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Supreme Court of India
Cognizant Technology Solutions … vs Deputy Commissioner Of Income Tax … on 4 March, 2020Author: Uday Umesh Lalit
Bench: Uday Umesh Lalit, Hon’Ble Ms. Malhotra, Hemant Gupta
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
1
NON-REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1992 OF 2020
(Arising out of Special Leave Petition(Civil) No.23705 of 2019)
COGNIZANT TECHNOLOGY SOLUTIONS
INDIA PVT. LIMITED …Appellant
VERSUS
DEPUTY COMMISSIONER OF INCOME TAX
LARGE TAX PAYER UNIT 1 …Respondent
ORDER
Uday Umesh Lalit, J.
1. Leave granted.
2. This appeal arises out of the final judgment and order dated
06.09.20191 passed by the High Court2 in Writ Appeal No.2063 of 2019.
3. The appellant is engaged in the business of development of
computer software and related services. In the Financial Year 2016-17, the
appellant approached the High Court with a Scheme of Arrangement and
Signature Not Verified
Digitally signed by
INDU MARWAH
Date: 2020.03.04
Compromise under Sections 391 to 393 of the Companies Act, 1956 to
16:57:19 IST
Reason:
1 Corrected vide further order dated 12.09.2019
2 The High Court of Judicature at Madras
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
2
buy-back its shares. The High Court sanctioned the Scheme on 18.04.2016
in Company Petition No.102 of 2016, pursuant to which the appellant
purchased 94,00,534 shares at a price of Rs.20,297/- per share from its four
shareholders and made a total remittance of Rs.19,080 crores
approximately. The details in that behalf were:-
Shareholder Shares Consideration Tax deducted at Source
Purchased (Amount in Rs.) (Amount in Rs.)
(No. of Shares)
Cognizant Technology 37,00,747 7511,40,61,859 810,73,37,402
Solutions Corporation
(“CTS USA”)
MarketRx Inc 2,38,521 484,12,60,737 52,33,24,388
(USA)
Cognizant (Mauritius) 53,01,778 10761,03,91,036 0
Limited (Mauritius) (Treaty benefit claimed)
CSS Investments LLC, 1,59,478 323,69,24,966 34,95,01,528
Delaware (USA)
Total 94,00,534 19080,26,38,598 898,01,63,318
According to the appellant, this buy-back of shares was effected in
May 2016.
4. Thereafter, the appellant made statutory filing under Form 15 CA
(under Rule 37BB of the Income Tax Rules, 1962) after obtaining requisite
certificate from a Chartered Accountant in Form 15CB furnishing details of
remittances made to non-residents.
5. On 21.11.2017 a letter was received by the appellant from the
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
3
Deputy Commissioner of Income Tax, Large Taxpayer Unit-1, Chennai in
connection with non-payment of tax on the remittances made to the non-
residents, in Financial Years 2015-16 and 2016-17. The letter stated:-
“… …On verification of 15CA data available with the
department, it is noticed that your company has made the
following remittances to non-residents during the financial
years 2015-16 and 2016-17.
Date of Name of the non-resident Amount Tax made on
Remittance company receiving the remitted (Rs.) remittance
remittance (Rs.)
17.02.2016 Cognizant (Mauritius) 335,36,38,361 Nil
Ltd.
19.05.2016 Cognizant (Mauritius) 10761,03,91,036 Nil
Ltd. 19.05.2016 Cognizant Technology 7511,40,61,859 810,73,37,402
Solutions Corporation,
USA
19.05.2016 Market Rx Luc, USA 484,12,60,737 52,33,24,388
19.05.2016 CSS investment LLC, 323,69,24,966 34,95,01,528
USA
Total 19415,62,76,959 898,01,63,318
The data available with the department shows that you have
not deducted/paid any tax on the remittances made to M/s
Cognizant (Mauritius) Ltd. on 17.02.2016 and 19.05.2016
whereas in the case of remittances to the concerns in USA,
you have only deducted/paid tax @ 10% (plus surcharge &
cess).
