New Delhi: British telecom giant Vodafone has questioned the I-T jurisdiction in slapping Rs 11,000 crore as capital gains tax over its buy out of Hutchison's 67 per cent stake in Essar-Hutchison joint venture, the final hearing on which began in Supreme Court on Wednesday.

Speaking before a three-judge bench headed Chief Justice S H Kapadia, Vodafone representative and senior advocate Harish Salve contended that transaction between two foreign companies -- Vodafone International Holding BV and Hutchison Communication International Ltd-- had happened outside India, hence the Income tax department cannot impose capital gain tax.

"Both the companies are foreigners and the transaction happened outside the country," Salve said, adding that the overseas transaction cannot be taxed.

He further contended that the deal was simply a transfer of control of "downstream companies by the two foreign companies and it cannot be a basis (for I-T Dept) to exercise jurisdiction".

The USD 11 billion-deal involved the sale of a Cayman Islands company owned by Hutchison to a Vodafone holding company in the Netherlands in 2007.

Salve while contending that there was no capital gains to Vodafone said that Hutchison controlled stake in Hutchison Essar joint venture through some downstream companies and
their control was transferred to Vodafone by an overseas transaction.

In the three-hour argument, the bench asked the company some questions on the nature of transaction and observations on this matter by the Bombay High Court, whose order it is
challenging before the Apex Court. Vodafone will continue its argument tomorrow.

The British telecom company had purchased 67 per cent stake of Hutchison in Hutchison—Essar for over USD 11 billion.

Following this, the I-T department raised a tax demand of about USD 2 billion on the company as it had failed to deduct (withhold) capital gains tax at the time of stake purchase.

This was challenged by Vodafone before the Bombay High Court, which ruled in favour of the I-T Department, following which Vodafone moved the Supreme Court last year.

The Apex Court had on November 15 directed Vodafone to deposit Rs 2,500 crore, along with a bank guarantee worth Rs 8,500 crore in the Rs 11,000 crore-tax demand. Further on April 15, the Supreme Court directed the telecom company to appear before the I-T Department, which had issued it a notice seeking penalty in the USD 2 billion tax case.

The department had on March 23 issued a notice to Vodafone, asking it why a penalty equal to the tax liability should not be imposed on it under section 271C of the Income Tax Act, and directed the company to be present before it on a specified date.

The I-T Department had sought to penalise Vodafone International, the holding company of Vodafone Essar, for its failure to present Cayman Island income tax returns and certain other documents.

The department had asked for these documents between January and October 2009.