The income tax department has sent a notice to Tata Industries, raising a demand of Rs 298 crore (Rs 2.98 billion) on capital gains on the sale of shares in Idea Cellular, held through a wholly-owned Mauritius-based subsidiary, Apex Investments, to Birla TMT Holdings in India.
Although the amount is not large, the notice, which was sent last month, is significant because, I-T department sources said, it was the first discovered case of "round- tripping" or "treaty shopping" and has significance for Indian companies structuring offshore deals.
|A controversial call
The multiple Idea Cellular deals
2000: Idea Cellular set up after AT&T, Grasim, Tata Industries sign shareholder's agreement. AT&T invests through its Mauritius-based firm, AT&T Cellular Pvt Ltd
2004: Cingular Wireless acquires AT&T Wireless Services, renames it New Cingular Wireless Services Inc. Ownership, name of Mauritius-based entity changed from AT&T to New Cingular Wireless and MMM Holdings LLC
2005: Grasim and Tata Industries agree to buy Idea stake from New Cingular Wireless. On behalf of the Birlas, Indian Rayon buys Idea shares from AT&T Cellular, Mauritius. Tata Industries offers to buy out the company, AT&T Cellular Pvt Ltd, from Cingular Wireless and renames it Apex Holdings Mauritius Private Ltd.
2006: Tata group exits Idea Cellular by selling its stake in Apex Holdings and TIL to Birla group companies Birla TMT Holdings and Aditya Birla Nuvo Ltd. While TIL has paid capital gains tax on the transactions in India, it did not pay any tax on the shares transferred from its Mauritius subsidiary
The notice was sent under section 143(3) of Income tax Act , 1961, but the demand for capital gains has been made under section 93 (3) of the Income Tax Act. The department is of the view that though both the companies are based in India, the deal was routed through Mauritius to take advantage of the Double Taxation Avoidance Treaty and avoid paying tax in India.
Section 93 deals with avoidance of income tax by transactions resulting in the transfer of income to non-residents. Section 93 (3), however, states that the rule under section 93 will not be applicable to the Indian entity if the company can assure the tax officer that the transaction concerned is not structured for tax avoidance.
In this connection the department depended on the Securities Exchange Commission filings made by US-based Cingular AT&T, the merged entity of Cingular Wireless and AT&T, when it sold its shareholding in Idea.
Earlier, the international tax division of the department had sent a show-cause notice to the company for not paying tax deducted at source on payments made to Cingular AT&T.
The department has also said the transaction violates Foreign Exchange Management Act (Fema) regulations on overseas investments by Indian companies in joint ventures and wholly-owned subsidiaries.
These investments, according to the notice, have also violated telecom regulations in India since Tata Industries held two licences simultaneously - one directly and the other through substantial holdings in Idea, which it has now exited, the report said.
Officials said the Enforcement Directorate, which is responsible for enforcing exchange control laws, was also being asked to look into the issue.
In a response to a questionnaire, a Tata Industries said, "TIL has received an order from the I-T department under section 143(3) of the IT Act for assessment year 2007-08. TIL has filed an appeal with CIT Appeals and the hearing is awaited".
"With regard to other points, we would like to state that the acquisition of Apex Investments (Mauritius) Holding Private Ltd was in compliance with all applicable laws and regulations. We cannot offer any further comments at this stage as the matter is sub-judice."
The company did not, however, comment on queries about alleged Fema and telecom regulations violations.