Essar Communications seeks refund of the amount Vodafone deposited with tax department in VEL's 22% stake sale deal in 2011
New Delhi: Ruias-owned Essar Group is seeking a refund of Rs4,000 crore capital gains tax deducted six years ago when it sold stake in telecom venture to Vodafone Plc of the UK. The group’s Mauritius unit, Essar Communications in July 2011 had sold 22% stake in Vodafone Essar for $4.2 billion.
Vodafone, however, paid Essar $3.32 billion after withholding $0.88 billion (around Rs4,000 crore) as tax deducted at source (TDS). It deposited that money with the income tax department as tax on long-term capital gains made by Essar.
Officials said Essar Communications has moved the Authority for Advanced Rulings (AAR) seeking a refund of the tax deposited by Vodafone as it believes that no tax was due on the transfer under the India-Mauritius treaty.
The tax department is, however, contesting the claim of Essar Communications, saying the deal was structured in a way so as to misuse the provision of the treaty.
When contacted, an Essar spokesperson confirmed making an application for tax refund, saying tax was withheld by Euro Pacific Securities Ltd, Mauritius (EPSL)/Vodafone way back in July 2011. The application was filed by Essar Mauritius Companies in September 2012 before AAR and the same was admitted in July 2015. There have been multiple hearings in 2016-17, the spokesperson said.
“The capital gains resulting from sale of VEL (Vodafone Essar Ltd) shares are not subject to tax in India in view of Article 13(4) of the India-Mauritius tax treaty and in light of settled judicial position established by catena of judicial pronouncements made by the Supreme Court of India, high courts and AAR, and (it) has also been confirmed on several occasions by the government of India," the spokesperson said.
The tax deducted in 2011 was based on the rupee exchange rate of around 45 against the dollar. The figure currently is nearly 65.
Essar Communications had held the shares in Vodafone Essar through its subsidiaries Essar Communications (ECL) and Essar Com (ECom).
Sources said these two companies were liquidated just before the stake sale to Vodafone and following liquidation, the shares were transferred to the Mauritius-based parent. This arrangement, the tax department alleges, led to “misuse" of the India-Mauritius tax treaty.
As per provisions of law, assessees can approach AAR for refund provided that no scrutiny has been initiated or notices issued or the case is not pending in any tribunal or court.
The Essar tax refund case is likely to linger at AAR as the post of chairman has been lying vacant since August 2016 after Supreme Court judge V.S. Sirpurkar retired. Earlier this month, the government named retired judge of Madhya Pradesh high court K.K. Trivedi as the vice-chairman of AAR. Trivedi has so far not assumed charge.
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