I T Department Freezes US Firm Cognizant’s Bank Accounts For Failure To Remit Dividend Tax

I T  Department Freezes US Firm Cognizant’s Bank Accounts For Failure To Remit Dividend TaxCognizant Technology Solutions office in Chennai. (Madhu Kapparath/Mint via Getty Images)

Cognizant Technology Solutions’ Bank accounts and deposits exceeding Rs 2,500 crore in Chennai and Mumbai have been frozen by the Income Tax department for the US-based firm’s failure to pay Dividend Distribution Tax (DDT).

Over two lakh people are employed by the New Jersey-based American firm across India, including in Bengaluru and Chennai. The $15-billion company bought back its shares from shareholders in May 2016 under the ‘arrangement and compromise’ scheme, reported The Hindu Business Line. A Mauritius firm holds 54 per cent of the Indian arm’s stake, while 46 per cent is held by the US parent.

Cognizant failed to deduct tax on the remittances made to the Mauritius company. However, it deducted 10 per cent on remittances made to the US company. The technology company claimed that the ‘arrangement and compromise’ scheme was according to the Companies Act and hence, payment of DDT did not arise, the financial daily said quoting company sources.

The IT department, however, said Cognizant has to pay DDT on any distribution or reduction of capital to the extent of accumulated profits that are defined as dividends.

Exception can be made for buybacks only under Section 77A of the Companies Act, but Cognizant is not covered under the exemption. It is obliged to pay a tax of over Rs 2,500 crore for the 2016-17 fiscal. The IT Department also contended that there should be a dispute between two parties for “arrangement and compromise” scheme. In the case of Cognizant, all shares were held by the same management, which was also party to all decision-making. There was no opportunity for dispute for the said scheme, the department argued.

A Cognizant’s spokesperson said: “The company believes that the position taken by the Indian Income Tax Department is contrary to law and without merit. Cognizant has paid all applicable taxes due on the transaction at issue. The company will continue to vigorously defend itself and will pursue all available legal remedies. Cognizant is committed to complying with the law in all jurisdictions where it operates.”