2014 (3) TMI 496 - AT - Income Tax

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 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. Article 11 of Indo-Sweden DTAA Obligation to deduct TDS - 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 mere fact that the interest has been remitted to ABN-S and that the benefit of Article 11(3) of Indo Swedish tax treaty or benefit of Article 11(3) of the Indo Dutch tax treaty are not available in respect of these remittances, does not imply that the amounts so paid are taxable in India. Even though such 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 assessee has filed elaborate documentation in support of their stand about tax residency status of beneficial owners of the interest paid by the assessee and has also addressed the arguments on merits, but, in the absence of this aspect of the matter having been examined is not inclined to deal with the matter on merits - the right course of action is to identify the factual aspects to be looked into, set out the legal principles the matter remitted back to the AO for fresh adjudication. Disallowance of interest u/s 40(a)(i) of the Act Held that - Whether disallowance under section 40(a)(i) can be made in a situation in which even if the foreign remittance had tax withholding obligations under section 195 but the assessee had bonafide reasons to believe that there were no tax with withholding obligations - as the matter is remitted back to the AO file of the Assessing Officer for adjudication on the basic question as to whether there were tax withholding obligations, this aspect of the matter is academic at this stage Decided in favour of Assessee. Disallowance u/s 40(a)(ia) of the Act TDS to be deducted u/s 194H of the Act Held that - The decision in CIT Vs Idea Cellular Limited 2010 (2) TMI 24 - DELHI HIGH COURT followed - 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 thus, the assessee was required to deduct tax at source from the commission so allowed by the assessee and failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H - The disallowance is thus confirmed Decided against Assessee. Deduction u/s 40(a)(ia) of the Act - Roaming and other telecom charges - Whether the amounts paid for roaming charges will attract tax deduction at source under section 194 J of the Act Held that - The decision in CIT v. Bharti Cellular Limited 2010 (8) TMI 332 - Supreme Court of India followed - the matter was remanded to the Assessing Officer (TDS) with certain directions for de novo adjudication - the authorities below have not examined the matter at any of the stages nor this specific argument was taken before them thus, the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee. Non-refundable security added to tax Held that - The non-refundable security deposit received from the landline subscribers is in respect of the services rendered by the assessee over the period in which the connection is in use, and, therefore, its being amortized over the estimated customer churn period is in consonance with generally accepted accounting principles inasmuch as it would indeed present a distorted picture of financial affairs when entire amount of non refundable security deposit is treated as income relatable to the year in which it is received - This is the practice that the assessee has consistently followed, and the revenue has also accepted the same in the other years Relying upon CIT v. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT - it would be inappropriate to allow reconsideration of an issue for a subsequent year when the same fundamental aspect permeates in the different assessment years thus, the AO is directed to set aside the additions made Decided in favour of Assessee. Transfer pricing adjustment Selection of comparables - Whether for the purposes of applying CUP method all the internal comparables are to be taken into account or whether only one of these comparables, namely sale to Maxis International (Malaysia), is to be taken into account Held that - The international call provider carries the incoming call to Indian upto Indian shore and the assessee carries the international call from Indian shores to the end subscriber - The services being provided to the international telecommunication companies are with respect to the activity performed in India, and, irrespective of the area from which such international calls originate, the activity remains the same. The origin of the call does not make any difference to the activity performed by the assessee thus, there cannot be any difference in the market conditions in such a case merely because the international call originates a different countries - It is a business to business service, without direct involvement of the end customer in call originating location thus, even if there is a difference in retail telecom market in countries of origin of call, such a difference cannot have any impact so far as determination of price for Indian segment of such a call is concerned the determination of arm s length price by the assessee has been decided on the basis of CUP method thus, the ALP adjustment in respect of sale of carriage and termination of voice traffic is set aside Decided in favour of Assessee. ALP Adjustment Interest on corporate deposits with Associated Enterprises Held that - While the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate - There is no material for vague observations about weak financials of the subsidiaries which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee - When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. 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 - In any event, the interest rate is independent of incidental costs, and since TPO has taken lender as the tested party, the transaction cost to the borrower is wholly irrelevant - This adjustment is devoid of any legally sustainable basis. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing - The approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. The proposition that the credit rating of the parent company and subsidiary company will be the same is not of universal application but it is certainly a good indicator, in the absence of anything else to the contrary, of the credit rating of the subsidiary as well - when parent company is able to raise foreign exchange borrowings at a certain rate, it is reasonable to assume that such rates can constitute valid comparable for similarly placed borrowings by the subsidiary as well - more so when subsidiaries are under management and control of the lender parent company, and the business risk is thus much lower thus, the ALP adjustments to interest rate for loans to subsidiaries are not warranted Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of variable license fees.
2. Disallowance of interest paid on term loans.
3. Disallowance of employee compensation expenses under ESOP.
4. Disallowance of lease charges.
5. Disallowance of interest paid to ABN Amro Bank under section 40(a)(i).
6. Disallowance of free airtime given as discount/trade margin under section 40(a)(ia).
7. Disallowance of roaming charges under section 40(a)(ia).
8. Bringing to tax non-refundable security deposits.
9. Addition/adjustment on account of the alleged difference in arm's length price of international transaction of sale of carriage and termination of voice traffic.
10. Addition/adjustment on account of interest on inter-corporate deposits with the AEs.

