9911796707
TMI Blog2025 (2) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td.[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. X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had responded to the show cause notice by submissions dated 22.12.2023 and after taking into consideration the submissions and the objections to the exercise of jurisdiction, the impugned order was passed whereby the revisional authority enhanced the assessment on certain issues and set aside the assessment on some other issues. 4. During pendency of appeal before this Tribunal, an effect giving order u/s 143(3) r.w.s. 263 of the Act dated 14.01.2025 was passed by the ld. AO and based upon the aforesaid subsequent event of passing of the effect giving order, certain grounds of challenge of impugned order have become superfluous and some require modification in terms of remaining grievances of the assessee. 5. On hearing ld. Sr. Counsel and ld. Departmental Representative, we find that primarily they have relied their respective cases as before ld. tax authorities and, accordingly, we proceed to decide the controversy in the form of issues and their consequences on the grounds as raised before the Tribunal. As for convenience, here itself the grounds raised by the assessee are reproduced:- "Validity of 263 order 1. That on the facts and circumstances of the case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Teleservices Ltd. business (in short "Tata Business"); (b) Alleged incorrect proportionate adjustment allowed by the Transfer pricing officer. 7. That the PCIT failed to appreciate that revisionary proceedings under section 263 of the Act could not be initiated merely to: (a) conduct vague/ roving enquiries; or (b) authorize the assessing officer to conduct roving/ fishing enquiries, by merely setting aside the assessment. Without Prejudice Qua claim of deduction on account of payment of license fees 8. That the PCIT erred in enhancing the income of the appellant by Rs. 39,251 crores by directing disallowance of license fees, spectrum usage charges (SUC) and interest/ penalty thereon payable to Department of Telecommunication ['DOT']. 8.1. That the PCIT erred in exercising revisionary jurisdiction, without appreciating that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and solely on this ground, without anything more, the impugned order qua the aforesaid issue was without jurisdiction and bad in law. 8.2. That the PCIT erred in holding/ directing disallowance of interest and penalty on delayed payment of license fee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue was without jurisdiction and bad in law. 9.2. That the PCIT erred in holding that 'demerger' of consumer wireless undertaking of TTSL did not fulfill the conditions of section 2(19AA) of the Act inasmuch as: (a) preference shares were issued pursuant to demerger, thereby violating the statutory mandate that three fourth (¾) of the shareholders must continue to participate in company; and (b) requirement of transfer of all assets and liabilities was not fulfilled. 9.3. That the PCIT erred in exceeding his jurisdiction in disregarding the NCLT sanctioned scheme of arrangement, having a statutory force, for Demerger and vesting of the consumer wireless undertaking of TTSL into the appellant, and instead in perversely holding the same to be mere 'business acquisition', not qualifying as 'demerger'. 9.4. That the PCIT erred in not: (a) considering the supplementary reply dated 11.01.2024 filed by the appellant providing detailed justification in support of the claim of losses under section 72A of the Act; and (b) issuing any show-cause notice and/ or granting hearing. 9.5. Without prejudice, the PCIT failed to appreciate that the eligibility of unabsorbed business l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)(i) of the Act 12. That the PCIT erred in issuing vague/ open ended direction to the assessing officer to examine transactions and disallow payments with non-residents without deduction of tax at source under section 40(a)(i) in cases where there is no certificate under section(s) 195/197 of the Act. 12.1. That the PCIT failed to appreciate that the scope of revisionary jurisdiction is limited to issues on which the assessment order is found to be erroneous and prejudicial to the interests of the Revenue and not for directing vague/ open ended direction to the assessing officer to undertake roving/ fishing enquiries. 12.2. That the PCIT failed to appreciate that the transactions entered into by the appellant with non-residents stands duly examined and accepted by the Department vide separate order passed under section 201 of the Act for the relevant assessment year. 12.3. That the PCIT erred in dictating the assessing officer to disallow expenses on which tax has not been deducted following stand of the revenue on those issues, which is not permissible. 