India's Supreme Court was expected to rule Friday on a multi-billion-dollar tax bill slapped on British phone giant Vodafone over its purchase of a local operator.

The tax battle is being closely scrutinised by foreign firms, which see it as setting a precedent for cross-border acquisitions in fast-growing India.

Vodafone faces a potential liability of $5 billion in tax and penalties over its $11.1 billion purchase in 2007 of a 67-percent stake in Hong Kong-based Hutchison Whampoa's Indian mobile unit.

The highly anticipated ruling was expected to be handed down at around 0530 GMT, a Vodafone spokesman told AFP. Indian authorities slapped a $2.5 billion tax bill on Vodafone and are seeking up to an equivalent sum in penalties.

The Indian company at the centre of the case, now known as Vodafone Essar, is a leading mobile operator in India's fiercely competitive mobile market.

Vodafone, the world's largest mobile operator by subscribers, maintains Indian law did not require it to deduct tax on the deal because it took place in the Cayman Islands and both buyer and seller were foreign.

Vodafone also noted it was the purchaser and not the seller and made no gain on the deal.

India's tax laws are "being reinterpreted in a completely new way" by the government, Vodafone said last year.

"The position being taken by the tax authorities is both unprecedented and also out of step with international taxation principles governing acquisitions, which are designed to encourage investment," Vodafone argued.

But Indian authorities countered in the case -- in which arguments wound up in October -- that tax must be paid on the transaction because it involved an asset based in India.

They contended Vodafone should have withheld the amount the vendor was due to pay in tax when it bought the stake.

Foreign investment in India has slowed amid investor concern over widespread corruption, bureaucratic delays, lack of progress on economic reforms and an uncertain regulatory climate.

India is one of the biggest markets for Vodafone, which has nearly 146 million subscribers in the country. The nation kicks in around nine percent to Vodafone's total revenues.