Vodafone India Services (P) Ltd. v. Asstt. CIT

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The Tax PublishersITA No. 7514/Mum/2013 2015 TaxPub(DT) 0544 (Mum-Trib) : (2015) 168 TTJ 0001 : (2015) 114 DTR 0073 Vodafone India Services (P) Ltd. v. Asstt. CIT INCOME TAX ACT, 1961 --Appeal [Tribunal]--Additional evidence Admissibility--Additional evidence were filed by both the parties. So far as the additional evidence sought to be filed by the revenue was concerned, all the documents were related to the assessee or its group concern, it was not a case of new document which was not in the knowledge of the assessee, rather the documents were executed either by the assessee or its group concern, therefore, the scope of misuse of process and provisions of law is ruled out. These documents were admittedly not filed by the assessee in the assessment proceedings, though some of them were produced before the Supreme Court, as such additional evidences filed by both the parties were admitted. At the stage of allowing the parties to produce additional evidence what has to be considered is the connection of the evidence with the issue under consideration and further whether parties seeking permission to file the additional evidence had reasonable cause of not producing the same at the time of assessment proceedings. These aspects are kept in mind in order to avoid misuse of process of law and to set up an entirely new case. So far as the additional evidence sought to be filed by the revenue was concerned, all the documents were related to the assessee or its group concern, therefore, it was not a case of new document which was not in the knowledge of the assessee, rather the documents were executed either by the assessee or its group concern. Therefore, the scope of misuse o' process and provisions of law is ruled out. These documents were admittedly not filed by the assessee in the assessment proceedings though some of them were produced before the Supreme Court at this stage. There is no dispute about the existence and correctness of documents sought to be filed by the parties as additional evidence. All the documents are pertaining to the process of execution of agreement relating to call options and put options as well as execution of put option. Therefore, it is necessary to examine all the documents before arriving at a conclusive finding on the issue. Accordingly, in the facts and circumstances of the case, the additional evidences filed by both the parties are admitted. [Para 19] Income Tax Act, 1961, Section 254(1) Income Tax Appellate Rules, 1963, Rule 29 INCOME TAX ACT, 1961 --Capital gains--Transfer under section 2(47)Assignment of call option to purchase shares--The H Group, Hong Kong (HK) first invested into the telecom business in India in 1992 when the said group had invested in an Indian joint venture vehicle by the name HMTL. (HMTL) was later renamed as HEL (HEL). CGP stood incorporated in Cayman Islands, with limited liability, as an 'exempted company', its sole shareholders being HTL, Hong Kong ('HTL'), which, in September, 2004, stood transferred to HTI (BVI) Holdings Ltd. ('HTIHL (BVI)'). HTIHL (BVI) was the buyer of the CGP Share. HTIHL (BVI) was a wholly-owned subsidiary (indirect) of HTIL (CI) ('HTIL'). In February, 2005, consolidation of HMTL (later on HEL) got effected, consequently, all operating companies below HEL got held by one holding company, i.e., HMTL/HEL. The ownership of the said holding company, i.e., HMTL/HEL was consolidated into the Tier I companies all based in Mauritius. TIIL ('Til'). Since there was a sectoral cap/ceiling on the FDI in telecom sector, the assessee (GSPL) entered into framework agreements in March, 2006, under which the shareholding of HEL was restructured through Til, an Indian company in which AS and AG acquired shares through their group companies with the credit support provided by HITL. In consideration of credit support, the parties entered into framework agreement under which call options were given to assessee (GSPL) to buy from AG and AS companies, the entire shareholding in the Til and consequently indirect holding in HEL. The shareholding of HEL again underwent a change in August, 2006 through execution of 2006 IDFC framework agreement on similar terms of providing financial assistance by HTIL and assessee, and in consideration whereof, the assessee would have call option to buy entire equity shares of SMMS thereby its entire holding in HEL. Due to the transfer of entire share capital (single share) of CGP from HTIL Group to VIH B.V., the Vodafone acquired the controlling interest in HEL via its subsidiary VIH B.V. through the subsidiary companies of HITL Group with control of 67 per cent interest in HEL, including indirect 15 per cent holding through framework agreements. New Framework Agreements (FWAs) were executed in the months of June and July, 2007 between assessee and Indian partners holding 15 per cent indirect interest in HEL. These new FWAs were entered into because of change of holding group companies from HTIL to Vodafone. Certain changes in terms and conditions of 2007 FWAs were made which has led to the controversy in question as the AO had treated these changes being transfer/assignment of option rights held by the assessee in 2006 agreement in favour of its