|CORAM:||Pramod Kumar (AM), S. S. Godara (JM)|
|SECTION(S):||92B, Rule 10B|
|CATCH WORDS:||international transactions, Transfer Pricing|
|COUNSEL:||B. S. Soparkar, S. N. Soparkar|
|DATE:||January 23, 2018 (Date of pronouncement)|
|DATE:||January 24, 2018 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: Important law explained on whether termination of Option rights under an agreement can be treated as a "deemed international transaction" under section 92B(2) of the Act read with Rule 10B (4) in the light of the judgements in Vodafone's own cases of the Supreme Court (341 ITR 1) and the Bombay High Court (385 ITR 169).|
97. The question that we really need to address ourselves to is whether the above arrangement constitutes an ‘international transaction’. However, before we do so, it is only appropriate that we take a look at the relevant definitions under the Income Tax Act, 1961. Section 92 B of the Act, which defines ‘international transaction’ states as follows:
92B – Meaning of international transaction
(1) For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. ITA No. 565/Ahd/17 Assessment year: 2012-13 Page 124 of 161
(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.
(Explanation to Section 92 B is not reproduced here, as it is not relevant for our purposes at present)
98. Section 92 C refers to the expression ‘transaction’ which, in turn, is defined under section 92F(v) in an inclusive manner. This statutory definition is as follows:
In Section 92, 92A, 92B, 92C and 92 D, unless the context otherwise requires,
(v) “transaction’’ includes an arrangement, understanding or action in concert,-
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding
99. When we interpose the aforesaid statutory definition in Section 92C(1), we find that the expression ‘international transaction’ means “an arrangement, understanding or action in concert etc between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other an arrangement, understanding or action in concert having a bearing on the profits, income, losses or assets of such enterprises ……..”. Therefore, 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.
100. As we deal with the question whether the payment made on account of termination fees is under an arrangement, understanding or concert etc with two or more associated enterprises, either or both of which are non-residents, it is essential to bear in mind the fact that termination deed is essentially required to be read with the related framework agreements, which has as its integral part the shareholders agreements and transaction agreements, and share purchase agreement between HTIL and TMT Hinduja, as also HTIL and Indusind Network India Ltd at its foundation. It is simply not possible to read termination deed in vacuum or to understand termination of option rights in vacuum. How can one interpret deed terminating the framework agreement 2007, unless one looks at framework agreement 2007 itself- which has, at its origin, framework agreement 2006, and none of these framework agreements would have come into existence if the share purchase agreements between TMT Hinduja and Indusind Network and HTIL Mauritius were not to come into existence. When we put all these documents together, the arrangement appears to be like this. HTIL-M, a Mauritius based entity, who had contracted to buy, from two Indian companies by the name of TMT Hinduja and Indusind Network, 54.21% equity capital of ITNL, which in turn, held investments in HEL/VIL, nominates SMMS Investments to buy this equity shareholding, and also arranges for finances to enable such acquisition, by, inter alia, arranging guarantee from its ultimate parent company CGP-Cayman Islands and by ensuring subscription of, inter alia, SMMS Investment’s equity shares (Rs 2 crores) and redeemable preference shares (Rs 48 crores) by IDFC Investors. However, in order to ensure that SMMS Investors remains in the control of the group entities, the assessee, a group entity, enters into an agreement with IDFC Investors under which assessee had a right to buy entire equity of SMMS Investments from IDFC Investors for a consideration of the same Rs 2 crores plus interest @ 17.5% p.a. – which reflects compensation for the investment of Rs 2 crores and separately for the allied services rather than the intrinsic worth of the underlying assets of SMMS Investments which are several hundred times more than the agreed consideration. This arrangement is terminated on 24th November 2011, and under the termination arrangement, the shareholdings in SMMS Investments is transferred to TII, another group entity, and yet the assessee, for this loss of opportunity of buying the SMMS Investments equity for a mere Rs 4.13 crores (i.e. including interest) whereas the said equity is stated to be worth Rs 1,588. 85 crores, the assessee pays a further amount of Rs 21.25 crores to IDFC Investors. Learned counsel for the assessee also contends that options were not for a meagre amount as “a minimum return of 17.5% was stipulated- this does not qualify as a meagre amount”. However, it is this plea of the assessee which infact demonstrates that the IDFC Investors, who was under an option to sell entire equity of SMMS at an agreed price of 2 crores plus 17.5% interest, was nothing more than a financial investor- something much less than a genuine investor as the connotation of this expression are known in the commercial world.
