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TMI Blog2025 (2) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case and in law, the learned Dispute Resolution Panel-II, Mumbai ("DRP") has erred in passing the order under section 144C(13) of the Income Tax Act, 1961 (Act'), partly confirming the adjustments proposed by the Deputy Commissioner of Income Tax, Circle 8(3)(2), Mumbai (AO) [jurisdiction later transferred to Assistant Commissioner of Income Tax 5(3)(2) pursuant to merger of Vodafone India Limited with Idea Cellular Limited] in the draft assessment order, and the learned AO has accordingly erred in passing the assessment order under section 143(3) read with section 144C of the Act. Each of the ground is referred to separately, which may kindly be considered independent of each other. 1. Disallowance under section 14A of the Act 1.1. On the facts and circumstances of the case and in law, the learned DRP/AO has erred in invoking the provisions of section 14A of the Act and thereby, has erred in making a disallowance of INR 362,23,34,000 under section 14A of the Act under normal provisions of the Act, as well as special provision of computing book profit section 115JB of the Act. 1.2. Without prejudice to ground 1.1. above, on the facts and in the circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten down value of capital expenditure incurred by the Appellant on acquisition of right to use 3G spectrum in AY 2011-12. 3.2. On the facts and in the circumstances of the case and in law, once the learned DRP/AQ has clearly held that one-time expenditure incurred on acquisition of 3G spectrum is capital expenditure which is in nature of 'intangible asset and also that the spectrum was de-linked from telecom license, it was axiomatic for them to allow tax depreciation under section 32 of the Act. 3.3. On the facts and in the circumstances of the case and in law, the learned DRP has erred in confirming the observation of the learned AO that right to use 3G spectrum is covered by the specific provision of 35ABB of the Act which overrides the general provision of section 32 of the Act. 4. Disallowance of payments made to IBM 4.1. On the facts and in the circumstances of the case and in law, the leamed DRP/AO has erred in disallowing service charges paid to IBM, amounting to INR 14,66,83,051 on the premise that such charges are capital in nature. 4.2. Without prejudice to the ground 4.1 above, on the facts and in circumstances of the case and in law, the learned DRP/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken by the Appellant using comparable uncontrolled price method ("CUP") and not considering the economic analysis undertaken by the Appellant using transactional net margin method (TNMM') to determine the ALP of the royalty payment made for grant of right to use of 'Vodafone trademark and trade name. 6.1.5. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of royalty payment for grant of right to use "Vodafone trademark and trade name at Nil price by questioning the commercial expediency of such expenditure. 7. TP adjustment amounting to INR 2,45,23,347 on account of re-imbursement of expenses to AE 7.1. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of the international transaction pertaining to reimbursements made in relation to PwC consulting charges and people survey costs at Nil price without appreciating the fact that these payments represent cost to cost reimbursement of payments made by AE on behalf of the Appellant and cannot be termed as shareholder services. 8. TP adjustment amounting to INR 84,57,000 on account of payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Subsequently, the Appellant filed revised return on 27/02/2017 declaring total loss of INR 474,26,15,918/-. The case of the Appellant was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant has entered into international transactions with its Associated Enterprises (AEs) and therefore, a reference was made under Section 92CA(1) to the Transfer Pricing Officer (TPO) for the determination of Arm's Length Price (ALP) of the international transactions. The TPO, vide order, dated 30/10/2017, passed under Section 92CA(3) of the Act proposed, inter alia, the following transfer pricing adjustments: S.No. Nature of Transaction Amount (INR) 1 Payment of Royalty 35,97,56,258/- 2 Payment of Centralized support service (Machine to Machine) 84,57,000/- 3 PwC recharges and other reimbursement 2,45,23,347 Total 39,27,36,605/- 3.1. On 28/12/2017, the Assessing Officer passed Draft Assessment Order under Section 143(3) read with Section 92CA read with Section 144C(1) of the Act incorporating the above transfer pricing adjustment. In addition the Assessing Officer also proposed other additions/disallowances as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt previous year no fresh investments were made by the Appellant. Further, no finance cost has been incurred in relation to investments made in the prior years. The investments in the prior years were sourced from shares swap, issue of shares by way of rights issue and internal cash accruals. Further, during the relevant previous year the Appellant had earned exempt dividend income of INR.220 Crores from Indus Towers Limited. However, no expenditure was incurred in relation to earning the said dividend income. It was further contended the management/administrative expenses incurred by the Appellant during the relevant