Madras High Court Orders Cognizant to Pay $75 Million in Tax Dispute Case

The Madras High Court ordered Cognizant Technology Solutions (CTS) on April 3 to pay 15 per cent of the disputed tax amount in a case involving the Income Tax department in the next two days.

The court ordered unfreezing Cognizant’s account with JP Morgan in Mumbai, but its other accounts will still remain frozen. The New Jersey-based tech company is embroiled in a Rs 2,800 crore tax dispute with the Indian I-T department.

A sum of $75 million (Rs 4.9 billion) i.e. 15 per cent of the disputed amount will be transferred by Cognizant to a suspense account by the I-T Department while the remainder will be marked under lien. The court will hear about I-T department’s collection actions after Cognizant’s request on April 18, according to Business Today.

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

In May 2016, Cognizant purchased its own shares from the two subsidiaries under the scheme of arrangement and compromise between them and the company. The I-T department is prosecuting Cognizant for not paying 20 per cent Dividend Distribution Tax (DDT) on buyback of its shares.

“The underlying 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. In that transaction, undertaken pursuant to a plan approved 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,” the company said in a statement.

The income tax department froze some accounts of Cognizant to recover Rs 2,800 crore in March 2018 and the company took the I-T department to court over  the same on March 28. The court told the income tax department to not take any further action and file an affidavit defending its move by April 2.

“It basically circles around their argument that the arrangement approved by the high court excludes any applicability of dividend distribution tax, while our argument is that is a clandestine arrangement done without knowledge of the tax department,” Additional Solicitor General G Raja Gopalan, appearing on the behalf of the tax department, told the Economic Times.