2014 (3) TMI 495 - AT - Income Tax

Disallowance on transfer of telecom infrastructure - Whether the Assessing Officer could have made an addition for this amount to the income returned by the assessee Double additions - Held that - The entries were absolutely profit neutral so far as the profit as per profit and loss account is concerned, and since it is this profit which is starting point for computation of business income, effectively no adjustments thereto were required - Even if no adjustment was carried out in the computation of income, the resultant income would have been the same, but the adjustments, if at all required for the sake of completeness and transparency, were required for both the entries, i.e. loss on transfer of assets as also amount withdrawn from business restructuring. - The contention of the assessee was that no such addition was justified because the assessee has, on his own, made appropriate adjustments in the computation of taxable income and an addition by the Assessing Officer will result in double disallowance of the said amount - the addition made is deleted Decided in favour of Assessee. Working of DRP - Held that - The fact that even such purely factual issues are not adequately dealt with by the DRPs raises a big question mark on the efficacy of the very institution of Dispute Resolution Panel - One can perhaps understand, even if not condone, frivolous additions being made by the Assessing Officers, who are relatively younger officers with limited exposure and experience, but the Dispute Resolution Panels, manned by very distinguished and senior Commissioners of eminence, will lose all their relevance, if, irrespective of their heavy work load and demanding schedules, these forums do not rise to the occasion and do not deal with the objections raised before them in a comprehensive and effective manner. Disallowance of suo-motu commission to cover up corporate guarantee international transaction - Held that - The onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have bearing on profits, income, losses or assets of the enterprise, and there was not even an effort to discharge this onus - Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets - these conditions are not satisfied on the facts of this case - Even after the amendment in Section 92 B, by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise thus, it is outside the ambit of international transaction to which ALP adjustment can be made Decided in favour of Assessee. ALP Adjustment Interest on corporate deposits with Associated Enterprises Held that - The TPO overlooks the fact that such a transaction cost is relevant only to the domestic borrower who borrows in foreign currency from outside India - It has nothing to do with the arm s length interest rate for foreign currency borrowing by an overseas subsidiary - the ALP adjustments to interest rate for loans to subsidiaries are not warranted Decided in favour of Assessee. Addition on account of notional interest Held that - There is no provision in law enabling deeming fiction - What is before us is a transaction of capital subscription - Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of ALP adjustment is devoid of legally sustainable merits. It is not open to the revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus transaction - While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such re-chracterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form - there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee - The transaction is accepted to be genuine in effect Decided in favour of Assessee. Disallowance of interest expenses u/s 40(a)(i) of the Act Held that - ABN- S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis - ABN-S cannot be treated as tax resident of Indo Swedish tax treaty thus, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot be applicable on the ground that the interest remittances are made to ABN-S - the authorities below were clearly in error in treating ABN Amro Bank as recipient and as beneficial owner of the entire interest paid by the assessee remitted to ABN-S - even though interest is remitted to ABN-S, since ABN -S has mainly acted as a conduit, it is to be treated as having been paid to the beneficial owners of such interest i.e. original lenders under the financing arrangement - though through the ABN-S the matter is remitted back to the AO for adjudication Decided in favour of Assessee. Amortization of expenses u/s 35ABB of the Act - Disallowance of variable license fees - Deduction u/s 37(1) of the Act - Disallowance of interest paid on term loans Loans utilized only for business purpose Held that - As already decided by the HC that the expenditure incurred towards licence fee is partly revenue and partly capital - Licence fee payable upto 31st July 1999 should be treated as capital expenditure, and licence fee on revenue sharing basis, after 1st August 1999, should be treated as revenue expenditure - Capital expenditure will qualify for deduction as per section 35 ABB of the Act - the licence fee is on revenue sharing basis and pertains to period post 1st August 1999 thus, the disallowance set aside and the entire amount of licence fees is allowable as revenue deduction - The disallowances on interest paid is allowed as deduction - Decided in favour of assessee. Deduction u/s 37(1) of the Act employee compensation expenses Issuance of ESOPs Held that - The decision in Biocon Limited v. DCIT 2013 (8) TMI 629 - ITAT BANGALORE followed - The difference between the fair market value of the shares and the amount receivable from the employee at the time of issue/or exercise of the Employee Stock Option, debited to the profit and loss account is allowed partly in the year under consideration and partly in the earlier assessment year Decided in favour of Assessee. Disallowance of prepaid coupons u/s 40(a)(ia) of the Act - Free airtime given as discount/trade margin to the retail price Held that - As decided in assessee s own case, there is no element of agency, that talk time is traded and distributed, that it s a principal to principal relationship that the assessee has with his distributors, that flow of payment is in the reverse direction which is contrary to the concept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability - the assessee was required to deduct tax at source from the commission so allowed by the assessee - failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H Decided against Assessee. Disallowance of lease charges Held that - The Assessing Officer has not given any adjudication on merits and nor has he dealt with the contentions of the assessee by way of a speaking order - The Assessing Officer and the DRP have simply followed the order of the earlier years, and the matter for that year stands restored to the file of the Assessing Officer - in such a situation, it will be inappropriate to deal with the matter on merits thus, the matter is remitted back to the AO for adjudication Decided in favour of Assessee. Admission of additional ground - Deduction of liability u/s 201(1) of the Act Default in deduction of TDS on various expenses - Held that - The additional ground of appeal is purely a legal issue as to whether or not the liability borne by the assessee, under section 201 and which is not recovered from the recipients of payments without deduction of tax at source, is deductible in computation of assessee s income - as it involves factual verifications the matter is remitted back to the AO for adjudication Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of loss on transfer of telecom infrastructure.
2. Deduction under section 80IA for profit from Karnataka (B&T) circle.
3. Transfer pricing adjustments for international transactions.
4. Disallowance of interest paid to ABN Amro Bank under section 40(a)(i).
5. Disallowance of variable license fees under section 35ABB.
6. Disallowance of ESOP expenses.
7. Disallowance of free airtime to distributors under section 40(a)(ia).
8. Disallowance of roaming charges under section 40(a)(ia).
9. Disallowance of lease charges to IBM & Nortel.
10. Admission of additional ground for deduction of liability under section 201.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Transfer of Telecom Infrastructure
The primary issue was whether the addition of Rs 5,739.60 crores by the Assessing Officer for the disallowance of loss on transfer of telecom infrastructure was justified. The Tribunal found that the loss was neutralized by a corresponding credit from the 'business restructuring reserve,' thus having no net effect on the profit and loss account. The Tribunal concluded that the addition was wholly erroneous and devoid of legally sustainable merits, leading to the deletion of the impugned addition.