previous year were recovered by the Appellant from its subsidiaries as management support services income of INR 14 Crore. Therefore, no disallowance under Section 14A of the Act was warranted. On a without prejudice basis, it was also contended by the Appellant that even in a case where investments were made from common pool of funds it was to be presumed that the investments were made from Appellant's own funds. It was also contended that even while applying provisions contained in Rule 8D of the IT Rules, only the investments yielding exempt income were to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of shares by way of rights issue or by way of internal cash approvals. On perusal of paragraph 5.2.25 of the Assessment Order we find that the investments made by the Appellant as on 01/04/2012 and 31/03/2013 stood at INR 7,122.60 Crores and INR 7,122.40 Crores, respectively. At the same time the Aggregate Share Capital and Reserves & Surplus of the Appellant stood at INR 8,043.90 Crores and 7,701.10 Crores as on 01/04/2012 and 31/03/2013, respectively. The contention of the Appellant is that no disallowance of interest in terms of Rule 8D(2)(ii) of the IT Rules can be made in respect of interest expenses since the Appellant had sufficient own funds. On the other hand, the Assessing Officer has made proportionate disallowance of interest on the premise that the Appellant has utilised funds from common pool of funds comprising of interest bearing borrowed funds and interest free own funds for making investment yielding tax free income. We note that in the case of South Indian Bank Ltd. Vs. CIT [2021] 438 ITR 1 (SC), cited on behalf of the Appellant, it has been held by the Hon'ble Supreme Court that where the interest-free owned funds available with the assessee are more than t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinate Bench of the Tribunal either in law or on facts. Therefore, respectfully following the same, 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 of INR.326.6214 Crores made by the Assessing Officer by disallowing proportionate interest cost is deleted under the normal provisions. 4.6. As regards disallowance of INR.35.612 Crores made by the Assessing Officer under Rule 8D(2)(iii) of the IT Rules is concerned, we find that Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi Trib.) (SB) 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 Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) of the IT Rules read with Section 14A of the Act as per the decision of Special Bench of the Tribunal in the case of Vireet Investments Pvt. Ltd (supra). 4.7. We note that in the case of Vireet Investments Pvt. Ltd. (supra) the Special Bench of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2009-10 [ITA No. 1121 & 1885/Mum/2014, common order dated 08/11/2023], and identical disallowance made under Section 40(a)(ia) of the Act by the Assessing Officer in respect of the upfront discount was deleted by the Tribunal holding as under: "11. The next issue urged in Ground no.9 relates to disallowance of discount extended on pre-paid cards/recharge vouchers u/s 40(a)(ia) for non-deduction of tax at source. It was brought to our notice that an identical issue was examined by the co-ordinate bench in ITA No.3425/Mum/2014 relating to AY 2009-10 in the case of M/s Vodafone Idea Ltd (As successor to Spice Communications Ltd) and the Tribunal, vide its order dated 24-02- 2023, has held that the TDS is not deductible from the discount paid on prepaid cards. The relevant observations are extracted below:- "3.30. In view of the above observations, we hold that the decision rendered by us in assessee's own case for A.Y.2008-09 in ITA No.2285/Mum/2014 dated 12/10/2022 would be squarely applicable to the facts of the assessee's case before us for the year under consideration also. The relevant operative portion of the said order of this Tribunal is reproduced hereunder:- "2.8.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of tax under Section 194H of the Income Tax Act ? (b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble Income Tax Appellate Tribunal erred in setting aside the case to the Assessing Officer?" 5. The Tribunal noted the observations of the Assessing Officer that the discount allowed to the distributors by the Respondent - assessee company is on account of principal to principal relationship and not that of principal to agent. The Tribunal followed the decision of the Karnataka High Court in the 20 M/s. Vodafone India Ltd. case of Bharati Airtel Ltd. vs. DCIT [372 ITR 33] and held that the sale of SIM cards/recharge coupons at discounted rate to the distributors was not commission and therefore not liable to deduct the TDS under Section 194H. The Tribunal noted that there was no decision of this Court on this issue on that date. 6. Learned counsel for the parties have tendered the copy of the order passed in Income Tax Appeal No. 702 of 2017 subsequently in the case of Pr. Commissioner of Income Tax-8 vs. M/s. Reliance Communications Infrastructure Ltd., where same issue arose for the consideration of this Court. The Division Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decisions of Hon'ble Delhi High Court, Hon'ble Kerala High Court and Hon'ble Calcutta High Court referred supra had been considered and distinguished by the Hon'ble Karnataka High Court referred supra. 