In this regard, I request you to kindly furnish the following
information:
a) The dates and amounts of remittances to the non-residents
during the FYs. 2015-16 & 2016-17, along with their
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
4
residential status.
b) The nature and purpose of the said remittances. Copies of
the documents submitted to the RBI for obtaining the
permission and remitting the amounts.
c) Whether the above remittances are in accordance with any
agreement, scheme etc.? If so, please furnish the copies of
the same.
d) Dates and amounts of taxes deducted/paid into govt.
account, along with evidences, and the sections under
which the said tax was deducted and/or claimed exempt, as
the case may be.
e) The rate(s) at which the above tax is deducted/paid into the
govt. account, in each case; and reasons for deviation from
the statutory requirement of tax, if any, or non-
deduction/non-payment, as the case may be.”
6. The requisite details were furnished by the appellant vide letters
dated 01.12.2017 and 05.12.2017 whereafter meetings were held between
the officials of the appellant and the officers of the Department. Later, a
communication was addressed by the Department to the appellant on
22.03.2018. After referring to the remittances made by the appellant to its
four shareholders, it was stated:-
“2. The company has not remitted any tax u/s. 115-O of the
Act till date, even though the tax @ 15% u/s. 115-O is to be
remitted into the central Govt. Account within 14 days from
the date of payment to the shareholders.
3. The assessee company was under the impression that
since its scheme of “arrangement and compromise” between
the shareholders and the company, was in accordance with
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
5
sec.391 to 393 of the Companies Act, and approved by the
Court, the provisions of section 115-QA, 115-O or 2(22) of
Income Tax Act are not applicable to its case. During the
personal discussion between the company and the
AO/JCIT/CIT (LTU), it was brought to the notice of the
Company that:
Provisions of sections 115-QA of the IT Act, which
were introduced w.e.f. 01.06.2013, defines the ‘buy-
back’, as the one done in accordance with sec.77A of
the Companies Act (valid upto 31.05.2016). W.e.f.
01.06.2016, any buy-back of own shares will attract
115-QA.
Provisions of sec.2(22)(d), clearly postulates that any
distribution on reduction of capital, to the extent of
accumulated profits will amount to dividends. The
only exception to this is the buy-back u/s. 77A of the
Companies Act. Provisions of sec.2(22)(d) are:
S.2(22)(d): any distribution to its shareholders by a
company on the reduction of its capital, to
the extent to which the company possesses
accumulated profits which arose after the
end of the previous year ending next before
the 1st day of April, 1933, whether such
accumulated profits have been capitalised
or not:
Even otherwise, provisions of sec. 2(22)(a) of the Act,
which stipulate that any distribution to the shareholders
is a dividend, if it is contended that it was not a case of
reduction of capital. Provisions of sec.2(22)(a) are:
S.2(22)(a): any distribution by a company of
accumulated profits whether capitalised
or not, if such distribution entails the
release by the company to its
shareholders of all or any part of the
assets of the company;
Once, the provisions of sec.2(22)(d) or 2(22)(a) are
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
6
applicable, the distributor is required to pay tax
u/s.115-O of the Act.
In the present case, the assessee’s purchase of its own
shares, which is not in accordance with sec.77A of the
Companies Act, will amount to dividends within the
meaning of sec.2(22)(d) or 2(22)(a) of the Act, and
consequently, liable for tax u/s. 115-O of the Act in the
hands of the assessee company.”
After considering factual aspects it was stated :-
“11. This clearly shows that, to the extent of face value
(issued price), the paid-up share capital will be utilized and
the balance will be paid from the reserves, which are
nothing but accumulated profits in the present case. Here
the payment from the paid-up shares capital is nothing but
reduction of capital and the latter (i.e. payment from the
reserves being accumulated profits) is distribution of
profits.
12. When any company reduces the ‘share capital’ as per
the provisions of the Companies Act, by way of reducing
the face value of shares or by way of paying off part of the
share capital, it amounts to extinguishment of the rights of
the shareholder to the extent of reduction of share capital.
Therefore, it is regarded as transfer under section 2(47) of
the IT Act and would be chargeable to tax.”
Finally, it was concluded:-
“18. Thus, the payments made to the shareholders, under
purchase of shares through the scheme of “arrangements
and compromise”, is a dividend within the meaning of
section 2(22)(d)/2(22)(a) of the Act, requiring to remit the
taxes in to the government account u/s. 115-O of the Act.
