Essar, Tata, Birla to take heat of retrospective amendment

The biggest setback will be for the Essar group which last year sold its 33% stake in Vodafone-Essar to the Vodafone Group. Though it paid a withholding tax on the deal to the government under protest, it sought its refund this year after the Supreme Court’s judgment absolving Vodafone of any tax payment in the Hutch acquisition case. However, now it has lost any locus standi to seek a refund. Essar’s case is also not before any court of law; so it probably becomes the biggest loser.

Many other legal battles could be hit by the proposed amendment. These include Kraft?s buy of Cadbury, Tatas and Aditya Birla group acquiring the stake of AT&T’s stake in Idea Cellular, GE’s stake sale in Genpact and UK-based brewer SABMiller’s acquisition of the Indian assets of Australia’s Foster. In these cases, where tax demands are contested in courts, the companies concerned might witness a weakening of their case.

Most lawyers that FE spoke to were critical of the government?s move to bring in the legislation with retrospective effect, particularly to tax the Vodafone-Hutch case where the SC had clearly ruled in favour of the company.

Senior Supreme Court lawyer Harish Salve, who represented Vodafone in the case termed the government’s move as ?unfortunate?. ?It may be constitutionally correct but morally wrong. It may be legally permissible but smacks of unfairness on the part of the government to change the rules when the deals are already settled and that too after the apex court?s judgment,? Salve said. ?What message are you sending across the world? You are telling investors that India can?t be trusted. This is nothing but an ego battle. This can be seen from the dead silence maintained by the government when useless allegations are being leveled against chief justice SH Kapadia after the Vodafone judgment,? he added.

Concurred advocate Tarun Gulati, partner, Economic Laws Practice: ?The disturbing trend is that this a concerted effort to negate judicial pronouncements which are adverse to the revenue department.?

Following the Supreme Court ruling in January on the Vodafone case, the Essar Group had decided to seek refund of the $800 million withholding tax from the Income Tax department paid in July, 2011. The tax was paid as part of its $5.46 billion deal to sell off its 33% stake in Vodafone-Essar to Vodafone group.?While Vodafone and Essar continue to believe that no tax is due on this transfer, it was viewed as prudent to deduct and pay withholding tax. Essar will have a claim on the refund of the withholding tax, after following due process,? an Essar statement had said in July last. The issue of payment of withholding tax had come up because Essar?s 33% stake was structured in two parts ? 11% was held through an Indian entity while the balance 22% was held through a Mauritius-based entity.

The Tata group, the Aditya Birla group and US-based telecom major AT&T would also be affected as their cases currently pending in the Supreme Court would become infructuous with this change. The three firms were partners in Idea Cellular but in 2005, AT&T sold off its stake to the two Indian firms through its Mauritius-based entity. The issue is once again of paying withholding tax.

SAB Miller’s acquisition of the Indian assets of Foster in 2006 is also quite similar to Vodafone. Here, the Indian arm of SABMiller acquired the Indian assets of Foster but the deal happened between two companies overseas. The tax department issued a notice and the companies moved the Bombay High Court.