The authorities have slapped a claim on the company, which as on last year, had ballooned to over Rs 1,000 crore, starting from the assessment year 1995-96.

The COD, which is a Government arm authorised to hear disputes between two Government departments, held hearings last week and has in its order allowed VSNL to contest its claim.

VSNL has said that the licence fee which it pays yearly is a revenue expenditure and should, hence, be deductible. VSNL pays Rs 2.5 lakh per circuit as licence fee and the fee varies depending on the number of circuits utilised.

The assessment officer turned down VSNL's plea. VSNL then went in for an appeal before the Commissioner Income Tax (appeals) and here too its plea was turned down.

The company thenappealed before the ITAT seeking a stay on the I-T authorities' claim. But prior to being able to contest the case at this level, the company needed the prior approval of COD and, hence, an application was filed recently.

VSNL finance director RSP Sinha confirmed that the COD had allowed the company to contest its case before the appellate body. "We will now go ahead and contest the case," said Sinha.

In its GDR offer letter earlier this year, VSNL had said that its dues as per the taxman's calculations could be in excess of Rs 1,000 crore for the period up to September, 1998.

Given the high amount of tax outgo which VSNL may be forced to fork out if it loses the case, the issue has become of immense significance to the international telephony monopoly, in which the government holds a majority stake.

At the same time, the tax authorities too, are not expected to contest the case given the high stakes for meeting its targets.

VSNL has been witnessing a penomenal growth in its earnings over the pastfew years. It has ended up garnering a revenue in excess of Rs 7,000 crore for 1998-99. It is country's largest forex-earning company. The telecom major is facing competition in its hitherto monopoly of Internet services and its hold on international telephony too is expected to cease from 2004 onwards.