101. As a plain look at the above facts unambiguously indicates, 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. Can we say that HTIL-M, which is Mauritian parent company of the assessee, is not a party to this understanding when entire edifice of agreements is in respect of certain shares which, at the sweet will of HTIL-M, have been acquired by, and all the arrangements for finance to fund this acquisition have been guaranteed for by another key group entity almost at the top of the pyramid (i.e. CGP Cayman Islands), by an entity shareholding in which is subject matter of the present options i.e. SMMS Investments. The option to purchase entire shareholding in this entity, i.e. SMMS Investments, have been obtained by the assessee company 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. If it was not to happen, SMMS Investments was a worthless entity and it is certainly little more than an innocent coincidence that the acquisition of ITNL/Omega equity by SMMS Investments and the assessee getting the option to buy the entire SMMS Investments equity from IDFC Investors, owners of entire equity in SMMS Investments, at a nominal consideration of Rs 2 crores plus interest @17.5% p.a. compounded annually w.e.f. July 2007. Certainly, it will be preposterous to even suggest that HTIL-M, which is admittedly a non-resident associated enterprise, is not a party to the arrangements in question. Similarly, it is also not possible to even seriously suggest that VIH-BV, which is the ultimate parent company was not part of the arrangement in question. VIH-BV is not only a signatory and party to the FA 2007, SHA 2007, TA 2007 and Termination Deed 2011, it is the end beneficiary of all these arrangements. Once an entity is party to an agreement, it cannot be said that the said entity, even if it does not have any legal rights under the agreement, is not part of arrangement or understanding. An entity may be part of the arrangements with or without any enforceable legal rights. The correctness of statement, however, independent of the position whether or not such an entity may or may not have any enforceable legal rights, is evident from the statutory definition of transaction which states that “transaction, includes any an arrangement, understanding or action in concert,-(a) whether or not such arrangement, understanding or action is formal or in writing; or(b) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding”.
102. As we have noted earlier as well, learned counsel has a serious objection with respect to the above position. Every time we put to him any proposition on the lines of our understanding as set out above, he submitted that the issue, as to whether VIH-BV or HTIL-M is a party to the arrangement with respect to the options, is no longer res integra in view of Hon’ble Supreme Court’s judgment in the case of Vodafone International Holdings BV (supra) and reminded us about article 141 of the Constitution of India. Learned counsel also relies upon certain observations made by Hon’ble Bombay High Court, in assessee’s own case for the assessment year 2008-09. Learned counsel apprised us on how our treating VIH-BV and HTIL-M as parties to the arrangements will may be seen as contrary to the principles of judicial discipline because Hon’ble Supreme Court has categorically held the options agreement are independent agreements between the assessee and the IDFC Investors which is an Indian entity. He submits that all the players in the transaction are Indian entities and, therefore, it cannot be said that any non-resident AE is involved in the transaction, but then even if beneficial ownership of the ultimate parent company is to be taken into account, there is no international transaction since it does not make a difference to the ultimate parent company whether group entity ‘x’ or group entity ‘y’ holds these shares because both the entities are only holding it for the same beneficial owner i.e. the ultimate parent company. Viewed thus, even if beneficial ownership aspect is to be taken into account, there is no international transaction in the shares being held by any one of the entity controlled by the same ultimate parent company. He urges us not to take a myopic view of the matter. He also submits that what is before us is termination of agreement and there cannot be a prior arrangement about termination of agreement so as to satisfy the requirements of Section 92B(2). An arrangement, according to the learned counsel, can only be to effectuate not to terminate. It is thus contended that the scope of expression ‘transaction’, by no stretch of logic, can include ‘termination’ of a transaction. The fact that TII was a foreign controlled entity, as against the IDFC Investors being an independent enterprise, does not make a difference, because if one has to see as to who owns whom, we should further look up the pyramid as well which shows that the end beneficiary of all the arrangements is the same entity. Learned counsel has then referred to judgment of Hon’ble Bombay High Court, in the case of Vodafone India Services Pvt Ltd Vs Union of India [(2014) 361 ITR 531 (Bom)] in support of the proposition that unless there is an income