holding company VIH BV by virtue of 2007 framework agreements. Thus, as per the Revenue, the assessee had transferred the right to acquire 15 per cent shareholding of HEL in the 2006 framework agreements in favour of its holding company (AEJ by execution of 2007 FWAs. As there was the transaction of transfer of shareholding of CGP by HTIL to VIHBV through share transfer agreement (STA) and in consequence thereof the framework agreements of 2006 were rewritten as framework agreement 2007 under which the assessee was holding option rights indirectly of 12.25 per cent equity interest in HEL/VIL. (VTL) through AG and AS Group companies under the identical framework agreements. *Held:* The combined reading of framework agreements 2007 and shareholders agreement dt. 5-7-2007 as well as considering the relevant facts and surrounding circumstances emerged from these arrangements made pursuant to VIH BV purchased the controlling interest held by THIL in CGP, leads to the logical conclusion that option rights under the framework agreements of 2007 held by the assessee were transferred/assigned in favour of CGP. Thus, it corroborates the intention of the parties at the time of framework agreements and, thereafter shareholders agreement dt. 5-7-2007 that the option rights held by the assessee under framework agreements were to be transferred/assigned only to CGP and none other. As per clause 4.4 of framework agreement 2006, the assessee shall have the right at any time to purchase all of the indirect shareholding to the extent of 12.25 per cent in VIL as held by the group companies of AS and AG under call options. The call options under the framework agreement 2006 has to be exercised either by the assessee or its nominee whereas the call option under framework agreement 2007 has to be exercised either by the assessee or any wholly-owned subsidiary of V Group PLC. Apart from assessee or wholly-owned subsidiary of V PLC a third option was also provided under framework agreements of 2007 whereby the assessee could nominate a person other than the wholly-owned subsidiary of V Group PLC for purchase of all but not part only of the shares held by Analjit Singh and Asim Ghosh Group of companies. Therefore, it is manifest from the comparative reading of the relevant clauses of the framework agreements of 2006 and 2007 that under the framework agreements of 2006, the call option can be exercised either by the assessee or by its nominee whereas under the framework agreements 2007, the call option can be exercised either by the assessee or any wholly-owned subsidiary of V PLC. It is clear that the only difference under the framework agreements 2007, regarding call option is inclusion of any wholly-owned subsidiary of V Group PLC to exercise the call option. However, this right of exercising the call option by a person other than assessee is not automatic merely by inclusion in clause 4.4 of the framework agreements 2007, but the same is subject to assignment or transfer of rights as stipulated in clause 4.10 of the agreement which requires the assignment or transfer by GSPL though without the consent of AG AS. The inclusion of probable assignee in clause 4.4 of framework agreements 2007 alone would not tantamount to assignment or transfer of call option. [Para 33] The transfer it relation to a capital asset inter alia includes creating or parting with any right in an asset in any manner, whatsoever directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by agreement or otherwise. The essence of transfer still remains in the amended provision is the actual disposal or actual creation or parting with any interest in an asset. Without going into the means and methods, such disposal or parting with or creating any interest in an asset must exist and borne out of the arrangement or transfer. Making the provision of one of the prospective nominees would not amount to creating any interest in the asset in the shape of right to acquire the shares held under call option. Under the framework agreements of 2007, any of wholly-owned subsidiaries of V PLC is a prospective nominee but would gel the right to acquire shares only when a nomination is made by the assessee in favour of such subsidiary. Under clause 4.4 read with clause 4.10 of framework agreements, the right to acquire shares remains with the assessee till the assessee exercises its right to nominate a pre-mentioned wholly-owned subsidiary of V PLC failing which the right to acquire the shares remains with the assessee. It is clear from clause 4.4(a)(i) that the assessee shall have the right to purchase or require that any wholly-owned subsidiary of V Group PLC to purchase the shares held under the call option. It is discernible from the comparative study of the relevant clauses of two framework agreements that by change of prospective nominee it does not ' amount to transfer or creating any right in favour of the said prospective nominee until the actual nomination is made. [Para 34] Though the rewriting of the framework agreement in the year 2007 stand alone does not constitute assignment, transfer or creating any right of call options in favour of prospective nominee however, the matter does not rest at this stage because there is also a shareholders agreement dt. 5-7-2007 between the shareholders of TII on one