The Bombay High Court has dismissed Vodafone Plc's petition challenging a $2 billion capital gains tax demand by the Indian income tax authorities, relating to its $11.2 billion acquisition of Hutchison International's India mobile phone operations (See: Vodafone pays $10.9 billion to complete Hutch deal).

A division bench of Justices S Radhakrishnan and Anand Nirgud, however, granted Vodafone an eight-week stay on the ruling, during which time it can move the Supreme Court.

Vodafone claims that Indian tax authorities have no jurisdiction over the transaction and that it will move the Supreme Court against the high court ruling.

Vodafone Group Plc last year bought the Indian operations of Hong Kong's Hutchison Whampoa for $11.1 billion, to take a controlling stake in its Indian mobile joint venture with the Essar Group.

The unlisted Indian unit of Vodafone Group Plc received a $2 billion bill from the income tax department, which said Vodafone was liable to pay capital gains tax as most of the assets it bought were based in India,  a claim the UK operator had disputed (See: Hutch deal not taxable in India, claims Vodafone)

Vodafone challenged the income tax department's claim, saying the law at that time did not require it to withhold tax on the acquisition, and that capital gains tax was usually paid by the seller, not the buyer.

It also questioned the constitutionality of a retrospective change to the tax law in May this year that would allow the government to take action against companies that do not withhold taxes when making a transaction.

The income tax authorities, however, expect the buyer of assets to deduct the tax before making the payment to Hutch.

Vodafone Holdings International, a Netherlands-based company, picked up the stake of Hutchison in Hutchison-Essar to form the new entity Vodafone-Essar in a USD 11.2 billion deal in 2006.

I-T authorities issued a notice to Vodafone Essar last year for capital gains tax to the tune of around USD two billion. Though seller of assets has to pay this tax, I-T expected Vodafone to deduct the tax before making the payment to Hutch.

Vodafone, a majority shareholder in India's second largest private mobile telecom firm Vodafone-Essar, has a subscriber base of over 56 million.