Vodafone has received a tax demand of Indian rupees 112.2 billion (US$2.5 billion) from India's Income Tax Department in connection with the company's $11 billion payment in 2007 to Hutchison Telecommunications International for a 67 percent stake in joint venture Hutchison Essar.
The mobile operator was subsequently renamed Vodafone Essar.
In a case that has run for about three years, and in various courts in India, the government has insisted that Vodafone should have collected tax from Hutchison before making the payment for Hutchison's stake in the Indian joint venture.
India's income tax rules require that tax should be deducted before a payment is made to a foreign company or nonresident for assets in India. Failure to deduct tax, or to pay the tax after deduction, makes the principal officer and the company an assessee in the default of taxes, according to the rules.
The order on Friday from the tax department has invoked both these rules to serve the notice on Vodafone International Holdings BV, a part of Vodafone Group. The company is allegedly in default for failure to deduct tax before making the payment to Hutchison.
Vodafone said in a statement on Friday that it disagrees with the tax calculation. The tax authority is attempting to interpret Indian law as it has never been interpreted for the past 50 years, and this interpretation also goes against internationally recognized tax norms, it added.
The company has so far claimed that it is not liable to pay tax on the transaction that was executed outside the country by two foreign companies.
The tax demand is to be paid within 30 days of the receipt of the notice of demand.
In an interview recently with a local daily newspaper, The Economic Times, Vittorio Colao, CEO of Vodafone, linked future investments in India by the company to the tax issue.