2.8.4. We further find that the Hon'ble Rajasthan High Court in the case of Hindustan Coca Cola Beverages (P) Ltd vs CIT III Jaipur reported in 402 ITR 539 (Raj) which had rendered a comprehensive judgement on the impugned issue together with various other assesses including Idea Cellular Ltd (assessee herein). The relevant Income Tax Appeal Nos. 168/2015, 169/2015, 170/2015 and 171/2015 which were admitted by the Hon'ble Rajasthan High Court on 18/10/2016 relates to assessee herein for Rajasthan Circle in respect of the identical issue. The question no.1 raised before the Hon'ble Rajasthan High Court is as under:- 1. Whether in the facts and circumstances of the case, the Tribunal was justified in holding that whether the assessee is liable to deduct TDS u/s. 194-H of IT Act, as the relation between assessee and distributor is that of Principal to Agent? 2.8.4.1. We find that the Hon'ble Rajasthan High Court after considering the plethora of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon supra by the ld. DR. It is trite law that though the decision of Hon'ble Apex Court would be binding as per Article 141 of the Constitution of India, still the judgement of the Hon'ble Supreme Court should be understood from the issue raised before it. In our considered opinion, this decision has got absolutely nothing to do with the applicability of provisions of section 194H of the Act. Hence we hold that the reliance placed by the ld. DR on the said decision is grossly misplaced. 2.8.7. The ld. DR before us vehemently submitted that the orders of Hon'ble Rajasthan High Courts and Hon'ble Jurisdictional High Courts and Hon'ble Karnataka High Court had not attained finality as they had been appealed by the revenue before the Hon'ble Supreme Court. This argument of the revenue, in our considered opinion, cannot be a deterrent for this Tribunal to follow those High Court orders. We find that the similarly worded distribution agreement had been subject matter of adjudication and examination by the Hon'ble Rajasthan High Court and Hon'ble Jurisdictional High Court wherein the Hon'ble High Courts had taken a categorical view that the relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount offered to Pre-paid Distributors, and consequently, no disallowance could be made under Section 40(a)(ia) of the Act for failure to deduct tax at source. The above decision of the Tribunal has been followed by the Co-ordinate Benches of the Tribunal while deciding identical issue in favour of the Appellant in appeal preferred for the Assessment Years 2011-2012 & 2012-13 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order dated 17/05/2024] and for the Assessment Year 2013-2014 [ITA No.6671/Mum/2017, dated 22/10/2024]. 5.6. Both the sides agree that there is no change in facts and circumstances, therefore, respectfully following the above decisions of the Tribunal in the case of the Appellant, the disallowance of INR 68,19,45,415/- made under Section 40(a)(ia) of the Act in respect of the upfront discount extended to Pre-paid Distributors is deleted. Ground No. 2. to 2.4. raised by the Appellant are allowed. Ground No. 3 to 3.3. 6. Ground No. 3 to 3.3 raised by the Appellant pertains to disallowance of depreciation on 3G Spectrum. 6.1. We have head both the sides and perused the material on record pertaining to this issue. It is admitted position that during the Financial Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the Act for the Assessment Year 2011-12, the Mumbai Bench of the Tribunal concluded that depreciation in respect of 3G spectrum charges was correctly allowed by the Assessing Officer [vide order dated 28/08/2020, passed in ITA No. 3327/Mum/2018 (Vodafone India Ltd. Vs. Principal Commissioner of Income Tax-8)] holding as under: "29. Accordingly, we can safely conclude that on the merits of the issue, the Mumbai Bench of the ITAT in the case of Idea Cellular Ltd. (ITA No. 360/Mum/2016) has already held that the provisions of section 35ABB are not applicable on the cost of acquisition of the 3G Spectrum and no specific arguments have been made on the said decision of the ITAT on the merits of the issue by the Revenue. 30. This decision has also been followed by the ITAT in the case of Tata Teleservices Maharashtra Ltd.(ITA No. 3567/Mum/2016 and 4392/M/2017). 31. With regard to reliance of the ld. DR on the decision of Hon'ble Supreme Court in the case of Britania Industries Ltd.(278 ITR 546), we observe that the question before the Supreme Court in the said case was whether expenses towards rent, repairs, depreciation and maintenance of a building used as a guest house, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed after conducting a detailed enquiry and adopting one of the legally permissible view, the revisionary proceedings initiated on such issue has no legs to stand on and is thus liable to be quashed. Refer paras 13 to 16 of the order (page no 19 to 25 of the order). b. On merits of allowability of depreciation claimed on 3G spectrum fees: The Hon'ble Tribunal observed that the telecom license and spectrum are independent of each other and 3G spectrum fee merely provides a right to use a particular frequency/spectrum while providing telecommunication services. The assessee has rightly claimed depreciation under section 32 of the Act and the provisions of section 35ABB of the Act are clearly not applicable. Refer paras 17 to 20 of the order (page no 25 to 30 of the order). It was further highlight that the Jurisdictional