from a transaction, the provisions of transfer pricing donot come into play, and, in that sense, existence of income is a jurisdictional requirement for invoking the transfer pricing provisions. This condition, according to the learned counsel, is not satisfied in the present case since there is no income and the assessee has merely made a payment of Rs 21.25 crores which is tax neutral as no deduction is claimed in respect of the same. It is also contended that transfer pricing provisions cane come into play only when there is shifting of profits and erosion of tax base. It is also contended that we are looking at only rights under call options and not obligations under put options. We are urged to take a holistic view of the matter and take into account the put options as well. Learned counsel also suggests that since the proceedings for the assessment year 2008-09, which deals with somewhat similar issue is pending before Hon’ble Supreme Court, we should block the hearing of this case till Hon’ble Supreme Court disposes of the said case. A very curious justification for blocking of the appeals is that the facts found by us may prejudice the interests of the assessee in proceedings before Hon’ble Supreme Court. Learned counsel submits that it is for this reason that a Mumbai bench of this Tribunal has blocked hearing of one the assessee’s appeal on a related issue. We are urged to follow the path so shown by the coordinate bench. On the basis of this line of reasoning, we are urged to hold that non-resident AEs are not part of the transaction of termination of options, and, in the alternative, at least block the hearing till Hon’ble Supreme Court takes a call on assessee’s case for the assessment year 2008-09 which is pending before Hon’ble Supreme Court at the instance of the revenue authorities. As for the plea for adjournment on the ground that some other year is pending before Hon’ble Supreme Court, even though the issues in the said case before Hon’ble Supreme Court are different because our findings may affect that case as well, it is only fit to be noted and rejected. Let us, therefore, deal with other aspects of the matter before proceeding further.
103. Let us first deal with the judgment of Hon’ble Supreme Court in the case of Vodafone International Holdings BV (supra) The backdrop of this decision was that there was sale of share of CGP Cayman Islands, by HTIL Cayman Islands to VIH-BV, The Netherlands. What was in challenge in this case before Hon’ble Supreme Court was Hon’ble Bombay High Court’s judgment in the case of Vodafone International Holdings Vs Union of India [(2010) 329 ITR 126 (Bom)], and the conclusions so arrived at by Hon’ble Bombay High Court, which were under challenge, have been aptly summed by headnotes in the Income Tax Report at page 129 as follows:
Held, dismissing the writ petition, that HTIL’s interest in HEL arose by way of indirect equity shareholding, option agreements, finance agreements, shareholders agreements, etc., the aggregate of which conferred a controlling interest of 66.9848 per cent, in HEL. All these varied interests did not emerge only from one share of CGP and could not have been conveyed by the transfer of only one equity share. The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transfer¬ring the rights and entitlements of HTIL to VIH BV. HEL was at all times intended to be the target company and a transfer of the controlling interest in HEL was the purpose which was achieved by the transaction. The true nature of the ITA No. 565/Ahd/17 Assessment year: 2012-13 Page 128 of 161
transaction as it emerged from the transactional documents was that the transfer of the solitary share of the Cayman Islands company reflected only a part of the arrangement put into place by the parties in achieving the object of transferring control of HEL to VIH BV. HTIL had put into place, during the period when it was in control of HEL, a complex structure including the financing of Indian companies which in turn had holdings directly or indirectly in HEL. In consideration call and put options were created and the benefit of those options had to be transferred to the purchaser as an integral part of the transfer of control over HEL. These rights and entitlements constituted in themselves capital assets within the meaning of section 2(14) which expression is defined to mean property of any kind held by an assessee. VIH BV’s disclosure to the FIPB was indicative of the fact that the consideration that was paid to HTIL in the amount of US $ 11.01 billion was for the acquisition of a panoply of entitlements including a control premium, use and rights to the Hutch brand in India, a non-compete agreement with the Hutch group, the value of non-voting non-convertible preference shares, various loan obligations and the entitlement to acquire subject to the Indian foreign investment rules, a further 15 per cent, indirect interest in HEL. The transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. VIH BV by the diverse agreements that it entered into had a nexus with Indian jurisdiction. In these circumstances, the proceedings initiated by the income-tax authorities could not be held to lack jurisdiction.
