while holding that it was open to him to file an appeal.

"Though it was observed that the observations were only prima facie in nature, the writ petition was dismissed on the reasons assigned. Therefore, the findings rendered cannot be termed as prima facie as they were not mere observations," the bench said.

"Thus, the learned single judge, in our considered view, ought not to have gone into the merits of the case. The first finding rendered by the learned single judge is to the effect that the transactions are not mere buying back of shares but granting dividends to the shareholders," the bench said.

The issue pertains to an order passed by a single judge of the court on June 25, dismissing the plea moved by CTS challenging the tax demand for remitting Rs 19,415 crore to its non-resident shareholders in the US and Mauritius towards the buyback of 94,00,543 of its equity shares in May 2016.

The order of dismissal was passed on the ground that the company had not exhausted all other available legal remedies before approaching the high court.

Aggrieved, the company has moved the present appeal.

According to CTS, it had remitted capital gains tax of Rs 898.01 crore to the I-T department by way of deduction of tax at source for having remitted Rs 19,415 crore to its non-resident shareholders, through a scheme approved by the high court in 2016 for buyback of shares.

Therefore, it was not liable to pay any more tax.

Disputing the stand, the I-T department contended that the company had framed a scheme for buyback, because the number of shares was higher than the limit allowed under section 77A of the Companies Act of 1956.

If the shares were bought under section 77A, then the company should have paid tax at the rate of 20 per cent, the department said.