The tax authorities have refused to accept VSNL's contention that the licence fee it pays to DoT should be treated as a revenue expenditure and should, therefore, be treated as a pre-tax charge. VSNL went into appeal before the CIT (appeals) in October last year and is now pressing for an early hearing in the case.

The tax authorities had slapped a claim of Rs 240 crore for the year ended March, 1995, and have since been sending assessment officers in every subsequent year to identify their claims. As of September 30, 1998, these claims add up to around Rs 940 crore by VSNL's own admission in its recent GDR preliminary offering circular.

Since its appeal is yet to be heard, VSNL is expected to write to thetax authorities to expedite the hearing on the case so that they can proceed further. In the event of the appeal being dismissed, VSNL would need to appeal before the income tax tribunal.

"The Indian tax authorities have taken the position that the company is not entitled to a tax deduction it took in the year ended March 31, 1995, for licence fees paid by it to DoT. The Indian tax authorities claim that the company owes approximately Rs 240 crore in respect of taxes due for the year ended March, 1995. Tax refunds otherwise due to the company for subsequent years, amounting to approximately Rs 140 crore, have been applied by the tax authorities to a portion of the disputed claim. The outstanding amount of claim continues to accrue interest at a rate of 2 per cent per month", says the circular.

"The company disputes this claim and has lodged an appeal with the Commissioner of Income Tax (appeals)-I, Mumbai. The company has been advised by independent counsel that it has a very strong case and that if it'scurrent appeal is not successful, it is very likely that the company would succeed at the next higher level of appeal before the income tax appellate tribunal".

"Consequently, the company has not made provision for the potential liability arising from this claim. If the company loses its appeal, the tax authorities may make similar claims for the subsequent years, resulting in an aggregate liability of approximately Rs 940 crore as of September 30, 1998, and additional amounts for periods thereafter", the circular states.

Vimal Jain, telecom analyst with Prime Securities, says that VSNL is justified in claiming the expense as a revenue expenditure as it pays the fee on the basis of actual usage.

"The company pays Rs 2.5 lakh per circuit used per year and hence it is a clear case of revenue expenditure. We feel that there is no immediate threat to VSNL for paying up the money as a final decision in the matter would come through only after several years of litigation. In our opinion VSNL should win thecase without a problem," he said.