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2025 (2) TMI 1070 - AT - Income TaxRevision u/s 263 - allowability of payment of license fee spectrum usage charges (SUC) interest and penalty thereon - HELD THAT - Interest and penalty clauses are enshrined in the license agreement as compensatory mechanism for delayed payment of three components i.e entry fee license fee and charges. Charges is not specifically defined but when we take into consideration the aforesaid clauses we find that apart from entry fee and license fee the Licensee was supposed to pay Radio Spectrum Charges and royalty for the use of spectrum for point to point links and access links. These charges admittedly were considered as revenue expenditure. It is very much apparent from the clauses of license agreement that the interest is payable on the quantum of delayed payment of license fee determined as per the license agreement. Penalty is payable in case the total amount paid as quarterly License Fee for the 4 (four) quarters of the financial year falls short by more than 10% of the payable License Fee. Delayed payment of penalty shall also be liable to interest. In the absence of rights of revocation/termination of the agreement for default in payment of penalty/interest cannot be equated with consequences arising out of default in payment of the license fee which as per the judgement of Bharti Hexacom 2023 (10) TMI 786 - SUPREME COURT was similar to one time entry fee. Therefore the interest/penalty payment arising out of default in payment of the license fee is merely compensatory in nature. Delayed payment of license fee would result in benefitting the assessee in terms of availability of the funds available for use in its own business and that in turn lead to payment of compensatory cost of the delayed payment of the license fee in the form of interest or penalty. The license here was to grant services as defined. Thus it is the right to provide services in lieu of entry free license fee or charges formed the intangible asset and interest or penalty were only by way of default in payment in time as per agreement. So there could have been no situation like loan borrowing. The reasoning given by the ld. PCIT as followed by the ld. AO in the effect giving order is that the interest and penalty will take the colour of license fee to hold that the same is capital expenditure. We consider the same to be not a justified manner of determining the taxability of an expenditure. Every expenditure or income giving rise to a tax incidence should be categorically defined either in the statute or be otherwise impliedly decipherable from the transaction. It is not justified to draw any inferences about the nature of an expenditure being revenue or capital on the basis of another expenditure without analyzing the surrounding circumstances and the context in which the liability of expenditure arises. On the one hand the assessee has established that the issue was genuinely examined by the AO before passing of the assessment order and on the other hand it is established that the conclusion drawn by the PCIT and as followed by the AO at the time of effect giving order to colour the interest and penalty component similarly to license fee and hold them to be of capital expenditure is not sustainable under law. This issue no. 1 is decided in favour of the assessee. Allowability of carry forward of accumulated business loss and unabsorbed depreciation relatable to the consumer wireless undertaking - PCIT in his order u/s 263 of the Act had directed the AO to deny the benefit of section 72A and withdraw the allowance of brought forward business loss and unabsorbed depreciation relatable to the consumer wireless undertaking of TTSL - HELD THAT - Ld. Sr. Counsel has sufficiently established on the basis of the queries which were raised by the AO that a comprehensive response was submitted to the AO explaining the scope and terms of the schemes of arrangement. The details of the accumulated business loss and unabsorbed depreciation of consumer wireless mobile undertaking of TTSL were provided to the AO. Still PCIT has held that the AO had not conducted in-depth inquiries. On the contrary we are of the firm view that if this all was part of assessment record then PCIT was supposed to take that first into consideration and then examine the issue. Rather from the conclusions which have been drawn by the PCIT it appears that more than analysis of questions of facts on the basis of material available from assessment record by the queries raised by the AO and response of the assessee the PCIT has gone on a different tangent discussing more about the manner in which the provisions of section 2(19AA) of the Act can be interpreted. However that cannot be a basis to hold the assessment order to be erroneous so far as prejudicial to the interest of revenue. Thus we firmly hold that at one end there was sufficient examination of the issue by the AO at time of assessment. Then on merits the case as made out by the PCIT is not sustainable as all the conditions u/s 2(19AA) r.w Section 72A(4) of the Act stood fulfilled and there was erroneous conclusion to hold assessment to be erroneous so far as prejudicial to the Revenue. Taxation of difference of asset over liability with TTSL u/s 56(2)(x) - The provisions of section 56 of the Act are deeming income provisions and come into effect where there is some sort of allegation