2018 (6) TMI 1029 - AT - Income Tax

Addition on account of commission - assessee paid commission to the agents in the post-paid segment of its business - Held that- The assessee furnished necessary details and also Form no.16As in respect of major payments - DRP deleted the addition by relying on the order passed for the A.Ys. 2000-01 to 2008-09 in the case of sister concern of the assessee. The Revenue assailed the said order passed by the first appellate authority before the Tribunal. In DCIT vs. Vodafone Mobile Services Ltd. (2015 (12) TMI 1761 - ITAT DELHI) the Tribunal has upheld the deletion of addition. - decided in favour of assessee Addition on account of Royalty WPC expenses - AO treated such amount as a capital expenditure incurred to get the right to use spectrum and hence covered it under section 35ABB - Held that - When we advert to the nature of royalty paid by the assessee, it clearly emerges that the same is in the nature of spectrum charges paid to Government of India as a percentage of revenue on regular basis. This payment is not meant for obtaining a licence to use spectrum, but for the actual use of it on regular basis. It is in the nature of a revenue expenditure eligible for deduction. It cannot be construed as a capital expenditure and thus goes out of the ken of section 35ABB. As relying case of the assessee s sister concern, namely, Vodafone Mobile Services Ltd as relying on COMMISSIONER OF INCOME-TAX VERSUS FASCEL LTD. 2008 (12) TMI 743 - DELHI HIGH COURT we uphold the impugned order in deleting the disallowance. - decided in favour of assessee Addition on account of Advertisement expenses - nature of expenditure - Held that - This issue is no more res integra in view of the judgment of the Hon ble Delhi High Court in CIT vs. Citi Financial Consumer Finance Ltd. 2011 (3) TMI 622 - DELHI HIGH COURT in which advertisement expenditure has been treated as revenue. Deduction towards frauds committed by its customers - allowable expenditure u/s 37(1) - Held that - Deduction towards frauds is not on account of embezzlement by employees, but, for the loss incurred due to frauds committed by the assessee s customers who did not make payments for the bills raised on them by the assessee. This loss, being incidental to carrying on business, cannot be treated as an item of non-revenue nature. We, therefore, uphold the impugned order in deleting the disallowance. This ground is dismissed. Amortization of revenue-based licence fee - Held that - As in CIT vs. Bharti Hexacon Ltd. 2015 (2) TMI 874 - CESTAT NEW DELHI considered the instant issue in an elaborate manner and held that the licence fee paid or payable for the period up to 31st July, 1999, i.e., the date set out in the 1999 Policy should be treated as capital in nature and the balance amount payable on or after the said date should be treated as revenue. Since the amount of ₹ 205.38 crore incurred by the assessee as licence fee @ 8%/6% on adjusted gross revenue is in relation to the period after 31st July, 1999 and is not in the nature of entry fee, such amount is to be allowed as deduction in entirety in the year of incurring without invoking the provisions of section 35ABB of the Act. As the AO has made an addition of ₹ 154.54 crore on this score, we order for its deletion as the same is of the revenue nature. As clarified that if certain sums claimed by the assessee as revenue in the preceding or succeeding years got capitalised by the AO u/s 35ABB, then, the proportionate amount from such capitalisation should not be allowed as deduction in the later years since the full amount of such licence fee pertaining to the year under consideration is being separately allowed. AO will verify the calculations in this regard and ensure that no double deduction is allowed in the current or earlier or later years in this regard. Disallowance of depreciation claimed on fixed assets on account of Asset restoration cost (ARC) obligation - Held that - There is absolutely no doubt on the interpretation of clause 10 of the agreement that the assessee will be obliged to incur cost at the time of determination of the agreement only if damage is caused in the course of removal of cables, antennas or other equipments and not otherwise. Damage to the premises, if any, arising on the removal of cables, antennas and other equipments, etc., can be ascertained only at the time of termination of the agreement and not at the time of entering into the agreement. Further, no obligation will be incurred if no loss is caused to the premises at the time of removal of cables etc. As such, we are of the considered opinion that the addition of ₹ 5.10 crore has been rightly made. This ground is not allowed. Disallowance of interest on capital work-in-progress - assessee has a common pool of funds - assessee argued that investment in CWIP was made out of own interest free funds - Held that - Even though the shareholders fund is more than the investment in CWIP, but no detail of secured loan is available. In the absence of such specific information, it is difficult to decide the issue at our end. The impugned order is set aside to this extent and the AO is directed to decide this issue afresh in consonance with our foregoing observations. It is made clear that if there is some direct borrowing for investing in CWIP, then interest paid on such borrowing has to be disallowed. If, on the other hand, there is no specific borrowing, the financing of CWIP has to be treated as out of interest-free shareholders fund. In such a scenario, no disallowance of interest can be made as the interest-free shareholders fund would be higher than the amount of investment in CWIP. TDS u/s 194J - addition u/s 40(a)(ia on account of Roaming charges - why such payment be not considered as fees for technical services under section 9(1)(vii)? - Held that - Referring to case of Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT as eventually held that the roaming processes between the participating companies cannot be termed as technical services and, hence, no deduction of tax at source is required - the payment of roaming charges by the assessee to other domestic players for use of their respective networks does not amount to payment of fees for technical services within the meaning of section 9(1)(vii) of the Act and, hence, no deduction of tax was required u/s 194J. Ex consequenti, no