#2 is correct. A contested hex is considered contested throughout the Reinforcement stage. Only once the battle is resolved during the Battle stage does one player have control (rulebook, p. 10, "The winner of the battle now controls the territory.")
Hope this helps.
The card states you receive victory points on taking control of a city or village away from an opponent during the combat phase.
The argument that was had:
1) If during the reinforcement phase on the first players turn if he knocks out all of your units he has achieved this phrasing before even anyone else takes their reinforcement turn and should be awarded points.
2) You only receive these points if at the end of the entire combat phase (or even reinforcement stage) you are in control of the city you took 'away' from the opponent.
Which version is correct?