2015 (10) TMI 2487 - HC - Income Tax

Transfer u/s 2(47) - satisfaction of essential ingredients - effect of amendments - intention of the assessee to control the telecommunication business of HEL in India through the TII and downstream companies - Held that - One deal cannot be picked up in isolation so as to hold that it is a deliberate and intentional act of parties to circumvent Indian tax structure. The deals and agreements are but part of a larger and bigger picture to gain entry in Indian Telecom market and Multinational Corporations to adopt a mode by which they firmly establish themselves by taking support from Indian partners. On the same transactions and same set of facts reaching a different conclusion than that of the Hon ble Supreme Court is not possible and rather impermissible. None of these amendments and post the Supreme Court judgment would enable the Revenue to urge that the position as noted in the Supreme Court judgment no longer subsists. Even if there was a change therein on the basis of the Revenue s stand itself the Tribunal concluded quite contrary to what is now urged before us. Apart therefrom, we find that the essential ingredients of the definitions as amended are not satisfied and the conflicting and shifting stand of the Revenue worsens the position. Another agreement between a co-subsidiary of the appellant CGP Mauritius and AG and AS and their companies which allegedly had yet another set of call options in favour of CGP. - Held that - this is only an intention of the parties. It has never translated, even according to the Tribunal, into anything beyond what is concluded by the Tribunal and to be termed as a transfer. Applicability of section 92B(2) - Held that - The Tribunal does not indicate in any of the foregoing paragraphs which we have referred or reproduced above that the transaction in question is in the nature of purchase, sale or lease of tangible or intangible property. The Revenue itself understands that this provision does not necessarily require a transfer or assignment of a property or creating any right or interest in the same, but attempts to justify the conclusion reached by the Tribunal and to be found in the foregoing paragraphs. For the purpose of applicability of section 92B itself we will have to draw an inference but without some concrete primary facts being established. Mere receipt of incidental benefits may not be sufficient to attract transfer pricing provisions. In the ultimate analysis, the requirements of section 92B read with section 92F are fulfilled according to the Tribunal because the 2007 Framework Agreement is an arrangement, understanding or action in concert between the assessee and VIH BV for grant of call option by AG and AS to the assessee against the agreed consideration paid by VIH BV. If that is how the matter is approached, then, we do not see any basis for the subsequent observations. The Hon ble Supreme Court has categorically held that there is no capital gain which can be taxed in terms of Indian tax regime. This is as far as the transfer of a share. The Court holds that there is no transfer of asset. As far as the above transactions are concerned, that is termed as arrangement creating an interest in option rights under the Framework Agreement of 2007. As already held this is also not covered by section 2(47) as amended retrospectively. Regarding Call Centre Business Applicability of section 92B(2) - whether appellant and HWP India were associated enterprises? - whether any capital tax gain was attracted in the hands of HTIL when it transferred its 67% VIL shares to VIH BV - Held that - In this case, it is an admitted position that before signing of the SPA, HTIL, appellant and HWP (India) are associated enterprises. HTIL is a non-resident. Since the transaction is between associated enterprises and one of them is a non-resident, the condition specified in section 92B(1) is satisfied. Further, the transaction involves sale of call centre business which is a capital asset. The capital asset of the assessee is getting transferred which in turn affects the income or profits and assets of the appellant. Hence this transaction of sale of call centre satisfies the condition specified in section 92B(1) and constitutes an international transaction even if the assessee s contention that the BTA was signed before the implementation of the SPA is assumed to be correct for the sake of argument. There was no warrant for the Tribunal to have rendered a conflicting conclusion on the applicability of the two provisions, namely, sections 92B(1) and 92B(2). In any event, the Tribunal committed a basic and fundamental error in not referring to Chapter X, its title and subsection (1) of section 92 before applying the mechanism devised therein. If Chapter X has been inserted to make special provisions relating to avoidance of tax and by section (1) of section 92 computation of income from international transaction having regard to arm s length price has to be done, then, there ought to be an income arising from an international transaction. That only would enable applying further provisions in this Chapter. That being not the position even on this aspect, we are unable to agree with Mr. Setalvad. Thus Tribunal s order is vitiated by serious errors of law apparent on the face of the record. Tribunal s order contains inconsistent and contradictory findings on the issue discussed above. We have also indicated the contradictions and inconsistencies in these findings in the foregoing paragraphs. We have found that the Tribunal s attempt to get over the binding judgment of the Hon ble Supreme Court in the manner done also cannot be sustained. - Decided in favor of assessee.

Summary

Issues Involved:

1. Jurisdiction of the Tribunal to determine transfer of rights.
2. Misreading and mischaracterization of Supreme Court judgment.
3. Tribunal's bypassing of Supreme Court judgment observations.
4. Tribunal's handling of transfer of call option rights.
5. Tribunal's adherence to Supreme Court's findings on transfer pricing provisions.
6. Tribunal's interpretation of transfer under the TII Shareholders' Agreement.
7. Tribunal's view on assignment under Section 2(47) of the Act.
8. Violation of natural justice by Tribunal.
9. Tribunal's reliance on unargued documents.
10. Tribunal's change of basis of Respondent's case.
11. Tribunal's admission of TII Shareholders' Agreement.
12. Tribunal's view on contingent call and put options under TII Shareholders' Agreement.
13. Tribunal's holding on international transaction under Section 92B.
14. Tribunal's inconsistency in determining the international transaction.
15. Tribunal's misinterpretation of call and put options.
16. Tribunal's view on exercise of put options not considered by Supreme Court.
17. Tribunal's widening of 'international transaction' definition.
18. Tribunal's view on sale of Call Centre business as an international transaction.
19. Tribunal's non-application of mind on lifting corporate veil doctrine.
20. Tribunal's upholding of DRP's action on international transaction.
21. Tribunal's adoption of valuation method for Call Centre business.

