Although Vodafone has taken the position that it was not liable to pay capital gains tax on the deal and it was the seller (Hong Kong based Hutchison Telecom International) who should be taxed, the tax authorities here contend that Vodafone was as a payer legally responsible for deduction of tax at source.

Tax is collected directly or indirectly. Vodafone is the payer in this case. So it is liable to deduct withholding tax on the payment it has made, Mr G.C. Srivastava, Director General (International Tax) in the Finance Ministry, told reporters on the sidelines of an international tax conference here.

The Tax Departments focus has been on Vodafone and the show cause notice served on Vodafone-Essar (formerly Hutchison Essar) sought to know as to why the latter company should not be treated as an agent of Vodafone under the income-tax law. In response to the show cause notice, Vodafone-Essar filed a writ petition in the Mumbai High Court seeking the quashing of the notice. The first hearing in the case is slated for September 27.

Last week, Vodafone Essars Vice-Chairman, Mr Arun Sarin, told newspersons that neither the Essar Group, nor Vodafone, nor Vodafone Essar was liable to pay taxes.

It is the seller who should be taxed and the seller is not one of the parties represented here, he said after a board meeting of Vodafone Essar in Mumbai.