The HCL group had filed a writ petition before the Delhi High Court seeking a stay against the proceedings of the I-T department. The court has, however, asked the department to continue with its proceedings and to produce before it the assessment order. The HCL group has challenged the assessment order in the court. The case will come up for hearing on April 19.

The HCL group was raided by the I-T department in January '02. The department claims that the documents seized during the raid allegedly provide documentary evidence of capital gains tax evasion. Company sources, however, claimed that the I-T department had wrongly implicated the company in the case.

Senior sources in HCL say the dispute has arisen primarily on account of a new interpretation of the tax provisions that's now being put forth by the I-T authorities. This, HCL sources say, raises issues about the pricing principles under the provisions of the I-T Act.

HCL Corporation, Slocum Investment and Shiv Nadar Investment sold, on June 10, 1999, 70 lakh equity shares of HCL Consulting (now HCL Technologies) to Mauritius-based Wintech Investments, an overseas corporate body, at a price of Rs 50 per share.
Now called HCL Holdings, Wintech Investments is owned by Shiv Nadar's brother SN Balakrishanan, who is an NRI. HCL Technologies was listed on the stock exchange in December, 1999. HCL Consulting (the company whose shares were sold) was later merged with HCL Technologies.

From the documents seized during the search, the I-T department claims to have gathered evidence that the share price was allegedly undervalued and the actual price was much higher than Rs 50. HCL Corporation and Shiv Nadar Investments were later merged into Slocum Investments in August '01.

Company sources say, though the transaction pertains to a period before Sebi relaxed IPO norms for IT companies on October 15, '99, the company has not hidden this fact from the public.
After the merger of HCL Consulting with HCL Technologies, and the subsequent IPO of HCL Technologies in January '00, the company claims this deal was revealed in the IPO filing with Sebi.

The I-T department alleges that the apparent reason for transfer of shares to the Mauritius-based associated company at a low price was to evade capital gains tax in India.
Capital gains tax is absent in Mauritius for a certain class of overseas investors. This, according to the tax authorities, also ensured that the company didn't lose control over HCL Consulting (now HCL Technologies). Any attempts to evade capital gains tax is illegal under Section 92 of the Income Tax Act, 1961.

According to the I-T department, the seized documents show that key persons in HCL group allegedly knew that the real price of HCL Technologies shares was much more than Rs 50 per share.
HCL sources, however, say the price of Rs 50 per share was the correct price at that point of time. All transparency was maintained when the valuation was done. The price was approved by the Secretariat for Industrial Assistance (SIA) and RBI, they claim. It was also apparently disclosed in the IPO document in November 1999.

The I-T department alleges that the valuation was not carried out by someone who has an expertise in valuing technology stocks, such as Merrill Lynch, Alex Brown, JP Morgan, Morgan Stanley, Salomon Brothers, Goldman Sachs, Robert Stevenson or Lehman Brothers. The department claims it has taken all these names from a security purchase agreement, dated January 27, 1998, between the Shiv Nadar group and Arjun Malhotra group.

However, later when HCL Consulting shares were sold to Wintech, the task for valuation was given to a CA firm called Purshottaman Bhutani & Co and not to any of these bulge-bracket banks.
HCL sources, however, defend the appointment of Bhutani & Co saying that any chartered accountant is capable of doing the valuation, in accordance with the existing regulatory rules.

The I-T department has calculated the actual share price at Rs 1,807. The total undisclosed income of Slocum comes to Rs 1,319 crore. At a rate of 60% tax (including penalty) and 2.5% surcharge, the total demand on Slocumm is of Rs 811 crore.