104. Hon’ble Supreme Court, inter alia, noted that the basic case of the revenue is that “the SPA (Share Purchase Agreement), commercially construed, evidences a transfer of HTIL’s property rights by their extinguishment” and that “HTIL had, under the SPA, directly extinguished its rights of control and management, which are property rights, over HEL and its subsidiaries and, consequent upon such extinguishment, there was a transfer of capital asset situated in India”. Their Lordships then took note of the features of SPA, which were highlighted in support of this proposition, including the revenue’s stand that “as a holder of 100 percent shares of downstream subsidiaries, HTIL possessed de facto control over such subsidiaries” and that “such de facto control was the subject matter of SPA”. As Hon’ble Supreme Court proceeded to examine this aspect of the matter, it was, inter alia, observed as follows:
………….In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the court is satisfied that the transaction satisfies all the parameters of “participation in investment” then in such a case the court need not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc.
74. Be that as it may, did HTIL possess a legal right to appoint directors onto the board of HEL and as such had some “property right” in HEL? If not, the question of such a right getting “extinguished” will not arise. A legal right is an enforceable right. Enforceable by a legal process. The question is what is the nature of the “control” that a parent company has over its subsidiary. It is not suggested that a parent company never has control over the subsidiary…..
(@ page 42; Emphasis, by underlining, supplied by us now)
105. Clearly, Their Lordships were dismissive about de facto rights and practical rights and concentrated only on the question whether HTIL-CI had any legal rights, enforceable by law and by legal process, which were in the nature of ‘property rights’. This underlying approach of Their Lordships is even more unambiguous from the following observations:
………In this case, we are concerned with the expression “capital asset” in the income tax law. Applying the test of enforceability, influence/persuasion cannot be construed as a right in the legal sense. One more aspect needs to be highlighted. The concept of “de facto” control, which existed in the Hutchison structure, conveys a state of being in control without any legal right to such state. This aspect is important while construing the words “capital asset” under the income tax law. As stated earlier, enforceability is an important aspect of a legal right. Applying these tests, on the facts of this case and that too in the light of the ownership structure of Hutchison, we hold that HTIL, as a Group holding company, had no legal right to direct its downstream companies in the matter of voting, nomination of directors and management rights.
(@ page 45; Emphasis, by underlining, supplied by us now)
106. Quite clearly, entire thrust of discussions by Hon’ble Supreme Court is on the aspect of legal rights and it was in this context that Hon’ble Supreme Court held that “It is important to note that even in the fresh agreement, the call option remained with GSPL and the said agreement did not confer any rights on VIH”. This observation, given the backdrop discussions above, refers to only the legal rights and not the factual rights. The concluding portion of the lead order, authored by late Hon’ble Justice Kapadia (as he then was) and which was concurred with other Hon’ble Justices on this bench, was as follows:
Summary of Findings
90. Applying the look at test in order to ascertain the true nature and character of the transaction, we hold that the Offshore Transaction herein is a bonafide structured FDI investment into India which fell outside India’s territorial tax jurisdiction, hence not taxable. The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction. The said Offshore Transaction was between HTIL (a Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject matter of the Transaction was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshore Transaction.
91. FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has contributed an amount of Rs. 20,242 crores towards direct and indirect taxes on its business operations in India.
92. For the above reasons, we set aside the impugned judgment of the Bombay High Court dated 8.09.2010 in Writ Petition No. 1325 of 2010. Accordingly, the Civil Appeal stands allowed with no order as to costs. The Department is hereby directed to return the sum of Rs. 2,500 crores, which came to be deposited by the appellant in terms of our interim order, with interest at the rate of 4% per annum within two months from today. …….
107. While on the subject, we may take note of the fact that Hon’ble Supreme Court also held that since options, as held by the assessee, do not constitute capital asset. While doing so, Their Lordships have observed “Call and put options are contractual rights and do not sound in property and hence they cannot be, in the absence of a statutory stipulation, considered as capital assets”. However, we will come back to this aspect of the matter, in detail, a little later. We may at this stage also take note of the fact that 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 fair market value. 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, in our humble understanding, only an exit option for all practical purposes.
108. Coming back to Hon’ble Supreme Court’s detailed observations, in the case of Vodafone International Holdings BV (supra), on what constitutes ‘legal rights’ of the holding company, this is what learned counsel for the assessee puts before us as the foundation of his contention that the termination of framework agreement, vide termination deed dated 24.11.2011, was a transaction between independent entities, namely the assessee, IDFC Investors and, at best, TII Investments. The relevant observations, in the written submission filed by the assessee, are once again being reproduced below for ready reference:
141. The Hon’ble Supreme Court concluded that the FWAs did not confer any rights on VIHBV, and further that the right to acquire shares through exercise of Call Options vested in the Assessee, and not in Vodafone group companies generally, upholding corporate separateness in the Hutchison structure inherited by Vodafone.
