Bengaluru: A bench of the Madras high court has asked Cognizant Technology Solutions Corp. to deposit Rs420 crore, or 15% of the Rs2,800 crore demanded by income tax (I-T) authorities, in an escrow account over the next two days—even as the court asked tax authorities to defreeze one of the firm’s bank accounts.
The court has set 18 April as the date when it will next hear the dispute between Cognizant and the I-T department.
Last week, the I-T department had frozen 68 bank accounts of Cognizant, claiming the firm had not paid Rs2,800 crore in dividend distribution tax (DDT) when its India unit transferred Rs19,415 crore to shareholders in the US and Mauritius following a $2.8 billion share buyback in 2016.
“Our operations remain unaffected. 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," said Karen McLoughlin, chief financial officer, Cognizant. “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."
Cognizant and the I-T department differ on the interpretation of the current law. Cognizant claims the transaction was undertaken pursuant to a plan approved by the Madras high court. It further argues that the transaction comes under capital gains made, which under India’s tax treaty with Mauritius does not attract any tax.
The I-T department, however, is treating the transaction as dividend distribution. “The minimum responsibility that can be expected from the petitioner is to pay the tax due to the country while taking away/repatriating huge accumulated profits of ₹ 19,415 crore," the IT department said in its petition filed before the court.
“In mid-May, prior to the June 1 effective date of the enactment, our principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, valued at $2.8 billion," Cognizant said in its annual report for 2016. “This transaction, or the India Cash Remittance, was undertaken pursuant to a plan approved by the High Court of Madras and simplified the shareholding structure of our principal operating subsidiary in India," it said.
“Pursuant to the transaction, our principal Indian operating subsidiary repurchased approximately $1.2 billion of the total $2.8 billion of shares from its U.S. shareholders, resulting in incremental tax expense, while the remaining $1.6 billion was repurchased from its shareholder outside the United States. Net of taxes, the transaction resulted in a remittance of cash to the United States in the amount of $1.0 billion. As a result of this transaction, we incurred an incremental 2016 income tax expense of $238 million," it said.