I-T Dept freezes Cognizant's bank accounts over alleged Rs 2,500 crore tax evasion

Last month, Cognizant had proudly announced that it had bagged the 16th rank in the first-ever Barron's 100 Most Sustainable Companies list that looked at the environmental, social and governance practices of large American firms. But this month, the information technology major is making headlines for alleged tax evasion in India.

The Income Tax department has frozen some of the bank accounts of Cognizant Technology Solutions in Mumbai and Chennai - a week ago, according to some media reports - for non-payment of dividend distribution tax (DDT) to the tune of over Rs 2,500 crore in the previous financial year.

The dispute pertains to Cognizant's share buyback under the scheme of 'arrangement and compromise' nearly two years ago. In its second quarter 2016 results, the company had said: "In May 2016, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, resulting in a one-time remittance of $2.8 billion of cash from India. $1.2 billion, or $1.0 billion net of taxes, was transferred to the US with the other $1.6 billion remaining overseas." The "non-Indian" entities mentioned above are Cognizant's Mauritius-registered company and the US-based parent, which reportedly held 54 per cent and 46 per cent shares (respectively) in CTS India.

According to the Business Standard, the tax department claims that DDT has to be paid on any distribution, or reduction of capital, to the extent of accumulated profits defined as dividends. "The only exception to this is the buyback under section 77A of the Companies Act and CTS was not covered. Therefore CTS was required to pay DDT of more than Rs 25 billion (Rs 2,500 crore) in the FY2016-17 itself but failed to pay," it said.

The allegation is that while CTS deducted 10 per cent TDS on the remittances to the US company, it failed to deduct tax on the remittances to the Mauritius-based entity. However, the tax applicable was much higher. Section 115QA of the Income Tax Act provides for payment of additional tax by the company at the rate of 20 per cent on the distributed income on buy-back of unlisted shares. In a circular dated February 26, 2016, the CBDT had further clarified that "consideration received on buyback of shares between the period 01.04.2000 till 31.05.2013 would be taxed as capital gains in the hands of the recipient in accordance with section 46A of the Act and no such amount shall be treated as dividend".

The tax department further alleged that Cognizant has not declared any dividends since financial year 2003-04, despite earning substantial profits regularly. So, its stand is that any payment to the shareholders should be considered as distribution of profits, no matter what route a company chooses.

However, the tech firm has claimed that since its scheme of arrangement and compromise between the shareholders and the company was in accordance with the relevant sections of the Companies Act, and approved by the Court, DDT does not apply.

In response to the taxman's move, it also approached the Madras High Court. The report adds that according to the company spokesperson, the court on Tuesday directed the Department to not take further action pending further hearings. "The company believes that the positions taken by the Indian Income Tax Department are contrary to law and without merit. Cognizant has paid all applicable taxes due on the transaction at issue. The company will continue to vigorously defend itself and will pursue all available legal remedies. Cognizant is committed to complying with the law in all jurisdictions where it operates," said the spokesperson, adding that, "Cognizant's business operations, our associates and our work with clients are not impacted by actions recently attempted by the Income Tax Department."

This, incidentally, is not Cognizant's first run-in with the taxman. According to media reports, in January this year, the income tax department had issued draft assessment orders to Cognizant Technology Solutions Corporation and Cognizant Mauritius for allegedly diverting accumulated profits from its Indian subsidiary without paying tax in May 2013. CTS India had allegedly bought back over 9 lakh shares from Cognizant Mauritius for close to Rs 24,000 per share, which according to the department was an overvaluation in violation of the Income Tax Act and FEMA. Moreover, the transaction was supposedly undertaken to avoid the buyback tax that came into existence from June 1 that same year. The department had reportedly cited Rs 564 crore as collective tax due from these companies, but CTS had refuted charges, claiming that the income from the transaction was not taxable as per the provisions of the Double Taxation Avoidance Agreement.

The authorities are now reportedly planning to drag Cognizant to the Economic Offences Court for alleged fraudulent expense claims made over the past three years.