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The income tax (I-T) department in Mumbai has requested Vodafone to make an application to the assessing officer for determining the exact tax liability resulting from buying out 62 per cent equity stake from Hutchison in Hutchison Essar Ltd.
However, tax experts say the income tax department has no jurisdiction on a deal which has been undertaken between two parties overseas.
"As the deal (between HTIL and Vodafone) is through transfer of a Mauritius-based entity that holds majority stake in Hutch-Essar, IT department's demand of tax on capital gains will not stand," a senior executive of an international chartered accountant firm said. All will depend on which company's shares are being transferred, if it is an
Indian company then the tax demand is justified, he said, adding that this is not the case with the HTIL-Vodafone deal.
The tax authorities have also rejected Hutchison-Essar's stand in response to an income tax query dated March 15 that as a company it was not party to the transaction between Hutch Telecom and Vodafone, and therefore could not provide details of the transaction.
The income tax move comes when the Vodafone application would be discussed by the Foreign Investment Promotion Board on Thursday. Representatives from Hutch-Essar, Vodafone and Hutch Telecom will be presenting their views in this crucial meeting.
In its notice on March 23 addressed to Hutch-Essar, the income tax department has pointed out that section 195 of the Income Tax Act casts an obligation to a person responsible for paying any sum, which is chargeable to tax in India to a foreign company, to deduct income tax at source at the time of payment or credit.
Thus both the payer (Vodafone) as well as the payee (Hutch Telecom) is required to discharge their obligations or liability as provided in the Income tax Act 1961.
The notice has requested both Vodafone as well as Hutch Telecom to make an application to the assessing officer under the Income tax act for determining the exact tax liability from the transactions. A Vodafone spokesperson said, "We have no comments to offer on this issue."
However, an executive of an international consultancy firm said the income tax department has no jurisdiction to tax capital gains arising out of the transfer of shares of a foreign company, in this case a holding company of HTIL that holds majority stake in Hutch-Essar.
Vodafone has bought the shares of the HTIL subsidiary to gain control of Hutch-Essar and have not directly bought the shares of the Indian telecom company.
Rejecting Hutch-Essar's stand that they cannot provide any details of the Vodafone-Hutch transaction the income tax has pointed out that this contention is not true since it is the shares of the company which is being sold and therefore transaction details can be procured by them from the concerned parties.
Meanwhile, the law ministry is awaiting the Reserve Bank of India report on the details of the transactions before it gives its legal view on the issue.
The race for Hutch-Essar: Complete coverage
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