12.4. That the PCIT erred in passing the aforesaid directions, without issuing any show-cause notice on the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by ld. Sr. Counsel of the assessee that as a result of the consequential order passed under section 143(3)/ 263, and more particularly in view of the assessing officer, after fresh re-examination/ re-verification, granting relief to the appellant on some of the issues, the substantive grievance of the appellant survives on the residual issues on which relief has not been allowed and the grievance of the appellant on the issues on which relief has already been granted are merely rendered academic in nature. Still for completeness, while adjudicating the residual issues on merits we shall examine this controversy, as to if the allegation and conclusion of PCIT about lack of enquiry is sustainable, as same goes to the question of validity in assumption of jurisdiction. 9. Issue No.1: We will like to preface the discussion on this issue by bringing some vital facts on record, though same may seem superfluous, in the light of effect giving order narrowing the controversy, but still remain vital. The appellant, as stated above, is engaged in the business of providing telecommunication services and was granted permission/ license to operate cellular services under Section 4 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.03.2020 observing as follows: "..........no exercise of self-assessment/re-assessment to be done and the due which placed before us have to be paid as we have affirmed these dues including interest and penalty as ordered in the judgement." 9.3 Accordingly, in view of the above orders, during the year under consideration, the appellant provided an amount of Rs. 28,498 crores comprising of license fee of Rs. 17,044.60 crores and SUC of Rs. 11,453.20 crores as a charge to the statement of profit & loss account, disclosed as an exceptional item. Relevant extracts of audited financial statement for the year ended 31.03.2020 are on record at pages 3657 to 3658 of paper book Vol.II. Ld. Sr. Counsel has submitted that the aforesaid amount was computed after excluding impact of certain computation errors and payments already made by the appellant in past periods not considered by DoT while raising the demands. Subsequently, the Hon'ble Supreme Court vide order dated 01.09.2020, directed that demands raised by DoT in respect of AGR dues based on order dated 24.10.2019 and 18.03.2020 shall be final and there shall not be any dispute raised by any of the Telecom operators. Accordingly, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.4 In pursuance of the aforesaid order, the appellant immediately filed rectification request vide letter dated 25.10.2023 before the assessing officer requesting for re-calculation of the amount of variable license fee of Rs. 5,082 crore included in the additional claim of Rs. 38,631 crores which was to be amortized and allowed in terms of section 35ABB of the Act. The aforesaid rectification application filed by the appellant, suo-moto seeking recalculation of variable license fee continues to remained pending before the assessing officer as on date when impugned order u/s 263 of the Act was passed. It was thus submitted that the appellant taking cognizance of the order of the Supreme Court suo-moto requested the assessing officer to recompute the amount of variable license fee allowable in terms of section 35ABB of the Act. Thus, as per ld. Sr. Counsel the assessing officer, rightly allowed the claim of additional license fee and SUC and initiation of impugned revisionary proceedings on the said issue was without jurisdiction, unwarranted and bad in law. 10. Thus, this issue arises out of allowability of payment of license fee, spectrum usage charges (SUC), interest/penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, the net disallowance (in consequential assessment) stands at Rs. 11,269 crores which includes: (i) Rs. 1,487.30 crores qua unamortized balance [out of Rs. 5,082 crores of VLF, no grievance survives in this regard in view of Supreme Court order dated 16.10.2023 (supra) and rectification application dated 25.10.2023] (ii) Rs. 9,781.7 crores towards unamortized interest and penalty on delayed payment aforesaid VLF [surviving grievance]. 10.3 Ld. Sr. Counsel has submitted that the exercise of revisionary jurisdiction qua the said issue is invalid and bad in law, inter alia, for the reasons briefly explained hereunder: (a) It is worthwhile to note that the genesis of revisionary jurisdiction invoked by the PCIT on the said issue is the order passed by the apex Court decision in the case of CIT vs. Bharti Hexacom: (2023) 458 ITR 593(SC) holding variable license fee (VLF) to be capital expenditure to be amortized as per section 35ABB of the Act. It is pertinent to note that the issue of allowability of interest or penalty or nature of the same (capital v. revenue) was undisputedly not the question before the apex Court nor the said judgement deals with the said issue. