In a potentially controversial move that could extend the indirect tax department’s ambit to capital transactions and pit it against the income-tax wing, the former could soon ask the Tata Group to shell out some Rs 1,600 crore as 18% goods and services tax (GST) on the payment of $1.2 billion it made to Japanese telecommunication firm NTT Docomo — a former JV partner of Tata Teleservices — as damages following an arbitration.
In a potentially controversial move that could extend the indirect tax department’s ambit to capital transactions and pit it against the income-tax wing, the former could soon ask the Tata Group to shell out some Rs 1,600 crore as 18% goods and services tax (GST) on the payment of $1.2 billion it made to Japanese telecommunication firm NTT Docomo — a former JV partner of Tata Teleservices — as damages following an arbitration. Official sources confirmed to FE that the Central Board of Indirect Taxes and Customs (CBIC) is currently examining if provisions of GST could be invoked for the transaction that took place a year ago. They added that since NTT Docomo is a foreign entity, the tax liability could fall on Tata Group (the liability is reversed from the supplier of service to the recipient, which in this case is Tata Teleservices).
The tax department is understood to have begun the investigation into the matter after getting the go-ahead from finance secretary Hasmukh Adhia earlier this year. However, Tata Sons are still to be served with notices as the probe report is being finalised. Cases involving transaction of shares or award of arbitration amount to a foreign company by a domestic firm have hitherto been treated exclusively under the direct tax provisions.
In April last year, the Delhi High Court allowed Tata Sons to pay NTT Docomo $1.2 billion upon termination of their telecom JV. The HC had upheld the award passed by an arbitration court in London and declared the same as enforceable in India, despite the RBI challenging it on grounds of its rule against a fixed rate or return on existing a company. (When they formed the JV in November 2009, Docomo and Tata Tele had agreed that the latter could exit in five years by selling to a third party or the Tatas at a minimum of 50% of the acquisition price).
In this case, a joint approach agreed upon by the JV partners to enable enforcement of the arbitral award is what the taxman thinks brought the transactions under GST. Tata Sons paid Docomo to ensure that the latter doesn’t lay hands on Tata Group assets in Tata Teleservices and withdraw other enforcement actions instituted by the former JV partner elsewhere. The GST Act says that, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act..” in lieu of payment would be considered as supply of services. The concept of forbearance was introduced in the service tax regime in 2012 but has rarely been used. This means that there is almost no precedent of such a case in domestic law and jurisprudence.
Sources said that the matter was critical as Tata Teleservices was being liquidated currently with its assets being sold to different entities. This tax liability would be harder to recover once the company is fully liquidated. “GST is an indirect tax, which is to levied on the ‘supply of goods or services’. Extension of such levy to capital transactions including equity re-purchase agreement under the garb of agreeing to the obligation to refrain from an act, or to tolerate an act seems to be illogical and irrational,” Rajat Mohan, partner, AMRG & Associates said.
The indirect tax department’s move comes at a time when a final hearing in Cairn Energy Plc’s challenge to a `10,247 crore retrospective demand for capital gains tax by India began in The Hague in August. An international arbitration tribunal will in February next year is expected to start hearing in Vodafone’s challenge to India’s `22,100-crore tax demand on the British telecom giant’s purchase of Hutch’s India assets.