A tax tribunal has settled the issue of deemed international transactions when the company concerned terminates its call option. The case relates to Vodafone India Services not exercising its call option to buy just over three per cent stake in group company Vodafone India. Nitin Narang, executive director at Nangia & Co, said Vodafone India Services, a back office company for the group, had the option to buy 3.18 per cent equity in Vodafone India for Rs 27.8 million, so long as the fair market value of these shares was less than Rs 15 billion. If the latter value rose higher, it was to pay slightly more. This stake in Vodafone India was held by Omega Telecom Holdings, in which a majority stake of over 60 per cent was held by SMMS Investments. In turn, IDFC Equity had a stake in SMMS. Rather than buying this stake, Vodafone India Services decided not to exercise the call option. It paid Rs 21.25 crore to IDFC for terminating the call option. This transaction prompted tax officials to levy the demand. Their contention was that the assessee should have received Rs 16 billion (Rs 21.25 that it paid to IDFC and Rs 15.8 billion from shares), had it exercised the call option.
The whole deal was deemed an international transaction and hence coming under transfer pricing rules. The consideration value was based on prices of the shares that IDFC later sold in the market.Vodafone India Services contended termination of an option could not be taxed. It also objected to the argument that this was an international transaction, saying the deal was between domestic companies. The Income Tax Appellate Tribunal at Ahmedabad rejected this argument and held it to be an international transaction, falling under the ambit of tranfer pricing regulations in India. It said the deal was done in concert with other group companies, noting the stake holdings and incorporations in this regard. However, it rejected the way the tax liability was calculated and ordered this be redone.