Rs 837 Cr Tax Demand of Vodafone India Stayed by ITAT – Judgment

ORDER

Pramod Kumar, Accountant Member – By way of this application, the assessee applicant seeks a stay on collection/recovery of disputed tax and income tax demands aggregating to Rs 837.84 crores in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 for the assessment year 2012-13, which is impugned in appeal before this Tribunal.

Background:

2. Briefly stated, the relevant material facts, as required to be taken of at this stage of hearing of stay petition, are as follows. The assessee before us a domestic private limited company, and it had disclosed the total income of Rs 22.91 crore. However, the income as finally assessed by the Assessing Officer, was Rs 1,640.15 crores, and this huge difference between the returned income and assessed income has arisen on account of additions of:

The core issue in dispute:

3. As evident from the facts set out above, over 98% of the impugned additions, in terms of quantum, relate to the arm’s length price adjustment on account of termination of call options. To get an idea about the nature of this arm’s length price adjustment, a few material facts, as culled out from material on record, need to be taken note of. The assessee is a wholly owned subsidiary of a Mauritian company by the name of Hutchinson Teleservices (India) Holdings Limited [Hutch- M, in short], which, in turn, was a wholly owned subsidiary of CGP Investments (Holdings) Limited, a company incorporated in Cayman Islands [CGP-Cayman, in short]. CGP-Cayman, in turn, was owned by Hutchison Telecommunications International Ltd (HTIL-Cayman, in short), which was owned by the Hutchison Group Hong Kong (HG-HK, in short). HTIL- Cayman had entered into telecom business in India when it invested in joint venture vehicle by the name of Hutchinson Max Telecom Limited (later renamed as Hutchinson Essar Limited; HEL, in short) in 1992. [This company, at a later stage- post acquisition of interest in HTIL- Cayman by Vodafone International Holdings BV, was renamed as Vodafone India Limited]. When a group consolidation exercise took place in 2005, all the operating companies in India were placed under the ownership of HEL, which, in turn, was owned by tier I companies in Mauritius. The other shareholders included Telecom Investments India Pvt Ltd (TII, in short), Indusind Telecom Network Pvt Ltd (later renamed Omega Telecom Holdings Pvt Ltd- Omega, in short) and Usha Martin Telematics Limited (UMTL, in short). In November 2005, when FDI ceiling in the telecom sector increased from 49% to 74% and it was also clarified that proportionate foreign investment held in Indian company was to be counted towards the ceiling of 74%, the HTIL group decided to buy out stakes owned by the Indian shareholders, and to overcome the foreign holding limit, entered into arrangements with Indian investors in the form of ‘framework agreement’ under which the financial support was provided by HTIL, the ultimate holding company of the group, and, in turn, certain entities, including the assessee company, were given an option to buy the shares at a fraction of the fair market value. It was in this backdrop that the assessee company entered into framework agreements, in March 2006, with Analjit Singh (AS, in short) and Asim Ghosh (AG, in short), under which the shareholdings of HEL was restructured through TII in which AS and AG acquired the share with the help of credit support provided by HTIL, and under which, the assessee had call option to buy, from AS and AG, entire shareholding of TII and consequent indirect holding in HEL. The shareholding pattern in HTIL was subjected to yet another change in August 2006 when Hindujas Group exited and its shareholding was acquired by an Indian company by the name of SMMS Investments Pvt Ltd- a joint venture company formed by three Indian entities, collectively referred to as ‘investors’, namely India Development Fund, Infrastructure Development Finance Co Ltd, and SSKI Corporate Finance Pvt Ltd. Pursuant to this change, a fresh framework agreement was entered into under which, inter alia, the assessee had a call option to “purchase the entire share capital of SMMS at a pre-determined price equal to Rs 66,12,50,000 plus 15% compound interest”. In February 2007, the Vodafone Group, through Vodafone International Holdings BV (VIH, in short), acquired entire stake in HTIL-Cayman, and thus the controlling interest in HEL. The new Framework Agreements were then entered into, in view of the fact that, in terms of the original framework agreements, any change in the control of the company was to result in a situation that the Indian partners were not to remain bound by the framework agreements. A series of agreements, including agreements between various stakeholders on 5th June 2007 providing for exercise of put option and cashless option under this agreement rather than under 2006 agreement and between SMMS HTIL and VIH on 7th June 2007 for regulating the affairs of Omega, were signed. The shareholding pattern of Omega now stood at 38.4% with HTIL-M and 61.6% with SMMS. Under the new Framework Agreement dated 6th June 2007, amongst other things, the assessee had a call option to buy entire equity shares of SMMS. The price at which the assessee was to be “Rs 20 million plus 17.5% per annum (compounded annually) interest subject to Rs 7.6 million”.