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex Court (AGR Judgement). Payment of compensatory interest/ penalty does not result in acquisition of any capital asset or right coming into existence, but merely compensating for delay in payment of license fees. The said interest and penalty is period cost and is thus required to be expensed off in any case. The same is thus clearly a revenue expense which crystallised into a liability as a consequence of the Supreme Court decision directing payment of license fees, read with the terms of the license agreement between the DOT and the telecom operators and has rightly been allowed as revenue deduction in the assessment order. Allowance of the interest/ penalty cannot thus be alleged to have resulted in an error causing prejudice to the Revenue, so as to warrant exercise of revisionary jurisdiction. * It is emphatically reiterated that the issue of allowability of interest/ penalty was not at all agitated before/ is not dealt with by the apex Court in 458 ITR 593 (SC). Therefore, the judgment rendered by the Apex Court cannot, in any case, be a legitimate ground to justify exercise of revisionary jurisdiction by the PCIT in respect of interest/ penalty on variable license fees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigations, as required in law, before passing the order, as would be evident from the details of enquiries conducted: S. No Issue Information sought by AO/TPO in original proceedings Summary of information/documents filed before AO/TPO Finding of AO/TPO 1. Claim of deduction on account of payment of license fee Vide notice dated 11.09.2023, the appellant was required to furnish comments qua allowability of penalty paid for license fee and spectrum usage charges as allowable expenditure. (@ pages 2589 to 2592 of paper book Vol. III) The appellant vide reply dated 16.09.2023, filed comprehensive response to the query raised in the notice dated 11.09.2023. (@ pages 2593 to 2621 & 3111 to 3364 of paper book Vol. III) Thereafter, the appellant vide reply dated 19.09.2023, filed justification in support of claim of deduction while relying upon the Hon'ble Supreme Court judgement. (@ pages 3365 to 3370 of paper book Vol. III) Post assessment, in light of the Supreme Court verdict vide CA No. 11128 of 2016, order dated 16.10.2023 the appellant vide rectification letter dated 25.10.2023 recalculated the amount allowable under section 35ABB of the Act. (@ pages 3371 to 3503 of pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant immediately filed rectification request vide letter dated 25.10.2023 before the assessing officer requesting for re-calculation of the amount of variable license fee of Rs. 5,082 crore included in the additional claim of Rs. 38,631 crores which was to be amortized and allowed in terms of section 35ABB of the Act. (@ pages 3371 to 3503 of paper book Vol. III). It may thus be appreciated that the appellant taking cognizance of the order of the Supreme Court suo-moto requested the assessing officer to recompute the amount of variable license fee allowable in terms of section 35ABB of the Act. * Considering the aforesaid facts, it is respectfully submitted that all the necessary facts were on record before the assessing officer and the original assessment was completed after conducting extensive enquiries and verification. * It is trite that where an issue has been examined by the TPO/AO, the PCIT cannot set aside the assessment merely because according to the PCIT enquiries should have been conducted in a particular manner and/ or further enquiries ought to have been conducted by the TPO /AO. PCIT cannot substitute his opinion in place of that of the TPO/AO as to the manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the context of AGR issue was not in issue at all. The issue only revolved around the determination of validity of Hon'ble Delhi High Court holding a part of the license fee to be capital expenditure and part to be revenue expenditure. The Hon'ble Delhi High Court had held that the license fee payable up to 31 July 1999 should be treated as capital expenditure which is to be amortised under section 35ABB of the Act, and the variable annual license fee payable on revenue sharing basis after 1 August 1999 should be treated a revenue expenditure and in that context only the Hon'ble Supreme Court had examined the agreement signed under the Policy of 1994 letter issued by the DOT proposing the migration to the Policy of 1999 and the amendments made to the existing license agreement with effect from 1 August 1999 and laid down that variable annual license fee to be paid on the basis of the annual gross revenue. It was held that the reliance placed by the Hon'ble High Court in cases of Jonas Woodhead and Sons India Limited v. CIT [1997] 224 ITR 342 (SC); CIT v. Best and Co [1966] 60 ITR 11; Southern Switch Gear Limited v. CIT (1998) 232 ITR 359 (SC) was misplaced, as these cases do not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nomenclature and manner of payment is irrelevant. It is noteworthy that, even under the Policy of 1994, the consideration for the license was bifurcated in two parts. A fixed payment in first three years of the license regime and a variable payment from the fourth year of the license regime onwards