disallowance u/s 40(a)(ia) is called for. We, therefore, order to delete the disallowance. TDS u/s 194H - Disallowance u/s 40(a)(ia) on account of discount extended to pre-paid distributors - Held that - There is a judgment of the Hon ble Rajasthan High Court in the assessee s own case 2017 (7) TMI 1076 - RAJASTHAN HIGH COURT holding that the provisions of section 194H are not attracted on the part of total commission disallowed by the AO u/s 40(a)(ia). Whereas, in the context of the assessee and to the extent of the amount on which the Rajasthan High Court has held that no deduction of tax at source is warranted, the judgment of the Hon ble Delhi High Court in Idea Cellular Ltd. 2010 (2) TMI 24 - DELHI HIGH COURT is in rem, but the judgment of the Hon ble Rajasthan High Court is in personam. Once the Hon ble Rajasthan High Court has erased the liability of the assessee by holding that the provisions of section 194H are not attracted on a part of the amount under consideration, in our considered opinion, such part of commission cannot be construed as a sum on which tax is deductible at source under Chapter XVII-B , so as to bring it within the sweep of section 40(a)(ia) of the Act, calling for any disallowance - remaining amount of commission, on which the liability u/s 201(1) has not been set aside, would be governed by the judgment of the Hon ble jurisdictional High Court in the case of Idea Cellular Ltd. (supra) and the disallowance would be mandated. - Decided party in favour of assessee Penalty paid to Department of Telecommunications (DoT) - allowable business deduction u/s 37(1) - Held that - Referring to relevant provisions of the Indian Telegraphs Act, 1885 and find that anomalies and irregularities in CIF and CAF are not covered under any of the specific provisions of the Indian Telegraphs Act. Rather, such penalties were imposed for non-compliance with the contractual obligations under the Licence agreement. As the payment by the assessee is not for an offence, nor is it prohibited by law, the same being failure to comply with the contractual obligations, cannot fall within the domain of Explanation 1 to section 37(1) of the Act.Addition deleted Disallowance of deduction u/s 80IA on certain items of income - Held that - To the extent the FDRs were obtained to serve as a margin money for availing credit facilities from the bank, we find that the link of such interest income with the eligible business stands established and the resultant interest income assumes the character of Business income . Income earned from such FDRs qualifies for deduction u/s 80-IA of the Act. Since details of interest income of ₹ 3.70 crore are not available on record, we set aside the impugned order on this score and remit the matter to the file of the AO with a direction to allow deduction u/s 80IA. The remaining amount of interest income having no link with the business of telecommunications, which is simply on parking of surplus funds in FDRs, will remain Income from other sources and hence ineligible for deduction u/s 80IA. Miscellaneous income - same are received during the course of business of telecommunication. Even though these are not derived from the eligible business, but, they are in the nature of profits and gains of eligible business. The same, in our considered opinion, qualify for deduction u/s 80IA Cell site sharing revenue -there is a direct link of such income with the eligible business of providing telecommunication services. The ld. DR likened such hire charges to the earning of rental income from letting out property and contended that the same cannot be considered as profits and gains of business of telecommunications. In our view, this analogy drawn by the ld. DR is not correct - ince the underlying assets in the situation under consideration are cell towers, which are in the nature of tools of the assessee s business, income from their commercial exploitation, in our opinion becomes business income qualifying for deduction in contradistinction to income from simple hiring of property retaining the character of Income from house property . It is, therefore, directed to be considered as eligible for deduction u/s 80IA of the Act. Revenue from Indefeasible right to use (IRU) since we have held that the income from cell site sharing is eligible for deduction u/s 80IA, as the sequitur, revenue from IRU is also eligible for the deduction. Addition u/s 68 - Held that - the claim of the assessee of having received such amounts from Distributors has not been corroborated before the AO and hence the same cannot be accepted. The ld. AR contended that the necessary details are available for production and one more opportunity be granted to it. Considering the totality of the facts and circumstances of the instant case, we are of the considered opinion that it would be in the fitness of things if the impugned order on this score is set aside and the matter is restored to the file of the AO for a fresh decision. Disallowance of brand royalty - Held that - beyond doubt that brand names of Essar and Vodafone have in fact been used by the assessee, which deciphers that the international transaction entered in to by the assessee with its AEs was genuine and bona fide. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman & Wakefield (supra) - send the matter to the file of AO/TPO for deciding it in conformity with the above discussion Transfer pricing adjustment of Advertising, Marketing and Promotion (AMP) expenses - Held that - There is not even a single order in which the selling expenses have been directed to be included in the overall AMP expenses. Simply because the Department has not accepted the judgments of the Hon ble jurisdictional High Court and SLPs have been admitted, the binding nature of such judgments is not mitigated in any manner. Unless the Hon ble Supreme Court reverses the judgment of a High Court, the same holds the field and remains binding on all the authorities working under its jurisdiction. It is, therefore, directed that selling expenses should be excluded from the overall purview of the AMP expenses for the benchmarking exercise, if necessity arises. Non-granting of full credit in respect of TDS and non-granting of Minimum Alternate Tax (MAT) credit - Held that - AO is directed to verify the assessee s claim in this regard and allow the necessary credit, if available.

