The Income Tax department of India has attached bank accounts and deposits of Cognizant, the information technology major in Chennai and Mumbai. The attached financial assets are frozen to recover the Rs 2500 crore in Dividend distribution tax (DDT) that the company owes to the government.
As per the Income Tax Act, a company needs to pay DDT on any distribution or reduction of capital to the extent of accumulated profits defined as dividends. According to reports, the only way a company can gain an exception to the tax rule is the option of buy back under section 77A and the NASDAQ listed company was not covered under it. Cognizant has not paid the DDT from the financial year 2016-17 onwards.
According to reports, the allegations of DDT evasion is in connections with the transaction the Indian wing of Cognizant made while buying shares of the US and Mauritius wings of the company. The Mauritius and US companies of Cognizant owned 54% and 46% of shares of Cognizant Technology Solutions India Private Limited respectively.
Cognizant purchased its own shares from the two shareholders in May 2016 under the ‘arrangement and compromise’ scheme, described under Section 391-393 of the Companies Act.
Cognizant allegedly did not deduct tax while paying remittance to the Mauritius company and deducted 10% TDS on remittance to the US company. The company, however, has claimed that its transactions were in accordance with the relevant sections of the companies act and no DDT is payable to the government of India.
The Income Tax department has claimed that Cognizant has not declared any dividends since 2003-04 despite earning significant profits each year and any payment to the shareholders is a distribution of profits. The department has also alleged that there are irregularities in payments made by the company through an Indian company for setting up offices in India.
Cognizant has approached the Madras High court against the I-T department’s actions. The I-T department is also planning to prosecute the company for alleged fraudulent expenses claim in the Economic Offences Court in Chennai.