I-T Dept seeks clarification from Cognizant on share buyback in 2013

The allegation is that Cognizant India has bought back almost 0.91 mn shares from Cognizant Mauritius for around Rs 23,000 per share

The income tax department has issued notices to the information technology services major Cognizant Technology Solutions Corporation and the group's arm in Mauritius for allegedly diverting accumulated profits from its Indian company without paying tax.

The money was diverted through an overvalued share buyback by the Indian subsidiary in 2013 and a scheme of arrangement by the US firm in 2016, alleges the tax department.

The department issued draft assessment orders in December to the two entities for the assessment year 2014-15, asking them to file objections before a resolution panel within 30 days.

A Cognizant spokesperson said, “Cognizant is committed to compliance with the law in all jurisdictions in which it operates.”

Cognizant Technology Solutions India bought back 0.91 million shares from Cognizant Mauritius for around Rs 23,000 per share, which according to the department, is an overvaluation. The transaction in May 2013 was allegedly undertaken to avoid the buyback tax that came into existence from June 1, 2013. If the buyback was carried out after that, it would have attracted 20 per cent tax.

Besides, the Cognizant Technology Solutions Corporation through a scheme of arrangement repatriated Rs 210 billion in May 2016 and restructured itself so that there would not be any surplus left in India, the tax department alleges.

Cognizant Technology Solutions Corporation had 22 per cent of the shares in the Indian subsidiary and Cognizant Mauritius 76 per cent before the buyback. The Indian company had accumulated free reserves before the buyback of around Rs 110 billion and 25 per cent of the allowed repatriation, around Rs 28.8 billion, was done.

The buyback was based on a discounted cash flows valuation, prepared by consultant E&Y Merchant Banking Services, and it put the value of the Indian company at over Rs 23,000 per share. However, the tax department said the value at that point would have been around Rs 8,000 per share and the buyback was overvalued, which was in violation of the Income Tax Act and FEMA. The company had avoided more than Rs 500 crore in tax through various methods, the tax department alleged.

Cognizant Technology Solutions has refuted the allegations during proceedings. The US parent has also detailed the Indian cash remittance in its annual report for 2016-17, that in mid-May, prior to the enactment of the Finance Bill 2016, which expanded the applicability of India's buyback distribution tax to certain share buyback transactions occurring after June 1, 2016, the Indian subsidiary of Cognizant had repurchased shares from non-Indian Cognizant entities valued at $2.8 billion and this was undertaken pursuant to a plan approved by the High Court of Madras. This was to simplify the shareholding structure of the Indian subsidiary, it said.

Cognizant’s Indian subsidiary repurchased around $1.2 billion of the total $2.8 billion of shares from US shareholders while the remaining $1.6 billion was repurchased from shareholders outside the US. The US firm had incurred an incremental income tax expense of $238 million in 2016, it added.