2025 (2) TMI 867 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - We accept the contention of the Appellant that no disallowance under Section 14A read with Rule 8D(2)(ii) of the IT Rules was warranted in the present case and therefore addition made by the Assessing Officer by disallowing proportionate interest cost is deleted under the normal provisions. Disallowance u/Rule 8D(2)(iii) - As in the case of ACIT Vs. Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that for computing the disallowance under Rule 8D(2)(iii) of the IT Rules only the investments yielding exempt income are to be taken into consideration. Accordingly we direct the AO to recompute the disallowance under Rule 8D(2)(iii) of the IT Rules read with Section 14A. MAT computation u/s 115JB - Amount for the purpose of Clause (f) of Explanation 1 to Section 115JB(2) of the Act can be computed on other reasonable basis. However given the facts and circumstances of the present case in order to put quietus to this issue we deem it appropriate to direct the Assessing Officer to re-compute the said amount keeping in view the provisions of Clause (f) of Explanation 1 to Section 115JB(2) of the Act on a reasonable basis with the directions to restrict the same to the amount computed in terms of paragraph 4.6 above. The Assessing Officer is directed to grant to the Appellant a reasonable opportunity of being heard. TDS u/s 194H - Disallowance of discount extended to pre-paid distributors under section 40(a)(ia) - discount extended represented the difference between the Maximum Retail Price (MRP) of the talktime pre-paid connections and the price at which these were transferred to the Pre-paid Distributors - DRP were of the view that the upfront discount given by the Appellant to the Pre-paid Distributor was in the nature of commission liable to withholding of tax at source u/s 194H - HELD THAT - Mumbai Bench of the Tribunal in case of the Assessee for the Assessment Year 2009-10 2024 (1) TMI 991 - ITAT MUMBAI wherein Tribunal had concluded that tax was not required to be withheld u/s 194H from the upfront discount offered to Pre-paid Distributors and consequently no disallowance could be made u/s 40(a)(ia) of the Act for failure to deduct tax at source. Decided in favour of assessee. Disallowance of depreciation on 3G Spectrum - AO disallowed the depreciatio claimed by the Appellant and allowed the Appellant to amortized the same u/s 35ABB - DRP declined to grant any directions and concluded that the AO had rightly amortized the expense of 3G spectrum over the period for which the spectrum was allocated to the Appellant - HELD THAT - Mumbai Bench of the Tribunal for the Assessment Year 2011-12 2020 (8) TMI 954 - ITAT MUMBAI concluded that depreciation in respect of 3G spectrum charges was correctly allowed by the AO. Thus we direct the AO to allow depreciation in respect of the 3G spectrum charges capitalize by the Appellant under Section 32(1)(ii) Disallowance of payments made to IBM - Appellant had entered into a service agreement with IBM whereby IBM was under obligation to provide end-to-end information technology services and solutions to the Appellant for a period of five years which included providing IT support as well as provision of IT hardware on an operating lease basis - HELD THAT - We find merit in the contention advanced on behalf of the Appellant that the claim of deduction made by the Appellant cannot be rejected merely on the ground that the expenditure under consideration was capitalized in the books of accounts of the Appellant. We find that the underlying agreement between the Appellant and IBM is not on record. Accordingly we deem it appropriate to remand this issue back to the file of the Assessing Officer. The Appellant is directed to file the relevant agreement invoices and other supporting documents before the Assessing Officer. AO directed to allow a deduction for service charges paid/payable to IBM in case on verification of the aforesaid agreement and supporting documents the Assessing Officer is satisfied that the aforesaid payment is in the nature of annual maintenance charge or annual operating lease rental paid/payable by the Appellant to IBM for the relevant previous year. TP Adjustments - payment of brand royalty for obtaining the right to use of Vodafone trademark and trade name - HELD THAT - As was the case in the preceding three assessment years the benchmarking done by the Appellant using the CUP Method has been rejected by the TPO. The TPO rejected the comparables selected by the Appellant on account of significant differences in the functions geography and level of operations. It has been submitted on behalf of the Appellant that the corroborative benchmarking using Transaction Net Margin Method (TNMM) had also not been considered by the Assessing Officer and the DRP. Given the aforesaid factual matrix and keeping in view the fact that for the three preceding Assessment Years 2011-12 to 2013- 14 the issue of benchmarking of the royalty transaction has been remanded back to the file of the TPO/Assessing Officer we deem it appropriate to remand this issue back to the file of TPO/Assessing Officer with the directions to decide the issue of transfer pricing adjustment in relation to international transaction of royalty payment afresh. TP adjustment pertaining to reimbursement of expenses - HELD THAT - We deem it appropriate to grant to the Appellant another opportunity to substantiate its claim that the INR.2, 45, 23, 347/- were incurred in relation to the employees deputed with the Appellant and that the same having being recovered on cost to cost basis from the Appellant was at arm s length. Appellant is directed to furnish relevant documents/details to substantiate its claim. TPO/AO shall grant reasonable opportunity of hearing to the Appellant and shall decide the issue in accordance with law after taking into consideration the details/documents furnished by the Appellant.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Disallowance under Section 14A of the Income Tax Act concerning the computation of disallowance related to exempt income.
Disallowance of discount extended to pre-paid distributors under Section 40(a)(ia) of the Act concerning the non-deduction of tax at source.
Disallowance of depreciation on 3G Spectrum under Section 32(1) of the Act.
Disallowance of payments made to IBM, considering whether they are capital in nature.
Transfer Pricing adjustments concerning brand royalty payments and other international transactions.
Initiation of penalty proceedings under Section 271(1)(c) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A of the Act

