The Bombay High Court on Wednesday dismissed telecom major Vodafone International’s petition challenging the Income Tax Department’s show-cause notice for payment of capital gains tax of around $2 billion.

The division bench of Justice S Radhakrishnan and Justice Anand Nirgude, however, continued the earlier stay on the I-T Department’s show-cause notice for further eight weeks to enable Vodafone to file an appeal. The company will file an appeal in the Supreme Court soon.

Vodafone Holdings International, a Netherland-based company, picked up the stake of Hutchison in Hutchison-Essar to form the new entity Vodafone-Essar in a $ 11.2 billion deal in 2006.

I-T authorities issued a notice to Vodafone Essar last year for capital gains tax of around $2 billion. Vodafone’s lawyer Iqbal Chhagla had argued that Vodafone was a Dutch company, Hutchison was incorporated in Cayman Islands and Income Tax Act did not apply in such a situation. He argued that a share-purchase did not amount to transfer of capital assets which could be taxed. The I-T Department held Vodafone liable because it expected the company to deduct capital gains tax while making payment to Hutchison. But Chhagla argued that since the entire deal occurred on foreign soil, if Vodafone were to shell out the tax, there was no way it could recover it from Hutch, which was the seller. The I-T department had argued that a foreign entity could be liable for tax if it gained any income through “business connections in India”.