The Hindu Business Line : I-T dept issues show-cause notice to Vodafone Essar

Taxing times
If it is finally proved to be an agent of Vodafone, then the I-T department can assess the agent for recovery of various tax liabilities.

K.R. Srivats

New Delhi, Sept. 4

Vodafone’s $11.1-billion buyout of Hong Kong-based Hutchison Telecom International’s direct majority holding in Hutchison-Essar has come under Income-Tax Department’s lens.

The I-T Department has issued a show-cause notice to Hutchison Essar (now Vodafone Essar) as to why it should not be treated as an “agent” of Vodafone, sources familiar with the situation said.

A show-cause notice has legal sanctity and if Vodafone Essar is finally proved as an agent of Vodafone, then the department, according to tax experts, can go ahead and assess the agent for recovery of various tax liabilities on transactions of the non-resident entity.

Seeking information

In the months after the Foreign Investment Promotion Board clearance to the Vodafone-Hutchison deal, the tax department had sent letters to Vodafone Essar seeking information on taxation issues.

Official sources said that now a show-cause notice has been issued, and that the stage of determining and proving any tax liability has not been reached. “First, let it be ascertained whether agent relationship is established or not. If it is, then the other procedures will automatically follow,” sources said.

The issue of who can be regarded as an “agent” of non-resident is dealt in Section 163 of the Income-Tax Act, 1961. Experts also point out that the department may go by a tax provision that deems all incomes accruing or arising through any business connection in India, or through any property in India, or through any transfer of capital asset situated in India as income that accrue or arise in India and hence taxable here.

Intensive examination

In April this year, the FIPB had given its consent to the Vodafone-Hutchison deal only after intensive examination of the shareholding pattern and stakeholder interests in the transaction.

The size of the deal and other shareholding complexities on indirect holdings had prompted the FIPB to recommend to the Government to completely review the direct and indirect holding of sectoral caps (for all sectors).

The FIPB wanted indirect holding to be defined in such a way that ensures it was only a genuine Indian party with full freedom and “not an Indian party who cannot sell his shares”.

The shareholding of two individuals — Mr Asim Ghosh and Mr Analjit Singh — in Hutchison Essar had come in for some scrutiny before the Vodafone-Hutchison deal was cleared.