The legal framework involves Section 14A of the Income Tax Act, which deals with disallowance of expenditure incurred in relation to income not includible in total income, and Rule 8D of the Income Tax Rules.
The Court found that the disallowance under Section 14A should be based on the investments yielding exempt income, as per the Special Bench decision in ACIT Vs. Vireet Investments Pvt. Ltd.
The Court directed the Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) and adjust the Book Profits under Section 115JB accordingly.
The Court concluded that the disallowance made by the Assessing Officer was unwarranted and directed a recalculation based on the Tribunal's previous decision for the Assessment Year 2013-2014.

Disallowance of Discount Extended to Pre-paid Distributors

The issue revolved around whether the discount given to distributors was in the nature of commission requiring tax deduction at source under Section 194H of the Act.
The Court relied on previous Tribunal decisions and High Court rulings, which held that such discounts were not commissions and thus not subject to tax deduction under Section 194H.
The Court concluded that the disallowance under Section 40(a)(ia) was not justified and deleted the addition.

Disallowance of Depreciation on 3G Spectrum

The legal question was whether the cost of acquiring 3G Spectrum should be amortized under Section 35ABB or depreciated under Section 32(1) as an intangible asset.
The Court referred to previous Tribunal decisions which allowed depreciation under Section 32(1) and rejected the applicability of Section 35ABB.
The Court directed the allowance of depreciation for the 3G Spectrum charges, following the Tribunal's prior rulings.

Disallowance of Payments Made to IBM

The issue was whether the service charges paid to IBM were capital in nature or deductible as revenue expenditure.
The Court found that the deduction could not be denied merely because the expenditure was capitalized in the books.
The Court remanded the issue back to the Assessing Officer for verification of the nature of the expenses and directed a deduction if they were annual charges.

Transfer Pricing Adjustments - Brand Royalty Payment

The question was whether the arm's length price (ALP) for the royalty payment for using the Vodafone trademark was correctly determined.
The Court noted that the TPO had rejected the Appellant's CUP Method and determined the ALP as Nil.
The Court remanded the issue back to the TPO/Assessing Officer for fresh determination, allowing the Appellant to present supporting evidence.

Transfer Pricing Adjustments - Reimbursement of Expenses

The issue concerned the ALP determination for reimbursements made to AEs for seconded personnel.
The Court followed previous Tribunal decisions and remanded the issue back to the TPO/Assessing Officer for reevaluation with directions to consider the Appellant's evidence.

Initiation of Penalty Proceedings under Section 271(1)(c)

The Court dismissed the grounds related to penalty proceedings as premature.

3. SIGNIFICANT HOLDINGS

The Court upheld the principle that disallowance under Section 14A should be limited to investments yielding exempt income, as per the Special Bench decision in Vireet Investments Pvt. Ltd.
The Court reiterated that discounts to distributors are not commissions, following High Court rulings, and thus not subject to tax deduction under Section 194H.
The Court affirmed that depreciation on 3G Spectrum should be allowed under Section 32(1) as an intangible asset, rejecting the applicability of Section 35ABB.
The Court remanded the issue of IBM service charges for verification, emphasizing that capitalization in books does not preclude deduction.
The Court directed a fresh determination of the ALP for royalty payments, allowing the Appellant to present evidence supporting their position.
The Court remanded the reimbursement of expenses issue for reevaluation, following consistent Tribunal decisions.
The Court dismissed the penalty proceedings as premature, indicating that they were not ripe for adjudication.