The Income Tax (I-T) department has frozen bank accounts and deposits of Nasdaq listed IT firm, Cognizant in Chennai and Mumbai for allegedly evading dividend distribution tax (DDT).
Officials from the I-T department, on condition of anonymity, said that Cognizant Technology Solutions (CTS) was required to pay DDT of more than ₹2,500 crore in the financial year 2016-17 but failed to do so. According to sources, the accounts were frozen a week back. It is also learnt that Cognizant has moved the High Court against the attachment proceedings of the department.
Cognizant purchased its own shares from its shareholders in May 2016 under the scheme of ‘arrangement and compromise’ between the shareholders and the company, in accordance with Section 391-393 of the Companies act. The shareholders are a Mauritius company and another from the US holding 54% and 46% of the shares respectively.
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CTS did not deduct tax on the remittances to Mauritius company and deducted 10% TDS on the remittances to the US company. The company’s claim was that since the scheme of ‘arrangement and compromise’ between shareholders and the company was in accordance with the necessary sections of the Companies Act and approved by the court, no DDT was payable by the firm to the government of India.
The I-T Act requires DDT on any distribution, on reduction of capital, to the extent of accumulated profits defined as dividends. The only exception is the buy-back under section 77A of the Companies Act. CTS was not covered.
The I-T department has also found that the company has made illegal payments through an Indian company for setting up its offices and claimed as expenses in returns of income for FY 2013-14, 2014-15 and 2015-16. Sources say that the I-T department has decided to prosecute CTS for all three years for claiming fraudulent expenses and is filing complaints in the Economic Offences Court, Egmore.
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When contacted, a Cognizant spokesperson said its “business operations, our associates and our work with clients are not impacted by actions recently attempted by the Income Tax Department. The High Court of Chennai [on Tuesday] heard the matter and instructed the... Department to not take further action pending further hearing before the court. The company believes that the positions taken by the... Department are contrary to law and without merit.”
The spokesperson further added, “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.”