Vodafone ruling aftermath – Potential widening of TP-scope to third party transactions?

March 21,2018
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Prasad Pardiwala (Director, Price Waterhouse & Co LLP)

Umesh Agarwal (Manager, Price Waterhouse & Co LLP)

In a recent judgment of Vodafone India Services Pvt Ltd[1], the Ahmedabad bench of the ITAT held Vodafone India’s termination of call option rights under an agreement (‘termination agreement’) with IDFC as an international transaction under section 92B(1) read with section 92F(v) of the Income-tax Act, 1961. The ITAT observed that Vodafone India and foreign associated enterprise (‘AE’) had an arrangement or understanding or acted in concert leading to termination agreement between Vodafone India and IDFC.

In the backdrop of this judgment, the authors in this article are focusing on the potential widening of scope of transfer pricing on third party transactions, audit challenges and what taxpayers can do in such situations.

What is the controversy about?

Section 92B(1) provides that a ‘transaction’ between two or more associated enterprises, either or both of whom are non-residents, would be regarded as an international transaction, if the said transaction falls within the specific class of transactions or has a bearing on the profit, income, losses or assets of the enterprises. In a typical situation, a third party transaction would not qualify as an international transaction since it is not between associated enterprises. Further, such a transaction would not qualify as a deemed international transaction if the terms of the transaction entered into with the third party are determined independently by the taxpayer and not by their foreign AE.

In the Vodafone’s case, the ITAT while deciding in the favour of the Revenue observed that there was an arrangement or understanding or action in concert between the parties through conduct of the parties and various agreements (framework, share purchase agreement, etc.) and thereby somewhat went beyond the scope of a deemed international transaction to conclude the termination agreement (a third party transaction) as an international transaction in section 92B(1).

In the past, a judgment on similar principle was rendered by the Bangalore bench of the ITAT in case of Novo Nordisk India Pvt Ltd.[2], wherein the ITAT held that respective agreements between the foreign AE, contract (third party) manufacturer and taxpayer constituted an arrangement between the three parties and since one of the parties was a non-resident AE, the arrangement fell within the ambit of section 92B(1) and accordingly even the transaction (of sale of raw materials) between the foreign AE and third party contract manufacturer was required to be established at arm’s length.

What is an ‘arrangement or understanding or action in concert’?

The linchpin of the Vodafone judgement is phrases ‘arrangement or understanding or action in concert’.

To put things in perspective, let’s focus at the definition of a ‘transaction’. As per section 92F(v), a transaction includes an arrangement, understanding or action in concert whether or not the same is in writing or intended to be enforceable by legal proceeding.

It is pertinent to note that the said arrangement, understanding or action in concert need not specifically be in writing and even an implied arrangement established through the conduct of the parties may be sufficient to qualify as a transaction.


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