SC asks Madras HC to decide Cognizant plea over Rs 9,400-cr tax demand in 6 weeks

Cognizant gets relief from Supreme Court

The Supreme Court has directed the Madras High Court to decide tech major Cognizant Technology Solution's appeal against the income tax demand of Rs 9,400 crore in the next six weeks, according to the order copy released on January 10.

The tech major is fighting a case against an income tax demand over a Dividend Distribution Tax (DDT) on a buyback of shares worth Rs 19,000 crore under a scheme of arrangement. The matter pertains to assessment year (AY) 2017-18, when Cognizant purchased 94 lakh equity shares with a face value of Rs 10 each from its shareholders in the US and Mauritius.

These shares were bought at a price of Rs 20,297 per share, resulting in a total consideration of Rs 19,080.26 crore. This transaction was carried out in accordance with a scheme that had been approved by the Madras High Court.

The apex court, in a relief to Cognizant, dispensed with the direction of the Madras High Court and asked it to furnish a security for penalty of Rs 3,301 crore. Cognizant had contended that there is no penalty imposed on it so far as it is contesting the tax demand.

The court further permitted the income tax department to encash Rs 2956 crore the company has deposited towards the tax demand, after the department informed the court that they will refund the money if the tech major succeeds at the high court.

Cognizant was represented by senior counsels Mukul Rohatgi and Balbir Singh while the income tax department was represented by Additional Solicitor-General Venkatraman.

In December 2023, a division bench of the Madras High Court granted an interim stay against the income tax department's Rs 9,400-crore demand. In lieu of the stay, the court had asked the company to deposit Rs 1,500 crore  in addition to giving property security for the balance tax
liability with interest and penalty. Cognizant had also sought a stay on the department encashing the Rs 2956 crore from fixed deposits in bank accounts, stating that its business activities would be affected.

In September 2023, the Chennai bench of the Income Tax Appellate Tribunal (ITAT) ruled that Cognizant  is liable to pay DDT on a buyback of shares worth Rs 19,000 crore under a scheme of arrangement. The income tax department argued that this changed the company's shareholding pattern, with the Cognizant Mauritius entity holding 76.68 percent of the shares.