New Delhi, Aug 3 (IANS): The Supreme Court Wednesday was told that there was nothing colourable in telecom giant Vodafone's transaction with Hutchinson International Ltd. for acquiring its Indian arm Hutch Essar in 2007.

The apex court bench of Chief Justice S.H. Kapadia, Justice K.S. Panicker Radhakrishnan and Justice Swatanter Kumar was told that taking the Mauritius route for investment was a device to knock out the tax liability and this was a channel permitted by the central government to attract foreign direct investments.

Vodafone said this in response to a query by the Chief Justice S.H. Kapadia: "Do we take it that concession was not colourable but a device."

Senior counsel Harish Salve, appearing for the company, told the court that "it was not a bogus transaction but the whole scheme was to knock out taxes".

He said that "there was a distinction between colourable exercise and device directed only to knock out taxes".

The court is hearing a challenge to the Bombay High court order asking the tax authorities to go ahead with the assessment of the tax liability of the telecom company arising out of its acquisition. The tax liability worked out to Rs.11,128 crore.

Vodafone contended that it did not attract the jurisdiction of the Indian tax authorities as Vodafone PLC was based in the Netherlands and Hutchinson International Ltd. was based in Hong Kong.

It said that the transaction of acquiring the Hutch Essar too took place on a foreign soil.

Posing the question as to why did they (government) allow the Mauritius route, Salve said that it resulted in huge foreign investment without attracting taxes.

The judges said they wanted to know what was the share capital of the Mauritius company (involved in the transaction).

Salve said it was a genuine foreign institutional investment and it couldn't be targeted. "They being exempted from tax is not immoral," he contended.

Chief Justice Kapadia said did it mean that the Mauritius industry did not carry out the business. "No, only a few of them," he said.

Salve told the court that any tax on capital gains would hit foreign investments with long term perspective. "We are in a serious threat of lack of resources and China is drying up the market," senior counsel said.

On the direction of the apex court Nov 15, 2010, Vodafone deposited Rs.2,500 crore as a component of its tax liability on its takeover.

The court said that besides depositing Rs.2,500 crore, the telecom giant would furnish a bank guarantee of Rs.8,500 crore from a nationalised bank.

The court said that if Vodafone succeeded in its case then the tax authorities would refund the excess amount with interest to be decided by the apex court.