The Supreme Court today turned down a Special Leave Petition by Vodafone International BV, the Netherlands-based telecom giant challenging the Income Tax department's show cause notice on its $11 billion overseas acquistion of Hutchinson Essar.

The notice of September 2007 asked  Vodafone to pay $1.7 billion as capital gains tax for the acquistion of its stake in  Hutchison Essar (now Vodafone Essar).

Vodafone filed a writ petition in the Bombay High Court on January 28, 2008 challenging the show cause notice.

According to Vodafone, as it had acquired the entire share capital of non-resident company CGP (Holdings) from HTI (BVI) Holdings, a foreign company having no presence in India, the share capital purchase was paid outside India without deducting tax at source.

The Bombay High Court, in its order, upheld the Income Tax department's contention and ruled that the transaction of purchase of shares by the company in Cayman Islands was chargeable to capital gains tax in India.

However Vodafone in its petition to the apex court contended that,"Section 9 (1) of the Income Tax Act merely provides that income accruing or arising from the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. There is no legal fiction deeming the transfer of a capital asset (taking place outside India) to take place in India".

Income Tax department officials said that the key to taxability was jurisdiction. IT department's former director general G C Srivastava said, "Issue of jurisdication relates to chargeability of income to tax".

Vodafone has to now convince IT authorities that the transaction of its $11.2 billion purchase of 67 per cent stake in Hutchison Essar in February 2007 falls outside their jurisdiction.

In a press statement Vodafone said that considering the important questions of juridiction, the IT authorities have been asked by the apex court to decide, as a preliminary issue only whether the department has jurisdiction to proceed against Vodafone.

Vodafone has been permitted to directly approach the High Court again against the IT department if it decides it has jurisdiction over the transaction.

According to legal experts the positive side of the order is that it allows Vodafone to approach the High Court in the event of the department's adverse finding which speeds up the process. The order also makes the High Court's order redundant (See: Vodafone loses petition over $2-billion tax claim) and the assessing officer would have to consider the matter afresh they add.