Vodafone again in Tax Trouble – ITAT decides against Vodafone on TP issue of ‘call options’

MUMBAI – ITAT :- As per the definition of international transaction as contemplated u/s 92B r.w.s 92F(v), it does not necessarily require a transfer or assignment of a property or creating any right or interest in the property but even an arrangement, understanding and action in concert, whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings or not, if the said understanding shall have a bearing on the profits, income, losses or asset of the enterprises, the same would fall within the realm of international transaction

Change of prospective nominee for holding shares in group companies to be acquired by holding company under call option by rewriting Framework Agreement between holding company and other shareholders is not “transfer” by “creating any interest in any asset whatsoever” in favour of the prospective nominee until the actual nomination is made. It does not amount to assignment, transfer or creating any right of call options in favour of prospective nominee. This is so despite the retrospective amendments made to definition of “Transfer” in section 2(47) by Finance Act, 2012

• In terms of Explanation 2 to section 2(47) inserted by retrospective amendment by Finance Act,2012,the transfer in relation to a capital asset inter alia includes creating or parting with any right in an asset in any manner whatsoever directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by agreement or otherwise.

• The essence of transfer still remains in the amended provision is the actual disposal or actual creation or parting with any interest in an asset. Without going into the means and methods, such disposal or parting with or creating any interest in an asset must exist and borne out of the arrangement or transfer.

• Making the provision of one of the prospective nominees would not amount to creating any interest in the asset in the shape of right to acquire the shares held under Call Option. Under the framework agreements of 2007, any of wholly owned subsidiary of Vodafone PLC is a prospective nominee but would get the right to acquire share only when a nomination is made by the assessee in favour of such subsidiary.

• Under clause 4.4 read with clause 4.10 of framework agreements, the right to acquire shares remains with the assessee till the assessee exercises its right to nominate a pre mentioned wholly owned subsidiary of Vodafone PLC failing which the right to acquire the shares remains with the assessee.

• It is clear from clause 4.4(a)(i) that the assessee shall have the right to purchase or require that any wholly owned subsidiary of Vodafone Group PLC purchase the shares held under the Call Option.

• It is discern from the comparative study of the relevant clauses of two framework agreements that by change of prospective nominee it does not amount to transfer or creating any right in favour of the said prospective nominee until the actual nomination is made

Framework Agreement whereby foreign holding company is granted call options to acquire shares held by other shareholders for consideration paid by foreign holding company or its affiliates is an international transaction between the foreign holding co and its Indian Subsidiary even if Indian subsidiary is only confirming or consenting party to the Framework Agreement

• As per the definition of international transaction as contemplated u/s 92B r.w.s 92F(v), it does not necessarily require a transfer or assignment of a property or creating any right or interest in the property but even an arrangement, understanding and action in concert, whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings or not, if the said understanding shall have a bearing on the profits, income, losses or asset of the enterprises, the same would fall within the realm of international transaction.

• Even if it is accepted that VIH BV is only a confirming/consenting party to the framework agreements, the said agreement is a mutual agreement under which the Call Options were granted by Asim Ghosh and Analjit Singh to assessee Vodafone India Services Private Ltd. against the consideration to be paid by the assessee or an affiliate for an aggregate amount of US $ 10.2 million and US $ 6.3 Million per annum respectively to the counter parties.

• There is no dispute that the said consideration has been paid by VIHBV, an affiliate of the assessee, for retaining the Call Options by Asim Ghosh and Analjit Singh.

• Therefore, the requite ingredients and conditions of an international transaction between the assessee and its associated enterprise (VIHBV) in terms of section 92B r.w.s 92F(v) are fulfilled and satisfied.

• Accordingly, the 2007, framework agreements is an arrangement, understanding or action in concert between the assessee and VIHBV for grant of Call Option by Asim Ghosh and Analjit Singh to assessee against the agreed consideration paid by the VIHBV.

• This mutual understanding and arrangement as well as action in concert between the assessee and VIHBV for securing the Option Rights against the consideration paid by VIHBV certainly having a bearing on the profits, income, losses or asset of the associated enterprises.

• Therefore, the grant of Call Option under framework agreements 2007, against the consideration is an international transaction as per provisions of section 92B r.w.s 92F(v).

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