142. The law laid down vis-a-vis Call and Put Options are mere contractual rights and do not sound in property, and therefore are not capital assets, until exercised, has full application, in the facts and circumstances of the present case.
143. The Assessee has submitted that factual rights do not exist independent of legal rights, i.e. the law recognizes a right enforceable in law, or no right at all, and it is not available to Revenue to segregate de facto rights as independent stand-alone rights.
161. The Hon’ble Supreme Court of India in 341 ITR 1, has extensively examined the Hutchison group structure, including all details surrounding the FWAs and SHAs between the three Indian investors in the Hutchison group structure and later the Vodafone group structure, the grant of FIPB approvals, albeit in the context of examining ‘jurisdiction’ of the Indian Tax Authority to render exigible to tax the 11.2.2007 transaction, from the standpoint of tax deduction obligations of VIHBV, and concluded that “Thus it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a fly-by-night operator/short time investor” (paragraph 73, page 42).
162. Filings examined by the Hon’ble Supreme Court relating to the FIPB, viz. all of the arrangements proposed to be entered into with the (three) Indian Investors by Vodafone International Holdings BV, including inter alia the express approval in writing (dated 7 May 2007) obtained prior to ‘closing’ (on 8 May 2007) of the SPA dated 11 February 2007, which was followed by execution of the FWA 2007 and SHA 2007 inter alia with the IDFC Investors, have been placed on the file of this Tribunal. It is apparent from 341 ITR 1 that the Hon’ble Supreme Court of India in the course of examining the Hutchison group structure and the Vodafone group structure examined all material details concerning the FWA 2006 and FWA 2007 and related SHAs, concerning the IDFC Investors, and the conclusions around the integrity of the structure are, therefore, binding upon and rendered unassailable by the Revenue.
163. In the circumstances, Revenue is estopped from questioning the good standing of the (three) Indian Investors, in the present AY, or classifying the IDFC Investors as mere benamidaars.
109. In taking this plea, what learned counsel for the assessee essentially ignores us is that unlike, for instance, in taxation of capital gains- as held by Hon’ble Supreme Court in the case of Vodafone International Holdings BV (supra), existence of “legal rights” is not a sine qua non for treating a transaction as an international transaction under section 92B. Since, as Hon’ble Supreme Court has categorically observed in so many words, in this case Their Lordships were essentially concerned about legal rights which are “enforceable in law”, and, to that extent, de facto control or practical situation was irrelevant. As a matter of fact, Their Lordships did observe that “as a practice, the subsidiaries did comply with the arrangements suggested by the group holding company” but then hastened to add that since they are “concerned with the expression ‘capital asset’ in the income tax law” “applying the test of enforceability, influence/persuasion cannot be construed as a right in the legal sense”. Their Lordships had adopted a strictly legal approach and preferred to “look at” rather than “look through” the arrangements. These discussions on legal rights, in our considered view, have no relevance in the context of definition of transaction under section 92F(v). That apart, the law itself stands amended now, and the statutory definition of capital asset under section 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 regards learned counsel’s contention that “factual rights do not exist independent of legal rights, i.e. the law recognizes a right enforceable in law, or no right at all, and it is not available to Revenue to segregate de facto rights as independent stand-alone rights”, this plea also proceeds on the fallacy that existence of legal rights of the parties is a condition precedent for any arrangements, understanding or action in concert etc being treated as a “transaction” under section 92F(v). What plea of the learned counsel overlooks is that Section 92F(v) specifically provides that irrespective of whether an arrangement, understanding or action in concert “is intended to be enforceable by legal proceedings” or not, it is includible in the definition of ‘transaction’. In other words, 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”.
110. In our considered view, stand of the assessee proceeds on the assumption, which is wholly incorrect and contrary to the plain statutory provisions, that we are required to keep any arrangement, understanding or action in concert outside the ambit of ‘international transaction’ under section 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.
