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Vodafone Group has been granted permission to challenge a tax claim by the Indian government over the UK mobile phone group's $10.7bn purchase of a stake in Hutchison Essar.
The UK group bought a 52 per cent stake in the Indian company in May, which is now called Vodafone Essar. Mumbai-based Essar Group owns 33 per cent, with Asim Ghosh, Vodafone Essar managing director, and Indian businessman Analjit Singh owning the remaining 15 per cent.
In August India's tax department served a "show cause notice" to Vodafone about the alleged tax liability, estimated to be $2bn. In November, Andrew Halford, chief financial officer of Vodafone, said the claim by India had "no basis".
Since September Vodafone has been battling to have its case heard before India's high court. The Mumbai High Court court admitted a writ petition that challenged the jurisdiction of the Indian tax authorities to issue the notice for recovery of the tax, Vodafone
Vodafone is arguing that the transaction took place between offshore entities owned by itself and Hutchison and was outside India's jurisdiction.
It also argues that any tax liability lies with the Hong Kong group as the seller, not with Vodafone as the buyer.
But India's tax department is seeking to show that, since most of the assets were in India, the deal was liable to Indian capital gains tax.
It also argues that under Indian law, the buyer in a deal is required to withhold any capital gains tax liability and pay it.
Foreign investors are concerned that a ruling against Vodafone could mean any offshore deal by a foreign company with a substantial presence in India might be subject to Indian tax.