4. On 24th November 2011, the assessee terminated this framework agreement, and rather than exercising the option to purchase the entire share capital of SMMS at a price of Rs 2 crores (and, if FMV of these shares exceeded Rs 15 billion, Rs 2 crores multiplied to the factor obtained by dividing FMV by Rs 15 billion), which seemed a highly beneficial and valuable proposition- as is contended by the revenue, by paying Rs 21.25 crore as termination fees to come out of this arrangement. The importance and value of this option, as seems to be the case of the revenue, can be appreciated from the fact that SMMS had 61.6% holding in Omega, which, in turn, has 5.11% holding in HEL, and the effective indirect holding in HEL thus worked out to 3.15%. As against this transaction of giving up option to buy 3.15% in Vodafone India for a consideration of Rs 2 crores, the assessee was assigned cashless option for buying 0.1234% shares in HEL for a consideration of Rs 62,24,27,849. It is this transaction of terminating the call option which has resulted in the impugned ALP adjustment.

5. The short case of the revenue seems to be that by terminating the framework agreement the assessee was put to deliberate and undue loss, while the VIH-BV has correspondingly gained- something for which the assessee should have been compensated adequately rather than being made to pay Rs 21.25 crores as termination fees. It’s the arm’s length price of this transaction which is in dispute before us. While the assessee claims an expenditure of Rs 21.25 crores, the TPO holds, with the approval of the DRP now, that the assessee should have been paid Rs 1588.85 crores. It has been noted by the TPO that assessee is a party to the agreement with several entities including VIH-BV, and, as the framework agreement would show, various parties including the assessee and the VIH-BV were acting in concert, and various factors, indicating in that direction, have been pointed out. It is also the stand of the TPO that “no unrelated party would terminate these valuable options without adequate consideration” and that the 3.15% shareholding in HIL that the assessee could have bought under the call option have ultimately found their way to the VHI-BV, 2.52% in the current year, through TII and CGP, and the remaining 0.63% subsequently though Analjit Singh. Giving up the call option, it seems to be the suggestion of the revenue authorities, was a transaction in concert with its several AEs, including VIH-BV, for the benefit of VIH-BV. As for the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt Ltd v. CIT [(2016) 69 taxmann.com 283 (Bom)], the DRP has noted that the observations of Hon’ble Bombay High Court in the said case are “distinguishable on the facts of the present case” as “there was no express ‘termination’ of options rights by the assessee(whereas)…. In the present case, the assessee has entered into a ‘termination agreement’ to terminate its option” The arm’s length value of this termination of the agreement should have been the fair market value of the shares which, under the framework agreement, the assessee could have obtained for a token value of Rs 2 crores. The amount is worked out by computing the FMV of these shares on the basis of a transaction, though, at much earlier point of time, which was 0.1234% of shares in HEL at Rs 62.24 crores- as against an indirect holding of 3.15% as on now. The ALP adjustment so computed works out to Rs 1588,85,55,303.

