Tax dept asks DoCoMo to pay ~2,500 cr on Tata Tele award

NTT DoCoMo, the Japanese telecom major, has been slapped with a tax demand of up to ~2,500 crore, after it won ~8,256 crore as damages from Tata Sons on sale of its shares in Tata Teleservices. DoCoMo is the first multinational after Vodafone to face such a demand from the tax department in the country.

According to a legal source, the tax department is considering the arbitration award and damages as DoCoMo’s income and not as capital gains on the sale of its 26 per cent stake in Tata Teleservices. Under the tax laws, the tax rate on income by way of damages is higher than that on capital gains.

DoCoMo had applied for a withholding tax certificate from the Indian tax department before the funds can be repatriated overseas.

The tax demand could once again create a flutter among multinationals doing business in India. Earlier, Vodafone Plc faced a $2.5-billion tax demand in 2007 for buying Hutchison’s stake in Vodafone India.

Later, even after the Supreme Court came out with an order in 2012 quashing the tax department’s order, the government came out with a retrospective tax law and raised a fresh demand and slapped a penalty. A similar fate awaited Cairn Plc and Shell, which sold shares in their Indian subsidiaries.

After the National Democratic Alliance government was elected in 2014, the Vodafone case went into arbitration and India recently made a fresh tax demand on Hutchison.

NTT Docomo declined to comment on the current development.

Tax experts said Docomo will have to fight its case in the courts. “Firstly, it is important to recognise the fact that the Delhi High Court judgment has held that the amount payable to Docomo is in the nature of damages, and not a sale price of shares. As such, the issue of whether damages are income or capital receipt has been a matter of litigation,” said Ketan Dalal, managing partner of Katalyst Advisors.

He added, “In several cases, it has been held that such damages are capital receipts, not liable to tax. This view seems to be the better view, and hence, the amount of damages payable to Docomo should not be liable to tax in India.”

With the fresh tax demand, DoCoMo’s plan to exit India gets tougher after its tumultuous relationship with the Tatas. The Japanese company had invested $2.7 billion in Tata Teleservices, with an agreement that the Tatas would buy back its shares at a minimum of 50 per cent of its acquisition price if certain performance targets were not met. In July 2014, Docomo, exercised its put option and asked Tata Sons to acquire its entire stake in Tata Teleservices at the preagreed price of ~58.04 per share. Tata Sons then sought permission of the Reserve Bank of India (RBI) to purchase DoCoMo’s shares at the pre-determined price. But the RBI rejected the application and said the acquisition can only be made at fair market value prevailing at the time of the acquisition as pre-determined valuation is not allowed under Indian laws.

When Tata Sons conveyed to Docomo its willingness to acquire the shares at the fair market value of ~23 a share, Docomo reiterated its position that its shares will have be acquired at ~58 per share and moved the London Court of International Arbitration. In June last year, the arbitration court asked Tata Sons to pay to Docomo an amount equivalent to ~8,257 crore (about $1.17 billion) towards damages against tender of shares, interest and costs. Tata Sons again sought the RBI’s approval to make the payment. The RBI declined approval and again reiterated its earlier position.