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The Income-Tax department has raised a tax demand of Rs 45 crore on Tata Industries (TIL) on account of the Rs 660 crore purchase of a stake in Idea Cellular stake from AT&T in 2005. It is the first demand notice sent by the Income-tax department on a cross-border deal that resulted in a change of ownership of the company. The department has already brought under its scanner several such deals including the acquisition of Hutch-Essar by Vodafone, Foster’s beer by SABMiller.

The demand notice was issued by the office of additional director of Income Tax (international taxation) range II. The order was passed on March 28.

TIL argued that it was not bound to pay tax in India on a deal struck overseas. TIL has taken a stand that there was no transfer of capital assets in India following the deal. The situs of a capital asset is the place where registers of the members of the company is kept and maintained and in this case the situs of shares is Mauritius. India has a Double Taxation Avoidance Agreement (DTAA) with Mauritius and hence tax is not payable in India on making payment for the purchase or the idea cellular stake from AT &T Cellular, based in Mauritius.

Idea Cellular was held by Birlas, Tatas and AT&T. When AT&T wanted to exit, it had offered its stake to the Birlas and Tatas equally. TIL acquired the shares of a company AT&T Cellular Services Mauritius , Mauritius. AT &T Cellular Mauritius was held by two US companies, Cingular Wireless Services and MMM Holding. TIL entered into an agreement on 28 September 2005 with these two US companies for purchase of shares of AT&T Cellular.

However, after the exit of AT&T, the Income-tax department initiated a probe into the deal. The department treated the transaction as one between an Indian company and a US company.

The department also treated TIL as an agent under Section 163 of the Income-tax Act and held that assessee is in default under section 210 of the I-T Act for failing to deduct tax while making payment of Rs 660 crore to the two US-based companies.

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