Issue-wise Detailed Analysis:

1. Disallowance of Variable License Fees:
The assessee challenged the disallowance of Rs. 8,66,67,12,532 by amortizing the license fees under section 35ABB instead of allowing it as a deduction under section 37(1). The Tribunal noted that the issue was covered in favor of the assessee by the Delhi High Court's judgment, which held that license fees on a revenue-sharing basis post 1st August 1999 should be treated as revenue expenditure. Consequently, the disallowance was deleted, and the entire license fee was allowed as a revenue deduction.

2. Disallowance of Interest Paid on Term Loans:
The assessee contested the disallowance of Rs. 4,18,10,255 as interest on term loans. The Tribunal observed that similar disallowances had been deleted by higher judicial authorities, including the Supreme Court. Therefore, the Tribunal directed the Assessing Officer to delete this disallowance.

3. Disallowance of Employee Compensation Expenses under ESOP:
The assessee claimed a deduction of Rs. 11,96,23,407 for ESOPs, which the Assessing Officer disallowed as capital expenditure. The Tribunal referred to the Special Bench decision in Biocon Ltd v. DCIT, which allowed ESOP-related expenses as deductible during the vesting period. Consequently, the disallowance was deleted.

4. Disallowance of Lease Charges:
The Assessing Officer disallowed Rs. 129,62,06,055 paid as lease charges to IBM India and Nortel Networks, treating the transactions as disguised purchases. The Tribunal found that the Assessing Officer had not adjudicated on merits and remitted the matter back to the Assessing Officer for a fresh decision, requiring a speaking order and addressing all contentions of the assessee.

5. Disallowance of Interest Paid to ABN Amro Bank under Section 40(a)(i):
The Assessing Officer disallowed Rs. 87,83,92,587 for non-deduction of tax at source on interest paid to ABN Amro Bank, Stockholm. The Tribunal noted that the taxability of ABN-S should be examined under the India-Netherlands DTAA, not the India-Sweden DTAA. The Tribunal remitted the matter back to the Assessing Officer for a fresh adjudication, considering the beneficial ownership of the interest and the applicable tax treaties.

6. Disallowance of Free Airtime Given as Discount/Trade Margin under Section 40(a)(ia):
The Assessing Officer disallowed Rs. 505,47,21,495 as free airtime given to distributors, treating it as commission requiring TDS under section 194H. The Tribunal upheld the disallowance, citing the Delhi High Court's decision in the assessee's own case, which treated such discounts as commission.

7. Disallowance of Roaming Charges under Section 40(a)(ia):
The Assessing Officer disallowed Rs. 2,47,31,57,620 paid as roaming charges, treating them as fees for technical services requiring TDS under section 194J. The Tribunal remitted the matter back to the Assessing Officer to examine whether the payments were part of a revenue-sharing contract, as argued by the assessee, and to adjudicate the issue afresh.

8. Bringing to Tax Non-Refundable Security Deposits:
The Assessing Officer added Rs. 3,46,00,000 as non-refundable security deposits to the income. The Tribunal found that amortizing the deposits over the customer relationship period was in line with generally accepted accounting principles and consistent with the assessee's practice. The addition was deleted.

9. Addition/Adjustment on Account of the Alleged Difference in Arm's Length Price of International Transaction of Sale of Carriage and Termination of Voice Traffic:
The Assessing Officer made an ALP adjustment of Rs. 7,14,84,331, comparing the rate charged to Singtel with that charged to Maxis International. The Tribunal held that geographical location alone does not determine comparability and that all internal comparables should be considered. The adjustment was deleted.

10. Addition/Adjustment on Account of Interest on Inter-Corporate Deposits with the AEs:
The Assessing Officer made an ALP adjustment of Rs. 10,11,786, applying an interest rate of 14% instead of the 7.33% charged by the assessee. The Tribunal found that the interest rate on rupee loans was irrelevant for foreign currency loans and that the adjustments made by the TPO were not justified. The adjustment was deleted.

Conclusion:
The appeal was partly allowed, with several disallowances and adjustments being deleted or remitted back for fresh adjudication. The Tribunal's decisions were based on established legal principles, previous judgments, and the specifics of the case at hand.