Further, since the company has failed to remit the taxes
within the stipulated period, the company is ‘deemed to be
an assessee in default’, u/s. 115-Q of the Act. Therefore the
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
7
assessee company is required to remit the taxes (calculated
@ 15% of the total payments of Rs.19415,62,77,269/- to
the shareholders, and surcharge etc as per the Act) along
with the interest payable u/s. 115-P of the Act, immediately,
failing which the department will proceed with the
collection and recovery of the taxes, including coercive
steps, as per the provisions of the Act.”
7. Said communication dated 22.03.2018 was received by the
appellant on or about 26.03.2018 and soon thereafter the bank accounts of
the appellant were attached by the Department.
8. It must be stated here that while the meetings between the officials
of the appellant and the officers of the Department were going on, an
application was preferred by the appellant on 20.03.2018 before the
Authority for Advance Ruling (AAR) under Section 245Q of the Act 3
seeking a ruling on the issue whether the appellant was liable to pay tax on
buy-back of its shares under Section 115QA or Section 115-O or any other
provision of the Act.
9. The appellant challenged the communication dated 22.03.2018 by
filing Writ Petition No.7354 of 2018 in the High Court submitting inter
alia that while the issue was pending before the AAR under Section 245Q
of the Act, in view of the bar provided under Section 245RR of the Act, the
matter could not have been considered. It was also submitted that the
3 The Income Tax Act, 1961
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
8
appellant was never put to notice whether it would be liable under Section
115-O of the Act. It was further submitted that all the while the
Department was only soliciting information which the appellant had readily
furnished and at no stage the appellant was put to notice that its liability
would be determined in any manner.
10. The Writ Petition came up before a Single Judge of the High Court
on 03.04.2018 when following interim directions were issued:-
“11. In my considered view the impugned proceedings has
crystallized in the form of a demand for payment of tax,
and if the petitioner has to be granted an interim protection
till the writ petition is finally heard, the same has to be
conditional and cannot be unconditional. Assuming
without admitting the petitioner had to avail an appellate
remedy under the Act and prays for appropriate interim
orders before an appellate authority, then the appellate
authority is entitled to grant an order of stay, which is
invariably conditional on account of guidelines issued by
the Central Board of Direct Taxes (CBDT) with a view to
maintain uniformity in the matter of grant of interim orders.
As per the latest guidelines prescribed by CBDT, it has
recommended that 20% of the demand, which has been
made shall be directed to be remitted by the assessee for
grant of stay of the remaining demand. Though this cannot
be a universal rule, invariable in most cases, the authorities
have adopted the 20% formula. However, in certain cases,
this Court has interfered with such orders and reduced the
amounts payable by the assessee and in certain other cases,
where no stay has been granted by the authority and the
assessee has approached the Court for grant of interim stay,
the Court has imposed condition by directing payment of
more than 20% of the demand. Therefore, the facts of each
case have to be considered while granting interim order
bearing in mind the interest of the assessee as well as
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
9
safeguarding the interest of the Revenue.
12. Thus, considering the facts and circumstances of the
case, there will be an order of interim stay of the impugned
proceedings subject to the condition that the petitioner pays
15% of the tax demanded and furnishes a Bank Guarantee
or security by way of Fixed Deposits for the remaining
taxes (only), to be paid. For the purpose of complying with
the above condition, the attachment of the Bank account in
JP Morgan Chase Bank N.A., J.P. Morgan Tower, 8 th Floor,
Off C.S.T Road, Kalina, Santacruz East, Mumbai – 400
098 shall stand lifted forthwith. However, the attachment
in respect of other Bank accounts viz.,
(a) State Bank of India, CAG Branch, Chennai.
(b) Deutsche Bank, Ground Floor,
Door No.4 & 4A,
Western Tower,
Sunny Side, Shafi Mohammed Road,
Thousand Lights, Chennai – 600 006.
(c) Corporation Bank, Corporate Banking Branch,
38 & 39 Whites Road, Chennai-600 014.
(d) City Bank N.A., No.163, Anna Salai,
Chennai-600 002.
(e) HDFC Bank, No.115, Dr. Radhakrishnan Salai,
9th Floor, Mylapore, Chennai-600 004,
shall continue till the compliance of the above direction.