hand and CGP TII and VIH BV on the other hand. The said shareholders agreement dt. 5-7-2007, has been filed by the revenue as an additional evidence. [Para 35] Though under FWAs the assessee was having tlae right to assign option rights to one of the probable persons/assignees, however, till the assignment took place the rights were to remain vested with the assessee. These rights to call option to purchase the shares held by Asim Ghosh and Analjit Singh including their 100 per cent subsidiaries ND Callus Information Services (P) Ltd. and Nadal Trading Company in Til stand transferred and vested in CGP India Investments (Mauritius) by virtue of Til shareholders agreement as it is clear from the els. 4.2 and 4.3 of the shareholders agreement in question. As per the definition clause, call option has the meaning assigned to the term call options under the framework agreements, therefore, all the terms have the same meaning as it was understood by the parties under the framework agreements. Even under the framework agreements of 2007 what was to be transferred under the option rights were 23.97 per cent and 38.78 per cent. of shares in Til and thereby indirect 12.25 per cent shareholding in HEL. [Para 39] The combined reading of framework agreements 2007 and shareholders agreement dt. 5-7-2007 as well as' considering the relevant facts and surrounding circumstances emerged from these arrangements made pursuant to VIH BV purchased the controlling interest held by THIL in CGP, lead to the logical conclusion that option rights under the framework agreements of 2007 held by the assessee were transferred/assigned in favour of CGP. [Para 40] Thus, it corroborates the intention of the parties at the time of framework agreements and, thereafter shareholders agreement dt. 5-7-2007 that the option rights held by the assessee under framework agreements were to be transferred/assigned only to CGP India and none other. The shareholders agreement dt. 5-7-2007 was signed in pursuant and in furtherance of framework agreements 2007 and not as an independent distinct agreement having no connection with the option rights under the framework agreements. Therefore, this Tribunal does not agree with the contention of the assessee that shareholders agreement has no relevance or bearing on the issue of assignment of call option. The observation of the Supreme Court as referred by the assessee is regarding the binding nature of documents between the parties and not to the other remaining shareholders. It is pertinent to note that the entire shareholding of Til was held by three shareholders namely, CGP India, NT and ND who are the parties to the Til SHA including the Til company itself. Therefore, the SHA is binding to all the shareholders and company as well. Even otherwise, when the issue of assignment/transfer of call options right by the assessee was not before the Supreme Court, then the said observation of the Supreme Court was not in the context of the issue before this Tribunal. [Para 40] The interpretation and construction of a document is to ascertain the meaning which the document would convey and what the parties of the document intended and understood having all the background knowledge available to the parties at the time of the contract. Therefore, to understand the true meaning and intent of the parties to the agreement, the surrounding circumstances and background knowledge is very relevant and important. In the case in hand, the framewor-c agreements as well as TII shareholders agreement were signed in the background of the SPA, share transfer agreement (STA) between HTIL and VIH BV and further with the intention to keep the 12.25 per cent shareholding in HEL indirectly through AG and AS so that the assessee could acquire the same whenever it is permissible as per the FDI limit in telecommunication sector is relaxed. Therefore, from the framework agreements, TII shareholders agreement and the background of the development as well as surrounding circumstances, is clear that the mutual intention of the parties of framework agreements and TII shareholders agreement was to transfer the option rights vested with the assessee in favour of CGP. Accordingly, the option rights including the call option held by the assessee under framework agreements stand transferred/assigned in favour of CGP by virtue of TII shareholders agreement. [Para 42] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 7514/Mum/2013
2015 TaxPub(DT) 0544 (Mum-Trib) : (2015) 168 TTJ 0001 : (2015) 114 DTR 0073

Vodafone India Services (P) Ltd. v. Asstt. CIT

INCOME TAX ACT, 1961

--Appeal [Tribunal]--Additional evidence Admissibility--Additional evidence were filed by both the parties. So far as the additional evidence sought to be filed by the revenue was concerned, all the documents were related to the assessee or its group concern, it was not a case of new document which was not in the knowledge of the assessee, rather the documents were executed either by the assessee or its group concern, therefore, the scope of misuse of process and provisions of law is ruled out. These documents were admittedly not filed by the assessee in the assessment proceedings, though some of them were produced before the Supreme Court, as such additional evidences filed by both the parties were admitted.

