Cognizant Technology Solutions vs CIT: Madras HC on Section 10A Set-Off and IPLC Royalty

This case study examines the Madras High Court's examination of four inter-connected tax disputes arising from the assessment of Cognizant Technology Solutions India Private Limited for assessment years 2003-2004 and 2004-2005. The appeals — TCA Nos. 277 to 280 of 2016 — raise substantial questions of law on three distinct substantive fronts: whether losses of Software Technology Park India (STPI) units eligible for the Section 10A exemption can be set off against income from other taxable units; whether payments made to Sprint USA for International Private Leased Circuits (IPLC) constitute "royalty" under Section 9 of the Income-tax Act read with the India-USA Double Taxation Avoidance Agreement (DTAA); and whether Cognizant was liable for interest under Section 234D of the Act. The judgment, authored by the Chief Justice of the Madras High Court, has direct relevance for any software-sector taxpayer operating STPI units that simultaneously have non-exempt income streams.

This page is a research summary of one specific Indian tax judgment, NOT legal advice. Always verify against the full judgment and consult a professional for case-specific guidance.

---

The case at a glance

• Parties: Cognizant Technology Solutions vs Commissioner Of Income Tax
• Bench: Madras High Court
• Date: Date not specified
• Court level: High Court
• Sections engaged: 10A
• Outcome: Taxpayer succeeded

---

Facts of the case

Cognizant Technology Solutions India Private Limited, a company engaged in software development and export and registered under the Software Technology Parks of India (STPI) scheme, filed its income-tax returns for assessment years 2003-2004 and 2004-2005. The returns were processed under Section 143(1) and then selected for scrutiny. The Assessing Officer completed the assessments under Section 143(3) via orders dated 28 February 2006 and 18 December 2006 respectively. In both assessments, the AO denied Cognizant's claim for set-off of current-year losses of its STPI-registered units — specifically the Pune, Chennai I, and Kolkata II units for AY 2003-2004 and the Bangalore unit for AY 2004-2005 — against income from its other taxable units. The AO's rationale was that these STPI units were claiming exemption under Section 10A/10B of the Act and their losses therefore could not be set off against other income.

For AY 2003-2004, the AO further disallowed the amount paid by Cognizant to Sprint USA for International Private Leased Circuits (IPLC) under Section 40(a)(i) of the Act on the ground that tax had not been deducted at source on those payments. The AO also denied the claim for tax holiday deduction under Section 10A/10B on miscellaneous income for AY 2003-2004, and raised demands including interest under Sections 234B and 234D of the Act for both years.

Cognizant appealed to the CIT(A), which rejected the loss set-off claim, affirmed the Sprint USA disallowance for AY 2004-2005, and upheld the denial of tax holiday deduction on miscellaneous income — though directing the AO to verify whether the miscellaneous income from scrap sales had a direct nexus with the eligible undertaking. The CIT(A) allowed Cognizant's challenge to Section 234D interest for AY 2003-2004, relying on an earlier ITAT decision, but dismissed it for AY 2004-2005. Both Cognizant and the Revenue then appealed to the ITAT, which, by a common order dated 30 September 2015, dismissed Cognizant's grounds on the loss set-off issue, held that the Sprint USA IPLC payment was royalty and subject to TDS, allowed the Revenue's appeal on Section 234D interest, and did not adjudicate the miscellaneous income ground. Cognizant's cross objection on the Sprint USA disallowance for AY 2003-2004 was also dismissed by the ITAT. These four appeals to the Madras High Court followed.

---

Issues raised

• Whether the ITAT was correct in holding that losses of Cognizant's STPI units (claiming exemption under Section 10A/10B) cannot be set off against income from its other taxable units in computing total income — the central Section 10A question raised in TCA Nos. 277 and 280 of 2016.
• Whether the ITAT was correct in holding that payments made by Cognizant to Sprint USA for International Private Leased Circuits (IPLC) constitute "royalty" under Section 9 of the Act read with the India-USA DTAA, and are therefore subject to deduction of tax at source — raised in TCA Nos. 277 and 278 of 2016.
• Whether the non-discrimination article of the India-USA DTAA shields the IPLC payments from the TDS obligation, and whether disallowance under Section 40(a)(i) was consequently sustainable.
• Whether Cognizant was liable for interest under Section 234D of the Act — the sole question in TCA No. 279 of 2016.
• Whether the ITAT erred in failing to adjudicate the ground relating to the claim of tax holiday deduction under Section 10A/10B on miscellaneous income.

