Buoyed by a favourable Supreme Court order in the Vodafone tax case, the income-tax department has asked E*Trade Mauritius to pay capital gains tax on the sale of its shares held in Indian company IL&FS Investsmart to HSBC in September 2008.

E*Trade Mauritius is indirectly held by E*Trade Financial Corporation and is in the business of identifying opportunities for investment in the Asian region.

Though the sale was routed through a company based in Mauritius with which India had a Double Taxation Avoidance Agreement (DTAA), the Indian income-tax department held that since profit was generated in India, tax is liable to be paid here.

The overseas company dragged the department to court claiming that it could not be taxed in India under the India-Mauritius DTAA. The Bombay High Court, after hearing both sides, directed the company to go back to the Income-tax department and present its case before the Director, International Taxation. It simultaneously asked the Director International Taxation to give the order within three months.

The court also directed the company to deposit Rs 24.5 crore with the high court. The director eventually gave the order, upholding the earlier order demanding Rs 24.5 crore.

This is the latest in the line of cross-border deals involving Indian companies. The income-tax department has already sent notices to Vodafone on its $11 million acquisition of Indian telecom major Hutch Essar, from the Hong Kong-based Hutchison International. The ball is now in the income-tax departments court after a direction to the company from the Supreme Court to take up the matter with the department before approaching the high court.

The department has sent similar notices on the acquisition of Fosters Australias Indian subsidiary, Fosters India, by British brewer SABMiller, Idea-Cellular AT&T deal, etc.