At the stage of allowing the parties to produce additional evidence what has to be considered is the connection of the evidence with the issue under consideration and further whether parties seeking permission to file the additional evidence had reasonable cause of not producing the same at the time of assessment proceedings. These aspects are kept in mind in order to avoid misuse of process of law and to set up an entirely new case. So far as the additional evidence sought to be filed by the revenue was concerned, all the documents were related to the assessee or its group concern, therefore, it was not a case of new document which was not in the knowledge of the assessee, rather the documents were executed either by the assessee or its group concern. Therefore, the scope of misuse o' process and provisions of law is ruled out. These documents were admittedly not filed by the assessee in the assessment proceedings though some of them were produced before the Supreme Court at this stage. There is no dispute about the existence and correctness of documents sought to be filed by the parties as additional evidence. All the documents are pertaining to the process of execution of agreement relating to call options and put options as well as execution of put option. Therefore, it is necessary to examine all the documents before arriving at a conclusive finding on the issue. Accordingly, in the facts and circumstances of the case, the additional evidences filed by both the parties are admitted. [Para 19]

Income Tax Act, 1961, Section 254(1)

Income Tax Appellate Rules, 1963, Rule 29

INCOME TAX ACT, 1961

--Capital gains--Transfer under section 2(47)Assignment of call option to purchase shares--The H Group, Hong Kong (HK) first invested into the telecom business in India in 1992 when the said group had invested in an Indian joint venture vehicle by the name HMTL. (HMTL) was later renamed as HEL (HEL). CGP stood incorporated in Cayman Islands, with limited liability, as an 'exempted company', its sole shareholders being HTL, Hong Kong ('HTL'), which, in September, 2004, stood transferred to HTI (BVI) Holdings Ltd. ('HTIHL (BVI)'). HTIHL (BVI) was the buyer of the CGP Share. HTIHL (BVI) was a wholly-owned subsidiary (indirect) of HTIL (CI) ('HTIL'). In February, 2005, consolidation of HMTL (later on HEL) got effected, consequently, all operating companies below HEL got held by one holding company, i.e., HMTL/HEL. The ownership of the said holding company, i.e., HMTL/HEL was consolidated into the Tier I companies all based in Mauritius. TIIL ('Til'). Since there was a sectoral cap/ceiling on the FDI in telecom sector, the assessee (GSPL) entered into framework agreements in March, 2006, under which the shareholding of HEL was restructured through Til, an Indian company in which AS and AG acquired shares through their group companies with the credit support provided by HITL. In consideration of credit support, the parties entered into framework agreement under which call options were given to assessee (GSPL) to buy from AG and AS companies, the entire shareholding in the Til and consequently indirect holding in HEL. The shareholding of HEL again underwent a change in August, 2006 through execution of 2006 IDFC framework agreement on similar terms of providing financial assistance by HTIL and assessee, and in consideration whereof, the assessee would have call option to buy entire equity shares of SMMS thereby its entire holding in HEL. Due to the transfer of entire share capital (single share) of CGP from HTIL Group to VIH B.V., the Vodafone acquired the controlling interest in HEL via its subsidiary VIH B.V. through the subsidiary companies of HITL Group with control of 67 per cent interest in HEL, including indirect 15 per cent holding through framework agreements. New Framework Agreements (FWAs) were executed in the months of June and July, 2007 between assessee and Indian partners holding 15 per cent indirect interest in HEL. These new FWAs were entered into because of change of holding group companies from HTIL to Vodafone. Certain changes in terms and conditions of 2007 FWAs were made which has led to the controversy in question as the AO had treated these changes being transfer/assignment of option rights held by the assessee in 2006 agreement in favour of its holding company VIH BV by virtue of 2007 framework agreements. Thus, as per the Revenue, the assessee had transferred the right to acquire 15 per cent shareholding of HEL in the 2006 framework agreements in favour of its holding company (AEJ by execution of 2007 FWAs. As there was the transaction of transfer of shareholding of CGP by HTIL to VIHBV through