Cognizant to deposit $75 mn in suspense account after tax demand dispute

The dispute involves the I-T Department's recent assertion that the company owes additional taxes in connection with a $2.8-billion share buyback transaction undertaken by a subsidiary in 2016

IT major Cognizant has said that it will deposit $75 million (Rs 4.9 billion), representing 15 per cent of the disputed tax demand from the Income Tax Department, to be kept in a suspense account. The remaining amount would be marked under line. It has said that despite the department attaching its bank accounts, its operations remain unaffected.

On Tuesday, a single judge of the Madras High Court granted an interim stay on the I-T Department's proceedings, subject to the condition that the company pays 15 per cent of the tax demand and furnishes a bank guarantee or security by way of fixed deposit for the remaining anount. While directing a proper compliance to these conditions, the court lifted the attachment of bank account J P Morgan Chase Bank, Mumbai, enabling the company to pay the said amount.

The tax demanded by the department would be around Rs 32.66 billion, according to a calculation based on the amount Cognizant is paying as 15 per cent. 

“Our operations remain unaffected,” said Karen McLoughlin, Chief Financial Officer, Cognizant.  

“This dispute is with respect to a lawful, fully reviewed and disclosed transaction, and we are pleased with today’s decision that restores appropriate due process.  Cognizant is committed to complying with the law in all jurisdictions in which we operate, and we will continue our defense against the assertions of the Indian Income Tax Department in this and other tax disputes,” added the official. 

The dispute involves the Indian Income Tax Department’s recent assertion that it is owed additional taxes in connection with a 2016 $2.8 billion share buyback transaction undertaken by Cognizant’s principal operating subsidiary in India to acquire shares from the overseas shareholders. 

In that transaction, which was undertaken after approval by the Madras High Court, Cognizant paid approximately $135 million (Rs 9 billion) in Indian income taxes, which it believes are all applicable taxes owed according to Indian law, said the company.

The department has alleged that Cognizant evaded Dividend Distribution Tax (DDT) on some transactions the Indian entity has made while buying shares of the company from the Mauritius and US companies of Cognizant. These companies held 54 and 46 per cent shares respectively in Cognizant Technology Solutions India Pvt Ltd.

As per the department, 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 (Cognizant) was not covered. Therefore CTS was required to pay DDT of more than Rs 25 billion in the FY 2016-17 itself but failed to pay,” it says.