Madras HC dismisses Cognizant's plea over Rs 2,800 crore tax demand

The company was accused of evading DDT on transactions made while buying shares from its Mauritius and US arms

The Madras High Court (HC) has dismissed Cognizant Technology Solutions India’s (CTSIPL’s) petition challenging the recovery proceedings initiated by the income tax department for non-payment of Rs 2,800 crore in dividend distribution tax (DDT). The court has dismissed another plea by Cognizant (Mauritius) and Cognizant Technology Solutions Corporation (US), against the department.

Justice K Kalyanasundaram directed the firm to approach the respective authorities for remedy.

“Since this writ petition is dismissed, directing the petitioner to avail the appeal remedy; the Appellate Authority shall take into account the amount deposited in pursuance of the order referred supra, while entertaining the appeal,” he said in the order. The company had deposited Rs 495 crore last year in connection with the dispute. 

The petition was against the department’s order on March 22, 2018, directing it to remit tax at 15 per cent of the total payment of Rs 19,415.62 crore, plus interest.

The department had also alleged remittance to non-resident shareholders in May 2016, without payment of DDT. A Cognizant spokesperson said: “Cognizant will now appeal the High Court order in the Division bench. It continues to be Cognizant’s position that the recovery proceedings initiated by the Income Tax Department are improper and no additional taxes are owed.”

Issues were raised regarding a transaction in 2013, when the Indian arm bought back its shares from foreign entities under Section 77A of the Companies Act. Thereafter, in 2016 under the Scheme of Arrangement and Compromise, it planned to purchase its own shares under Sections 391 to 393 of the Companies Act. It was granted approval in 2016 to buy back a maximum of 9.4 million equity shares for Rs 19,080 crore. The company said the amount was paid to shareholders in May 2016.

A total of Rs 898 crore was paid as capital gains tax to the department. The valuation for the buyback in 2013 — calculated using the discounted free cash flow method — was Rs 23,915 a share. The department determined the value at Rs 7,990 per share.