Telecom operator expenses, spectrum charges, and infrastructure demerger transfers: most deductions allowed; remands for CWIP interest, ARC depreciation, deposits.

Ad-hoc disallowance of 10% commission was unsustainable in absence of specific defects and consistent Tribunal precedent; the disallowance was deleted. Royalty/WPC spectrum usage charges were for ongoing use and not for acquisition of licence; treated as revenue expenditure and allowed. Advertisement/hoardings spend was revenue; deduction allowed. Interest attributable to specific borrowings used for CWIP was directed to be disallowed, otherwise no disallowance where interest-free funds exceeded CWIP; issue remanded. Subscriber-fraud loss was incidental to business and allowable u/s 37(1); Revenue's ground dismissed. Transfer of passive infrastructure under an HC-approved demerger as a "gift" fell within s.47(iii) and not s.2(47); Revenue's challenge failed. Multiple s.80-IA exclusions were factually incorrect; AO directed to compute without excluding already-eliminated items and to include eligible receipts. Variable licence fee was to be disallowed and allowed on amortisation per SC; AO to verify working. ARC depreciation issue and s.68 security-deposit addition were remanded. Roaming charges and prepaid discounts did not attract TDS u/ss 194J/194H; s.40(a)(ia) disallowances deleted. DoT penalty and crystallised site rentals were allowed. TP additions on brand royalty and AMP were deleted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1. Whether ad-hoc disallowance of 10% of commission expenses paid to distributors was justified.

1.2. Whether Royalty-WPC spectrum usage charges payable to DoT/WPC were capital or revenue in nature and allowable as deduction.

1.3. Whether advertisement expenditure on granty signs and hoardings was capital or revenue and liable to amortisation.

1.4. Whether interest attributable to capital work-in-progress (CWIP) was disallowable under proviso to section 36(1)(iii) and how it should be determined.

1.5. Whether loss on subscriber-based fraud was an allowable business deduction under section 37(1).

1.6. Whether transfer of passive infrastructure (PI) assets under a High Court approved demerger scheme, without consideration, constituted a taxable transfer and warranted reduction of deemed sale consideration from block of assets and consequential disallowance of depreciation.

1.7. Scope of deduction under section 80-IA(2A) in relation to various items of "other income" (interest, cellsite sharing, forex gain, profit on sale of fixed assets, provisions written back, miscellaneous income) and correctness of AO's exclusions.

1.8. Character of variable licence fee paid to DoT (revenue vs. capital) after the Supreme Court decision in Bharti Hexacom, and consequential computation under section 35ABB.

1.9. Allowability and treatment of Asset Restoration Cost (ARC) obligation (depreciable capital cost or revenue deduction u/s 37) and remand for quantification in light of jurisdictional High Court judgment.

1.10. Whether roaming charges paid to other domestic telecom operators attracted TDS under section 194J as "fees for technical services" and consequent disallowance under section 40(a)(ia).

1.11. Whether upfront discount to prepaid distributors constituted "commission" attracting TDS under section 194H and disallowance under section 40(a)(ia).

1.12. Whether penalty paid to DoT for subscriber verification lapses was hit by Explanation to section 37(1) as being for an offence or prohibited by law.

1.13. Legality of DRP's directions and AO's implementation regarding disallowance of network site rental charges paid to Indus and the test of "crystallisation" of such liability.

1.14. Sustainability of addition under section 68 in respect of security deposits/unsecured loans received from distributors, and need for remand.

1.15. Validity of transfer pricing adjustments on (a) brand royalty payments to AEs (ALP determined at nil), and (b) AMP expenditure treated as a separate international transaction compensated by AEs with mark-up.

1.16. Correct grant of TDS credit and MAT credit, and consequential interest under section 234B.

2. ISSUE-WISE DETAILED ANALYSIS

2.1. Ad-hoc disallowance of commission expenses to distributors

Interpretation and reasoning:

2.1.1. The AO disallowed 10% of commission expenses on an ad-hoc basis despite the assessee having furnished details and TDS certificates for major payments. DRP deleted following Tribunal orders for earlier years and for sister concern.

2.1.2. The Tribunal noted that in identical facts for AY 2009-10, similar ad-hoc disallowance was deleted; Revenue brought no distinguishing facts or law.

