The Income Tax department has demanded that Hutchison Telecom International (HTIL) pay capital gains tax of about $1.9 billion on the gains that it is likely to make by selling its stake in Hutchison-Essar.

The international taxation unit of the Income Tax department in Mumbai has issued a notice to Hutchison-Essar, asking it to impress upon HTIL the need to discharge its tax liabilities on the gains.

...it has come to our knowledge that HTIL has made substantial gains from their investment in Hutchison Essar. You are requested to impress upon HTIL to discharge their tax liabilities on the gains made, the notice dated March 23 and served on the principal officer of Hutchison-Essar says.

This issue relates to HTIL and not to Hutch Essar. Secondly, this is a transaction between a non-resident and a non-resident. It will attract tax in the respective jurisdictions, said Asim Ghosh, managing director Hutch Essar told ET.

The tax demand comes just weeks after the Hong Kong-based Hutchison concluded a deal to sell its majority holding in Hutch Essar to Britains Vodafone in a deal valued at about $18.8 billion. The I-T department notes that the HTIL has said that the transaction is expected to generate a profit before tax of about $9.6 billion.

Your attention is directed to Section 195 of the Income Tax Act which casts an obligation on a person responsible for paying any sum which is chargeable to tax in India to a foreign company to deduct income tax at source at the time of payment credit. Thus, both the payer and the payee are required to discharge their obligations/liabilities as provided in the Income Tax Act, the departments notice continues.

Your stand that you are not in a position to submit requisite details since you are not a party to the transaction is not correct since the shares of your company are being sold and you can provide the information from the parties concerned, the notice concludes.

R Sriram
(With inputs from M Padmakshan)