111. The expression ‘acting in concert’, in common business parlance, suggests two or more persons acting in coordination or in tandem for a common goal, even if for different purposes. Its dictionary meaning includes (a) “agreement of two or more persons in a design or a plan; combined action; accord or harmony”; and (b) “to arrange or contrive (a plan) by agreement”; and (c) “acting in a coordinated fashion with a common purpose”. As the parties to the agreement include the foreign AEs and, leaving aside the question whether such foreign AEs had legally enforceable rights or not, there can hardly be any dispute that all the parties to the agreement are essentially ‘acting in concert’. In the absence of a statutory requirement to that effect, legal rights of the parties cannot be inferred to be sine qua non for treating the parties ‘acting in concert’ as such. Whether persons are acting in concert or not is essentially a question of facts which must be decided in the light of facts of each case. In the case of CIT Vs Jubilee Mills Ltd [(1963) 48 ITR 9 (SC)] connotations of the expression ‘action in concert’, which finds place in the inclusive definition of ‘transaction’ under section 92F(v), came up for consideration before Hon’ble Supreme Court. It was in the context of determining whether the assessee company is a company in which public is substantially interested. Hon’ble Supreme Court took note of its earlier judgment in the case of Raghuvanshi Mills Ltd Vs CIT [(1961) 41 ITR 613(SC)], and observed that “one has to find out is whether there is an individual who, or a group acting in concert which, controls or control the affairs of the company”. It was in this backdrop that Their Lordships had thrown light on connotations of the expression ‘acting in concert’ by observing that “The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together”. We respectfully adopt this test for the purpose of deciding what amounts to ‘acting in concert’ for the purpose of definition of transaction under section 52F(v)as well, particularly as there is no statutory definition of this expression, there is nothing contrary to this meaning in the context and there is no judicial precedent suggesting to the contrary. Quite clearly, therefore, as to whether the assessee has acted in concert with its overseas AEs is a question of fact to be decided on the basis of reasonable inferences from facts of facts and circumstances of the case, and it has nothing to do with legal rights of the parties. Viewed in this light, let us also look at the facts of the case to find out whether the parties can be said to have acted in concert or not. Let us not forget that 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. Can it be said that it is not an action in concert with HTIL-M; our answer is an emphatic ‘No’. It is a later avtar of this Framework Agreement, entered into by the assessee with IDFC and others- including overseas AEs, which was terminated on 24th November 2011 and payment of termination fees by the assessee is triggered. Even as the agreement was terminated, the payment was not only for termination of options agreement but virtually ensuring that the shareholdings in SMMS Investments are transferred to another group entity, i.e. TII Investments- which has the same ultimate parent company as the assessee and the said ultimate parent company is also a part of this entire arrangement. Given these facts, can it be said that the ultimate parent company, a non-resident AE, has not acted in concert in this arrangement? Once again, de horse the question whether there is any evidence to the effect that the assessee and the ultimate parent company has actually acted in concert or not, “the circumstances are such that human experience tells us that it can safely be taken that they must be acting together” and that is what satisfies the test of “acting in concert” as laid down by Hon’ble Supreme Court.
112. Nothing, therefore, turns on the lack of legal rights to the foreign AEs, under the agreements on termination of which the termination fee of Rs 21.25 crores was paid by the assessee. 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 under section 92B read with section 92F(v).
113. Once we come to the conclusion that the lack of legal rights to the non-resident AE does not take away the transaction from the ambit of ‘international transaction’ under section 92B r.w.s. 92F(v), as we do in our foregoing analysis, learned counsel’s reliance on Hon’ble Supreme Court’s judgment in the case of Vodafone International Holdings BV (supra) ceases to be relevant. We are not really impressed with the line of reasoning adopted by the assessee. Having said so, we may also add that all that Article 141 states is that “(t)he law declared by the Supreme Court shall be binding on all courts within the territory of India”. The question whether the non-resident AE of the assessee has acted in concert with the assessee, in an arrangement with the assessee or as a part of understanding with the assessee are all questions of fact and these aspects have not even been considered by Their Lordships in the aforesaid case. The reliance placed on Hon’ble Supreme Court’s judgment in Vodafone International Holdings’ case (supra), to the extent it pertains to the question as to whether there was an international transaction, involving non-resident AEs or not, is devoid of legally sustainable merits.
