A day after the Supreme Court cleared British telecom major Vodafone Plc of its Rs 11,000 crore tax liability, its former Indian partner, Essar, is seeking a refund of tax.
Sources in the metals-to-shipping group, Essar say that Vodafone had deducted as much as $880 million (Rs 4,426 crore) as withholding tax, in anticipation of a possible tax claim, while purchasing Essar's stake.
The deal was sealed by Vodafone Plc and the Essar group in July last year, after going through rough patches like a court case and a series of negotiations. Withholding tax is a measure taken by the government to ensure that the parties involved do not evade taxes later, leading to litigations.
Back then, the case between Vodafone and the Income Tax department was still being heard in the Supreme Court. And Vodafone had faced legal setbacks, especially from Bombay High Court which upheld IT department's jurisdiction in claiming tax.
“They were under pressure from the income tax department then. So, it was deducted. But now we have to ask them,” said an Essar group official. An e-mail sent to Vodafone Plc on the matter did not elicit any response, while Essar officials did not comment on the matter.
The provision to hold withholding tax was made by both the companies as a part of the settlement. Because one of the Essar group companies which held stake in Vodafone Essar, the erstwhile Vodafone India. Essar Communications Mauritius (ECML), the foreign entity, held 22 per cent stake in the company, while the rest 11 per cent was held by a domestic entity.
Vodafone has paid $400 million as its part of the tax, while the Essar group has paid $480 million (Rs 2,414 crore) . Tax refunds, if any, would be collected by the Essar group at a later date.
"While Vodafone and ECML continue to believe that no tax is due on the transfer, it was viewed as prudent to deduct and pay withholding on a without prejudice basis and claim a refund after following the due process," Essar group had then said in a press release.
Vodafone Plc which won a case against the Income Tax Department in the Supreme Court yesterday, upheld the company's claim that no tax was payable for its 2007 transaction with Hutchinson Essar. The revenue authorities had claimed that even though the deal was done between two foreign entities via share transfer, since it involved Indian assets, it should be taxed in India. It had charged Vodafone Plc for not deducting tax at source. The Supreme Court verdict however dismissed this charge, leading to clarification of taxability of such offshore transactions, in addition to that of Vodafone.