Conclusion:

2.1.3. Ad-hoc disallowance of 10% of commission is unsustainable; deletion by DRP upheld and Revenue's ground dismissed.

2.2. Character of Royalty-WPC spectrum usage charges

Legal framework discussed:

2.2.1. Section 35ABB (amortisation of capital expenditure for acquiring telecom licence); section 37(1); Delhi High Court in CIT v. Fascel Ltd.; Supreme Court decision in CIT v. Bharti Hexacom Ltd.; Supreme Court order de-tagging issue of WPC royalty in Vodafone Mobile Services matter.

Interpretation and reasoning:

2.2.2. AO treated Royalty-WPC as capital expenditure for "right to use spectrum" and applied section 35ABB, disallowing net amount after depreciation. DRP followed earlier Tribunal order and Delhi High Court in Fascel, allowing as revenue.

2.2.3. Tribunal examined Supreme Court's later Bharti Hexacom ruling and subsequent order de-tagging WPC royalty issue, and held that Bharti Hexacom finally decided only licence fee, not WPC royalty.

2.2.4. Tribunal followed its own earlier order (AY 2009-10) holding WPC royalty is a recurring revenue-share charge for actual use of spectrum, not for acquisition of licence; therefore outside section 35ABB and deductible as revenue.

Conclusion:

2.2.5. Royalty-WPC expenses are revenue in nature and deductible under section 37(1); DRP's deletion of disallowance sustained; Revenue's ground dismissed.

2.3. Advertisement expenditure on granty signs and hoardings

Interpretation and reasoning:

2.3.1. AO treated expenditure on granty signs and hoardings as giving enduring benefit and amortised over 4 years, disallowing balance. DRP followed earlier DRP and Tribunal decisions to allow as revenue.

2.3.2. Tribunal relied on its AY 2009-10 order, which in turn followed Delhi High Court in CIT v. Citi Financial Consumer Finance Ltd. treating such advertisement spend as revenue.

Conclusion:

2.3.3. Expenditure on granty signs and hoardings is revenue; no amortisation required; disallowance deleted. Revenue's ground dismissed.

2.4. Interest on capital work-in-progress (CWIP) - section 36(1)(iii)

Legal framework discussed:

2.4.1. Proviso to section 36(1)(iii) (as applicable for AY 2010-11) requiring disallowance of interest for capital borrowed for acquisition of an asset for extension of existing business, till first put to use; jurisprudence on mixed funds (Reliance Utilities & Power Ltd.; Tin Box Co.).

Interpretation and reasoning:

2.4.2. AO inferred use of borrowed funds in CWIP and disallowed interest at 7.7% of monthly CWIP; DRP deleted following earlier year.

2.4.3. Tribunal noted its detailed directions for AY 2009-10: (a) setting up new towers within same circles amounted to "extension" of business; (b) if specific borrowings were used for CWIP, corresponding interest disallowable; (c) if only mixed funds and own interest-free funds exceed CWIP, presumption that CWIP is from own funds and no disallowance.

Conclusion:

2.4.4. Issue remanded to AO with identical directions as for AY 2009-10 to examine nexus of borrowings and CWIP; Revenue's ground allowed for statistical purposes.

2.5. Loss on subscriber-based fraud - section 37(1)

Interpretation and reasoning:

2.5.1. AO treated Rs 33 lakh as non-deductible "embezzlement"/penalty; DRP allowed relying on earlier year.

2.5.2. Tribunal reiterated its AY 2009-10 finding that the amount represented loss due to customer fraud/non-payment, incidental to business, and not employee embezzlement.

Conclusion:

2.5.3. Loss from subscriber fraud is allowable business expenditure under section 37(1); Revenue's ground dismissed.

2.6. Transfer of passive infrastructure assets as "gift" - depreciation consequences

Legal framework discussed:

2.6.1. Sections 2(47), 47(iii) (transfer not including gift); High Court approvals under Companies Act; corporate "gift" jurisprudence (Lakshmanaswami Mudaliar; Tibruz Mustafa Bilgen); concept of sham vs. genuine transaction.

Interpretation and reasoning:

2.6.2. Under a court-approved demerger scheme, PI assets were transferred to another group company without consideration. Assessee claimed no loss and even voluntarily reduced WDV of transferred PI assets from its block. AO treated transfer as non-gift, imputed market value as consideration and reduced block by deemed sale value, leading to disallowance of depreciation.