that the transaction of acquisition of an asset is without consideration or the consideration is less than the fair market value. The consumer mobile business undertaking of TTSL was acquired by the appellant on a wholesome basis without valuation of an individual asset and a lumpsum consideration through the process of demerger was paid. It has been established before us that the valuation of this demerger was done by professional valuers and the valuation was accepted in the scheme of arrangement by NCLT and High Court. That being the case on the one hand it was erroneous on the part of the PCIT to have gone beyond the scope of notice u/s 263 of the Act on the other hand to allege that there was a deemed capital gain on acquisition of consumer wireless business of the TTSL. Therefore we are inclined to allow this issue in favour of the assessee and corresponding ground nos. 10 to 10.4 are allowed. TP adjustment - PCIT had directed an adjustment on account of alleged incorrect reduction of proportionate adjustment allowed by the TPO - HELD THAT - We are of the considered view that only for the reason that an issue is pending before the Hon ble Supreme Court that cannot be a basis for interference into an assessment order and direct for an adjustment in the transfer pricing while exercising powers u/s 263 of the Act. The assessment order being erroneous so far prejudicial to the interest of the Revenue is to be examined in the light of the existing state of affairs including the settled provisions of law so far and only for the reason that Revenue is contesting the settled provision before the Hon ble Supreme Court cannot be the basis for invoking exceptional jurisdiction of Section 263. Here the AO had sufficiently examined the issue and benefitted assessee on basis of decision of Hon ble Jurisdictional High Curt so a contrary direction is rather not appreciable. Rather it is established before us on the basis of a decision of Mumbai benches in the case of M/s Damco India Pvt. Ltd 2019 (3) TMI 2080 - ITAT MUMBAI Hon ble Supreme Court is merely dealing with the issue of disallowance u/s 14A of the Act in M/s Firestone case 2015 (6) TMI 1123 - BOMBAY HIGH COURT SLP. Thus that all the more requires setting aside the directions of PCIT on this issue. AO has not examined the issue of disallowance u/s 40(a)(i) of the Act while huge payments were made without deduction of tax - HELD THAT - As decided in Bharti Airtel Ltd. 2024 (10) TMI 699 - ITAT DELHI has held that the appellant is not liable to deduct tax at source on payment of bandwidth charges to non-residents including where payees are from non-treaty countries. Thus the said issue squarely covers the case of the appellant. On the basis of aforesaid we are of the considered view that not only the issue was duly examined by the AO during the assessment but the law at time of assessment stood settled that when the payments are not in regard to royalty or FTS under the Act then also in respect of non-treaty countries the payments on account of bandwidth charges to non-residents are not subject to TDS provisions. Thus the issue did not require any fresh enquiry by AO by interference u/s 263 of the Act. Consequently we are inclined to decide this issue in favour of the assessee. Disallowance u/s 14A - HELD THAT - We find that during the year the assessee has received exempt dividend from its subsidiary company Bharti Infratel Ltd. only and there was no other source of exempt income nor fresh investment was made during the year in the shares of Bharti Infratel Ltd.. Still a suo-moto disallowance was made. There were no borrowed funds used for investments and no disallowances u/s 14A were made in the past. However as during the consequential assessment ld. AO has not given any adverse findings on the issue the aforesaid submissions become academic. AO did not investigate the issue concerning non-availability of depreciation - HELD THAT - No depreciation on good will was claimed by appellant during the year and as with regard to tangible assets detailed enquiry was conducted by the AO vide notice dated 06.09.2023 and 11.09.2023 as replied by assessee by reply dated 16.09.2023 copy available. Though in the consequential proceedings no adverse inference has been drawn by the AO. Thus the grievance of the assessee on the directions issued by the ld. PCIT as challenged do not survive but certainly as the issue was duly examined by the AO we are of considered view that issue did not deserved to be interfered u/s 263. AO has not verified the relevant transactions from the perspective of section 269SS and thereby did not initiate penal action u/s 271E - The case of the assessee was that the issue was extensively examined and all transactions were through banking channel only. The ld. Sr. Counsel has pointed out various notices and replies communicated between the AO and the assessee during the assessment proceedings. In the effect giving order no adverse inference was drawn by the AO and he was satisfied by the evidences of the assessee and upon verification of the same therefore as such no grievance of the assessee survives substantially. In any case we are satisfied that as issue was considered duly by AO vide notice dated 06.09.2023 and response of assessee dated 16.09.2023 copies of which are part we are of considered view that issue did not deserved to be interfered u/s 263. Genuineness of claim with regard to