Madras HC orders Cognizant to pay Rs 420 cr in tax dispute, stays freezing of account

The Madras High Court on Tuesday ordered Cognizant Technology Solutions (CTS) to cough up 15% of the alleged tax evasion amount as security. According to the Economic Times, the Madras High Court stayed the IT department’s freeze on the alleged Rs 2,500 crore in bank deposits.

The newspaper also reported that de-freezing of CTS’ bank accounts was subject to the the multinational technology firm paying 15% or Rs 420 crore as security deposit. Until the Madras High Court decides on the case, the rest of the amount will be held in lien. A lien is the right to keep possession of property belonging to a debtor until the debt owed is paid.

According to the Times of India, in order to facilitate payment of the amount, the court ordered the de-freezing of CTS’ bank account with JP Morgan in Mumbai.

The interim stay was granted by Justice Sivagnanam in response to a plea by the firm asking for its 68 bank accounts to be made operational again.

According to the IT department, Cognizant failed to pay Dividend Distribution Tax (DDT) of over Rs 2,500 crore in FY17. When any company in India declares dividends to its shareholders, it is liable to pay a certain percentage as tax. A 20% DDT is levied on the total dividends paid.

In May 2016, the Indian unit of Cognizant bought back shares from its shareholders under a Scheme of Arrangement and Compromise. The shareholders that it bought back shares from, are its subsidiaries in Mauritius and its parent company in the US, which held 54% and 46% of its shares respectively.

However, CTS failed to levy DDT on the Rs 19,415 crore it sent to its shareholders in the US and Mauritius towards buyback of 94,00,543 equity shares in May 2016, the ToI report says.

Income Tax provisions operative from June 2013 stipulate levy of tax on buyback of shares.