Friday's Supreme Court verdict that British telecom giant Vodafone wasn't liable to pay taxes for acquiring a majority stake in mobile phone operator Hutchison-Essar is set to bring a windfall for Essar.
The Ruias-controlled Essar will now seek a $886 million (about Rs 4,600 crore) refund from the Income tax department.
Company sources said the firm will soon file refund claim from the tax department.
In a landmark judgment the SC on Friday made it clear that companies cannot be taxed in India for acquiring assets if the deal is concluded overseas.
In July 2011, Essar sold its 22% stake in Vodafone-Essar for $3.8 billion (about Rs 19,000 crore). The company held this equity through its Mauritius subsidiary, Essar Communications Mauritius Ltd (ECML), but Vodafone had deducted $886 million from its payment to Essar towards taxes payable to the Indian government.
"Under the agreements signed in Port Louis, Mauritius, Vodafone has made a net payment of $3.32 billion, after deduction of withholding tax of $0.88 billion," the Essar group said in a press statement. "While Vodafone and ECML continue to believe that no tax is due on this transfer, it was viewed as prudent to deduct and pay withholding tax on a without prejudice basis and have ECL and ECom claim a refund of such withholding tax after following due process."
According to the sale conditions, this amount would go to Essar if the Supreme Court ruled in favour of Vodafone.
The income tax (I-T) department had slapped the Vodafone with a Rs 11,218 crore tax bill after it acquired 67% stake in Hutchison Essar for $11.1 billion (about Rs 55,000 crore) in 2007.
The case was significant on account of the tax amount involved and the precedent it could set for taxation on merger and acquisition (M&A) deals concluded abroad.
The I-T department argued that although Vodafone made the payment to Hong Kong-based Hutchison's subsidiary in Cayman Islands, it was essentially a transfer of an Indian asset. Hence Vodafone should have deducted tax at source when it paid Hutchison
The apex court rejected the I-T department's contention and held that the deal was "not a sham or tax avoidant preordained transaction," setting aside a Bombay High Court judgment which had ruled that revenue authorities were empowered to tax such transactions.
"The offshore transaction… is a bona fide structured FDI investment into India which fell outside India's territorial tax jurisdiction, hence not taxable," a three-judge bench headed by Chief Justice SH Kapadia said.