The income tax (I-T) department has widened the scope of the investigation of the tax liability on Vodafone-Essar, Indias fourth-largest mobile service provider, to other offshore transactions associated with Vodafones buyout of Hutchison Whampoas 67 per cent stake in an $11.08 billion deal in 2007.

Sources close to the development said the department had sent a notice to the company seeking details and clarifications on a host of issues besides the original agreement between Hutch and Vodafone to establish the jurisdiction of the tax authorities to determine the tax liability.

These moves follow a Supreme Court order in January 2009 to the effect that Vodafone should present its case to the tax authorities first and submit a copy of the share purchase agreement, the deadline for which expires by the end of this month.

Sources said the details sought from the company not only involve Vodafone but also Essar, the 33 per cent partner. Among other things, the department has sought clarifications on a reported payment of Rs 1,600 crore to Essar Global, a Mauritius-based arm of Essar, by Vodafone for not exercising the first right of refusal in the transaction.

The I-T department has questioned the fact that the payment was made in Mauritius when the company holding the stake is in India and the original Hutchison-Vodafone deal took place in the Cayman Islands. Tax officials think the Mauritius route has been adopted only to evade capital gains tax, since India and Mauritius have a double taxation avoidance agreement. Capital gains tax in Mauritius is zero.

The department has also sought the agreement to split the tax liability on the deal in the ratio of one-third and two-third between Vodafone and Hutchison, respectively. Department sources said even if they knew about the agreement, they wanted the information to be furnished by the company.

Sources also said Vodafone-Essar may approach the high court after the deadline expired to contest the additional details.

In response to a query detailing these developments, a Vodafone group spokesperson said: We have been fully cooperating with the tax department, including this latest request for further information. Vodafone is hopeful this will help the department determine the issue of jurisdiction, in line with the Supreme Court judgement.

The department has also sought clarification on the due diligence reports by Vodafone and Essar before the final deal, plus the audited annual report, minutes of meetings, statutory registers and other papers related to the transfer of stake and management control from Hutchison to Vodafone in India and overseas.

Also under the scanner are foreign companies of Hutchison that were later transferred to Vodafone and guarantees provided by Vodafone for various loans taken by Essar.

The details of minority shareholdings of Indians in Hutchison Essar, its overseas holdings and other companies that have been transferred to Vodafone post acquisition also form part of the notice. The shareholdings of minority shareholders, primarily those of Asim Ghosh, former CEO, and Analjit Singh, promoter of healthcare group Max India, are under scrutiny.

A letter of credit issued by a Hong Kong entity at the instance of HTIL to an Indian finance company to extend loans to Asim Ghosh and Analjit Singh to buy their stakes also formed part of the investigation notice, sources said.

The minority shareholding was a contentious issue when the company applied to the foreign investment promotion board to approve the deal. The Reserve Bank of India and finance ministry were of the view that the sale breached Foreign Exchange Management Act and the 75 per cent limit on foreign direct investment in domestic telecom companies.

What the case is about

The I-T department had sent Vodafone a show-cause notice last year asking why it should not pay capital gains tax which could amount to $2 billion on the transaction on grounds. Vodafone approached the Bombay High Court against the notice and argued that the I-T Act does not apply in this case, since Vodafone is a Dutch company and Hutchison is incorporated in the Cayman Islands.

The I-T department, however, has argued that the deal transferring the stake from Hutchinson Telecom International Ltd (HTIL) to Vodafone through the Cayman Islands-based CGP Investment was structured to evade capital gains since Hutchison-Essar was the permanent establishment for HTIL in India. It also said Vodafone has acquired the telecom infrastructure of Hutchison in India. In December, the Bombay High Court dismissed the case, after which Vodafone appealed to the Supreme Court.