New Delhi, Oct. 30: The income tax (I-T) department has issued a show-cause notice to Vodafone International Holdings for not paying tax on its $11.2-billion stake purchase of Hutchison Telecom’s Indian operations in 2007.

Vodafone had acquired a 67 per cent stake in Hutchison Essar from Hong Kong’s Hutchison Telecommunications International Limited. The I-T department had asked the telecom firm to pay $2 billion in tax for the transaction.

“Vodafone has to comply with the notice by November 16,” the Central Board of Direct Taxes (CBDT) said in a statement. “Vodafone will have to reply to a show-cause notice issued by the tax department and the board will then take a final view,” said a CBDT official.

The case is significant because of the huge tax payout and the precedent it can set for transactions that take place overseas involving the transfer of Indian assets.

In January, the Supreme Court had dismissed Vodafone’s appeal against the I-T department’s order. Vodafone had asked the apex court whether the Indian authorities have the jurisdiction over a deal between two parties incorporated overseas.

The court had then said the country's Central Board of Direct Taxes has the jurisdiction over the case.

Vodafone had turned to the apex court after the Bombay High Court dismissed an appeal on December 3, questioning the right of the authorities to impose tax on a deal completed overseas.

Vodafone paid $11.1 billion for a 67 per cent stake of Hutchison Essar (since renamed Vodafone Essar) in 2007. The government approved the deal in May of the same year. Hutchison, the seller, controlled its Indian subsidiary through a cobweb of companies that finally led to a Cayman Islands-registered firm to receive the payment from Vodafone.

The I-T department felt the Cayman Islands transaction was essentially a transfer of an Indian asset and said that Vodafone should have deducted tax at source when it paid Hutchison. In 2007, Vodafone received a show-cause notice asking it why it had not done this. Following this, the company approached the Bombay high court.

EOM