The Income Tax department has frozen some of the bank accounts of Cognizant Technology Solutions India P Ltd (CTS) to recover Rs 2,500 crore which the Indian arm of NASDAQ-listed Cognizant owes as dividend distribution tax (DDT) to the government.
“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.
The department said that Cognizant purchased its own shares from shareholders in May 2016 under the scheme of arrangement and compromise between them and the company.
“The shareholders are a Mauritius entity and an American company, holding 54% and 46% of shares, respectively. Cognizant did not deduct tax on the remittances to the Mauritius company, but deducted 10% as tax on the remittances to the US company,” said the official.
A Cognizant spokesperson said, “Cognizant’s business operations, our associates and our work with clients are not impacted. The HC instructed the I-T department to not take further action pending further hearings.
The company believes that the positions taken by the I-T department are 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.”