based on the number of subscribers and subject to prescribed minimum payments. Both these components paid under the Policy of 1994 were treated as capital expenditure and were duly amortised. There is no basis of reclassifying the under the new Policy of 1999. The nature of payment that was made for the same purpose cannot have different characterization merely because of change in the manner of the payment. The High Court is not right in apportioning the expenditure partly as capital expenditure and partly as revenue expenditure. In view of the above, the one-time entry fee as well as the variable annual license fee paid by the taxpayer under the Policy of 1999 were held capital in nature and were to be amortised in accordance with section 35ABB of the Act. It is pertinent to mention that these very findings have been considered by the PCIT and reproduced on page 87 of the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hz + 4.4 MHz and License fee for Cellular Mobile handsets & Cellular Mobile Base Stations and also for possession of wireless telegraphy equipment as per the details prescribed by Wireless Planning & Coordination Wing (WPC). Any additional band width, if allotted subject to availability and justification shall attract additional License fee as revenue share (typically 1% additional revenue share if Bendwidth allocated is upto 6.2 MHz + 6.2 MHz in place of 4.4 MHz + 4.4 MHz). 18.3.2 Further, royalty for the use of spectrum for point to point links and access links (other than Cellular Service Spectrum) shall be separately payable as per the details and prescription of Wireless Planning & Coordination Wing. The fee/royalty for the use of spectrum /possession of wireless telegraphy equipment depends upon various factors such as frequency, hop and link length, area of operation etc. Authorization of frequencies for setting up Microwave links by Cellular Operators and issue of Licenses shall be separately dealt with WPC Wing as per existing rules. 18.3.3 The above spectrum charge is subject to unilateral review by WPC Wing from time to time which shall be binding on the licensee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed revenue for the quarter, subject to a minimum payment equal to the actual revenue share paid of the previous quarter. 20.3 The LICENSEE shall adjust and pay the difference between the payment made and actual amount duly payable (on accrual basis) for the last quarter of financial year within 15 days of the end of the quarter. 20.4 The quarterly payment shall be made together with a STATEMENT in the prescribed form as Annexure-II, showing the computation of revenue and License fee payable. The aforesaid quarterly STATEMENTS of each year shall be required to be audited by the Auditors (hereinafter called LICENSEE'S Auditors) of the LICENSEE appointed under Section 224 of the Companies Act, 1956. The report of the Auditor should be in prescribed form as Annexure-II. 20.5 Any delay in payment of License Fee payable, or any other dues payable under the LICENSE beyond the stipulated period will attract interest at a rate which will be 5% above the Prime Lending Rate (PLR) of State Bank of India prevalent on the day the payment became due. The interest shall be compounded monthly and a part of the month shall be reckoned as a full month for the purposes of calculation of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination of TRAI if any." 10.8 After taking into consideration the aforesaid relevant clauses, we are of the considered view that the 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. Thus sub clause 10.2 mentions that for delayed payment of fee and other charges due to this provision of clause of termination of license can be invoked. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10.11 Then we are of the considered view that the nature of agreement giving rise to the payment of interest or penalty should have been examined by the PCIT. 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. However, 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. 10.12 The fact that initially PCIT intended to question the payment of interest and penalty being hit by the provisions of section 37 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the appellant, the appellant vide rectification application dated 25.10.2023, suo-moto requested the AO to rectify the assessment order to the effect of allowing deduction in respect of license fees only to the extent of amount pertaining to the period of expired licenses and in respect of renewed license fees which was currently in operation, the same was requested to be amortized over the remaining life of the respective license in terms of section 35ABB of the Act. However, the PCIT has proceeded to completely ignore the aforesaid rectification application filed by the appellant before the AO, wherein the appellant had suo-moto requested for recalculation of variable license fee in terms of section 35ABB of the Act in light of the decision of the Hon'ble Apex Court. The PCIT failed to appreciate that rectification