How material is an unanticipated past tax liability of ₹6,436 crore in the case of a company whose average annual tax expenditure was approximately ₹5,500 crore in the recent few years?
HCL Technologies Ltd, a major player in the software industry, announced the results for the fourth quarter and FY25-26, yesterday.
The results carry a note that the company concluded, during the last quarter, a bilateral transfer pricing agreement with a specific overseas jurisdiction and the said agreement resulted in the above-mentioned additional tax liability.
The above matter may be of interest to tax professionals dealing with this domain of the law, which has, over time, become an irksome issue for companies that have transnational operations.
The note appended to the financials fails to specify as to which country(ies) was involved and the year(s) covered. Nor does it state whether this closes out all the open cases or otherwise.
In other words, besides firing a staggering number at the reader, the note only raises more questions than it answers. The company may have taken the approach that, for the purpose of publication of the results, the note given would suffice and choose to provide more details in the annual report.
The note states that the relevant proceedings resulting in the additional liability concluded sometime during the fourth quarter.
A search to find out if the company made any disclosure earlier proved futile.
The question that pops up in this connection is whether the company should have reported such additional liability arising, as and when the proceedings concluded, rather than await the declaration of the results and treat it as adequate disclosure.
Unless it was an extraordinary situation—the information was received only when the board was considering the accounts and then the numbers were plugged in!
The search for a better understanding of why HCL Technologies landed with such a big bill from the tax authorities, which is not seen among its peers in the same business, took one to the notes given in the 2024-25 annual report-
In India, Corporate taxpayers can opt for a specified lower tax rate in lieu of current applicable tax rate subject to taxpayers not claiming any specified tax incentives including tax incentives available to special economic zone units and carryover of unutilized MAT credit (‘new tax regime’). The Company will opt for new tax regime in the year new tax regime is beneficial to the Company. The tax returns are subject to examination by the tax authorities in the jurisdictions where the Group conducts business. The Group’s two major tax jurisdictions are India and USA. Tax examination is open in USA for tax years beginning 1 April 2017 onwards and for India, regular tax examination is open for tax years beginning 1 April 2022 and certain matters relating to prior years for which the tax assessment has already got concluded are subject to ongoing litigations, appeals and reassessment proceedings. The Company has significant inter-company transactions with its subsidiaries including in USA and UK. The Company has also filed for bilateral advance pricing agreements in certain jurisdictions starting from 1 April 2017 for some of which the resolutions have been reached during the year and accounted for in the consolidated financial statements. For certain jurisdictions, the resolution is yet to be reached. Resolution of these matters involves some degree of uncertainty; accordingly, the Group recognises income tax liability that it believes will ultimately result from the proceedings.
There is a reference to the pendency of the transfer pricing-related proceedings, though there is little information about the jurisdictions involved. More importantly, there is no mention of why these disputes have arisen.
The above note gives the impression that the company has been making enough provisions in this regard which assertion stands contradicted by the latest additional demand.
Did the company fail to assess the potential issues in due time, leading to such a significant amount hitting its books, like a bolt out of the blue?
It is also seen that there is no reference to any potential liability in this regard, in the annual report for 2024-25, under ‘contingent liabilities’. This is surprising. The note appearing under ‘taxation’ is no substitute for a proper disclosure under contingent liability.
The prosaic description in the board’s report of the tax risk should not be held against HCL Tech, as it is one of the few companies in the software services sector that identifies tax as an element in the risk analysis.
However, this features in the board’s report only since FY22-23. The company can pacify its conscience that by including it specifically, it has provided sufficient caution to the readers of the report that tax issues carry a higher risk in their case, than the other peers like TCS and Infosys, which do not include this in their reports!
BSR & Co LLP (for FY24-25), lists this area as the sole KAM (key audit matter).
Tax as a KAM appears only in HCL Tech’s case.
There are two ways of looking at this—a positive view is to credit the audit for highlighting this as a sole item, to attract enough attention. To be less charitable, is this a way of saying that the audit has looked at this area so thoroughly, and concluded that the company’s processes around this are very sound and no surprises are expected!
It would be taking a very generous view of both the audit and the board’s role that the BAPA process gave them no clue of the coming additional liability anytime earlier than 21 April 2026, when it was first disclosed!
The regulators, SEBI and NFRA, are repeatedly emphasising the need for better financial reporting and expect the audit committee and the auditor to raise their standards.
HCL Tech has an audit committee of five IDs (green mark). Barring one director, the entire board has proficiency in financial and risk management issues, as shown in the profile of the directors.
The question is, can the matter have been better handled by this committee of experts?
HCL Tech also has an issue that is not noticed in the case of its peers. The matter is explained in the note given in the annual report-
Undistributed earnings of the subsidiaries aggregate approximately ₹27,382 crores (31 March 2024, ₹25,185 crores). The Group has the intent to reinvest the undistributed foreign earnings indefinitely in its significant overseas operations or repatriate only to the extent these can be distributed in a tax-free manner. Consequently, the Company did not record a deferred tax liability on the undistributed earnings except for certain subsidiaries where the undistributed earnings are estimated to be in excess of the expected reinvestment needs.
With, possibly from a tax angle, a more aggressive business model as compared to its peers, does the company need an equally pushy audit committee to press for making timely provisions?
(Ranganathan V is a CA and CS. He has over 45 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