114. Learned counsel, however, submits that even if one could say that there is a transaction, unless an income emanates from a transaction, the requirement of section 92B, so as to be termed ‘international transaction’ cannot be satisfied and the transfer pricing provisions cannot be invoked. It is contended that since options are not capital assets under section 2(14), even under the post 2012 amendment law, no capital gains can arise in respect of these options. He refers to a large number of judicial precedents in support of the contention that in the absence of income, transfer pricing provisions have no applicability. He submits that as held by Hon’ble Supreme Court, options donot constitute capital assets, and the legal position, so laid down by Hon’ble Supreme Court, still constitutes good law. He also leans on the observations made by Hon’ble Bombay High Court in assessee’s own case for the assessment year 2008-09 (reported at 385 ITR 169) to suggest that the law laid down by Hon’ble Supreme Court in Vodafone’s case still holds good law. In particular, our attention is invited to the observation at page 284 where it is stated that “…none of these amendments post Supreme Court judgment would enable the revenue to urge that the position as noted in the Supreme Court judgment no longer subsists”. It is thus urged that there is no change in the legal position so far as the definition of ‘capital asset’ and ‘transfer’, so far as relevant to Hon’ble Supreme Court decision in Vodafone’s case (supra), is concerned.
115. Coming back to the definition of ‘international section’ once again, it is important to note that a transaction can be an international transaction, only when, inter alia, it is established that the transaction is in the nature of (i) purchase, sale or lease of tangible or intangible property, (ii) provision of services, or (iii) lending or borrowing money, or (iv) any other transaction having a bearing on the profits, income, losses or assets of such enterprises. 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. Section 92(1) requires that “any income arising from an international transaction shall be computed having regard to the arm’s length price”. Essentially, therefore, it is only when a transaction is inherently incapable of producing an income that the provisions of transfer pricing will not come into play, and that is precisely what Hon’ble Courts above, as also various benches of the Tribunal, have held time and again. However, just because an income is not reported or taken into account in computation of taxable income, an international transaction does not get out of the ambit of application of transfer pricing provision. Explaining the above legal position, a Special Bench of this Tribunal, in the case of Instrumentarium Corporation Ltd Vs ADIT [(2016) 49 ITR (T) 589 (SB)], has summed up the legal position as follows:
39. In our considered view, the assessee is not really correct in contending that when the assessee has not reported any income from a particular international transaction, the ALP adjustment cannot compute the same. The computation of income on the basis of arm’s length price does not require that the assessee must report some income first, and only then it can be adjusted for the ALP. Section 92(1) is not an adjustment mechanism; it is a computation mechanism. The arm’s length price principle requires that an arm’s length price is assigned to the transactions between the associated enterprise, and if the income in computed, if any, on the basis of the arm’s length price so assigned. As regards reliance on the Vodafone India Services (P.) Ltd.’s case (supra), that deals with a situation in which the international transaction was inherently incapable of producing the income chargeable to tax as it was in the capital field. This is evident from the observation of Hon’ble Bombay High Court to the effect that, “In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax”. Undoubtedly, learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make ALP adjustment therein, and then bring the ALP adjustment to tax, since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm’s length price in computation of that income. The ALP adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i.e interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm’s length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the AEs, the computation of income has to be on the basis of arm’s length interest. Therefore, in our considered view, even when no income is reported in respect of an item in the nature of income, such as interest, but the substitution of transaction price by arm’s length price results in an income, it can very well be brought to tax under Section 92. This plea of the assessee is also, therefore, unsustainable in law.
116. Clearly, therefore, nothing turns on, so far as definition of ‘international transaction’ or applicability of transfer pricing provisions or are concerned, on reporting or non- reporting of an item of income or expenditure for the purpose of computation of tax liability of the assessee is concerned. What is material is whether the transaction in question is capable of producing an income chargeable to tax or not, and that is an aspect that we have to now examine, but let us first finish the analysis with respect to applicability of Section 92B deal with definition of international transaction.
117. Viewed in the above light of the above analysis, 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.
118. We now move on to Section 92B(2), which sets out a deeming fiction with respect to ‘international transaction’. It provides that even a transaction with an independent enterprises, i.e. non AE, will be deemed to be an intra AE transaction, if there exists (i) a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or (ii) the terms of the relevant transaction are determined in substance between such other person and the associated enterprise”. When we interpose the definition of expression ‘transaction’ under section 92F(v), the relevant provision reads, i.e. section 92B(2), reads like this.
