After the work for establishment of the refinery commenced, the I-T department noticed that all three contracts were given to Essar Oil's sister concern, which had obtained a certificate under section 197(1) of the I-T Act for tax deduction at a lower rate on various contract payments to be made to Essar Projects. An I-T officer raised objection for a brief period of five months - from April 1 to September 1, 1997 that no TDS was paid by the Essar Oil Ltd.

The concerned officer issued a show cause notice as to why Essar should not be treated as a defaulter for recovery of dues towards TDS amount. The officer calculated that during these five months, the company paid nearly Rs 92 crore to its sister concern and the TDS deductible at 2% was around Rs 1.84 crore.

While the company claimed that most of the amount was paid towards procurement of equipments, the taxation department maintained that the three contracts made were essentially one contract only and that was for founding of the refinery. The issue reached the I-T commissioner, who opined that the company was liable to pay Rs 77.78 lakh towards TDS.

This was not acceptable to the company, which appealed before the I-T Tribunal at Rajkot and then before the HC, where Justice Akil Kureshi and Justice Sonia Gokani upheld the earlier decisions. (Times of India)