Rival contentions on the stay petition:

6. Learned senior counsel submits that the issue in the appeal is squarely covered by Hon’ble Bombay High Court’s judgment in the case of Vodafone India Services (supra). He took us through various observations made by Their Lordships so as to demonstrate the parity in facts of this case vis-à-vis the case before Their Lordships. It is pointed out that the Dispute Resolution Panel has taken note of the above judicial precedent but distinguished the said decision on wholly irrelevant and frivolous ground. Learned senior counsel also referred to, read out from, and relied on, the judgment of Hon’ble Supreme Court in the case of Vodafone International Holdings BV v. Union of India [(2012) 341 ITR 1 (SC)]. He submitted that the transaction of paying the fees for termination of call options is between two domestic entities, and, by no stretch of logic, such a transaction fits into the definition of international transaction under section 92B. It is also pointed out that out of the demand impugned before us, as much as Rs 307 crore is on account of interest under section 234 C which is ex facie unsustainable in law. Without prejudice to all these submissions, learned senior counsel further submits that in any event, the arm’s length price of the transaction is based on the comparable instance which took place in May 2007 i.e. acquiring 0.1234% of VEL holding for Rs 62.24 crores. Even if, therefore, the contention of the Assessing Officer is upheld in principle, the impugned adjustment cannot be sustained in law as the matter will have to be sent back to the Assessing Officer for recomputation on the basis of correct comparables. As for the other issues in appeal also, learned senior counsel points out, these issues are settled in favour of the assessee by binding judicial precedents, and he takes us through the same. When asked whether he is in a position to make part payment of disputed demands, he submits that it is a fit case for grant of stay on entire disputed demand. He, however, volunteers to pay Rs 10 crore to mainly cover the other issues in the appeal, even though, as he points out in meticulous detail, on these issues also, he has a strong case on merits and judicial precedents in his favour.

7. Learned Departmental Representative vehemently opposes the stay petition. He submits that all the issues being raised by the assessee on merits, including the judgment of Hon’ble Bombay High Court and Hon’ble Supreme Court- in the cases of Vodafone India Services (supra)and Vodafone International Holdings (supra), have been adequately and judiciously dealt by the DRP, and the demands raised by the Assessing Officer having been judicially approved, there is no reason for not paying the disputed demands now. Learned Departmental Representative vehemently relied upon the orders of the authorities below. It is submitted that merely because the assessee has some arguments in support of his plea, a stay on collection or recovery of the disputed demands cannot be justified. The working of the Government, according to the learned Departmental Representative, will come to a halt if the collection of disputed demands is stayed in a routine manner. He thus urges us to reject the stay petition and decline to interfere in the matter. Without prejudice to these submissions, learned Departmental Representative submits that the assessee should be asked to pay at least 15% of the disputed demands, which works out to approximately Rs 125 crores. He submits that in a materially identical situation, dealing with the demand of Rs 423.88 crores, the Mumbai K bench of this Tribunal, vide order dated 18th March 2016, directed the assessee to pay Rs 50 crore. By the same logic, and since disputed demands in this case are Rs 837.84 crores, the assessee should be asked to pay at least Rs 100 crores, plus the corporate guarantees for the remaining amount, before the grant of stay.

8. In rejoinder, learned senior counsel points out that, so far as the decision of Mumbai K bench is concerned, what the learned Departmental Representative has not informed us is that after the payment of Rs 50 crore, in terms of Tribunal’s order dated 18th March 2016, the actual hearing of appeal has not taken place due to dilatory approach being adopted by the revenue authorities. It is claimed that adjournments are sought by the revenue authorities on frivolous grounds. It is then pointed out that the assessee’s petition under section 154 is pending before the DRP and no action has been taken on the same. It is then submitted that there is a direct judgment by Hon’ble jurisdictional High Court to support the proposition that when an issue is covered, in assessee’s own case- as in the present case, by decision of Hon’ble High Court, related demands cannot be recovered by the revenue authorities. The plea of the revenue, according to the learned representatives for the revenue, devoid of any merits in law or on facts. We are once again urged to grant the stay on collection/ recovery of the disputed demands. In response to our questions, learned senior counsel takes instructions from the client and agrees to pay Rs 50 crore as part payment of the disputed tax. He, however, urges us to waive the corporate guarantee as it involves considerable time and problems in processing.

