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CASE LAWS

2018-TII-55-ITAT-AHM-TP

VODAFONE INDIA SERVICES PVT LTD Vs DCIT: AHMEDABAD ITAT (Dated: January 23, 2018)

Income Tax - Sections 2(47), 45, 92B(2), 92F(v), 143(3) & 144C.

Keywords: ALP - Cost of acquisition - Credit support - Finance Act 2012 - Foreign AE - Internationsal transaction - Option rights & Transfer.

The Assessee-company is engaged in cellular communications business. The Assessee had filed its return for the relevant AY. On reference made to the AO, TPO noted that the Assessee was in its independent business operations and played a strategic role in structuring the financial transactions for the Vodafone Group namely, Hutchinson Teleservices (India) Holdings Limited (Hutch- M), Vodafone Tele-Services (India) Holdings Limited (Vodafone M) and CGP Investments (Holdings) Limited (CGP-Cayman). A sale and purchase agreement dated 11 February 2007 (SPA) was executed between Hutchison Whampoa Group of Hong Kong (Hutchison Group) and Vodafone Group of UK, for acquisition of direct and indirect equity interests in Hutchison Essar Limited (HEL renamed as Vodafone India Limited, VIL). The (Indian) Foreign Investment Promotion Board (FIPB) granted approval on 7 May 2007, to the acquisition, by VIHBV, of 51.96% in M/s. Hutchison Essar Limited. Therein, the Assessee had entered into a Framework Agreement on 6th June 2007 with SMMS Investments Private Limited (SMMS), Vodafone International Holdings BV (VIH-BV), Vodafone Telecommunications (India) Limited, Infrastructure Development Finance Co Ltd, IDFC Private Equity Company Limited, and Omega Telecom Holdings Pvt Ltd. It ws noted that as per the termination deed of the agreement dated 6th June, 2007 (Framework Agreement 2007), the Assessee had paid Rs 21.25 crores as termination fees. The said termination deed noted that all the parties to the termination deed namely, SMMS, VTIL, Omega and Vodafone were the parties to a shareholder agreement dated June 6, 2017 (Shareholder agreement). Further, in consideration of the mutual release of their duties and obligations under the Framework Agreement, the said parties agreed that the Framework Agreement be terminated and the terms would cease to apply w.e.f. the termination date. The termination deed further noted that the IDF had ceased to hold 51% or more of the paid up capital of SMMS and the IDF had to pay an aggregate amount of Rs 21.25 crores. The said amount was paid in consideration of the Assessee giving up the rights under the said Framework Agreement dated 6th June 2017. TPO found that under the Framework Agreement, the Assessee had the right to buy entire equity capital of SMMS Investments Private Limited, i.e., 61.6% equity shares of Omega for Rs 2 crores and in the event of the FMV of the shares was in excess of Rs. 1500 crores, an additional amount equivalent to Rs 2 crores plus FMV/1500 crores. Therefore, the Assessee had a right to buy 3.15% equity in Vodafone India for an amount not more than Rs 2.78 crores as long as FMV of these shares were less than Rs 1500 crores. The Assessee was asked to provide with the requisite documents as regard to the termination fees. Further, the TPO noted the explanation of both the Assessee and the IDFC and found that the IDFC held 3.15% stake in Vodafone India, as on 1st April 2011, whereason 31st March 2012, it did not had any stake. The TPO also observed that in additions to taking on record Assessee’s submissions about cashless options for IDFC Investor’s 0.1234% direct equity in Vodafone India for a consideration of Rs. 62 crores, the investors under the Framework Agreement, wanted to sell the entire share capital in SMMS Investments Pvt Ltd, and therefore, exercised their put option. It was also found by TPO that by the mechanism of the said call and put options, the direct and indirect shareholding of Vodafone Group plc UK had gone up by 2.6%. Thus, the TPO proceeded to examine the issue of applicability of Chapter X of the Act. However, the same was objected by the Assessee and therein, made its submissions but, TPO was not impressed with the same. On verifying the documents so furnished by the Assessee, the TPO noted that the Assessee had the valuable call options which entitled it to subscribe the shares of HEL (Vodafone India) indirectly at a fraction of their FMV and further, the holding company of the Assessee was not only a party to the arrangement.