Detailed Analysis:

1. Jurisdiction of the Tribunal:
The Tribunal was challenged on its jurisdiction to determine the transfer of rights, which was not explicitly set out in the draft order of assessment, the order of the TPO, or the DRP. The High Court found that the Tribunal had overstepped its jurisdiction by making determinations on issues not previously raised.

2. Misreading and Mischaracterization of Supreme Court Judgment:
The Tribunal was accused of misreading the Supreme Court's judgment in VIH BV vs. Union of India. The High Court noted that the Tribunal incorrectly held that it was not bound by the Supreme Court's judgment, which had clearly addressed the transfer of rights and the nature of the transaction.

3. Bypassing Supreme Court Judgment Observations:
The High Court observed that the Tribunal erred in bypassing the Supreme Court's observations and findings from the judgment dated 6 September 2013. The Tribunal dismissed these findings as irrelevant without proper justification.

4. Handling of Transfer of Call Option Rights:
The Tribunal's handling of the transfer of call option rights by the appellant to its associated enterprise was found to be flawed. The High Court noted that the Supreme Court had already examined the transfer of controlling interest, which included the call option rights.

5. Adherence to Supreme Court's Findings:
The High Court emphasized that the Tribunal was bound by the Supreme Court's findings, which had already decided the jurisdictional fact regarding the transfer pricing provisions. The Tribunal's deviation from these findings was incorrect.

6. Interpretation of Transfer under TII Shareholders' Agreement:
The Tribunal's interpretation that the call options were transferred under the TII Shareholders' Agreement was found to be inconsistent with its own findings that a transfer can only occur upon actual nomination.

7. View on Assignment under Section 2(47) of the Act:
The Tribunal's holding that an assignment occurred under the TII Shareholders' Agreement by implication was found to be contradictory to its earlier finding that a transfer requires actual disposal or creation of an interest in an asset.

8. Violation of Natural Justice:
The High Court noted that the Tribunal violated principles of natural justice by not granting the appellant an opportunity for an oral hearing and by relying on documents not argued by the parties.

9. Reliance on Unargued Documents:
The Tribunal's reliance on documents not referred to or argued by any party without notifying the parties about their relevance was found to be a procedural error.

10. Change of Basis of Respondent's Case:
The Tribunal was found to have changed the basis of the Respondent's case without proper justification, which was inconsistent with the principles of fair adjudication.

11. Admission of TII Shareholders' Agreement:
The Tribunal's admission of the TII Shareholders' Agreement without considering its relevance in light of the High Court's directions was found to be an error.

12. View on Contingent Call and Put Options:
The Tribunal failed to appreciate that the call and put options under the TII Shareholders' Agreement were contingent upon the exercise of rights under the 2007 FWAs, and thus remained inchoate and unexercised.

13. Holding on International Transaction under Section 92B:
The Tribunal's holding that the grant of call option under 2007 FWAs against consideration is an international transaction was found to be inconsistent with its finding that no assignment occurred under the 2007 FWAs.

14. Inconsistency in Determining International Transaction:
The Tribunal's determination that the international transaction was between the appellant and VIH BV was found to be inconsistent with its finding that the assignment was from the appellant to CGP India Investments Limited.

15. Misinterpretation of Call and Put Options:
The Tribunal's holding that the call and put options under the 2007 FWAs are the same was found to be incorrect, as both are distinct rights vested with different parties.

16. View on Exercise of Put Options:
The Tribunal's finding that the exercise of put options was not considered by the Supreme Court was found to be incorrect, as the Supreme Court had examined this aspect.

17. Widening of 'International Transaction' Definition:
The Tribunal's widening of the definition of 'international transaction' beyond its scope as defined under Section 92B(1) was found to be legally unsustainable.

18. View on Sale of Call Centre Business:
The Tribunal's holding that the sale of the Call Centre business was an international transaction was found to be erroneous, as it did not properly apply the criteria for lifting the corporate veil and the doctrine of substance over form.

19. Non-application of Mind on Lifting Corporate Veil Doctrine:
The Tribunal was found to have grossly misconceived the law by not properly applying the criteria for lifting the corporate veil and the doctrine of substance over form as laid down by the Supreme Court.

20. Upholding DRP's Action on International Transaction:
The Tribunal's upholding of the DRP's action in treating the transaction as an international transaction was found to be unjustified, as the TPO had sought to treat the transaction under a different section.

21. Adoption of Valuation Method for Call Centre Business:
The Tribunal's adoption of the valuation method for the Call Centre business based on the Discounted Cash Flow method was found to be inconsistent with its own findings and the agreed methodology between the parties.

The High Court ultimately allowed the appeal, set aside the Tribunal's order, and dismissed the cross-objections filed by the Revenue.