India's income-tax authorities Friday asked Vodafone Group PLC's (VOD.LN) local unit to explain the reason for not deducting and paying tax on the $11.2 billion it paid to buy a majority stake in a mobile-phone operator in the country.

Vodafone, the world's biggest mobile operator by revenue, has until Nov. 16 to respond to the show cause notice, the Central Board of Direct Taxes said in an emailed statement.

India has slapped a tax bill on Vodafone International Holdings BV, reported by Indian media to be around $2 billion, related to its 2007 acquisition of a 67% stake in Hutchison Essar Ltd. from CPG Ltd., owned by Hutchison Telecommunications International Ltd. (2332.HK).

But Netherlands-registered Vodafone International has argued that the deal with Cayman Islands-registered CPG isn't liable to be taxed in India as it took place on foreign soil.

India's tax department says Vodafone is liable to pay taxes because the transaction involved the transfer of an Indian asset. It also said Vodafone should have withheld tax on behalf of the government.

Vodafone, which hasn't set aside a provision for the tax bill, reiterated Friday that the company isn't liable to pay tax on the transaction and that "all of the taxation and legal advice received remains consistent with this view."

Vodafone said it will review the document in detail and respond in due course.

"Vodafone will continue to defend its position vigorously," the company said in a statement, and will continue to cooperate fully with the tax department.

The Supreme Court of India in January declined to hear Vodafone's plea in the case and told the Central Board of Direct Taxes to look into it further, which resulted in Friday's show-cause notice.

A tax board spokesman said Vodafone International will have to reply to the notice and the board will then take a "final view."

Sanford Bernstein analyst Robin Bienenstock said there's a 50% chance that Vodafone will have to pay up some money, which he estimates will be around $1 billion. He has an outperform rating on Vodafone and 180 pence target price.

At 1532 GMT, Vodafone shares were down 2 pence, or 1.6%, at 137 pence, valuing the company at GBP71.93 billion, in a lower London market.

Vodafone competes in India with operators such as Bharti Airtel Ltd. (532454.BY), Reliance Communications Ltd. (532712.BY), Idea Cellular (532822.BY) and foreign telecom companies such as Telenor ASA (TEL.OS), Emirates Telecommunications Corp. (ETISALAT.AD) and Japan's NTT DoCoMo Inc. (9437.TO), which have entered the Indian telecom sector in the recent past to take advantage of its fast growth.

-By R. Jai Krishna and Romit Guha Dow Jones Newswires; +91-11-4356-3333; krishna.jai@dowjones.com

(Lilly Vitorovich in London contributed to this article)
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