The 2018 Vodafone case from India – whether termination of option rights under an agreement can be treated as a “deemed international transaction” under section 92B(2) of the Income Tax Act.
Vodafone India Services had a call option to buy shares in SMMS Investment Pvt Ltd — which held 5.11% equity capital of the Vodafone India through a web of holdings for 2.78 crore if the fair market value of these shares was less than 1,500 crore. If the fair market value was higher, it had to pay a little more.
Under the same agreement, if Vodafone India Services terminated its right to acquire the share, the company would have to pay Rs 21.25 crore.
Instead of exercising the call option and acquiring the valuable shares at a very low price, Vodafone India Service terminated the option and paid 21.25 crore.
The tax administration held that the Vodafone India Service should have received a substantial consideration for not exercising the option.
Vodafone India Services held that termination of an option was not a transaction. It also argued that it was not an international transaction, but a deal between domestic companies.
The tribunal held in favor of the tax administration. The deal was deemed an international transaction. The consideration value was to be based on the price of the shares that was later sold in the market.