2. Deduction under Section 80IA for Profit from Karnataka (B&T) Circle
The assessee's claim for deduction under section 80IA was not allowed by the Assessing Officer on the grounds that the required report in Form No. 10CCB was not furnished. The Tribunal remitted the matter back to the Assessing Officer for fresh adjudication in light of the assessed gross total income, as directed by the Dispute Resolution Panel.

3. Transfer Pricing Adjustments for International Transactions
The Tribunal addressed several transfer pricing adjustments:
- Corporate Guarantee: The Tribunal held that the issuance of corporate guarantees did not constitute an 'international transaction' under section 92B, as it did not involve any costs to the assessee and had no bearing on profits, income, losses, or assets. The impugned ALP adjustment of Rs 33,10,161 was deleted.
- Interest on Loans to AEs: The Tribunal upheld the assessee's contention that the interest rate of 7.33% charged on loans to AEs was at arm's length. The ALP adjustment of Rs 62,15,019 was deleted.
- Share Application Money: The Tribunal found that treating payments for share application money as interest-free loans for the period until shares were allotted was inappropriate. The adjustment of Rs 19,15,45,943 was deleted.

4. Disallowance of Interest Paid to ABN Amro Bank under Section 40(a)(i)
The Tribunal remitted the matter to the Assessing Officer for fresh adjudication, directing the AO to examine the tax residency status of the beneficial owners of the interest paid and to adjudicate the issue in light of applicable legal provisions and judicial precedents.

5. Disallowance of Variable License Fees under Section 35ABB
Following the decision of the Delhi High Court, the Tribunal held that the license fee on a revenue-sharing basis post-1st August 1999 should be treated as revenue expenditure. The disallowance was deleted.

6. Disallowance of ESOP Expenses
The Tribunal followed the Special Bench decision in Biocon Ltd. v. DCIT, allowing the deduction of ESOP expenses as employee cost. The disallowance of Rs 7,22,89,010 was deleted.

7. Disallowance of Free Airtime to Distributors under Section 40(a)(ia)
The Tribunal, relying on the Delhi High Court's decision, upheld the disallowance under section 40(a)(ia) for failure to deduct tax at source from the commission allowed to distributors. The disallowance was confirmed.

8. Disallowance of Roaming Charges under Section 40(a)(ia)
The Tribunal remitted the matter to the Assessing Officer for fresh adjudication, directing the AO to specifically address the assessee's plea that the payment of roaming charges was a revenue-sharing arrangement.

9. Disallowance of Lease Charges to IBM & Nortel
The Tribunal remitted the matter to the Assessing Officer for fresh adjudication on merits, directing the AO to deal with the contentions of the assessee by way of a speaking order.

10. Admission of Additional Ground for Deduction of Liability under Section 201
The Tribunal admitted the additional ground for deduction of liability borne by the assessee under section 201 but remitted the issue to the Assessing Officer for adjudication on merits.

Conclusion
The Tribunal provided detailed adjudication on each issue, often remitting matters back to the Assessing Officer for fresh consideration and directing specific findings to be made in accordance with legal principles and judicial precedents. The Tribunal also emphasized the need for the Assessing Officer to provide speaking orders addressing all contentions raised by the assessee.