application dated 25.10.2023 filed by the appellant formed part of the "record" and it was thus incumbent upon the PCIT to have considered the same while passing the impugned revisionary order. That apart, it comes up that the order of the Hon'ble Apex Court dated 16.10.2023 was rendered after the completion of the assessment vide order on dated 10.10.2023, thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs. 338 million which was paid by way of issuance of 9,70,668 equity shares of Rs. 5/- each and 470 redeemable preference shares of Rs. 100/- each. The excess of net assets over purchase consideration amounting to Rs. 12,301 million was recognized as capital reserve in the books of the appellant. Due disclosures in this regard were made under Note (iv) of the audited financial statements for the year ended March,2020. (@ pages 51 to 52 of paper book Vol.I) 11.3 Attention in this regard was invited to the Scheme of arrangement filed before NCLT, copy of which was duly filed before the AO vide submission dated 09.05.2023 during the course of original assessment(@ pages 432 to 433 of paper book Vol.I). It was pointed out that consideration was determined in terms of Share Entitlement Report dated 19.12.2017, issued by Ernst & Young Merchant Banking Services Private Limited and Walker Chandiok & Co LLP. Further, Fairness Opinion of even date was issued by RBSA Capital Advisors LLP, a merchant banker registered with the Securities and Exchange Board of India. It is specifically cited that the Revenue's counsel, Ms. Easha Kadian was present during the hearing and her presence was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of TTSL for the year ended 31.03.2020, Clause 32(a) explicitly discloses year wise details of total brought forwarded loss and depreciation allowance from assessment year 2002-03 to 2019-20. Copy of tax audit report of TTSL was duly filed before the AO during the course of original assessment vide submission dated 21.09.2023.(@ pages 492 to 494 of paper book Vol.II). It was however clarified that only losses eligible, i.e., not related to period exceeding eight years, is carried forward by the appellant pursuant to demerger 11.4 Further, it is submitted, that the issue of allowability of accumulated loss and unabsorbed depreciation of TTSL in the hands of the appellant pursuant to the demerger was specifically examined by the AO and in depth enquiries were made by the assessing officer during the course of assessment, in response to which the appellant filed detailed reply(ies) justifying the allowability of loss/depreciation as cited before us was tabulated in the submissions and same is reproduced hereunder: S. No Issue Information sought by AO/TPO in original proceedings Summary of information/documents filed before AO/TPO Finding of AO/TPO 2. Claim of brought forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to the following reasons: 1. It is an acquisition of business and not a demerger 2. The aforesaid proposition is made on the legal basis that "demerger' is well defined in section 2(19AA) as extracted above. To qualify as demerger certain conditions, need to be satisfied 3. On of the conditions stipulated in clause(iv) thereof is that in consideration of demerger at least 75% of the shareholders of the demerged company shall become shareholders of the resultant company. This is primary condition for demerger as also for amalgamation. The idea is to allow freedom of restructuring of businesses by the persons or entities, which are carrying on such businesses. While in amalgamation there is pooling of interest by both companies, in demerger, a company springs up to carry on the business with 3/4th of old shareholders continuing to participate in the business of the Resulting company. In either case, the participation of existing shareholders to the given extent is a must. 4. In the present case, the scheme as approved by NCLT provides for issue of not the equity shares but preference shares and that too much are redeemable non participative, non-voting. The shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons given above the transaction does not qualify to be a demerger and therefore the assessee was not entitled to benefits given by the AO under section 72(4) of the Act. The AO is directed to withdraw the allowance of the claim so made by him." 11.6 Now admittedly section 72A of the Act, allows in the case of amalgamation/ demerger, for the amalgamated/ resulting company to claim carry forward and set off of unabsorbed business loss and unabsorbed depreciation only of the amalgamating / demerged company, subject to the restrictions contained in that section. The said section enacts a deeming fiction to deem the unabsorbed business loss and unabsorbed depreciation of the demerged company to become the unabsorbed business loss and unabsorbed depreciation of the resulting company. As a result of the said deeming fiction, the resulting company is enabled to carry forward and set off unabsorbed business loss and unabsorbed business depreciation of the demerged company. The case of assessee is that since the entire business loss of TTSL related to the consumer wireless mobile business undertaking alone, the entire loss stood transferred to the appellant. In so far as unabsorbed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of determining if it is a case of demerger and the basic requirement to fulfill the eligibility of section 72A(4) of the Act is that the transfer of undertaking should be in pursuance of a scheme of arrangement under the Companies Act by demerged company. Thus, without examining the various aspects of the arrangement on a gross basis PCIT has drawn inferences holding that assessee is not entitled for benefit of any brought forward loss or unabsorbed depreciation. 