Our decision on the stay petition:

9. We must, and we do, refrain from making any observations on the merits of the case, and on whether or not the learned DRP was justified in distinguishing the judgment of Hon’ble Bombay High Court in assessee’s own case. We express no opinion, at this stage, on the rival contentions on merits or even on factual aspects as discernible, though without the benefit of assistance of either of the parties, from the material on record. As regards the matter being covered by Hon’ble Bombay High Court decision, in assessee’s own case for the assessment year 2008-09, and the impugned demands being stayed for that reason, it would prima facie appear to us, from a plain reading of the related judgment, that in the said case, there was no express termination of call option, and the fresh Framework Agreement in 2007 itself was treated, by the revenue authorities, as an assignment, or transfer, of the call option, and on this basis, it was held to be an international transaction. The stand so taken by the revenue authorities was negated by Hon’ble Bombay High Court, but the DRP has distinguished the said decision on the basis of a factual aspect, i.e. there was no express ‘termination’ of options rights by the assessee in the said case and that the assessee has entered into a ‘termination agreement’ in concert with several other associated entities in the year before us. The question, therefore, arises whether, on account of this distinction pointed out by the DRP, Hon’ble Bombay High Court’s aforesaid judgment can come to the rescue of the assessee at all. We express no opinion on this issue but we may simply point out that a conscious call is indeed required to be taken whether such a distinction has been rightly made by the DRP and whether such a distinction is so material that it will affect the legal outcome in the present case. That exercise cannot be conducted at this stage. All aspects of the case need to be dealt with in detail only after hearing the rival contentions at length and after stand of the parties on the same. We make it clear that none of the observations made by us in this order will have any influence on the hearing of appeal on merits, as these observations are based on limited arguments before us and are, therefore, tentative in nature. Coming to our view so far as prima facie merits of the appeal, about which we must be satisfied before granting a stay on related demands impugned before us, are concerned, suffice to say that, on the face of it, the appeal before us does not appear to be frivolous appeal, and based on our understanding, on the basis of this limited discussion, the assessee, therefore, has a prima facie arguable case. The assessed income in this case is more than seventy times the returned income, and the impugned additions are in respect of contentious points. In our considered view, and on a perusal of material on record and on consideration of rival contentions, the balance of convenience is in favour of partial stay on collection/ recovery of disputed demands. We, therefore, deem it fit and proper to grant a stay on collection/ recovery of the disputed demands, for a period of six month from the date of this order, till pronouncement of the order on the related appeal, or till further orders- whichever is earlier, on the condition that

(a) the assessee will deposit a sum of Rs 60 crores within two weeks from the date of this order being pronounced in the open court, the assessee will pay further amount of Rs 20 crores within four further weeks, i.e. six weeks from the date of this order, and yet another Rs 20 crores in four more weeks, i.e. ten weeks from the date of this order;

(b) the assessee will give a corporate guarantee, to the satisfaction of the Assessing Officer, within the two weeks from the date of this order, for the balance amount; and that

(c) the assessee, as also the revenue, will fully cooperate in expeditious disposal of the appeal, and will not seek any adjournment on any grounds whatsoever, other than the grounds on which the bench is satisfied about the grounds being wholly unavoidable and bonafide. In the event of adjournments, contrary to these directions, being sought by the assessee, the stay on collection/ recovery of demand, as also the out of turn hearing of this appeal, shall stand vacated forthwith. In case any adjournment is sought by the revenue authorities, which in the opinion of the bench is not wholly unavoidable and bonafide, in addition to any such action as the bench may deem fit and proper to ensure deterrence against such a conduct, the assessee will not be required to make the payment of instalments remaining outstanding, if any.

10. As a corollary to the stay being granted, the appeal is also granted out of turn hearing, subject to compliance with the terms of stay as above. The parties waive notice of hearing, and the date of hearing of appeal is pronounced, at the time of hearing of this stay petition itself, in the open court for 3rd May 2017. The parties will file all the requisite documents, such as paper books, well in advance.

The conclusion:

11. In the result, the stay petition is allowed in the terms indicated above.