2024 (5) TMI 1490 - AT - Income Tax

ITAT Mumbai allows telecom company's deductions under Sections 14A, 36(1)(iii), 40(a)(ia), and 80IA while deleting transfer pricing adjustments

Vodafone India Ltd. Versus Assistant Commissioner of Income Tax- 8 (3) (2), Mumbai, And Deputy Commissioner of Income Tax 5 (2) (1), Mumbai Versus M/s Vodafone Idea Limited, (Earlier known as Vodafone India Limited which now stands merged with Idea Cellular Limited (‘ICL’) and consequently known as Vodafone Idea Limited),

ITAT Mumbai ruled in favor of the assessee on multiple issues. The tribunal deleted disallowance under Section 14A as no exempt income was earned during ... Disallowance u/s 14A by invoking provisions contained in Rule 8D - HELD THAT:- It is admitted position that no exempt income earned by the Assessee during the relevant previous year. It has been contended by the Assesses that in absence of exempt income, disallowance under Section 14A of the Act was not warranted. We find merit in the aforesaid contention of the Assessee. In the absence of any exempt income arising in the relevant previous year, no occasion to make any disallowance under Section 14A of the Act can arise [Principal Commissioner of Income-tax Vs. Red Chillies Entertainment Pvt. Ltd. [2019 (8) TMI 1490 - BOMBAY HIGH COURT]. In the case of the Assessee, for the Assessment Year 2008-09 [2023 (5) TMI 576 - ITAT MUMBAI] and 2009-2010 [2023 (2) TMI 1250 - ITAT MUMBAI] Tribunal had deleted disallowance under Section 14A of the Act as the Assessee did not earn any exempt income during the corresponding previous years. Disallowance made by the AO u/s 14A of the Act is deleted - Decided in favour of assessee. Disallowance of interest expenses u/s 36(1)(iii) - HELD THAT:- It emerges that in identical facts and circumstances, vide common order for the Assessment Year 2006-07 [2023 (5) TMI 508 - ITAT MUMBAI], the Tribunal had decided identical issue in the favour of the Assessee and allowed deduction for interest on borrowed funds use for purchase of assets and capital work in progress. Addition deleted. Disallowance of roaming charges made u/s 40(a)(ia) - HELD THAT:- Tribunal in the case of the Assessee for the preceding Assessment Year 2009-10, which in-turn followed the decision of the Tribunal in the case of the Assessee for the Assessment Year 2006-07 and 2007-08, the disallowance made u/s 40(a)(ia) of the Act in respect of roaming charges is deleted. Disallowance of discount extended to pre-paid distributors u/s 40(a)(ia) deleted. Disallowance of deduction u/s 80IA - HELD THAT:- Tribunal in the case of the Assessee for the Assessment Year 2005-06 [2022 (12) TMI 28 - ITAT MUMBAI] decided the issue in favour of the Assessee holding that the Assessee had started providing telecommunication services after 01/04/1995 and claimed deduction for the first time in the Assessment Year 2005-06. Disallowance of deduction u/s 80IA on 'Other Income' - AO is directed to allow the benefit of deduction under Section 80IA of the Act in respect of Other Income and re-compute deduction under Section 80IA of the Act after including Other Income. Accordingly, Ground raised by the Assessee is allowed. TP adjustment - AMP Expenditure - HELD THAT:- Where an assessee denies existence of international transaction in case of AMP Expenditure, as is the case in the present appeal, the onus would be on the Assessing Officer to bring out facts, circumstances, policy or conduct to support existence of an international transaction. In the present case, there is nothing on record to show or infer the existence of international transaction. We also note that in the subsequent assessment years (i.e. Assessment Year 2012-13, 2013-14 & 2014-15) no adverse inference was drawn and no transfer pricing adjustment has been made in relation to advertisement, marketing and promotion expenses incurred during the relevant previous years. In the aforesaid facts and circumstances the transfer pricing addition made by the Assessing Officer in respect AMP Expenditure cannot be sustained and is, therefore, deleted. TP adjustment - payment of brand royalty for obtaining the right to use of Vodafone trademark and trade name - HELD THAT:- The transaction entered into by the Assessee with its AE (i.e. RGL) is a controlled transaction. Therefore, we find merit in the contention advanced by the Learned Senior Counsel that RGL cannot be used as comparable under CUP Method to benchmark the royalty paid to VIML. We note that the Assessee has now placed on record note giving reasons for differential payments of royalty to VIML and RGL. Keeping in view the overall facts and circumstances of the present case we remand this issue back to the file of TPO/AO with the directions decide the issue of transfer pricing adjustment in relation to international transaction of royalty payments afresh after granting the Assessee reasonable opportunity of being heard. The Assessee is directed to place before TPO/AO such agreements/documents on which the Assessee wishes to place reliance in support of its contentions. TP adjustment in respect of the technology support charges - HELD THAT:- We set aside the transfer pricing addition made in respect of technology support charges with the directions to the AO/TPO to determine the ALP of the relevant transactions as per law and make transfer pricing adjustment, if any. Assessee is directed to furnish all the information and explanations in support of the claim that the payments are at arm’s length. The TPO/Assessing Officer would consider the same and adjudicate the issue after granting the Assessee reasonable opportunity of being heard. TP adjustment pertaining to reimbursement of expenses - HELD THAT:- Assessee is granted another opportunity to substantiate its claim that the were incurred in relation to the employees deputed with the Assessee and that the same, having being recovered on cost to cost basis from the