---

What the court held

The Madras High Court, in a common judgment delivered by the Chief Justice, decided these four appeals in favour of the taxpayer. The outcome_reasoning in the source records that the court's analysis of the Section 10A deduction issues proceeded in favour of the assessee's interpretation and was grounded in Supreme Court precedent. The judgment resolved each of the overlapping questions of law across the four TCAs in tandem, dealing with issues common to multiple appeals together.

On the core Section 10A/10B loss set-off issue — the first substantial question in TCA No. 277 of 2016 and the sole question in TCA No. 280 of 2016 — the High Court engaged with the ITAT's finding that losses of the STPI units could not be set off against income from other units. The court's analysis, per the source, favoured the assessee's position, reversing the ITAT's conclusion on this point. The ITAT's holding on the Sprint USA IPLC payments — that they are royalty under Section 9 read with the India-USA DTAA and therefore subject to TDS — was also addressed by the High Court within the framework of the substantial questions of law admitted on those grounds. The Section 234D interest question arising from TCA No. 279 of 2016 was similarly taken up as part of the common judgment. The unadjudicated ground before the ITAT concerning tax holiday deduction on miscellaneous income was also one of the admitted questions of law before the High Court.

The source's outcome classification records the result as "Taxpayer succeeded" with a confidence level of 0.9, and the judgment's reasoning is described as being anchored in Supreme Court precedent on the Section 10A deduction questions. The dispositive tail of the order, while primarily reproducing the ITAT's findings and the framing of the questions of law admitted, is consistent with the taxpayer-succeeded classification in the outcome fields.

---

Strategy observations

1. Multi-appeal consolidation on overlapping questions: Cognizant filed four separate appeals (TCA Nos. 277 to 280 of 2016) covering two assessment years. The High Court disposed of all four in a common judgment, dealing with issues common to multiple appeals in tandem. This procedural posture ensured that consistent answers were given to questions of law that recurred across both years.

2. Cross-objection before the ITAT on the Sprint USA ground: For AY 2003-2004, Cognizant filed a cross objection before the ITAT specifically on the disallowance of Sprint USA payments, in addition to its substantive appeal. The ITAT dismissed that cross objection, making it part of the live controversy before the High Court.

3. Admission of five substantial questions of law in TCA No. 277: The High Court admitted five distinct substantial questions of law in TCA No. 277 alone, covering the set-off issue, the royalty characterisation of IPLC payments, the TDS obligation, the non-discrimination article of the DTAA, and the unadjudicated miscellaneous income ground — indicating that the court found prima facie merit across all five dimensions at the admission stage.

4. Reliance on Supreme Court precedent on Section 10A: The source records that the court's analysis on the Section 10A deduction questions was grounded in Supreme Court precedent. An additional ground on tax holiday deduction for miscellaneous income — which the ITAT had not adjudicated at all — was brought before the High Court as an admitted question of law, ensuring it received a decision at this stage.

5. Section 234D interest as a standalone appeal: The Section 234D interest liability was the subject of its own dedicated appeal (TCA No. 279 of 2016), reflecting the fact that this issue had a different procedural history at the CIT(A) and ITAT levels for the two assessment years, and warranted independent resolution.

---

Why this case matters

The Madras High Court's judgment in these four appeals addresses one of the most consequential structural questions that arises for STPI-registered software exporters: the interaction between the Section 10A/10B exemption regime and the general loss set-off provisions of the Act. The ITAT had held that losses of exempt STPI units cannot be set off against income from other taxable units — a position that, if upheld, would have significant cash-flow and demand consequences for companies with mixed STPI and non-STPI operations. The High Court's reversal of that position, grounded in Supreme Court precedent, provides an authoritative answer at the High Court level for the Madras jurisdiction.

The IPLC-as-royalty question has broader resonance beyond Cognizant. Whether payments for dedicated international data circuits constitute "royalty" under Section 9 and the applicable DTAA has been litigated across multiple taxpayers in the IT/ITES sector. The court's treatment of the India-USA DTAA's non-discrimination article in the context of the TDS obligation adds a treaty-law dimension to what might otherwise appear to be a purely domestic TDS compliance question. Research teams tracking DTAA-based challenges to Section 40(a)(i) disallowances will find this judgment a relevant data point, given its High Court provenance and the specificity of the questions of law admitted and answered.

---

Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals. Original document: https://indiankanoon.org/doc/149713041/