share transfer agreement (STA) and in consequence thereof the framework agreements of 2006 were rewritten as framework agreement 2007 under which the assessee was holding option rights indirectly of 12.25 per cent equity interest in HEL/VIL. (VTL) through AG and AS Group companies under the identical framework agreements. Held: The combined reading of framework agreements 2007 and shareholders agreement dt. 5-7-2007 as well as considering the relevant facts and surrounding circumstances emerged from these arrangements made pursuant to VIH BV purchased the controlling interest held by THIL in CGP, leads to the logical conclusion that option rights under the framework agreements of 2007 held by the assessee were transferred/assigned in favour of CGP. Thus, it corroborates the intention of the parties at the time of framework agreements and, thereafter shareholders agreement dt. 5-7-2007 that the option rights held by the assessee under framework agreements were to be transferred/assigned only to CGP and none other.

As per clause 4.4 of framework agreement 2006, the assessee shall have the right at any time to purchase all of the indirect shareholding to the extent of 12.25 per cent in VIL as held by the group companies of AS and AG under call options. The call options under the framework agreement 2006 has to be exercised either by the assessee or its nominee whereas the call option under framework agreement 2007 has to be exercised either by the assessee or any wholly-owned subsidiary of V Group PLC. Apart from assessee or wholly-owned subsidiary of V PLC a third option was also provided under framework agreements of 2007 whereby the assessee could nominate a person other than the wholly-owned subsidiary of V Group PLC for purchase of all but not part only of the shares held by Analjit Singh and Asim Ghosh Group of companies. Therefore, it is manifest from the comparative reading of the relevant clauses of the framework agreements of 2006 and 2007 that under the framework agreements of 2006, the call option can be exercised either by the assessee or by its nominee whereas under the framework agreements 2007, the call option can be exercised either by the assessee or any wholly-owned subsidiary of V PLC. It is clear that the only difference under the framework agreements 2007, regarding call option is inclusion of any wholly-owned subsidiary of V Group PLC to exercise the call option. However, this right of exercising the call option by a person other than assessee is not automatic merely by inclusion in clause 4.4 of the framework agreements 2007, but the same is subject to assignment or transfer of rights as stipulated in clause 4.10 of the agreement which requires the assignment or transfer by GSPL though without the consent of AG AS. The inclusion of probable assignee in clause 4.4 of framework agreements 2007 alone would not tantamount to assignment or transfer of call option. [Para 33] The transfer it relation to a capital asset inter alia includes creating or parting with any right in an asset in any manner, whatsoever directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by agreement or otherwise. The essence of transfer still remains in the amended provision is the actual disposal or actual creation or parting with any interest in an asset. Without going into the means and methods, such disposal or parting with or creating any interest in an asset must exist and borne out of the arrangement or transfer. Making the provision of one of the prospective nominees would not amount to creating any interest in the asset in the shape of right to acquire the shares held under call option. Under the framework agreements of 2007, any of wholly-owned subsidiaries of V PLC is a prospective nominee but would gel the right to acquire shares only when a nomination is made by the assessee in favour of such subsidiary. Under clause 4.4 read with clause 4.10 of framework agreements, the right to acquire shares remains with the assessee till the assessee exercises its right to nominate a pre-mentioned wholly-owned subsidiary of V PLC failing which the right to acquire the shares remains with the assessee. It is clear from clause 4.4(a)(i) that the assessee shall have the right to purchase or require that any wholly-owned subsidiary of V Group PLC to purchase the shares held under the call option. It is discernible from the comparative study of the relevant clauses of two framework agreements that by change of prospective nominee it does not ' amount to transfer or creating any right in favour of the said prospective nominee until the actual nomination is made. [Para 34] Though the rewriting of the framework agreement