Mumbai: The Bombay High Court has reserved its order on a disputed $2 billion capital gains claim by the income tax department, arising from telecom major Vodafone's acquisition of Hutchisson-Essar in 2006.

A division bench comprising Justices S Radhakrishnan and Anand Nirgude also asked Vodafone and the income tax department to submit their written arguments in the matter within one week.

Vodafone had approached the court soon after the I-T department issued it a show-cause notice.

Vodafone is contesting the tax claim saying the transfer of shares between two foreign companies was not taxable in India.

A subsidiary of Vodafone Group, Vodafone International (a Dutch company) picked up Hutchisson's (based in Cayman Islands) 66 per cent stake in Hutchisson-Essar to form the Vodafone-Essar in India in $11.2 billion deal in 2006.

Vodafone International had bought out a Cayman Islands company called CGP investments, which was owned by Hutchison. CGP owned 52 per cent stake in Hutchison Essar, the Indian telecom company, through several Mauritius entities.

The department had issued a show-cause notice to Vodafone Essar asking 'why it should not be treated as an agent of Hutchison International'.

The department is claiming capital gains under Section 9(1)(i) of the Income Tax Act as they are of the view that the transaction involved transfer of an Indian asset for which even the Foreign Investment Promotion Board's nod was taken.

Vodafone is contesting the claim that the erstwhile Hutchison Essar was as an 'agent' of the non-resident (Hutchison International) under Section 163 of the Income Tax Act, 1961.

Income tax authorities argue that Vodafone is liable to pay capital gains tax as the asset is in India even if the transfer of stakes took place between two foreign companies.

Income tax authorities have also written to the UK and Dutch authorities seeking details of the Hutch-Vodafone transaction. They have sought details of the agreement between Vodafone and Hutchison which would have been given to tax authorities in these countries.

The I-T department counsel had on July 7 said in the High Court that Vodafone had failed to produce the agreement between Hutchison and itself, which alone could reveal the true nature of the transaction.

Vodafone, at Tuesday's hearing, offered to file the 'sale purchase agreement it had signed with Hutchison.'

The department is yet to carry out an assessment of the transaction and books of accounts which takes place only after it has examined the reply to the show cause notice. 

The battle between Vodafone International and the I-T department may now shift to the Supreme Court as the party that loses in the Bombay High Court will approach the apex court.