Tribunal in the case of Tata Teleservices Maharashtra Limited (ITA 3567/Mum/2016 and 4392/Mum/2017), for AYs 2011-12 and 2012-13, has followed the decision of Idea Cellular (supra) and directed the AO to allow the depreciation claim under section 32(1)(ii) of the Act in respect of the amount paid to DOT for purchase of 3G spectrum and quashed the order passed u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which deduction could not have been allowed during the relevant previous years under mercantile system of accounting followed by the Appellant. The objections filed by the Appellant before DRP on this issue were rejected on the ground that Appellant had failed to demonstrate before the DRP the exact nature of the expenses. Accordingly, in the Final Assessment Order disallowance of INR.14,66,82,051/- was made by the Assessing Officer. 7.2. Being aggrieved, the Appellant is now in appeal before this Tribunal. 7.3. We have heard both the sides and perused the material on record. 7.4. It was vehemently contended on behalf of the Appellant that the sole reason for disallowing deduction of service charges claimed by the Appellant was that the said expenditure was capitalized in the books of accounts. It was also submitted that identical expenditure has been allowed as deduction in the preceding assessment years. In absence of any change in the facts and circumstances, there was no reason for the Assessing Officer to depart from the view taken in respect of service charges paid/payable under the same service agreement with IBM in the preceding assessment years. It was further submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vodafone" trademark and trade name. The Appellant contended that as per Comparable Uncontrolled Price Method (for short 'CUP Method') the royalty payment was at arm's length since on analysis of the comparables selected, the Appellant found that the mean of the royalty payments being made under comparable third-party arrangements was 1.25% which was more than the rate of royalty payment made by the Appellant to its AE. However, the TPO was not convinced. The TPO noted that Assessment Year 2009-10 till Assessment Year 2012-13, the Appellant used to pay royalty to VSSL upto rate of 0.70%. TPO noted that the Appellant had adopted CUP Method for benchmarking royalty transactions which according to the TPO was not the Most Appropriate Method. The TPO also rejected all the comparables selected by the Appellant on account of significant differences in the functions, geography and level of operations. The TPO observed that the Appellant was performing Development, Enhancement, Maintenance, Protection and Exploitation functions (for short 'DEMPE functions') for the brand in India and was bearing the related costs and risks. No compensation was received by the Appellant for the aforesaid DEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being heard. The Appellant is directed to file before the TPO/Assessing Officer such documents/details/report as the Appellant may deem fit to support the contention that the royalty payment made by the Appellant to its AE are at arm's length while the TPO is directed to examine the same afresh for determining the ALP and made consequent transfer pricing adjustment, if any, as per law. All the rights and contentions of both the sides are left open. In terms of aforesaid, Ground No. 6 to 6.1.5 raised by the Appellant are allowed for statistical purposes. Ground No.7 and 7.1 10. Ground No. 7 to 7.1 raised by the Appellant pertains to transfer pricing adjustment pertaining to reimbursement of expenses. 10.1. During the relevant previous year, the AEs of the Appellant cross charged salary cost of personnel seconded to India and who worked under the supervision, management and control of the Appellant. Subsequently, the Appellant reimbursed these expenses incurred by its AEs on cost to cost basis. Out of the aforesaid expenses, the TPO determined the ALP for the payments pertaining to GMAC Costs, PwC Consulting and people survey cost aggregating to INR.2,45,23,347/- as 'Nil'. Since, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid directly to the seconded employees. Taking into consideration entire facts, we deem it appropriate to restore this issue back to the file of Assessing officer for re-examination. The assessee is directed to furnish relevant documents to substantiate that the costs disallowed by the DRP were in fact cost paid by the assessee towards relocation/travel of the seconded employees. The assessing officer shall decide this issue after affording reasonable opportunity of hearing/to make submissions to the assessee, in accordance with law. Ergo, ground no.13 of the appeal is allowed for statistical purpose." 13.2 The facts available in this year, being identical, following the decision rendered by the co-ordinate bench in the assessee's own case in AY 2008-09, we restore this issue to the file of AO/TPO with similar directions." 10.3. The above decision was relied upon by the Tribunal while restoring identical issue back to the file of TPO/Assessing Officer with directions in appeal preferred by the Appellant for the Assessment Years 2011-2012 & 2012-13 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order dated 17/05/2024] and for the Assessment Year 2013-2014 [ITA No.6671/Mum/2017, da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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