An arrangement, understanding or action in concert etc [(a) whether or not such arrangement, understanding or action is formal or in writing; or(b) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding] entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant arrangement, understanding or action in concert etc [,-(a) whether or not such arrangement, understanding or action is formal or in writing; or (b) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding] are determined in substance between such other person and the associated enterprise
119. The present transaction before us is that of not only termination of options, but also, as we have seen in our analysis earlier, 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 (supra), “the test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together” which would essentially imply that the terms of the relevant arrangement, understanding or action in concert are, in substance, decided by the parent company. Given the facts of the case, it is a reasonable inference and that is what, in the light of judicial position set out above, is legally permissible. In a situation like this, there cannot be conclusive evidence of such an arrangement, particularly in a situation in which assessee is less than forthcoming is sharing all the relevant material. We will be superficial in our approach if we are to hold that the assessee’s giving up, by paying additional amount of Rs 21.25 cores, the right to buy interests in VEL equity at a fraction of its market worth, and facilitating another group entity to buy these interests on the same terms, is something without the terms of this arrangement being approved and decided by the parent company. In the normal course of life, every corporate entity seeks to maximise its gains and assets but here is a situation in which the business conduct of the assessee cannot be justified on the basis of what has been shared with us. The justification initially given for termination of options, and payment of Rs 21.25 crores for the same, was that the IDFC Investors had exercised its put option which the assessee could not fulfil, but then information gathered by the income tax authorities very well established that it is incorrect information. What is then submitted by the assessee is that options had to terminated because a delay was expected, due to required FIPB clearance, the assessee terminated the agreement and paid the termination fees of Rs 21.25 crores. This explanation is also unacceptable for the simple reason that the maximum exposure of the assessee, under the framework agreement- clause 7, was 115% of the transfer price, and since transfer price works out to Rs 4.13 crores, the assessee was required to pay not more than Rs 4.75 crores. No commercial entity would pay Rs 21.25 crores to terminate a contract when its maximum exposure under the contract is Rs 4.75 crores. Obviously, there are some other considerations other than normal commercial consideration, and, given the present set of facts, these considerations, as these are not commercial considerations of the assessee, can only be the business considerations of the group as a whole i.e. of the ultimate parent company. In Hon’ble Bombay High Court’s judgment dated 8th October 2015, in assessee’s own case for the assessment year 2008-09, it is specifically noted that the entire arrangement of framework agreement was initiated by Hutchinson Group which was looking for “Indian investors, who would be independent, but not hostile, and hold the interests till sector opened up”. It is then stated that “Hutchinson Group, therefore, identified three investors…….”. These observations of Hon’ble Bombay High Court donot leave anything for imagination so far as brain begind framework agreement is concerned. We may, in this context, refer to the following observations in sixth paragraph of the aforesaid order:
6. The appellant claims that as per the Foreign Direct Investment (for short “FDI”) norms in India, the ceiling in the telecom centre was 49% and which was enhanced to 74% in November, 2005. In order to acquire further equity interest as and when the FDI ceiling in the telecom sector were relaxed, Hutchison group looked for Indian investors who would be independent, but not hostile and would hold the interests till the sector was opened up. These would make a gain at a subsequent point of time when they exit the investment. The Hutchison group, therefore, identified three investors being Analjit Singh (for short “AS”), who was one of the leading industrialists of the company and a promoter of Hutchison Max Telecom Limited – Mumbai Telecom Circle and had formerly sold his investment to Hutchison. The other one was identified as Asim Ghosh (for short “AG”). He was associated with this group for a long time and was a Chief Executive Officer of Hutchison Essar. The third was the IDFC Group of Investors, leading players in the field of financial investments. These investors required credit support for the investment and the appellant and its then holding company HTIL agreed to procure credit support for them. In consideration thereof, in 2006, the appellant, inter-alia, acquired call option rights in pursuance of two Framework Agreements dated 1st March, 2006 with AG and his group companies and AS and his group companies. These agreements were styled as Framework Agreements and shall hereinafter be referred to as “2006 FWA” for short. ………..
(Emphasis supplied, by underlining, by us)
120. As evident from the above observations, 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. It is really strange that an assessee, which makes these submissions before Hon’ble Bombay High Court, now contends that the arrangements for framework agreement donot involve the foreign AEs. 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 authorities 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. In view of these discussions, the arrangement, understanding and action in concert, with respect to framework agreement and termination thereof, is an international transaction under section 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.
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