Similarly, the attachment of the nine Bank deposits viz., (1)
HDFC Limited, (ii) HDFC Limited, (iii) HDFC Limited,
(iv) HDFC Limited, (v) HDFC Limited, (vi) HDFC
Limited, (vii) Bajaj Finance Limited, (viii) Bajaj Finance
Limited, (ix) Bajaj Finance Limited shall also continue
subject to the lien being created for the remaining amount
of taxes. The remittance of 15% of the tax demanded shall
be retained in a separate account and shall abide by the
orders to be passed in the writ petition.”
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
10
11. The Single Judge by his decision dated 25.06.2019 dismissed the
Writ Petition as not being maintainable and relegated the appellant to avail
the remedy before the Appellate Authority under the Act. However, during
the course of his decision, the Single Judge concluded that there was no
need for issuance of any notice before making a demand under Section
115-O of the Act and the notice issued on 21.11.2017 calling for details
whereafter meetings were convened, was quite adequate. He rejected the
submission that there would be a bar in terms of Section 245RR of the Act.
The Single Judge did not find any merit in the contention that the shares
purchased pursuant to the order of the Company Court could not be treated
as dividend. While relegating the appellant to avail the remedy before the
Appellate Authority it was observed:-
“33. … … the Appellate Authority shall take into account
the amount deposited in pursuance of the order referred
supra, while entertaining the appeal. With regard to Fixed
Deposits, the respondent shall maintain status-quo as on
date for a period of two weeks. … …”
12. The appellant, being aggrieved, challenged the aforesaid view by
filing Writ Appeal No.2063 of 2019. While discussing the issues that came
up for consideration, the Division Bench observed that the Single Judge
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
11
after having found the Writ Petition to be not maintainable, ought not to
have gone into merits. As regards the nature of the communication dated
22.03.2018 and maintainability of an appeal challenging the same, it was
observed:-
“11. The learned Senior Counsel appearing for the
appellant would submit that it is not known as to whether
the impugned order dated 22.03.2018 is a show cause
notice or final order. Though there appears to be some
element of contradiction in the counter affidavit filed, the
said order appears to be a final one. Now it is also the
contention of the learned Additional Solicitor General that
it is only a final order. We are also of the view that the
further action taken would also indicate that the order under
challenge was a final one. If it is only a show cause notice,
then there is no need to challenge it and instead the
consequential freezing alone requires to be questioned.
The further question as to whether the order under
challenge violates the principles of natural justice or
requisite procedure contemplated under the Act is a matter
for consideration before the Appellate Authority. The
learned Single Judge has rightly observed that the appeal
can be entertained and decided on merit as the appellant has
already deposited a sum of Rs.495 crores.”
13. The view taken by the Division Bench of the High Court is
presently under appeal. On 04.10.2019, an affidavit of undertaking, filed
on behalf of the appellant was taken on record in which it was submitted:-
“In the event this Hon’ble Court is gracious to pass an
order that the fixed deposits over which a lien has been
created, pursuant to the Interim Order passed by the
Learned Single Judge (continued by the Division Bench), is
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
12
vacated as an interim measure to enable the Petitioner
Company to run its business and operations, the Petitioner
undertakes that in the event this Hon’ble Court is satisfied
that any security must be offered by the Petitioner ex debito
justitiae at the time of the disposal of the Special Leave
Petition, the Petitioner will unqualifiedly, without demur,
furnish such security/fixed deposits to the satisfaction of
the Registrar of the Hon’ble Court as this Hon’ble Court
may be so pleased to direct.”
However, by order dated 14.10.2019, this Court observed:-
“It is a matter of record that pursuant to order dated
03.04.2018 passed by the Single Judge of the High Court of
Judicature at Madras in Writ Petition No.7354 of 2018, a
sum of Rs.2806,40,15,294/- stands deposited and invested
in the form of fixed deposit receipts.”
It was then directed:-
“Pending further consideration, the amount which is
presently lying in deposit shall be maintained in the same
form.”
14. We heard Mr. Gopal Subramanium, learned Senior Advocate for the
appellant and Mr. Zoheb Hossain, learned advocate for the Department.