Summary

Issues Involved:
1. Delay in Revenue's appeal
2. Deletion of addition on account of commission
3. Deletion of addition on account of Royalty WPC expenses
4. Deletion of addition on account of advertisement expenses
5. Deletion of addition on account of frauds committed by customers
6. Amortization of revenue-based license fee
7. Disallowance of depreciation on fixed assets due to Asset Restoration Cost (ARC) obligation
8. Disallowance of interest on capital work-in-progress
9. Disallowance under section 40(a)(ia) for roaming charges
10. Disallowance under section 40(a)(ia) for discount extended to pre-paid distributors
11. Disallowance of penalty paid to Department of Telecommunications (DoT)
12. Disallowance of deduction under section 80IA on certain items of income
13. Addition under section 68 for unexplained cash credits
14. Disallowance of brand royalty as per Transfer Pricing Officer (TPO)
15. Transfer pricing adjustment of Advertising, Marketing, and Promotion (AMP) expenses
16. Non-granting of full credit in respect of TDS and MAT credit
17. Charging of interest and initiation of penalty proceedings under section 271(1)(c)

Detailed Analysis:

1. Delay in Revenue's Appeal:
The Revenue's appeal was delayed by two days. The Assessee did not object to the condonation of delay, and hence, the delay was condoned, and the appeal was admitted for hearing.

2. Deletion of Addition on Account of Commission:
The AO disallowed 10% of the commission expense on an ad hoc basis, resulting in a disallowance of ?14.23 crore. The DRP deleted the addition, relying on previous orders in similar cases. The Tribunal upheld the deletion, noting that the AO did not provide any distinguishing factual feature to justify the disallowance.

3. Deletion of Addition on Account of Royalty WPC Expenses:
The AO treated ?117.47 crore of Royalty WPC expenses as capital expenditure under section 35ABB, allowing depreciation at 25%. The DRP deleted the addition. The Tribunal upheld the deletion, stating that the payment was for the actual use of spectrum and was of a revenue nature, not capital.

