New Jersey-based technology company Cognizant’s Indian arm has run into trouble with the income tax department in India over Dividend Distribution Tax on shares it bought back from its foreign owners — Cognizant Mauritius and the U.S.-based parent Cognizant Technology Solutions (CTS) — in 2016.
The income tax department froze some accounts of Cognizant to recover Rs 2,500 crore last week. In May 2016, Cognizant purchased its own shares from the two subsidiaries under the scheme of arrangement and compromise between them and the company.
Cognizant Technology Solutions India P Ltd (CTS) took the matter to the Madras High Court on March 28, which told the income tax department to not take any further action and file an affidavit defending its move by April 2.
“As per the Income Tax Act, DDT needs to be paid on any distribution, reduction of capital, to the extent of accumulated profits defined as dividends. The only exception to this is the buy-back under section 77A of the Companies Act and CTS was not covered. Therefore, CTS was required to pay DDT to the extent of Rs 2,500 crore in the financial year 2016-17 itself, but has not paid so far,” said a senior tax official, according to the Times of India.
“The shareholders are a Mauritius entity and an American company, holding 54 per cent and 46 per cent of shares, respectively. Cognizant did not deduct tax on the remittances to the Mauritius company, but deducted 10 per cent as tax on the remittances to the U.S. company,” said the official.
The I-T department will be prosecuting Cognizant for failure to pay the 20 per cent DDT on buyback of its shares, the Economic Times reported, citing a senior official at the department as saying that the prosecution will not go against the high court order since the order is specific to the attachment order, which pertains to the freezing of the accounts.
Cognizant’s chief financial officer Karen McLoughlin said that payroll, promotions and wage revisions will not be affected by the dispute.
“I want to reassure you that these developments will have NO bearing on our ability to continue to support, reward or recognize our associates across the world. Cognizant’s balance sheet is robust with over $5 billion in cash and short-term investments, and our business continues to remain healthy. As such, your payroll and the promotion cycles and wage revisions announced by Jim Lennox last week will NOT be in any way impacted because of these developments. Please continue to focus on the good work you are doing for our clients, enabling them to drive digital transformation at scale,” she said in an email to employees.
The I-T department’s move to freeze its accounts, Cognizant said, is “contrary to law and without merit,” the Press Trust of India reported.