11.10 It is sufficiently established before us on the basis of various evidences discussed above and forming part of the paper book that TTSL was engaged in consumer wireless mobile business and was continuously incurring loss since inception and the entire business loss related to the said undertaking alone. The assets relating to consumer wireless mobile business undertaking was only considered for unabsorbed depreciation. In fact, all the assets/ liabilities relating to the demerged business have been transferred by the demerged company which has vested in the appellant. Attention in this regard was rightly invited to the special purpose balance sheet of demerged undertaking which provides for all assets and liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for shareholders becoming equity shareholders, such condition presumed by the Commissioner in the impugned is beyond the letter of the law, which is impermissible. 11.13 Thus the liberty was there with the assessee to issue shares of the class that were more beneficial to the shareholders or the resultant company itself. The Revenue cannot dispute that shareholders of preferential shares of the company are as good a shareholder like equity holder. We are of the considered view that as for the purpose of section 2(19AA) r.w.s. 72A of the Act, there is no requirement under law that the allotee shareholders should continue to be shareholders of the resultant company for a minimum period. Therefore, the observations of PCIT that preferential shares after redemption will lead to violation of clause (iv) and (v) of section 2(19AA) of the Act is not a correct perspective. The objective fulfillment of the condition is necessary and not the subjective effect on compliances of the conditions. The manner in which PCIT has examined the issue subjectively as to what would be the effect after redemption of the preferential shares on the shareholding of the resultant company cannot be basis to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submissions of the ld. Sr. Counsel is that no show cause notice was issued by PCIT u/s 263 of the Act on this issue. The PCIT had directed in the impugned order to enhance income of the assessee by Rs. 1230.01 crores being addition u/s 56 of the Act on account of alleged gain on acquisition of consumer wireless business of TTSL. In the effect giving order the net assets over consideration received on demerger to the extent of Rs. 1230.01 crores has been added u/s 156(2)(10) of the Act. 12.1 At outset it is pertinent to mention that the PCIT, in continuation to the preceding issue pertaining to disallowance of carry forward of accumulated business losses and unabsorbed depreciation of consumer wireless business undertaking of TTSL acquired by the appellant, in paragraph 4 at page 155 of the impugned order has further held that since the conditions of demerger under section 2(19AA) of the Act were not satisfied (as mentioned supra), the appellant is not entitled to benefit under proviso to section 56(2)(x) of the Act and accordingly, amount of Rs. 1230.01 crores representing excess of net assets acquired over purchase consideration paid by the appellant is liable to be taxed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough 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. 13. Issue No.4: As with regard to this issue arising out of transfer pricing adjustment, PCIT had directed an adjustment to the extent of Rs. 2663.71 crores on account of alleged incorrect reduction of proportionate adjustment allowed by the ld. TPO and ld. AO has enhanced the income to that extent in the effect giving order. In the impugned order, the PCIT has enhanced the TP adjustment on the alleged ground that in the case of CIT vs. Firestone International Ltd. 378 ITR 558 (Bom), SLP preferred by Revenue stood admitted by the Hon'ble Apex Court and thereby the TPO was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion before the Hon'ble Supreme Court cannot be the basis for invoking exceptional jurisdiction of Section 263 of the Act. 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. 13.4 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 versus DCIT, Circle-6(2)(1) Mumbai ITA1155/Mum/2017 order dated 20.03.2019, that Hon'ble Supreme Court is merely dealing with the issue of disallowance u/s 14A of the Act, in M/s Firestone case SLP. Thus that all the more requires setting aside the directions of PCIT on this issue. Therefore, this issue is decided in favour of the assessee and corresponding grounds nos. 11 to 11.3 are allowed. 