Tata faces tax claims for idea cellular deal!!

Aisha (Finance Professional) (8099 Points)

22 November 2007  
Idea Cellular has raised fresh heckles for Tata Industries with the income tax department accusing it of not deducting tax at source on $150 million it paid to AT&T Cellular for acquiring its stake in the company besides avoiding capital gains tax on a part of the equity the Tata group company sold to Birlas.

While a Tata spokesperson said the company had submitted all the details to the authorities, a similar dispute between the I-T department and Vodafone is holding a final decision on the notice to Tatas, which was issued a few months ago. The department has served a notice on Vodafone for its failure to deduct $2 billion tax while acquiring Hutchison's shares in Hutch Essar. Sources said authorities had also written to Idea a few months ago but no notice has been served on Birlas.

The I-T department, which woke up to the $150 million transaction between Tatas and AT&T Cellular (P) Ltd Mauritius nearly two years after the Indian conglomerate acquired 75.5 lakh shares from the US giant, issued a notice under section 201 of the I-T Act.

The department said that as per law, Tata Industries should have sought department's permission before remitting the amount, as was done by AV Birla group company Indian Rayon, which also acquired AT&T's equity at Rs 18 per share in a deal worth $150 million.

While accusing Tata of unilaterally deciding that the income of US companies was not taxable in India, the department said with AT&T's source of income being in India and an indirect transfer of capital assets in India, the American company was liable to pay tax.

Though AT&T had invested in Idea through Mauritius, the department believes it was primarily a conduit company and effectively, the US entity invested in India resulting in a capital gains liability in India.
On its part, the Tata group has responded by saying that it had purchased shares of an overseas company (AT&T Mauritius) as direct investment in wholly-owned subsidiary under the RBI's automatic route, which did not require tax deduction at source.

The other dispute with Tatas relates to its sale of Idea shares to Birla group in June 2006. The deal involved sale of shares to Birla TMT Holdings for a consideration of Rs 2,200 crore and Aditya Birla Nuvo for a little under Rs 700 crore for which advance tax of around Rs 500 crore was paid.

There was a third transaction too which involved the sale of 37 lakh shares by Apex Investment Mauritius Holdings, a wholly-owned subsidiary of Tata Industries, for a consideration of Rs 1,500 crore. AT&T Cellular was renamed as Apex Investment after the deal with the Tatas in 2005.

Tatas did not pay capital gains tax on this transaction arguing that capital gains, if any, will accrue to the Mauritius company which was exempt from paying taxes in India on account of the double taxation avoidance agreement between the two countries. The stand has been questioned by the tax department which is expected to issue an order in the next few weeks.