2.6.3. DRP held transaction is a genuine "gift" recognised by section 47(iii), supported by MoA, Delhi and Gujarat High Court scheme approvals, and no tax-evasion motive, especially as assessee added back book loss and reduced tax WDV suo motu.

2.6.4. Tribunal endorsed DRP's findings: (i) transfer as gift has been judicially accepted in scheme approval; (ii) once treated as gift, it is not a "transfer" for capital gains and no deemed consideration can be reduced from block; (iii) assessee has not claimed any tax loss on transfer.

Conclusion:

2.6.5. AO's treatment of transfer as taxable transfer and consequential depreciation disallowance of Rs 88.64 crore is unwarranted; Revenue's ground dismissed.

2.7. Section 80-IA(2A) - inclusion/exclusion of "other income"

Legal framework discussed:

2.7.1. Section 80-IA(1) ("profits and gains derived from" eligible business) vis-+?-vis section 80-IA(2A) ("profits of eligible business" of telecom undertaking; non-obstante clause); Delhi High Court in BSNL; Mumbai Tribunal in Vodafone India Ltd (group case).

Interpretation and reasoning:

2.7.2. AO excluded entire "other income" of Rs 72.01 crore on the assumption it was not "derived from" telecom undertaking. DRP upheld by invoking "derived from" jurisprudence (Sterling Foods, Cambay Electric).

2.7.3. Tribunal examined computation and found factual errors: (a) interest income and profit on sale of fixed assets, as well as capital forex gains and large portion of provisions written back, had already been excluded by assessee from business profits and were not part of 80-IA base; AO and DRP proceeded on incorrect factual premise.

2.7.4. Tribunal directed AO not to again exclude: (i) interest income Rs 0.86 cr, (ii) profit on sale of fixed assets Rs 6.48 cr, (iii) provisions written back Rs 49.90 cr, and (iv) forex gain (net) of Rs 6.47 cr, since related capital gains were already excluded.

2.7.5. For cellsite sharing revenue, Tribunal followed its AY 2009-10 order holding such income from commercial exploitation of business towers is "business income" of telecom undertaking and eligible for 80-IA.

2.7.6. For miscellaneous income, Tribunal followed group case Vodafone India Ltd where, relying on BSNL, it was held that in telecom 80-IA(2A) covers "profits of eligible business" and extends to all business-linked incomes, not restricted to "derived from". Therefore, other business-linked miscellaneous income is also eligible.

Conclusions:

2.7.7. AO directed to recompute 80-IA deduction by:

(a) Granting 80-IA on cellsite sharing income (Rs 0.81 cr) and miscellaneous income (Rs 5.81 cr);

(b) Not excluding amounts already removed from business income (interest, profit on sale of fixed assets, specified provisions written back, capital forex gains).

2.7.8. Assessee's ground on section 80-IA allowed partly in its favour.

2.8. Licence fee payable to DoT - section 35ABB vs. section 37(1)

Legal framework discussed:

2.8.1. Section 35ABB; Supreme Court in CIT v. Bharti Hexacom Ltd. (variable annual licence fee held capital, amortisable under section 35ABB).

Interpretation and reasoning:

2.8.2. Both parties accepted that Supreme Court's Bharti Hexacom judgment governs the character of variable licence fee, holding it to be capital expenditure amortisable under section 35ABB.

2.8.3. Tribunal noted that though this results in disallowance of current year's claim under section 37(1), it only converts it into staggered allowance over licence period, including consequential deduction for past years' capitalised amounts.

2.8.4. Assessee filed working showing net sustainable disallowance of approx. Rs 1.41 crore after applying section 35ABB.

Conclusion:

2.8.5. AO directed to verify assessee's working and recompute disallowance/allowance strictly as per Supreme Court in Bharti Hexacom; assessee's ground partly allowed.

2.9. Asset Restoration Cost (ARC) obligation - depreciation / section 37

Legal framework discussed:

2.9.1. Section 43(1) (actual cost), section 32, section 37(1); AS-29; Delhi High Court judgment (2025) 172 taxmann.com 378 (ARC provision for tower restoration allowable u/s 37(1)).

Interpretation and reasoning:

2.9.2. AO treated ARC provision capitalised in fixed assets as unascertained contingent liability, not part of actual cost nor deductible under section 37; DRP agreed.

