Income-tax notices to Reliance, Wockhardt over ECB payments

The income-tax department has sent notices to Reliance Industries (RIL) and Wockhardt to pay withholding tax on interest payments for external commercial borrowings (ECBs).

While the notice to RIL has been issued for interest payments on ECB for December and July 2005, the matter with Wockhardt pertains to interest on loans raised in 2003-04.

In case of RIL, the development pertains to a 2005 case, wherein an I-T appellate tribunal had upheld RIL's view of non-payment of the tax, but the income-tax department had moved the Mumbai High Court against the appeal. The matter is now under pending before the high court.

Corporates are required to pay 20 per cent withholding tax to the I-T department on interest payments of ECB loans.

While a faxed query to Wockhardt did not elicit any response, an RIL spokesperson said the matter was settled by the I-T tribunal of Mumbai in favour of Reliance, as a result of which no withholding tax was required to be deducted from the interest payment being remitted to foreign lenders.

Wockhardt, on the other hand, has explained to the I-T department that the borrowings were used by the company for export earnings outside India. However, the department was of the view that the material exported originated in India.

According to industry sources, Reliance had in 1996 borrowed around $1.3 billion overseas, which was to be paid back in 2016 and 2026. Since the amount was to be used for import of capital goods, the government had exempted the company from paying withholding tax on interest payments on this loan.

However, when the company applied to the government for retaining ECB proceeds aboard and use it to buy back outstanding overseas loans, the government withdrew the exemption on the ground that the loan was not used for the end-use mentioned in the earlier proposal in 2002.

Thereafter, a writ petition filed by RIL against the government order in Delhi High Court was rejected and company was asked to take up the issue with tax officials.

Following which, RIL approached the tribunal, which passed an order in February 2005 and upheld the exemption.

Subsequently, the income tax department moved the Mumbai High Court in August 2005.