2018 (1) TMI 928 - AT - Income Tax

Tribunal rules in favor of telecom company on license fee and investment loss issues

Vodafone Mobile Services Ltd., (formerly known as Vodafone Essar Mobile Services Ltd.) Versus DCIT, Circle 12 (1), New Delhi

The Tribunal ruled in favor of the Appellant, a telecom company, on issues concerning the disallowance of license fee, loss on investments, and guarantee ... Disallowance of license fee u/s 37(1) - CIT- A upholding the order of the learned AO that the annual revenue share based license fee payable by the Appellant to Department of Telecom (DoT) qualifies as a capital expenditure being consideration for obtaining the telecom license and hence is amortisable u/s 35ABB - Held that:- AO/CIT (A) have erred in disallowing the amount being the capital expenditure amortized u/s 35ABB incurred for obtaining telecommunication licence from the DoT. So, the amount being revenue expenditure is ordered to be deleted. See CIT vs. Bharti Hexacom Ltd. [2013 (12) TMI 1115 - DELHI HIGH COURT] Disallowance of claim for loss on account of diminution in value of investment in OFCD in ADIL - Held that:- Hon’ble Supreme Court in S.A. Builders Ltd. vs. CIT, Chandigarh – ( 2006 (12) TMI 82 - SUPREME COURT) held that, “even when the expenditure has not been incurred under any legal obligation yet is allowable to be as business expenditure if it was incurred on ground of commercial expediency.” So, in this case, investment in the OFCD by the assessee company in its subsidiary to utilize the license of ADIL for telecom is certainly a commercial expediency and is allowable u/s 37 of the Act as contended in the alternative. So, ground no.2 is determined in favour of the assessee company. Addition of guarantee payment - Held that:- Assessee company gave corporate guarantee facilities availed by the ADIL, its subsidiary, in favour of the DoT, and it is also not in dispute that ADIL suffered heavy losses exceeding share capital and consequently, the DoT terminated the licence of ADIL for Rajasthan and Haryana for 11 months and invoked the guarantee following which the bank has made a payment of ₹ 28,36,26,000/- and consequently, the assessee company has provided said amount to the bank which the bank provided to the DoT. The ratio of the judgment of Hon’ble Supreme Court in the case of CIT vs. Amalgamation (P.) Ltd. (1976 (3) TMI 31 - MADRAS High Court) is that, “loss incurred by the assessee on account of furnishing of guarantees to its subsidiary company is a business loss and as allowable business expenses.” We are of the considered view that the amount of ₹ 28,36,26,000/- is an allowable expenditure. So, ground no.3 is determined in favour of the assessee company. Amount being the waiver of the amount received on capital amount as income chargeable to tax in the year of waiver - Held that:- As copy of agreement to prove the receipt of the amount from Swisscom or the waiver of the liability by Swisscom has not been brought on record by the assessee company to work out the exact nature of consideration for which amount in question was received from the Swisscom. Let the assessee company produce copy of settlement deed entered into between the Swisscom and the assessee company in order to decide the nature of the consideration for which the amount in question was received. Consequently, this issue is set aside to the file of AO to decide afresh Issues involved:1. Disallowance of license fee u/s 37(1) of the Act2. Disallowance of loss incurred on diminution in value of investments3. Disallowance of payment made as guarantors4. Treating certain receipts/ waivers as income instead of capital receipts5. Levy of penalty U/S 271(1)(c) of the ActAnalysis:Issue 1 - Disallowance of license fee u/s 37(1) of the Act:The Appellant, a telecom company, challenged the disallowance of license fee as capital expenditure. The Tribunal referred to a High Court judgment holding that license fee post-31.07.1999 should be treated as revenue expenditure. Consequently, the disallowed amount was ordered to be deleted, favoring the assessee.Issue 2 - Disallowance of loss incurred on diminution in value of investments:The Appellant's claim for loss on OFCD investment was disallowed. The Tribunal held that the investment was made for commercial expediency, allowable under section 37 of the Act. Citing a Supreme Court decision, the Tribunal ruled in favor of the Appellant, allowing the claim for loss.Issue 3 - Disallowance of payment made as guarantors:The disallowed guarantee payment to DoT was challenged. The Tribunal allowed the claim, considering it a business expense under section 37(1) of the Act, following a Supreme Court precedent. The amount was deemed an allowable expenditure, favoring the Appellant.Issue 4 - Treating certain receipts/ waivers as income instead of capital receipts:The Tribunal set aside this issue as the Appellant failed to provide essential documentation to determine the nature of the receipt. The matter was remanded to the AO for fresh consideration upon submission of the required settlement deed between the parties.Issue 5 - Levy of penalty U/S 271(1)(c) of the Act:The Tribunal did not provide findings on this issue as it was deemed premature at the current stage. The appeal filed by the Appellant was allowed for statistical purposes.In conclusion, the Tribunal ruled in favor of the Appellant on issues related to license fee, loss on investments, and guarantee payment, while deferring a decision on the treatment of certain receipts. The penalty issue was not addressed at the current stage.