Vodafone and Essar had entered the Joint Venture (JV) in 2007 of which Vodafone had the majority stake. Under an agreement signed in 2007, Essar had the option to sell its 33 percent in the UK company's Indian arm for $5 billion by 2011. However, the contract had no provision for withholding tax.
Essar had held 22 percent stake in the JV through its Mauritian arm and the remaining 11 percent through Indian subsidiary.
Vodafone did not deduct withholding tax while paying $11 billion for acquiring a dominant stake from Hutch Essar in 2007 and this skip has involved in prolonged litigation with the Indian tax authorities.
Both, Vodafone and Essar, continue to believe that there is no tax liability due on this transfer because under the agreements signed in Port Louis, Mauritius, Vodafone has made a net payment of $3.32 billion, after deduction of withholding tax of $0.08 billion, according to Essar.
The government argued that the underlying asset of the seller was the shares of Vodafone India and hence liable to pay tax on it.
Friday they came on conclusion to pay withholding tax on a without prejudice basis and they would claim a refund after following due process.
Vodafone also withdrew its tax dispute petition in the Authority for Advanced Ruling (AAR).
Vodafone bought out its Joint Venture partner's 33 percent stake for $5 billion early this year but now the deal has been restructured and the revised deal amounts to $5.46 billion factoring in $880 million tax liabilities which was skipped earlier. Under $880 million tax liabilities, Vodafone's part in tax burden counts for $460 million, while that of Essar's $420 million.
With this the 22 percent stake of Essar works out to be $4.2 billion as against $3.8 billion decided earlier and rest, the value for the 11 percent stake has now been revised to $1.26 billion as against $1.20 billion decided earlier.
The transfer of shares from Essar to Vodafone for the 22% stake was completed in two tranches on June 1 and July 1. The payment of $1.26 billion for the remaining 11% stake held by Essar will be made by 15 February 2012. The transfer of shares would be completed after obtaining all necessary approvals expectedly by February 15, 2012.
The stake sale marks the end of a four-year partnership between Vodafone and the Essar group in India.
Shashi Ruia, chairman, Essar Group, said, "We were one of the early entrants in the telecom space in 1995 and we are really pleased that Vodafone Essar has grown to become one of the premier telecom companies in the country with over 140 million subscribers. We have also enjoyed an extremely successful relationship with Vodafone and we wish them all success in the future."