The Madras High Court directed the Income Tax Department to lift the attachment of Cognizant Technology Solution’s JP Morgan account today to enable the company to pay 15 per cent of the tax demand claimed by the department.

The account, along with 67 other accounts, was frozen by the I-T Department for non-payment of the Dividend Distribution Tax towards buyback of shares from overseas shareholders amounting to around ₹19,000 crore. The Department claimed ₹2,800 crore as tax demand from the US-based company, which has nearly 2 lakh employees in India.

There shall be an order of interim stay of impugned proceeding subject to the condition that Cognizant pays 15 per cent of tax demanded and furnishes a bank guarantee or security by way of fixed deposit for the remaining taxes demanded, Justice TS Sivagnanam said in the order.

For proper compliance with the above condition, the attachment of its bank account with JP Morgan Chase Bank, Mumbai, shall stand lifted forthwith, it said.

However, the attachment in respect of other banks, including State Bank of India, Deutsche Bank, Corporation Bank and HDFC Bank, will continue till the direction is complied with. Similarly, the attachment of nine bank deposits will continue, subject to lien being created for the remaining amount of taxes, he said.

The Judge said the remittance of 15 per cent of the tax demanded will be retained by the I-T Department in a separate account.

Cognizant’s counsel PS Raman told the court that the company would deposit the amount in two days. The company was finding it difficult to run day-to-day administration following the freezing of bank accounts. In the past eight days, the company had not paid vendors, he said, requesting the Court to order the I-T Department to unfreeze accounts.

Raman said the I-T Department had issued a show-cause notice on the same day it had attached the bank accounts. This is questionable, he argued.

The case history

The case is related to Cognizant Technology Solutions India (P) Ltd’s purchase of its own shares from shareholders in May 2016 under a scheme of ‘arrangement and compromise’. The shareholders are a Mauritius company, and a US company; they hold 54 per cent and 46 per cent of shares in the Indian entity, respectively.

While Cognizant did not deduct tax on the remittance made to the Mauritius company, it deducted 10 per cent TDS on remittances to the US company. It claimed that since the ‘arrangement and compromise’ was as per the Companies Act, no DDT was payable.

However, the I-T Department said the company requires to pay DDT on any distribution, on reduction of capital, to the extent of the accumulated profits defined as dividends.

The only exception to this is buyback under Section 77A of the Companies Act, and Cognizant was not covered under it. The company was required to pay DDT of over ₹2,500 crore in Financial Year 2016-17 itself, but had failed to pay.

The department held that in any scheme of ‘arrangement and compromise’, there should be a dispute between the parties concerned. In the case of Cognizant, all the shares were held by the same management and the decision-making was also in the same hands. Where was the dispute for ‘arrangement or compromise’?

No impact on salaries

The freezing of the bank accounts did not impact employees’ salary payments. Salaries were paid on time, said Cognizant employees.

Cognizant’s Chief Financial Officer, in a communication to employees, said the freezing of accounts will have no bearing on the company’s commitment to support, reward and recognise its employees.

Cognizant’s balance sheet is robust, with over $5 billion in cash and short-term investment. Payroll, promotion cycles and wage revision will not be in any way impacted because of the development, he said..

The matter was posted for April 18.

Related Topics
comment COMMENT NOW