We are pleased to
release a tax alert which summarizes a recent ruling of the Mumbai Income Tax
Appellate Tribunal (ITAT) in the case of Vodafone India Services Pvt. Ltd.
(Vodafone Services or Taxpayer) on the scope of the definition of
international transaction and deemed international transaction for
applicability of transfer pricing (TP) provisions of the Indian Tax Laws (ITL).
The ITAT, based on the facts of the case, ruled that the revision of Framework Agreements (FWA) considered in conjunction with relevant shareholders’ agreement, amounted to assignment/ transfer of call options rights held by the Taxpayer in favor of its nonresident (NR) Associated Enterprise (AE) and therefore qualifies as an international transaction under the TP provisions of the ITL. The ITAT reached this conclusion even though there was no formal or written agreement between the Taxpayer and its AE for the transfer/assignment. The ITAT accordingly upheld the TP adjustment for determining the Arm’s Length Price (ALP) which the Taxpayer should have received for assignment/transfer of the option rights.
Further, in respect of the sale of call centre business by the Taxpayer to another domestic entity, Hutchison Whampoa (India) Pvt. Ltd. (HWP India), a subsidiary of Hutchinson Whampoa Ltd. (HWL), the ITAT ruled that the transaction was in substance entered into between the Taxpayer and HWL, an NR AE of the Taxpayer, even in the absence of a formal or written agreement between the Taxpayer and its AE for the business sale. The ITAT therefore held that the same constituted an international transaction under the ITL. The ITAT upheld that Discounted Cash Flow (DCF) was to be considered for determining the ALP for the sale of call centre business; but remanded the manner of computation of the ALP back to the Tax Authority.
TP provisions under the ITL are applicable to international transactions. The term “international transaction” would generally cover transactions between two or more AEs, where either one or both of them are NRs. The ITL also deems transactions with non-AEs to be an international transaction (and therefore subject to TP provisions) if a prior agreement exists in relation to the relevant transaction between the non-AE and the AE, or the terms of the relevant transaction are determined in substance between the non-AE and the AE. Further, the term “transaction” has been defined to include an arrangement, understanding or action in concert whether or not such an arrangement, understanding or action is formal or in writing or intended to be enforceable by legal proceedings.
This ruling highlights the importance of considering the overall facts and circumstances, intent and conduct of the parties and substance of the arrangement to determine existence an international transaction, even in situations where the apparent transaction is between non-AEs or between parties resident in India.
Taxpayers may need to review impact of the ruling on their business and commercial arrangements to assess if they have properly identified, documented and reported any international transaction or deemed international transaction that may be embedded in these arrangements.
The ITAT, based on the facts of the case, ruled that the revision of Framework Agreements (FWA) considered in conjunction with relevant shareholders’ agreement, amounted to assignment/ transfer of call options rights held by the Taxpayer in favor of its nonresident (NR) Associated Enterprise (AE) and therefore qualifies as an international transaction under the TP provisions of the ITL. The ITAT reached this conclusion even though there was no formal or written agreement between the Taxpayer and its AE for the transfer/assignment. The ITAT accordingly upheld the TP adjustment for determining the Arm’s Length Price (ALP) which the Taxpayer should have received for assignment/transfer of the option rights.
Further, in respect of the sale of call centre business by the Taxpayer to another domestic entity, Hutchison Whampoa (India) Pvt. Ltd. (HWP India), a subsidiary of Hutchinson Whampoa Ltd. (HWL), the ITAT ruled that the transaction was in substance entered into between the Taxpayer and HWL, an NR AE of the Taxpayer, even in the absence of a formal or written agreement between the Taxpayer and its AE for the business sale. The ITAT therefore held that the same constituted an international transaction under the ITL. The ITAT upheld that Discounted Cash Flow (DCF) was to be considered for determining the ALP for the sale of call centre business; but remanded the manner of computation of the ALP back to the Tax Authority.
TP provisions under the ITL are applicable to international transactions. The term “international transaction” would generally cover transactions between two or more AEs, where either one or both of them are NRs. The ITL also deems transactions with non-AEs to be an international transaction (and therefore subject to TP provisions) if a prior agreement exists in relation to the relevant transaction between the non-AE and the AE, or the terms of the relevant transaction are determined in substance between the non-AE and the AE. Further, the term “transaction” has been defined to include an arrangement, understanding or action in concert whether or not such an arrangement, understanding or action is formal or in writing or intended to be enforceable by legal proceedings.
This ruling highlights the importance of considering the overall facts and circumstances, intent and conduct of the parties and substance of the arrangement to determine existence an international transaction, even in situations where the apparent transaction is between non-AEs or between parties resident in India.
Taxpayers may need to review impact of the ruling on their business and commercial arrangements to assess if they have properly identified, documented and reported any international transaction or deemed international transaction that may be embedded in these arrangements.
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