2.9.3. Tribunal noted that for a sister concern in identical fact pattern, Delhi High Court has held ARC obligation is a present obligation arising from lease contracts, reasonably estimable, satisfying AS-29, and allowable as deduction under section 37(1); the view that only "ascertained" liabilities qualify was rejected.

2.9.4. Following a recent coordinate Bench order in assessee's own case (AY 2007-08), Tribunal held that while allowability is settled in assessee's favour, quantum and computation were never examined by AO as he had rejected claim outright.

Conclusion:

2.9.5. Issue remanded to AO to (i) recompute/allow ARC as per Delhi High Court decision, and (ii) adjust/de-allow any depreciation earlier claimed on ARC component; assessee's ground allowed for statistical purposes.

2.10. Roaming charges - TDS under section 194J and disallowance u/s 40(a)(ia)

Legal framework discussed:

2.10.1. Sections 194J, 40(a)(ia), 9(1)(vii); Supreme Court in Bharti Cellular and Kotak Securities; Karnataka High Court in Vodafone South; Tribunal decision in Vodafone East Ltd.

Interpretation and reasoning:

2.10.2. AO treated roaming charges as "fees for technical services" involving human intervention and disallowed for non-deduction of TDS u/s 194J; DRP confirmed.

2.10.3. Tribunal relied on its AY 2009-10 order (after considering Supreme Court and later High Court decisions), holding that roaming/interconnect services are fully automated, common facilities, and do not amount to "technical services" requiring TDS u/s 194J; hence section 40(a)(ia) cannot be invoked.

Conclusion:

2.10.4. Disallowance of Rs 88.88 crore under section 40(a)(ia) deleted; assessee's ground allowed.

2.11. Discount to prepaid distributors - section 194H / section 40(a)(ia)

Legal framework discussed:

2.11.1. Section 194H (commission/brokerage); extensive High Court jurisprudence (Bombay, Karnataka, Rajasthan) on telecom prepaid discounts as principal-to-principal transactions; binding jurisdictional precedents.

Interpretation and reasoning:

2.11.2. AO/DRP treated upfront discount on SIM/recharge vouchers as "commission" and disallowed for non-deduction of tax u/s 194H by applying section 40(a)(ia).

2.11.3. Tribunal relied on recent Mumbai Bench orders in assessee's own cases, which in turn followed:

- Pune Bench in Idea Cellular Ltd; - Bombay High Court decisions (including assessee's own matter and Reliance Communications Infrastructure); - Rajasthan High Court decision in Hindustan Coca Cola & connected Idea Cellular appeals; holding relationship with distributors as principal-to-principal; discount not "commission"; no TDS obligation.

Conclusion:

2.11.4. No TDS was required u/s 194H; disallowance of Rs 144.45 crore u/s 40(a)(ia) deleted; assessee's ground allowed.

2.12. Penalty paid to DoT - Explanation to section 37(1)

Interpretation and reasoning:

2.12.1. AO held penalty paid to DoT for KYC/verification lapses was for "infringement of law" under Indian Telegraph Act and hit by Explanation to section 37(1); DRP affirmed.

2.12.2. Tribunal followed its AY 2009-10 order and Kolkata Bench in Vodafone East Ltd., noting that:

- such charges emanated from breach of licence conditions/contractual terms, not from a specific statutory offence; - irregularities in CAF/CIF were not shown as offences under Telegraph Act; - hence expenditure was for breach of contractual obligations, not for an act prohibited by law.

Conclusion:

2.12.3. Penalty to DoT is deductible under section 37(1); disallowance of Rs 2.41 crore deleted.

2.13. Network site rentals - scope of DRP directions and AO's enquiry

Interpretation and reasoning:

2.13.1. AO had originally disallowed entire network site rental of Rs 396.25 crore u/s 40A(2)(b) as excessive in light of alleged tax avoidance via tower demerger. DRP held section 40A(2)(b) inapplicable for AY 2010-11 (pre-amendment; no substantial interest of Indus), and directed AO to allow expense if it had crystallised in the year.

2.13.2. On remand, AO again disallowed amount, asserting lack of evidence of crystallisation and even questioning "reasonableness/genuineness", going beyond DRP's limited direction.

2.13.3. Tribunal observed that assessee had in fact furnished: (i) Indus' certificate of billing Rs 418.71 crore; (ii) Master Services Agreement and supplementary agreements; (iii) audited financials and tax audit report without contingent liability qualification; (iv) detailed chart of rentals.

