Satyam says it is being taxed for fictional income

The company’s previous management had allegedly inflated revenue and profit figures

Outsourcer Satyam Computer Services has challenged in a court in India a demand for rupees 6.16 billion (US$134 million) from India’s Income Tax Department, adding a new twist to the problems at the troubled company.

The company’s management plans to argue before a court in Andhra Pradesh state in south India that the company is being taxed on income that was never earned, because the previous management of the company inflated revenue and profit figures for several years.

Satyam filed an application before the court on Tuesday after the Central Board of Direct Taxes rejected its appeal for relief, Satyam said in a statement.

B. Ramalinga Raju, the founder of the company, is being prosecuted by Indian investigative agencies for inflating revenue and other figures at the company.

Satyam was plunged into a financial crisis after Raju disclosed in January 2009 that the company’s accounts had been fiddled with for several years.

“Tax can only be imposed on income,” said Vineet Nayyar, chairman of Satyam, during a conference call Tuesday. Raju had fabricated a large amount of revenue, he added.

After the scandal broke in 2009, the Indian government sacked the company’s board and appointed its own nominees. It also ordered the company’s accounts to be restated for several years, a process that is partially complete.

Another Indian outsourcer, Tech Mahindra, acquired a dominant 43 percent stake in Satyam in 2009, as part of a revival package for the company.

The new management is now asking that income tax be assessed and levied on the basis of accounts that have been reconstructed in accordance with Indian accounting rules, said Hari Thalapalli, chief marketing officer at Satyam.

Satyam said in February that revenue and net profits grew in the third quarter, which ended Dec. 31. The company has stabilized at annual revenue of about US$1 billion and is not facing an exodus of customers any more, analysts said.

If the company has to pay the disputed taxes it will not go under, but a large sum of money, which would have gone into productive investment, may have to be diverted to pay taxes, Thalapalli said.

Satyam is, separately, also negotiating with the U.S. Securities and Exchange Commission in connection with the restatement of accounts in line with U.S. accounting rules. The company delisted its American depositary receipts from the New York Stock Exchange last year as it could not meet an Oct. 15 deadline to file accounts.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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