Mumbai Income Tax Appellate Tribunal ("Mumbai ITAT")
in the case of Praful Chandaria ("the assessee"), dealt
with the issue of taxability of consideration received by the
assessee pursuant to grant of call option in respect of shares of
an Indian company.
The assessee was holding more than 99% shareholding in an Indian
company ('PHIL'), and vide the 'call option
agreement', the Mauritian company was granted an option to call
upon the assessee to sell his entire shareholding in Indian
company, further such right in shares was given for a period of 150
years. During assessment year (AY) 2002-03, the assessee received a
sum of USD2.45m as a consideration for the call options, but
claimed the same as non-taxable.
Mumbai ITAT has confirmed that under normal circumstances mere
grant of call option does not result into transfer of actual asset,
since no right in the shares is given by way of grant of "call
option", except a right to buy the shares at a specified price
within a fixed period of time. In view of peculiar facts of the
case viz. strike price of $1, incredibly large period of option 150
years, irrevocable PoA in respect of Indian company's shares; a
valuable and substantive right in the shares of the Indian Company,
separate from shares, was transferred by the assessee and hence the
same shall result in capital gains. However, under the beneficial
provisions of Article 13 of the erstwhile India-Singapore Tax
Treaty, such gains shall not be liable to tax.
Bombay High Court in the case of Vodafone India Services Pvt Ltd
[TS-621-HC-2015(BOM)-TP] had held that surrender of option rights
is not a 'transfer' under the provisions of the Act.
However, interestingly Mumbai ITAT in this ruling has upheld the
principle of "substance over form" and
considering the peculiarities of the facts of the case, held that
since valuable and substantive rights have been
transferred, gains arising on grant of option shall qualify as
Under the erstwhile provisions of the India-Singapore Treaty
applicable for the year under consideration, such gains were
taxable only in Singapore, however, under the extant provisions of
the Treaty, specific clause on taxation of transfer of shares in
capital gains Article was deleted, and hence such gains if arising
after 2005 shall be liable to tax in India.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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