This notice (in part) against the Nasdaq-listed CTS comes in the wake of government authorities challenging the company’s tax planning. The I-T department has sought the audit of transactions amounting to around Rs 5,000 crore.
The Indian subsidiary based out of Chennai is said to have attempted to circumvent the “deemed dividend pay-out” of 20 per cent by purchasing shares of a company.
The subsidiary was liable to pay this amount to its parent company. Intending to utilise a part of its huge cash pile of over Rs 10,000 cr, CTS tweaked its growth projections for the first 5 years since 2010. A back-of-the-envelope calculation reveals it had adjusted its profit to suit cash flows, leading to this audit, said the source. This hit in CTS’ profitability will bring down the earnings per share of its shareholders. Losses arising out of transfer pricing are either written off, or provisioned as a contingent liability in case of long-drawn legal proceedings, the source notes, highlighting that the state exchequer has incurred a loss of revenue on account of CTS.
It is also learnt that Ernst & Young (E&Y), one of the Big Four accounting firms, has been mandated to advice on the transfer pricing assessment (see box) for CTS. Though the notice was served few months ago, E&Y has not been able to bail out its client from the transfer pricing issue.
A Cognizant spokesperson issued a statement as: “In the normal course of business and from time to time, we review and discuss certain large transactions with the relevant tax authorities and, as always, will respond appropriately to any inquiries. Cognizant is committed to compliance with the law in all jurisdictions in which it operates.”
E&Y refused to divulge details, citing confidentiality clauses. A senior official from the I-T department also chose to remain non-committal, but did not deny that a tax inquiry was under way.
In an internal guidance to tax officers, the Central Board of Direct Taxes proposed a risk-based approach to select cases for audit scrutiny and onus on the assessing officer to record reasons for
referring specific transactions for further evaluation