Information technology services major Tata Consultancy Services (TCS) has reported a sharp rise in contingent liabilities due to tax demands. The figure more than doubled to Rs 8,148 crore at the end of FY16 from Rs 3,963 crore the previous year.
In addition to the disputed tax demands, the Rs 6,227-crore ($940-million) claim by Epic Systems Corp that the company has disputed and expects to defend, was also accounted as a contingent liability for the year.
As a result, total contingent liabilities shot up to Rs 15,021 crore at the end of FY16 (Rs 15167.92 crore at the consolidated level). This represented a three-fold increase over the previous year. In comparison, Infosys reported contingent liabilities of Rs 188 crore on a standalone basis (Rs 340 crore consolidated) for FY16.
A contingent liability in accounting norms is a potential financial obligation that could arise in the future because of certain developments - but may or may not result in an actual outgo of money.
The large number, especially Rs 4,185 crore or 105 per cent spike in contingent liabilities pertaining to tax demands, has raised concerns.
Proxy advisory firm Stakeholders Empowerment Services (SES) has said in its report that this number is "unusually high" and has questioned why TCS has such high level of contingent liabilities compared to its peers. It wondered if TCS' peers are paying unnecessary taxes.
A TCS spokesperson declined to comment citing an internal embargo ahead of the upcoming annual general meeting (AGM). The 21st AGM of the company is scheduled to be held in Mumbai on Friday.
In its report SES was concerned about the "unusually high" contingent liabilities, specially its growth in the last year. "The explanation and information in the annual report of the company (TCS) is not sufficient. The company should provide information as to why year-on-year income tax disputes keep on adding up without any resolution," the proxy firm said.
Tax demands increase TCS contingent liability by Rs 4k cr It added that such an amount was not large enough to cause any disruption even if the entire liability crystallises given the high net-worth, market cap and cash in hand. "But, the investors would like to know the factual position," SES concluded.
The proxy firm did not oppose any of the resolutions that are up for vote at the AGM, including one for adoption of accounts.
SES analysis of the contingent liabilities of top three IT Companies indicated that TCS had very high contingent liability compared to its peers both in quantitative terms and also in percentage terms.
For purpose of comparison, SES excluded contingent liability in ordinary course of business such as Bank Guarantee, Letter of Credits or guarantees given to and on behalf of subsidiaries. Only liabilities on account of some dispute have been included.
The effective tax rate of TCS was the lowest among the three at 21.41 per cent against 23.73 per cent for Infosys and 22.73 for Wipro.
"SES is of the opinion that either Infosys and Wipro are paying unnecessary taxes or TCS is paying taxes lower than what are applicable taxes," the proxy firm said. According to an SES calculation, if tax rate of Infosys was to be applied to TCS, the latter would have ended up paying Rs 3,483 crore more tax.
On the other hand, the Mumbai-headquartered firm had highest proportion of contingent liabilities as a percentage of net worth at 25.52 per cent. For Infosys, the number worked out to a third of a per cent. Wipro is yet to declare audited numbers for FY16.
"Looking at disparity in liabilities as percentage of Net worth and also in absolute number a probable question arises when all the three companies work in the same sector why is that TCS has such high level of contingent liabilities compared to its peers?" SES said.
Further, the company has not provided any reasons for such high contingent liabilities and such a high increase in income tax demands, the report added.
Citing notes to accounts in the Infosys annual report, SES said Infosys followed a different strategy when it came to tax disputes. The Bangalore-based firm has been depositing a portion of tax demanded, with respect to denial of certain tax benefits, resulting in lower contingent liabilities.