The income tax appellate tribunal (ITAT) has upheld the arm’s length price (ALP) adjustment against Vodafone India Services by the income-tax department. However, the Ahmedabad bench of the tribunal said that the department needed to modify the order that attributed Rs 1,588 crore as business income to the assessee and recalculate the liability of the firm under capital gains. The transaction in question is: Vodafone India Services had the right to buy entire equity capital of SMMS Investment Pvt Ltd — which held 5.11% equity capital of the assessee through a web of holdings — for Rs 2 crore. In effect, the assessee had a right to buy 3.15% equity in Vodafone India for Rs 2.78 crore as long as fair market value (FMV) of these shares was less than Rs 1,500 crore. According to the agreement, even if the FMV was more than Rs 1,500 crore, the assessee was to pay marginally more for buying these shares worth over Rs 1,500 crore. Under the same agreement, if Vodafone India Services terminated its right to acquire share, the company would pay Rs 21.25 crore to IDFC Investors at the time of terminating call options. Experts said that the agreement was ironical as the assessee is required to pay up for giving up its call option which was advantageous to it.
“It is this transaction which has triggered the impugned arm’s length price adjustment of Rs 1588. 85 crores, Narang said. The case of revenue department was that rather than assessee paying Rs 21.25 crore, on termination of call option, the assessee should have, in arm’s length situation, received Rs 1610.15 crore (Rs 1588.85 cr+Rs 21.25 cr) at the time of relinquishing its right to buy shares,” Nitin Narang, executive director-transfer pricing at Nangia & Co said. A call option provides the holder with a right to purchase the underlying stock but not the obligation to purchase the stock at a specified price (strike price) and date. A person buys a call option if he anticipates the market to go up. In its order, ITAT stated that even if an assessee hasn’t assigned any consideration to transfer of a capital asset under an international transaction, the computation of capital gains has to be on the basis of ALP rather than stated consideration.