The TPO then noted that the Assessee had failed to provide any benchmarking or ALP for the extinguishment / relinquishment of option rights. Further, the valuation of option was used as an Internal CUP for valuation of termination of option by the Assessee. Therefore, the TPO determined ALP for extinguishment/ relinquishment of option rights at Rs. 1588,85,55,303 and adjustment of the same was proposed to make to the international transaction of the Assessee. Thus, following the same, the AO made an addition of Rs 1588,85,55,303, in respect of termination of call options under the Framework Agreement 2007. On appeal, the DRP repeated the observations made by the TPO. Therefore, the AO proceeded with the said ALP adjustment.

On appeal, the Tribunal held that,

Whether when an amount is debited towards termination fees for options having an impact on assessee's profit, the same is to be treated as international transaction u/s 92B - YES: ITAT

Whether an arrangement by the foreign AE with respect to the framework agreement and termination can be considered as an international transaction u/s 92B(2) - YES: ITAT

Whether when the subsidiary is rendering certain services to the parent company in purusing its investment interests but not being compensated adequately by the parent, such a situatin warrants TP adjustment - YES: ITAT

+ in order to ascertain whether a particular transaction or not is an international transaction or not, the necessary preconditions which are to be satisfied are (a) that it is in the nature “an arrangement, understanding or action in concert etc”; (b) that it is between two or more associated enterprises, either or both of whom are non-residents; and (c) that it has a bearing on the profits, income, losses or assets of such enterprises. While the payment is certainly by the Assessee to an Indian entity, the payment is under an arrangement and understanding which has several parties acting in concert and many of these parties are non-resident associated enterprises. The option to purchase entire shareholding in this entity, i.e. SMMS Investments, have been obtained by the Assessee only because of, and clearly as a result of, HTIL-M nominating SMMS Investments for the purpose of purchase of equity shares in, what is now, Omega Investments and as a result of arranging finances for this acquisition. The fact that TII was a foreign controlled entity, as against the IDFC Investors being an independent enterprise, does not make a difference;

+ put options, in the present set of facts, are nothing more than exit options from the arrangements. In any case, these put options cannot have any value in the hands of the person exercising the option, beyond as a mode of exit, because put option, in this case, obligates the other party, i.e. the Assessee, to buy the entire equity capital in SMMS Investments at a fraction of its intrinsic and FMV. In a classical sense, a put option provides the option to sell, but not the obligation to sell, at an agreed price. That is not the case here. In the present situation, it is tagged along with the call options and is only an exit option for all practical purposes;

+ the statutory definition of capital asset u/s 2(14), in the light of retrospective amendment w.e.f. 1st April 192 by the Finance Act 2012, is materially different and much wider. As the statutory provisions make clear, lack of enforceability in law does not take an arrangement, understanding or action in concert outside the ambit of the expression ‘transaction’. Ironically, however, the entire defence of the Assessee, on this aspect, rests on a judicial precedent which deals only with “enforceability in law” and the “legal rights”. Stand of the Assessee proceeds on the assumption, which is wholly incorrect and contrary to the plain statutory provisions, therefore, this Tribunal is required to keep any arrangement, understanding or action in concert outside the ambit of ‘international transaction’ u/s 92B just because such an arrangement, understanding or action in concert does not give legal rights to the parties to arrangement, understanding or action in concert;

+ it is a case in which HTIL-M nominates SMMS Investments as nominee under the share purchase agreement, for transfer of shares in ITNL/Omega held by Hinduja group companies–namely Hinduja TMT and IndusInd Network, and, at the same time, the Assessee enters into the framework agreement with IDFC for option rights to buy entire equity of SMMS Investments at a nominal price which is just a small fraction of prevailing price of these shares now held by SMMS Investments. Therefore, it cannot be said that it is not an action in concert with HTIL-M;

