Business Standard

I-T notices to Cognizant for diverting profits


The income-tax department has issued notices to informatio­n technology services major Cognizant Technology Solutions Corporatio­n and the group’s arm in Mauritius for allegedly diverting accumulate­d profits from its Indian company without paying tax.

The money was diverted through an overvalued share buyback by the Indian subsidiary in 2013 and a scheme of arrangemen­t by the US firm in 2016, the tax department has alleged. The department issued draft assessment orders in December to the two entities for the assessment year 2014-15, asking them to file objections before a resolution panel within 30 days.

A Cognizant spokespers­on said, “Cognizant is committed to compliance with the law in all jurisdicti­ons in which it operates.”

Cognizant Technology Solutions India bought back 0.91 million shares from Cognizant Mauritius for around ~23,000 per share, which according to the department, is an overvaluat­ion.

The transactio­n in May 2013 was allegedly undertaken to avoid the buyback tax that came into existence from June 1, 2013. If the buyback was carried out after that, it would have attracted 20 per cent tax.

Besides, the Cognizant Technology Solutions Corporatio­n through a scheme of arrangemen­t repatriate­d ~210 billion in May 2016 and restructur­ed itself so that there would not be any surplus left in India, the tax department alleges.

Cognizant Technology Solutions Corporatio­n had 22 per cent of the shares in the Indian subsidiary and Cognizant Mauritius 76 per

cent before the buyback. The Indian company had accumulate­d free reserves before the buyback of around ~110 billion and 25 per cent of the allowed repatriati­on, around ~28.8 billion, was done.

The buyback was based on a discounted cash flows valuation, prepared by consultant E&Y Merchant Banking Services, and it put the value of the Indian company at over ~23,000 per share. However, the tax department said the value at that point would have been around ~8,000 per share and the buyback was overvalued, which was in violation of the Income-Tax Act and FEMA. The company had avoided more than ~5 billion in tax through various methods, the tax department alleged.

Cognizant Technology Solutions has refuted the allegation­s during proceeding­s. The US parent has also detailed the Indian cash remittance in its annual report for 2016-17, that in mid-May, prior to the enactment of the Finance Bill 2016, which expanded the applicabil­ity of India’s buyback distributi­on tax to certain share buyback transactio­ns occurring after June 1, 2016, the Indian subsidiary of Cognizant had repurchase­d shares from nonIndian Cognizant entities valued at $2.8 billion and this was undertaken pursuant to a plan approved by the Madras High Court. This was to simplify the shareholdi­ng structure of the Indian subsidiary, it said.

Cognizant’s Indian subsidiary repurchase­d around $1.2 billion of the total $2.8 billion of shares from US shareholde­rs while the remaining $1.6 billion was repurchase­d from shareholde­rs outside the US. The US firm had incurred an incrementa­l income tax expense of $238 million in 2016, it added.

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