15. It was submitted by Mr. Subramanium, learned Senior Advocate
that the instant transaction would not come within the scope of Section
115-O of the Act. It was submitted that the appellant was never put to
notice about the proposed determination in terms of Section 115-O of the
Act; that the communication dated 22.03.2018 could not be said to have
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
13
determined the liability of the appellant under Section 115-O of the Act
and consequently the appellant could not have been relegated to the
appellate remedy as directed. It was submitted that the communication
dated 22.03.2018 could, at best be treated as an intimation of the action
proposed to be taken resort to by the Department. These submissions were
countered by Mr. Zoheb Hussain, learned Advocate. According to him, the
matter would come within the ambit of Section 115-O of the Act. He also
relied upon Section 115-Q of the Act to submit that in case the assessee-
company had not paid tax on distributed profits in accordance with the
provisions of Section 115-O, the assessee-company would be deemed to be
“an assessee in default” in respect of the amount of tax and all provisions
relating to collection and recovery of income tax would apply. As an
extension of the concept, it was submitted that the Department was justified
in issuing the communication dated 22.03.2018 followed by attachment of
the accounts of the appellant.
16. On the issue whether communication dated 22.03.2018 was in the
nature of determination of the liability, both the learned counsel were heard
at considerable length, at the end of which it was agreed by Mr. Zoheb
Hossain, learned Advocate for the Department, that the communication
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
14
dated 22.03.2018 could be treated as a show cause notice and the
Department be permitted to conclude the issue within a reasonable time,
provided the interim order passed by the Single Judge of the High Court on
03.04.2018 was continued. The course suggested by the learned counsel
for the Department was acceptable to the learned Senior Counsel for the
appellant.
17. It was, therefore, suggested that the appellant may file an affidavit
of undertaking to withdraw the proceedings initiated by it before the AAR
and the Department may also file an appropriate affidavit stating that it was
willing to treat the communication dated 22.03.2018 as a show cause
notice. An appropriate affidavit of undertaking to withdraw the
proceedings initiated before the AAR has since then been filed by the
appellant. An affidavit has also been filed on behalf of the Department
stating:-
“The communication dated 22.03.2018 may be treated as a
show cause notice and the assessee will be given an
opportunity of being heard and a fresh order will be passed
within two months from the date of the judgment of this
Hon’ble Court.”
18. In the peculiar facts and circumstances of the present case, while
disposing of this Appeal, we direct:-
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
15
a) The communication dated 22.03.2018 shall be treated as a show
cause notice calling upon the appellant to respond with regard to
the aspects adverted to in said communication;
b) The appellant shall be entitled to put in its reply and place such
material, on which it seeks to place reliance, within 10 days from
today;
c) The appellant shall thereafter be afforded oral hearing in the
matter;
d) The matter shall thereafter be decided on merits by the concerned
authority within two months from today;
e) Pending such consideration, as also till the period to prefer an
appeal from the decision on merits is not over, the interim order
passed by the Single Judge of the High Court on 03.04.2018 and as
affirmed by this Court vide its order dated 14.10.2019, shall
continue to be in operation; and
f) The amount of Rs.495,24,73,287/- deposited towards payment of
tax and the amount of Rs.2806,40,15,294/- which stands deposited
and invested in the form of Fixed Deposit Receipts shall be subject
to the decision to be taken by the concerned Authority on merits or
to such directions as may be issued by the Appellate Authority.
Civil Appeal No. 1992 of 2020 @ SLP(C)No.23705 of 2019
Cognizant Technology Solutions India Pvt. Ltd. Vs. Deputy Commnr. Of
Income Tax Large Tax Payer Unit 1.
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19. We have stated the facts of the present case only by way of
narration of events and explaining the chronology. We shall not be taken to
have dealt with merits or demerits of the rival contentions of the parties.
The merits of the matter shall be gone into independently by the concerned
authorities without being influenced, in any way, by any of the observations
made by the High Court and this Court.
20. The Appeal is disposed of in aforesaid terms and the judgment and
order presently under appeal shall stand modified accordingly. No costs.
…………………………………J.
[UDAY UMESH LALIT]
…………………………………J.
[INDU MALHOTRA]
…………………………………J.
[HEMANT GUPTA]
New Delhi;
March 04, 2020.
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