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TMI Blog2024 (7) TMI 1460X X X X Extracts X X X X X X X X Extracts X X X X ..... ights, right of first offer, tag along right, drag-along right and call put options by revoking notification of year 2000. Hence for the period in question the Call Options were not legalized. However, it is observed that in Vodafone case, Hon ble Supreme Court has discussed and analyzed Call Options at length and there seems not even a whiff that the Call Option was illegal or not a valid contract. The judgment is prior amendment of 2013 in SCRA, 1956. The Framework Agreement contemplated the transfer of SBP Shares upon exercise of the Call Option granted to GSPL, the requirement/ obligation on the Appellant to hold the underlying shares which were the subject of the Call Option was ancillary and necessary for the Call Option to be enforceable. Accordingly, the consideration could not be attributed, and was not paid, for such an ancillary requirement as it had no separable commercial value. Therefore, the consideration was not for the restriction contemplated under clause 4.1 but for the grant of the Call Option. The SCRA further defines securities to include both rights in securities and derivatives , The grant of call option by the Appellant to GSPL results in the transfer of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Period Amount demanded 227/2011 dt.15.10.2012 2007-12 Rs.11,57,03,194 + Interest; Penalty Rs. 11,57,03,194 (u/s.78) + Rs.10,000/- 101/2012 dt 16.04.2014 2012-13 Rs.3,87,54,725/- + Interest; Penalty Rs.38,75,472/- + 10,000/- 39/2014 dt 13.4.2015 2013-14 Rs.4,34,56,471/-+ Interest; Penalty: Rs.43,45,647/- + Rs.10,000/- 2. Facts relevant for present adjudication are as follows:- The appellant is registered with Service Tax Commissionerate for rendering Management Consultant Services. Department had conducted audit of the appellant for the period 2007-08 to 2010-11 and it was observed that the appellant was having income in the form of Call Option Fee but has not paid service tax treating the said income non- taxable income. The following amounts were found to have been received by the appellant, in foreign currency, as all Option Fee . Year Amount received (Rs.) 2007-08 41,16,72,000/- 2008-09 37,79,35,500/- 2009-10 0 2010-11 12,49,88,938/- 2011-12 18,38,89,162/- Total 1,09,84,85,600/- 3. Department formed an opinion that the said amount is received for rendering taxable service called support service of business or commerce as defined under section 65 (104c) and taxable under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of appellant that the allegation that Framework Agreement is an arrangement under which AS has been paid for holding the shares so that FDI is limited to 74% with the restriction on subscription or transfer of shares (clause 4.1 of Framework Agreement), is not only contrary to the facts as enumerated in clause 2.3 of SCN and under the terms of the Framework Agreement, but is also without basis, being contrary to the judgment dated 20 January 2012 of the Hon'ble Supreme Court of India in the Vodafone case (supra). The Framework Agreement provides the event involving change in FDI rules removing the restriction of foreign holding to 74% as merely a trigger event for exercise of the Call Option and not as the reason for entering into the option agreement. It would be relevant to note the recitals in the Framework Agreement which lucidly explain the reasons for entering into the agreement specifically the clause 4.3 of the said Framework Agreement. It is insisted that there is no reason to give an interpretation contrary to the express wordings of the Framework Agreement. 7. Ld. Counsel has also relied upon the decision of Hon ble Supreme Court in the case of Vodafone Internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has prayed for setting aside of the order under challenge and for the appeal to be allowed. Decision of High Court of Bombay in the case of Percept Finserve Private Limited and Ors vs. Edelweiss Financial Services Limited in Commercial Appeal (L) No.284 of 2019 in Commercial Arbitration Petition No.220 of 2014 decided on 02.02.2023 has also been relied upon. 9. While rebutting these submissions ld. Departmental Representative has mentioned that all these submissions as made by the appellant before this bench have meticulously been dealt with in the impugned order and it has correctly been held that the entire transaction in the present case, as envisaged in the FrameWork Agreement, is not a mere call option by the appellant to GSPL on the SBP shares. 10. From the facts of the case, Adjudicating Authority found that AS did not have the shares of Vodafone International Holdings BY (hereinafter referred as VIH) initially. It also declined an offer of investment in Telecom Investment India Limited, an Indian company [hereinafter referred as TII] having a beneficial direct or indirect interest of 19- 54% in HEL's issued equity share capital unless helped financially. GSPL agreed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the rules and bylaws of such a Stock Exchange. 14. In the present case, the contract of call and put option entered by the parties was neither traded on a recognized Stock Exchange nor settled on a clearing House of the recognized stock exchange in accordance with the rules and bylaws of such exchange therefore said contract entered by the parties not a legal and valid contract as per the provisions of SCRA and cannot be treated as a valid contract of derivatives. Hence, the same cannot be treated as securities, as claimed by the appellant. 15. Ld Departmental Representative further impressed upon that though it is also a fact that Put/call options have become acceptable worldwide. Still, in India till2013, their legality was questionable when a notification under Sections 16 and 28 of the Securities Contracts (Regulation) Act, 1956, was published by SEBI on 03.10.2013 to include Options Contracts within its sphere. SEBI, on various occasions, had clarified that call options and put options are illegal for two reasons: (1) these Contracts cannot be considered valid derivatives contracts as they can only be traded on stock exchanges and not through private contracts betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VIH) based on the fact that the Appellant was paid the consideration for the call option for holding shares. As such, it supported the business compulsion/ requirement of VIH 19. Finally, it is submitted that the defect from 1.7.2012 the categorization of services is only for accounting purposes. All the activities included in the definition of service and not findings a place in the negative list of services under section 66D of the Act are subjected to Service Tax. The service provided by the appellant is not covered by any of the services mentioned in the said negative list nor are exempted by way of any notification. Therefore, the appellant was liable to pay service tax on the Call Option Fees received by him. Impressing upon no infirmity in the findings in the order under challenge, the appeal is prayed to be dismissed. 