in the year 2007 stand alone does not constitute assignment, transfer or creating any right of call options in favour of prospective nominee however, the matter does not rest at this stage because there is also a shareholders agreement dt. 5-7-2007 between the shareholders of TII on one hand and CGP TII and VIH BV on the other hand. The said shareholders agreement dt. 5-7-2007, has been filed by the revenue as an additional evidence. [Para 35] Though under FWAs the assessee was having tlae right to assign option rights to one of the probable persons/assignees, however, till the assignment took place the rights were to remain vested with the assessee. These rights to call option to purchase the shares held by Asim Ghosh and Analjit Singh including their 100 per cent subsidiaries ND Callus Information Services (P) Ltd. and Nadal Trading Company in Til stand transferred and vested in CGP India Investments (Mauritius) by virtue of Til shareholders agreement as it is clear from the els. 4.2 and 4.3 of the shareholders agreement in question. As per the definition clause, call option has the meaning assigned to the term call options under the framework agreements, therefore, all the terms have the same meaning as it was understood by the parties under the framework agreements. Even under the framework agreements of 2007 what was to be transferred under the option rights were 23.97 per cent and 38.78 per cent. of shares in Til and thereby indirect 12.25 per cent shareholding in HEL. [Para 39] The combined reading of framework agreements 2007 and shareholders agreement dt. 5-7-2007 as well as' considering the relevant facts and surrounding circumstances emerged from these arrangements made pursuant to VIH BV purchased the controlling interest held by THIL in CGP, lead to the logical conclusion that option rights under the framework agreements of 2007 held by the assessee were transferred/assigned in favour of CGP. [Para 40] Thus, it corroborates the intention of the parties at the time of framework agreements and, thereafter shareholders agreement dt. 5-7-2007 that the option rights held by the assessee under framework agreements were to be transferred/assigned only to CGP India and none other. The shareholders agreement dt. 5-7-2007 was signed in pursuant and in furtherance of framework agreements 2007 and not as an independent distinct agreement having no connection with the option rights under the framework agreements. Therefore, this Tribunal does not agree with the contention of the assessee that shareholders agreement has no relevance or bearing on the issue of assignment of call option. The observation of the Supreme Court as referred by the assessee is regarding the binding nature of documents between the parties and not to the other remaining shareholders. It is pertinent to note that the entire shareholding of Til was held by three shareholders namely, CGP India, NT and ND who are the parties to the Til SHA including the Til company itself. Therefore, the SHA is binding to all the shareholders and company as well. Even otherwise, when the issue of assignment/transfer of call options right by the assessee was not before the Supreme Court, then the said observation of the Supreme Court was not in the context of the issue before this Tribunal. [Para 40] The interpretation and construction of a document is to ascertain the meaning which the document would convey and what the parties of the document intended and understood having all the background knowledge available to the parties at the time of the contract. Therefore, to understand the true meaning and intent of the parties to the agreement, the surrounding circumstances and background knowledge is very relevant and important. In the case in hand, the framewor-c agreements as well as TII shareholders agreement were signed in the background of the SPA, share transfer agreement (STA) between HTIL and VIH BV and further with the intention to keep the 12.25 per cent shareholding in HEL indirectly through AG and AS so that the assessee could acquire the same whenever it is permissible as per the FDI limit in telecommunication sector is relaxed. Therefore, from the framework agreements, TII shareholders agreement and the background of the development as well as surrounding circumstances, is clear that the mutual intention of the parties of framework agreements and TII shareholders agreement was to transfer the option rights vested with the assessee in favour of CGP. Accordingly, the option rights including the call option held by the assessee under framework agreements stand transferred/assigned in favour of CGP by virtue of TII shareholders agreement. [Para 42]