+ as long as the action in concert, understanding or arrangements included any non-resident AEs, and de horse the question of their legal rights under the action in concert, understanding or arrangement, such a non-resident AE being a party to the arrangement, understanding or action in concert satisfied the first limb of definition of international transaction u/s 92B r.w. section 92F(v). In the present case, the Assessee has debited Rs 21.25 crores to the profit and loss account on account of termination fees for options. Clearly, therefore, in the present case, there is an impact on the profits of the Assessee, and, to this extent, this condition is also satisfied. The contention of the Assessee that the said amount has not been claimed as a deduction in the computation of total income, and, therefore, it has no impact on income of the Assessee is only fit to be noted and rejected;

+ the conditions precedent for invoking section 92B(1) are satisfied inasmuch as, with legally enforceable rights or not, foreign AEs, namely VIH- BV and HTIL-M are part of the arrangements and action in concert, and the transaction has a bearing on the profits of the Assessee.The present transaction is that of not only termination of options, but also, transfer of the shareholdings in SMMS Investments to of an Indian subsidiary of VIH-BV at a fraction of its market worth, and this arrangement involves an agreement between not only between Indian entities but also foreign AEs of the Assessee, i.e. HTIL-M and VIH-BV. There may not be formal, written or legally enforceable arrangement, understanding or action in concert, but applying the test laid down in Jubilee Investment’s case which would essentially imply that the terms of the relevant arrangement, understanding or action in concert are, in substance, decided by the parent company;

+ not only the investors were selected by the Hutchinson Group, which was taken over by Vodafone Group plc next year, but even the options were received in consideration of HTIL providing credit support to these investors. The fact and evidence about the terms of arrangements of this transaction being decided, in substance, by the foreign AEs is something which is in exclusive knowledge domain of the Assessee and its group entities and when the assessee decide not to share it and the circumstances are such that the terms of the transactions are established to not at all justified by the known commercial considerations of the Assessee, the Assessee cannot blame the Revenue for not brining on record the evidence of the terms of arrangement being decided by the foreign AE. In these peculiar facts, which are very unsusal facts by any standards, even in the absence of such an evidence, the terms of arrangements being decided by the foreign AE can be reasonably accepted. Therefore, the arrangement, understanding and action in concert, with respect to framework agreement and termination thereof, is an international transaction u/s 92B(2) as well. In other words, while foreign AE and parent company of the assessee is not only a party to the agreement but the terms of the agreement, in substance, are being decided by the foreign AE;

+ section 2(14) states that 'Capital Asset' means property of any kind held by the Assessee, whether or not connected with his business or profession, and does not include certain items, which are not relevant for our purposes at present. The Explanation to Section 2(14) explains the scope of expression ‘property’ used in above definition and states that the scope of expression “property” includes, and shall be deemed to have always included, any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. In effect thus, any rights whatsoever (including the rights to management or control) in, or in relation to, an Indian company are covered by the meaning of expression ‘property’ for the purpose of this definition;

+ explanation to Section 2(14) will have to be treated as otiose because if an asset meets the description of ‘property’ without taking into the impact of Explanation to Section 2(14), there is obviously no need to look at the Explanation. Therefore, this Tribunal believes that Explanation to Section 2(14) should be read as enlarging the scope of expression ‘property’ in the main definition clause, and, when such is the position, whether or not the asset in question is a ‘property’ as per meanings in main provision of Section 2(14), as long as it meets the test laid down in Explanation to Section 2(14), it is to be treated as a ‘Capital Asset’ nevertheless. Therefore, the right to nominate the assignee of the option rights, which was exercised by the assessee during the relevant previous year, was a capital asset.

Assessee's appeal partly allowed