Vodafone’s Tax Dispute: Arm’s Length Price and Capital Asset Clarified

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Case Name

Vodafone India Services Pvt. Ltd. Vs Commissioner of Income Tax & Anr. (High Court of Bombay)

Income Tax Appeal No. 82 of 2015

Date: 23rd December 2015

Key Takeaways

• The court emphasized the importance of income arising from international transactions when applying arm’s length pricing under Section 92 of the Income-tax Act.
• Option rights held by an assessee can be considered a capital asset as defined in Section 2(14) of the Income-tax Act.
• The judgment clarifies the application of Chapter X of the Income-tax Act, which deals with the avoidance of tax through international transactions.

Issue

Does the computation of income from international transactions under Section 92 require the presence of income arising from such transactions, and do option rights qualify as a capital asset?

Facts

Vodafone India Services § Ltd. was involved in international transactions that required the computation of income based on arm’s length pricing. The company held option rights to purchase shares, which were argued to be a capital asset. The dispute arose over whether these rights should be considered in the computation of income and how they fit within the tax provisions.

Arguments

• Vodafone’s Argument: The option rights to purchase shares should be considered a capital asset, and the computation of income should reflect this under the arm’s length principle.
• Commissioner’s Argument: The focus was on whether the income from these transactions was properly computed and whether the option rights should be included as a capital asset.

Key Legal Precedents

• Section 92 of the Income-tax Act: Deals with the computation of income from international transactions with regard to arm’s length price.
• Section 2(14) of the Income-tax Act: Defines a capital asset as property of any kind held by an assessee, which includes option rights.

Judgement

The court held that the option rights held by Vodafone are indeed a capital asset under Section 2(14) of the Income-tax Act. It emphasized that for the application of arm’s length pricing under Section 92, there must be income arising from the international transaction. The court clarified the application of these sections to ensure proper tax computation.

FAQs

Q: What is the significance of this case for international transactions?

A: It clarifies how income from international transactions should be computed using arm’s length pricing and the classification of option rights as a capital asset.

Q: How does this affect Vodafone?

A: Vodafone’s option rights are recognized as a capital asset, impacting how their income from international transactions is computed for tax purposes.

Q: What does this mean for other companies?

A: Other companies engaged in international transactions may need to consider how their option rights and similar assets are classified for tax purposes, ensuring compliance with the clarified legal standards.

1. Praecipes for speaking to the Minutes of the order and judgment dated 8th October, 2015, have been filed by the petitioners as well as the respondents.

2. By consent, the following corrections are ordered to be carried out in the said order and judgment dated 8th October, 2015.

(i) The names “Mr. Adhiraj Malhotra and Mr. Shantanu Singh” be added in the appearance on behalf of the appellant.

(ii) The names “Mr. B.M. Chatterjee, senior counsel & Ms. Maya Majumdar” be added in the appearance on behalf of the Respondent Nos.1 and 2.

2 The praecipes for speaking to the Minutes, accordingly, stand disposed of.

A.K. MENON, J. S.C. DHARMADHIKARI , J.