Madras HC stays I-T department freeze of Cognizant deposits, with rider

The Madras High Court on Tuesday stayed the Income Tax (I-T) Department’s move to attach over Rs 2,500-crore bank deposits of software exporter Cognizant, following a dispute over unpaid taxes on the dividend it paid to its overseas parent.

The court ordered that lifting of the attachment should be subject to Cognizant depositing 15% of the disputed amount, or over Rs 400 crore, as security in a suspense account till it decides on the case.

A lien, a form of a security interest, is to be created over the rest of the disputed sum until the case is resolved. The matter has been posted for further hearing on April 18.


“It basically circles around their argument that the arrangement approved by the high court excludes any applicability of dividend distribution tax, while our argument is that is a clandestine arrangement done without knowledge of the tax department,” Additional Solicitor General G Raja gopalan, appearing on the behalf of the tax department, told ET. Cognizant did not comment immediately.

The IT department had two weeks ago frozen a few bank accounts and deposits of over Rs 2,500 crore following a claim of unpaid dividend distribution taxes when the India unit of Cognizant made a share buyback of around $1.2 billion in May 2016.

The action was in connection with a notice sent in November last year over a share repurchase executed in May 2016 just ahead of the Finance Bill, 2016 which widened the scope of taxation for share buy-backs.

The buyback was done ahead of the Finance Bill 2016 came into effect in June. Cognizant says that it repatriated $ 1 billion to shareholders in the US and paid an $ 238 million in incremental income taxes in 2016.

The transaction, dubbed India Cash Remittance, was done with the approval of the Madras High Court and simplified the shareholding structure of its India subsidiary, according to the company.

Cognizant says it has complied with the law and would fight the IT department in the court.

“The company believes that the positions taken by the Indian Income Tax 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. Cognizant is committed to complying with the law in all jurisdictions where it operates,” it said in a statement last week.