huge expenses were not examine by the AO and no supporting documentary evidences were called - The assessee had provided party wise details of five major expenses along with supporting documents like invoices Form 16A etc. In the effect giving proceedings the assessing officer was satisfied and no addition has been made. Thus substantively no grievance of the assessee is left. In any case we are satisfied that as issue was considered duly by AO so the issue did not deserved to be interfered u/s 263 of the Act. Allegation of Ld. PCIT that during the assessment proceedings the AO has failed to make inquiries to ascertain the genuineness of liabilities claimed - Counsel has also pointed out that the issue was set aside by the ld. PCIT without minimal inquiries and for that reason the directions were not sustainable in the light of the decision in the case ITO vs. DG Housing Projects Ltd. 2012 (3) TMI 227 - DELHI HIGH COURT . As a matter of fact in the effect giving proceedings no adverse inference has been drawn. Thus substantially no grievance survives. In any case we are satisfied that as issue was considered duly by AO so the issue did not deserved to be interfered u/s 263.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Issue No.1: Validity of Section 263 Order The PCIT's order under Section 263 was challenged on grounds of jurisdictional errors and procedural lapses. The Tribunal found that the PCIT's order was issued without proper inquiry and was based on vague grounds. The Tribunal emphasized that the original assessment was conducted with due diligence, and the PCIT's reasons for invoking Section 263 were not substantiated by new facts. The Tribunal concluded that the PCIT's order was invalid and unsustainable. Issue No.2: Allowability of License Fee, SUC, Interest, and Penalty The Tribunal examined the nature of license fees and SUC payments, referencing the Supreme Court's judgment in CIT vs. Bharti Hexacom. It was determined that the interest and penalty on delayed payments were compensatory and not capital in nature. The Tribunal concluded that the PCIT's direction to treat these as capital expenditure was incorrect, and the original assessment allowing these as revenue expenditure was upheld. Issue No.3: Carry Forward of Accumulated Loss and Unabsorbed Depreciation The Tribunal analyzed the conditions under Section 72A and Section 2(19AA) concerning demerger. It was found that the demerger met all statutory requirements, including the issuance of shares to shareholders. The PCIT's conclusion that the transaction was not a demerger was rejected. The Tribunal upheld the original assessment allowing the carry forward of losses and depreciation. Issue No.4: Applicability of Section 56(2)(x) The Tribunal found that the transaction of demerger was specifically excluded from Section 56(2)(x) by virtue of its proviso. The PCIT's direction to tax the alleged gain was found to be without basis, as the transaction was not covered under the definition of 'property' in Section 56(2)(x). The Tribunal ruled in favor of the assessee. Issue No.5: Transfer Pricing Adjustment The Tribunal noted that the TPO conducted extensive inquiries and allowed pro-rata adjustments based on jurisdictional High Court judgments. The PCIT's reliance on pending SLPs was deemed insufficient to justify revision. The Tribunal upheld the original assessment's transfer pricing adjustments. Issue No.6: Disallowance under Section 40(a)(i) The Tribunal found that the AO conducted detailed inquiries into payments to non-residents and was satisfied with the assessee's explanations. The Tribunal noted that the payments were not liable to TDS under existing legal precedents. The PCIT's direction for further inquiry was found unwarranted. Issue No.7: Disallowance under Section 14A The Tribunal observed that the AO had considered the issue of disallowance under Section 14A during the original assessment. The PCIT's direction for further inquiry was found unnecessary, as the AO had already addressed the issue adequately. Issue No.8: Verification of Transactions under Section 269SS The Tribunal noted that the AO had verified transactions and found no violations of Section 269SS. The PCIT's direction for further inquiry was deemed unnecessary, as the AO had conducted sufficient examination. Issue No.9: Genuineness of Liabilities and Expenses The Tribunal found that the AO had examined the genuineness of liabilities and expenses during the original assessment. The PCIT's direction for further inquiry was found unwarranted, as the AO had already conducted a thorough examination. 3. SIGNIFICANT HOLDINGS The Tribunal concluded that the PCIT's order under Section 263 was invalid due to lack of jurisdiction and procedural errors. The Tribunal upheld the original assessment on all issues, finding that the AO had conducted sufficient inquiries and that the PCIT's directions were based on incorrect interpretations of law and facts. The Tribunal emphasized the importance of adhering to statutory requirements and judicial precedents when invoking revisionary powers under Section 263. It was reiterated that the AO's conclusions, based on thorough inquiries and existing legal frameworks, should not be overturned without substantial justification. Overall, the Tribunal ruled in favor of the assessee, allowing the appeal and setting aside the PCIT's order.
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