TS-37-ITAT-2018 (Ahd-TP)
Vodafone India Services Pvt. Ltd. vs. DCIT
ITA No. 565/Ahd/17
A.Y: 2012-13;
Date of Order: 23rd January, 2018
FACTS
The Taxpayer, an Indian company, was an indirect wholly-owned subsidiary (WOS) of a Netherlands entity (BV Co) and was a part of a global group of companies (V Group). V Group carried on its telecommunication business in India through an operating company, I Co. All the shares of I Co were indirectly controlled by BV Co through a number of subsidiaries, AEs, call options and other financial arrangements. One such entity through which BV Co indirectly held interest in I Co was an Indian company, Omega Telecom Holding (Omega). Omega held around 5% shares in ICo.
Prior to the Taxpayer becoming a part of V Group, it was held by Hutchinson Group (H Group). H Group purchased the stake in I Co through various unrelated third parties owing to the regulatory restrictions on investment in the telecom sector.
SMMS investment Private Limited (SMMS) was one such Indian company through which H Group acquired interest in I Co. SMMS held around 62% shares in Omega (another Indian Company) which translated to an indirect interest of 3% stake in I Co. The acquisition of Omega by SMMS was funded through certain loans and capital (equity and preference share) contributed by third party investors (Investors). Investors, thus, became 100% shareholders of SMMS. The loans taken by SMMS were guaranteed by the ultimate parent entity of H Group.
It was as a result of transfer of certain intermediary companies by H Group to BV Co that Taxpayer became an indirect subsidiary of BV Co.
Taxpayer entered into a Framework agreement in June 2007 (FA 2007) with the investor. In terms of FA 2007, the Taxpayer had a call option to acquire entire equity capital of SMMS at nominal consideration of 4 Cr. (even when the value of SMMS could have been much higher than 1,500 Cr.). The taxpayer also had right to nominate some other person to exercise the available option right.
In November 2011, Termination Agreement and Shareholders Agreement were signed. In terms of TA, Taxpayer terminated the call option and paid a termination fee of INR 21 Crores to the investors. Post the termination of the call and put options, SMMS issued shares to another Indian company, India Hold Co, as agreed under SHA. Issue of shares resulted in India Hold Co holding 75% shares in SMMS. Further, as per the SHA, investors effectively exited from SMMS India on buyback of shares by SMMS and consequently India Hold Co. became 100% shareholder of SMMS.
Taxpayer contended that options that it held vis-à-vis investors in respect of shares of SMMS India were a contractual right and not a property right. Therefore it did not qualify as capital asset. Without prejudice, termination of option does not result in transfer. Further, since the transaction was between two residents, it did not qualify as an international transaction.
AO held that the Taxpayer had two rights by virtue of the call option viz., the right to exercise the option of purchasing the shares of SMMS and the right to assign the call option. On termination of the call option, such rights were extinguished and resulted in transfer of a capital asset by the Taxpayer. Further, AO held that, various agreements entered into by the parties indicate that the terms of the transaction were, in essence, decided by BV Co. Thus, such a transaction would qualify as a deemed international transaction.
Aggrieved, Taxpayer appealed before the Tribunal.
HELD
Whether call option is a capital asset and whether there was a transfer of no cost asset
– The two rights viz. the right to purchase shares of SMMS from the Investors and the right to sell shares of SMMS to the Taxpayer granted under FA 2007 are independent rights, in the sense that if one of the rights is exercised, the other right would become infructuous.
– In essence, the Taxpayer had a right to nominate who could acquire shares of SMMS at the agreed price.
– In the present case, the Taxpayer did not acquire the shares of SMMS, but exercised the right to nominate the person who could acquire the share of SMMS. Such right clearly falls within the expanded definition of capital asset under the ITL.
– Undisputedly, the facts before the SC in the Taxpayer’s case for earlier years did not involve nomination or assignment and, hence, the question of whether a right to nominate can be treated as a capital asset was never considered by the SC. Without prejudice, post the amendment to the ITL expanding the definition of capital asset u/s. 2(14), the SC’s decision stating that pending exercise, an option does not qualify as a capital asset, is no longer applicable.
– The Taxpayer had exercised the right of nomination under the call option. Once the right is exercised, its existence comes to an end. Hence, exercise of right to nominate results in transfer of a capital asset under the ITL.
– All the agreements entered into by the parties are to be read together to understand the actual transaction. The rights were acquired by paying consideration and hence it is not correct to suggest that options were no cost asset.
Whether there is an international transaction and whether the TP provisions apply in the absence of a consideration?
– The Scheme of Arrangement implemented effectively ensured that SMMS shares which could have been acquired and held by taxpayer in India came to be held by AE of the Taxpayer (India Hold Co). Hence the transaction qualifies as an international transaction.
– The Taxpayer had a valuable right to purchase shares of I Co at a nominal consideration of ~INR4crores. Such a right was given up by the Taxpayer for “zero” consideration.
– The TP provisions enable determination of the ALP for an international transaction and, hence, they have a role to play in computation of income. As long as a transaction is capable of producing an income, the TP provisions will apply to compute the income in accordance with ALP.
– The termination if implemented at ALP could have resulted in an income in the form of capital gains and such income has to be computed having regard to the ALP of the transaction. Even in case where there is zero income but application of the ALP results in a consideration being assigned, then the income i.e., capital gains in this case, is to be computed basis such ALP.
– The TP provisions cease to apply only when a transaction is inherently incapable of producing an income and is applicable in cases where income is not reported or if an income is not taken into account in computation of taxable income. Reliance in this regard was placed on a Special Bench decision in the case of Instrumentarium Corporation Ltd. (171 taxmann.com 193).
– The Bombay HC decision in the Taxpayer’s own case for earlier years was concerned with determination of the ALP of shares issued by the Taxpayer, which was admittedly a transaction on capital account. It is a settled proposition that capital receipts cannot be brought to tax in the absence of a specific enabling provision. In other words, the ALP adjustment was proposed in respect of an item of income which could never be brought to tax. Thus, the ratio of that decision is not applicable in the present facts of the case.