14. Issue No.5: This issue concerns the observations of PCIT that the 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. The AO was directed to examine each contract between the assessee and non-residents and to make necessary disallowances u/s 40(a)(i) of the Act. The AO has made disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices/questionnaire and information/ replies filed by the appellant in response thereto from time to time were submitted during hearing. The AO had directed the appellant to provide the following details: "3. Foreign Remittance made to person(s) located in low tax jurisdiction countries (Business ITR) Assessee has made large Foreign Remittance to person(s) located in low tax jurisdiction countries. i). In your case Assessee has made large Foreign Remittance to person(s) located in low tax jurisdiction countries. In view of this kindly submit details of all the payments made under various heads to non residents in the format name, amount, country of residence, head /type of payment. ii) Kindly explain for each such payment, whether income tax was not deducted or was deducted at lower rate. If you have any certificate to that extent from Dept, please Submit copy of the same. iii) For all such payments where income tax is not deducted or deducted at Lowe rate, kindly submit copies bills and TRC issued by those parties along with copies of agreements and entered into with them for those transactions. iv) Also in this case kindly submit supporting documents to prove actual del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as Interconnection Usage Charges 'IUC'. Thus, if a subscriber of Airtel in Delhi makes a call to her friend in the USA, who is a subscriber of the AT&T network there, then if the call matures, a call termination charge is payable to AT&T, which is called the IUC charge, in this case. The aforesaid charges are prescribed and regulated by the Telecom Regulatory Authority of India ('TRAI/regulator') as far as the domestic arena is concerned whereas in the case of international interconnect, these are commercially negotiated and mutually agreed upon between the domestic operators and Foreign Telecom Operators (FTOs). Pursuant to these revenue sharing arrangements with overseas network operators, the appellant made various remittances of IUC or Communication Charges to FTOs. No tax was deducted on the said payments in terms of section 195 of the Act since their payments are not liable to tax in India. Attention in this regard is invited to the following: (a) The Hon'ble High Court in appellant's own case in 319 ITR 139, while examining the scope of the definition of "fees for technical services" in Explanation 2 to section 9(1)(vii) of the Act, observed that the expression "tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. M/s. Tata Teleservices Ltd ITA 1417/2018[page 2881 to 2885 of PB(Vol III)]before the jurisdictional Delhi High Court, wherein the Departmental Representative filed directions issued by the CBDT which state that the Board has accepted the position that Roaming and IUC charges are not to be subjected to TDS and thereby no appeal was preferred against the decision of the Karnataka High Court in the case of Vodafone South (supra). (e) Later, the Hon'ble Karnataka High Court in the case of Vodafone Idea Ltd vs. DCIT: [2023] 152 taxmann.com 575, has held that payments made to non-resident telecom operators by assessee, telecommunication service provider, for providing interconnect services and transfer of capacity in foreign countries was not chargeable to tax as royalty and hence tax is not deductible when payments are made to non-resident telecom operator. 14.4 Now what we find is that relying the jurisdictional Hon'ble Delhi High Court decision in the case of CIT v. Telstra Singapore Pte. Ltd.: [2024] 467 ITR 302 a co-ordinate bench at Delhi in appellant's own case for assessment year 2014-15 titled as Bharti Airtel Ltd. v. ACIT: ITA No.7891/Del/2019 order dated 09.10.2024 has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 621 of PB Vol. III, we are of considered view that issue did not deserved to be interfered u/s 263 of the Act. We thus allow the ground no. 13. 16. Issue No.7: This issues concerns the directions of ld. PCIT that the AO did not investigate the issue concerning non-availability of depreciation. It is established 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 at pages 2593 to 2621 of PB Vol. III. 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 of the Act. We thus allow the ground no. 14(a). 17. Issue No.8: This issue arises out of the directions of ld. PCIT that the AO has not verified the relevant transactions from the perspective of section 269SS of the Act and thereby did not initiate pena ..... X X X X Extracts X X X X X X X X Extracts X X X X
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