20. As regards as to whether the activities covered by definition of support service of business or commerce, ld. Departmental Representative has submitted that the definition of the said service in Section 65 (104c) of Finance Act clarifies that the definition is inclusive one. (b) It is clear that the definition of support services of business or commerce ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Holdings B.V. (Vodafone) acting as the confirming party to the frame work agreement. 22. To adjudicate the same, we observe following to be the apparent admitted facts : Year Event 1992 Vodafone India was incorporated as Hutchison Max Telecom Limited ( HMTL ). Appellants Company, Max Telecom Ventures ( MTV ) owned 50% of the shareholding. 1998 MTV divested 41% stake in Vodafone India 2005 MTV divested the balance stake in Vodafone India January 2006 Appellant acquired 7.577% indirect stake in Vodafone India through Scorpio Beverages Private Limited, ND Callus Service Private Limited, and other group companies. The investment was financed through a rupee loan facility availed from Rabo Finance India Limited. The loan was secured by a) pledge of underlying indirect stake in favour of the lender; and b) standby letters of credit issued by Caylon Bank. May 2007 The impugned Framework Agreement with Vodafone India offering call options in respect of the 7.577% indirect stake of the Appellant against call option fee to be paid to the Appellant was executed. May 2010 The Appellant increased its indirect stake to 7.67% as ND Callus Service Private Limited, a company of the Appellant, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities; 25. We also observe that the said definition of securities under the SCRA was made applicable for Service Tax also, by virtue of sub-section 65(93) of the Act. The said provision, as in force up to 31.06.2012, stated that: securities has the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); 26. From the above provisions it become clear that the Call Option is a derivative or a right in securities. Both of which are specifically included in the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment in Vodafone case (supra) the nature of all Options and their relevance in merger and acquisitions has been discussed clarifying that Call Option is a transaction in securities. The department s plea that Framework Agreement was an arrangement for holding shares in question was not a Call Option but was that of retaining of option by VIH to keep control over the entire structure has also been rejected by Hon ble Apex Court. In para 74 to 76 of the judgment in Vodafone case (supra) Hon ble Supreme Court has construed the Framework Agreement and held that the agreement did not confer any rights to Vodafone, and it was an agreement to confer call and put options to VISPL and/or the appellant and its Associate Companies. In the light of these observations of Hon ble Supreme Court we hold that the Framework Agreement contemplated the transfer of SBP Shares upon exercise of the Call Option granted to GSPL, the requirement/ obligation on the Appellant to hold the underlying shares which were the subject of the Call Option was ancillary and necessary for the Call Option to be enforceable. Accordingly, the consideration could not be attributed, and was not paid, for such an anc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of UP - AIR 2005 (SC) 1103 wherein the earlier decision of Privy Counsel in Dilworth vs. Commissioner of Stamps (1899) A C 99 was relied upon. This Tribunal also in the case of Air Liquid North India Pvt. Ltd. vs. CCE, Jaipur reported as 2012 (27) STR 295 (Tri.-Delhi) while relying upon Godfray Philips (supra) case has held that the similar transaction as the case in question was not covered under the scope of Business Support Service . The Departments appeal against the said order of the Tribunal has been dismissed by Hon ble Rajasthan High Court in a case reported as 2018 (8)TMI 1291. 32. It stands established from the definition above that from the entire above discussion, it is clear that the activity of giving call option is not an activity of rendering service. It is rather a transaction dealing in goods. Department has relied upon the dictionary meaning of commerce to mean buying and selling of commodities and upon apex court decision in Gannon Drunkly Company Madras Ltd. vs. State of Madras reported in 1954 (15) STC 216 wherein trade and commerce both denote an idea of sale and purchase with a view to make profit. But in the light of above discussion this plea itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded from the scope of the definition of 'service' in Section 65B (44). 37. The impugned Show Cause Notice has been issued by invoking the extended period of limitation. However, from the order under challenge, we observe that there is no discussion regarding any specific act on part of appellant which may establish the intent to evade tax. There is no discussion regarding which of the situation listed in clause (a) to (e) of the proviso to section 73 (1) of Finance Act is attracted. 38. From the entire above discussion, it is clear that granting call option is not an activity of rendering service. The appellant was of this bonafide belief only, which is why the service tax on call option fee was not paid by the appellant. In view of these apparent facts on record and absence of any evidence about the positive act of the appellant to evade duty, we hold that the department has wrongly invoked the extended period of limitation. We draw our support from the decision of this Tribunal in the case of Grindwell Norton reported as 2018 (1) TMI 715 (Tri. Ahmd.) wherein it was held that when appellant did not pay service tax under the bonafide understanding of the law and the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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