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.
Nangia's take
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 capital gains.
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.
Source: [TS-482-ITAT-2016(Mum)]
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