4. Deletion of Addition on Account of Advertisement Expenses:
The AO treated ?97.63 lakh on product launches and ?14.81 crore on granty signs as capital expenses, allowing 25% depreciation. The DRP deleted the addition, and the Tribunal upheld this, citing the Delhi High Court judgment in CIT vs. Citi Financial Consumer Finance Ltd., which treated advertisement expenditure as revenue.

5. Deletion of Addition on Account of Frauds Committed by Customers:
The AO disallowed ?31 lakh claimed as a deduction for frauds committed by customers. The DRP deleted the addition, and the Tribunal upheld this, noting that the loss was incidental to carrying on business and could not be treated as non-revenue in nature.

6. Amortization of Revenue-Based License Fee:
The AO treated ?205.38 crore claimed as a revenue share of the license fee as capital expenditure, allowing only ?24.83 crore under section 35ABB. The Tribunal held that the recurring license fee was for maintaining the license, not acquiring it, and should be allowed as a revenue expenditure.

7. Disallowance of Depreciation on Fixed Assets Due to ARC Obligation:
The AO disallowed ?5.10 crore claimed as depreciation on ARC obligation, considering it unascertained liability. The Tribunal upheld this, stating that depreciation could only be claimed on the actual cost incurred.

8. Disallowance of Interest on Capital Work-in-Progress:
The AO disallowed ?26.45 crore of interest on capital work-in-progress, considering it an extension of existing business. The Tribunal remanded the issue to the AO for fresh consideration, directing that if there was specific borrowing for CWIP, interest should be disallowed; otherwise, it should be presumed to be from interest-free shareholders' funds.

9. Disallowance Under Section 40(a)(ia) for Roaming Charges:
The AO disallowed ?70.86 crore of roaming charges for non-deduction of TDS under section 194J. The Tribunal deleted the disallowance, citing the Supreme Court's judgment in CIT vs. Bharti Cellular Ltd., which held that roaming charges did not involve human intervention and were not technical services.

10. Disallowance Under Section 40(a)(ia) for Discount Extended to Pre-Paid Distributors:
The AO treated the discount as commission liable for TDS under section 194H, disallowing ?130.33 crore. The Tribunal partly allowed the appeal, holding that ?48.14 crore was not liable for TDS as per the Rajasthan High Court's judgment, but upheld the disallowance for the remaining amount.

11. Disallowance of Penalty Paid to Department of Telecommunications (DoT):
The AO disallowed ?63.83 lakh paid to DoT as penalty for non-compliance, treating it as an expenditure incurred for an offense. The Tribunal deleted the disallowance, noting that the penalty was for non-compliance with contractual obligations, not an offense.

12. Disallowance of Deduction Under Section 80IA on Certain Items of Income:
The AO disallowed deduction on interest income, miscellaneous income, cell site sharing revenue, and IRU revenue. The Tribunal allowed the deduction for cell site sharing and IRU revenue, remanded the issue of interest income to the AO for verification, and allowed the deduction for miscellaneous income.

13. Addition Under Section 68 for Unexplained Cash Credits:
The AO added ?2 crore as unexplained cash credits. The Tribunal remanded the issue to the AO for fresh consideration, directing the assessee to furnish necessary details.

14. Disallowance of Brand Royalty as per Transfer Pricing Officer (TPO):
The TPO determined Nil ALP for royalty payments, and the AO made an addition of ?11.47 crore. The Tribunal remanded the issue to the AO/TPO for fresh consideration, directing them to follow the jurisdictional High Court's judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd.

15. Transfer Pricing Adjustment of Advertising, Marketing, and Promotion (AMP) Expenses:
The TPO proposed a transfer pricing adjustment of ?284.68 crore for AMP expenses. The Tribunal remanded the issue to the TPO/AO for fresh determination, directing that selling expenses should not be considered as part of AMP expenses.

16. Non-Granting of Full Credit in Respect of TDS and MAT Credit:
The AO was directed to verify the assessee's claim and allow the necessary credit for TDS and MAT.

17. Charging of Interest and Initiation of Penalty Proceedings Under Section 271(1)(c):
The issues of charging interest and initiation of penalty proceedings were considered consequential and premature, respectively.

Conclusion:
The appeal of the Department was dismissed, and the appeal of the assessee was partly allowed. The order was pronounced in the open court on 14.03.2018.