2.13.4. Tribunal held that AO could not revive 40A(2)(b) or question "reasonableness" once DRP had finally negatived that route; AO's remit was confined to verifying crystallisation in the relevant year.

Conclusions:

2.13.5. AO directed to:

(a) Examine assessee's evidence only to verify that network site rental liability accrued/crystallised during the year; and

(b) Allow deduction to that extent, in strict compliance with DRP directions.

2.13.6. Assessee allowed to furnish further supporting material to AO. Ground allowed for statistical purposes.

2.14. Addition under section 68 - security deposits/unsecured loans from distributors

Interpretation and reasoning:

2.14.1. AO treated Rs 3.94 crore as unexplained cash credits due to absence of confirmations, PAN and addresses, despite assessee's claim it represented distributor security deposits. DRP did not grant relief.

2.14.2. Tribunal followed its AY 2009-10 order where similar addition was remanded back, noting that mere banking channel is not enough; assessee must prove identity, capacity and genuineness, but assessee sought another opportunity to furnish details.

Conclusion:

2.14.3. Addition of Rs 3.94 crore set aside; matter remanded to AO for fresh examination with direction that assessee furnish complete particulars; AO free to draw adverse inference if assessee defaults. Ground allowed for statistical purposes.

2.15. Transfer pricing - brand royalty payments to AEs

Legal framework discussed:

2.15.1. Sections 92C, 92CA; accepted TP methods and CUP; Delhi High Court in CIT v. EKL Appliances; ITAT Third Member in Technimont ICB; concept that ALP cannot be fixed at "nil" by questioning commercial expediency.

Interpretation and reasoning:

2.15.2. TPO had determined ALP of royalty at nil on grounds that assessee showed no benefit or cost-benefit analysis, and CUP allegedly defective; DRP sustained.

2.15.3. Tribunal noted:

- identical issue for AY 2009-10 was decided in assessee's favour, deleting TP adjustment; - TPO/AO had rejected assessee's benchmarking without applying any statutory method or reliable CUP, and effectively substituted their business judgement contrary to EKL Appliances; - reliance on a related-party "Virgin" agreement as CUP was impermissible; - internal CUP and fresh external CUPs had been produced and considered in earlier order.

Conclusion:

2.15.4. Following its AY 2009-10 order, Tribunal deleted TP adjustment of Rs 27.20 crore on royalty; ALP cannot be nil absent proper method-based benchmarking.

2.16. Transfer pricing - AMP expenditure as separate international transaction

Legal framework discussed:

2.16.1. Sections 92B, 92C; invalidity of bright line test; Delhi High Court in Maruti Suzuki and Whirlpool; Supreme Court's dismissal of SLP in Whirlpool; requirement of an arrangement/understanding for AMP as international transaction.

Interpretation and reasoning:

2.16.2. TPO treated AMP expenses (including distribution and sales promotion costs) as creating marketing intangibles for foreign AEs, applied bright line based on comparables and imposed mark-up; DRP upheld based on LG Electronics (SB).

2.16.3. Tribunal, relying on its AY 2009-10 order and subsequent jurisprudence, held:

- Revenue has adduced no material to prove any arrangement or "action in concert" between assessee and AEs to promote foreign brands; - existence of high AMP vis-+?-vis bright line cannot by itself establish an international transaction; - bright line method is not a recognised TP method and is contrary to Delhi High Court in Maruti Suzuki and Whirlpool; - assessee is a full-fledged telecom service provider, not a mere distributor; AMP is part of its entrepreneurial business, not a service to AEs; - in later years, no such TP adjustment has been made.

Conclusion:

2.16.4. TP adjustment of Rs 167.83 crore on AMP expenditure deleted in entirety; AMP cannot be treated as a separate international transaction on these facts.

2.17. Grant of TDS and MAT credit; interest u/s 234B

Interpretation and reasoning:

2.17.1. Assessee claimed short-grant of TDS credit and non-grant of MAT credit as per revised return. Tribunal held these are matters of verification.

Conclusions:

2.17.2. AO directed to verify records and grant due TDS and MAT credits as per law. Ground allowed for statistical purposes.

2.17.3. Levy of interest u/s 234B held consequential to recomputation of income and credits.

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