Assessee, were at arm’s length.Assessee is directed to furnish relevant documents/details to substantiate its claim. AO/TPO shall grant reasonable opportunity of hearing to the Assessee and shall decide the issue in accordance with law after taking into consideration the details/documents furnished by the Assessee and the directions issued by the Tribunal in the case of the Assessee for the Assessment Year 2008-09 [2023 (5) TMI 576 - ITAT MUMBAI]. Disallowance of penalty paid to Department of Telecommunications (‘DoT’) - HELD THAT:- DRP has placed reliance on the decision of the Tribunal in the case of Vodafone East Limited [2015 (9) TMI 1358 - ITAT KOLKATA] and Vodafone Digilink Ltd. [2018 (6) TMI 1029 - ITAT DELHI] wherein in identical facts and circumstances disallowance made under Section of the Act of in respect of penalty paid to DoT was deleted by the Tribunal holding that penalty paid to DOT is for the breach of contractual obligation and hence is allowable as a deduction under section 37 of the Act read with Explanation thereto. Accordingly, we do not find any infirmity in the direction issued by the DRP. Disallowance of depreciation on 3G Spectrum - Assessee paid charges for allotment of right to commercially utilize the 3G spectrum allotted to it for a period of 20 years in the telecom circle of Mumbai - HELD THAT:- We direct the Assessing Officer to allow depreciation upon the 3G spectrum charges capitalize by the Assessee under Section 32(1)(ii) of the Act. Ground raised by the Assesee is allowed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Disallowance of interest on Capital Work-in-Progress under Section 36(1)(iii).3. Disallowance of roaming charges under Section 40(a)(ia).4. Disallowance of discount extended to pre-paid distributors under Section 40(a)(ia).5. Disallowance of deduction under Section 80IA.6. Disallowance of deduction under Section 80IA on 'Other Income'.7. Transfer Pricing Adjustments related to AMP Expenditure, Brand Royalty, Technology Support Charges, and Reimbursement of Expenses.8. Levy of interest under Section 234D and 244A.9. Incorrect computation of Book Profits under Section 115JB.10. Non-Grant of full credit in respect of Tax Deducted at Source (TDS).11. Initiation of penalty proceedings under Section 271(1)(c).12. Disallowance of penalty paid to DoT.13. Disallowance of depreciation on 3G Spectrum.Detailed Analysis:1. Disallowance under Section 14A:- The Assessee contested the disallowance of INR 357,23,70,000/- made under Section 14A, arguing no exempt income was earned during the relevant year. The Tribunal found merit in this argument, referencing past Tribunal decisions and the Principal Commissioner of Income-tax Vs. Red Chillies Entertainment Pvt. Ltd., and deleted the disallowance.2. Interest on Capital Work-in-Progress:- The Assessee was disallowed INR 19,35,01,258/- under Section 36(1)(iii) for interest on borrowed funds used for capital work. The Tribunal, referencing past decisions, concluded that the interest was not for business extension but for improving service quality, and thus allowed the deduction.3. Roaming Charges:- The disallowance of INR 30,95,03,786/- for roaming charges under Section 40(a)(ia) was contested. The Tribunal, following previous decisions, found that TDS provisions were not applicable to roaming charges and deleted the disallowance.4. Discount to Pre-paid Distributors:- The Tribunal deleted the disallowance of INR 47,17,99,596/- under Section 40(a)(ia), determining that the relationship between the Assessee and distributors was Principal to Principal, not requiring TDS under Section 194H.5. Deduction under Section 80IA:- The Tribunal allowed the Assessee's claim for deduction under Section 80IA, recognizing that the Assessee started providing telecommunication services after 01/04/1995, aligning with past Tribunal decisions.6. Deduction on 'Other Income':- The Tribunal allowed the deduction under Section 80IA on 'Other Income', following the judgment of the Hon'ble Delhi High Court in PCIT vs. Bharat Sanchar Nigam Limited, which interpreted Section 80IA(2A) as allowing deductions on all profits of eligible business.7. Transfer Pricing Adjustments:- AMP Expenditure: The Tribunal deleted the adjustment of INR 22,01,14,350/- for AMP Expenditure, citing lack of evidence for an international transaction.- Brand Royalty: The Tribunal remanded the issue of INR 7,97,68,155/- for fresh examination, directing the TPO to reassess with provided documentation.- Technology Support Charges: The Tribunal remanded the issue of INR 1,31,43,772/- for fresh determination of ALP as per law.- Reimbursement of Expenses: The Tribunal remanded the issue of INR 4,14,86,237/- for reassessment, allowing the Assessee to substantiate its claim.8. Levy of Interest:- The Tribunal directed the Assessing Officer to recompute interest under Sections 234D and 244A as per law.9. Book Profits under Section 115JB:- The Tribunal directed the Assessing Officer to address the pending rectification application regarding the computation of book profits.10. Credit for TDS:- The Tribunal instructed the Assessing Officer to grant full TDS credit as per law, addressing the pending rectification application.11. Penalty Proceedings:- The Tribunal dismissed the initiation of penalty proceedings under Section 271(1)(c) as premature.12. Penalty Paid to DoT:- The Tribunal upheld the DRP's decision to allow the penalty paid to DoT as a deduction, considering it a contractual liability and not a statutory one.13. Depreciation on 3G Spectrum:- The Tribunal directed the Assessing Officer to allow depreciation on 3G spectrum charges, following previous Tribunal decisions recognizing it as an intangible asset under Section 32(1)(ii).Conclusion:- For the Assessment Year 2011-12, the Assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. For the Assessment Year 2012-13, the Assessee's appeal was allowed for statistical purposes.