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Issues: (i) Whether depreciation on passive infrastructure assets transferred under a court-approved demerger could be disallowed by treating the transfer as not being a gift; (ii) whether network site rentals paid to Indus Towers required fresh factual verification; (iii) whether disallowance under section 14A could survive in the absence of exempt income and whether the same could be added back under section 115JB; (iv) whether roaming charges attracted tax deduction at source and consequent disallowance; (v) whether depreciation on 3G spectrum fees was allowable as an intangible asset or had to be amortised under section 35ABB; (vi) whether deduction under section 80IA was allowable on scrap sales, cell site sharing income, IRU revenue, late payment charges, cheque bounce charges, provisions written back, other income and SFIS income; (vii) whether the transfer pricing adjustment on ECB interest and upfront fee was sustainable; (viii) whether the license fee payable to DoT had to be dealt with under section 35ABB; (ix) whether royalty paid to WPC and brand royalty paid to associated enterprises called for interference; and (x) whether initiation of penalty proceedings under section 271(1)(c) could be adjudicated.
Issue (i): Whether depreciation on passive infrastructure assets transferred under a court-approved demerger could be disallowed by treating the transfer as not being a gift.
Analysis: The transfer of passive infrastructure assets had been effected without consideration under a scheme of demerger sanctioned by the High Court. The same controversy had already been decided in the assessee's own case for an earlier year, where the transfer was treated as a genuine gift falling within section 47(iii), and the Revenue had failed to show any contrary factual matrix or higher court ruling.
Conclusion: The disallowance of depreciation was unsustainable and was deleted in favour of the assessee.
Issue (ii): Whether network site rentals paid to Indus Towers required fresh factual verification.
Analysis: The allowability of the payment turned on the commercial restructuring, the cost structure of tower operations and the nature of the services rendered after the transfer of passive infrastructure. Those aspects had not been fully examined by the lower authorities, and the earlier year's decision had restored the matter for de novo examination.
Conclusion: The issue was remanded to the Assessing Officer for fresh adjudication and was allowed for statistical purposes.
Issue (iii): Whether disallowance under section 14A could survive in the absence of exempt income and whether the same could be added back under section 115JB.
Analysis: The assessee had not earned any exempt income during the year. The issue was covered by binding precedent holding that section 14A disallowance is not attracted when no exempt income arises. Once that disallowance failed, there was no basis to add the same to book profit under section 115JB, and in any case such adjustment was not permissible mechanically under the MAT computation.
Conclusion: Both the section 14A disallowance and the corresponding section 115JB adjustment were deleted in favour of the assessee.
Issue (iv): Whether roaming charges attracted tax deduction at source and consequent disallowance.
Analysis: Roaming services between telecom operators were held in earlier years to be rendered through an automated and standardised process without human intervention. On that basis, the payments were not treated as fees for technical services and the provisions invoked for disallowance on non-deduction of tax did not apply.
Conclusion: The disallowance under sections 40(a)(ia) and 40(a)(i) was deleted in favour of the assessee.
Issue (v): Whether depreciation on 3G spectrum fees was allowable as an intangible asset or had to be amortised under section 35ABB.
Analysis: Consistent Tribunal decisions in related cases had held that the right to use spectrum is a business or commercial right of similar nature eligible for depreciation as an intangible asset. The amortisation provision for telecommunication licences under section 35ABB was held not to govern such a claim.
Conclusion: Depreciation on 3G spectrum fees was allowed in favour of the assessee.
Issue (vi): Whether deduction under section 80IA was allowable on scrap sales, cell site sharing income, IRU revenue, late payment charges, cheque bounce charges, provisions written back, other income and SFIS income.
Analysis: For telecommunication undertakings, section 80IA(2A) operates as a special provision and the restrictive construction of the expression "derived from" was not applied in the same narrow manner. Scrap sales, cell site sharing receipts, IRU income, late payment charges, cheque bounce charges, provisions written back, other income and SFIS income were treated as having a proximate and business-linked nexus with the eligible undertaking.
Conclusion: Deduction under section 80IA was allowed on these receipts in favour of the assessee, while the related objection concerning disallowance under section 14A became academic.
Issue (vii): Whether the transfer pricing adjustment on ECB interest and upfront fee was sustainable.
Analysis: The RBI-approved all-in-cost for the ECB was treated as a highly relevant benchmark. The TPO's comparable set suffered from material infirmities relating to the nature of the loan, security profile, purpose, tenor, risk adjustments and subordination. The upfront fee formed part of the borrowing cost and had to be considered with interest for an effective all-in-cost analysis.
Conclusion: The transfer pricing adjustment was deleted in favour of the assessee.
Issue (viii): Whether the license fee payable to DoT had to be dealt with under section 35ABB.
Analysis: In view of the Supreme Court ruling on telecom licence fees, the annual license fee was held to be capital in nature and liable to amortisation under section 35ABB rather than being allowed as revenue expenditure under section 37(1).
Conclusion: The matter was restored to the Assessing Officer to compute the disallowance in accordance with section 35ABB, resulting in a partial success for the Revenue.
Issue (ix): Whether royalty paid to WPC and brand royalty paid to associated enterprises called for interference.
Analysis: The WPC payment was held to be recurring operational expenditure incurred for use of spectrum and not capital in nature. As to brand royalty, the ALP could not be fixed at nil without a proper comparability analysis and the TPO could not reject the assessee's benchmarking merely on conjectural grounds.
Conclusion: The deletion of the WPC disallowance and the deletion of the brand royalty transfer pricing adjustment were upheld in favour of the assessee.
Issue (x): Whether initiation of penalty proceedings under section 271(1)(c) could be adjudicated.
Analysis: The penalty ground was premature and did not give rise to a justiciable controversy at that stage.
Conclusion: The ground was dismissed.
Final Conclusion: The assessee succeeded on the principal substantive additions and transfer pricing disputes, while the Revenue obtained limited relief only on the treatment of telecom licence fee under section 35ABB and the connected remand. The appeals were therefore disposed of with mixed results, largely in favour of the assessee on merits.
Telecom tax deductions and transfer pricing: depreciation, section 14A, 80IA income, spectrum fees and royalty claims mostly favoured the assessee.
Depreciation on passive infrastructure assets transferred under a court-sanctioned demerger was held allowable, while network site rentals to Indus Towers required fresh factual examination and were remanded. Section 14A disallowance was held inapplicable where no exempt income arose, and the corresponding MAT adjustment under section 115JB was deleted. Roaming charges were treated as non-technical automated telecom services, so TDS-based disallowance failed. Depreciation on 3G spectrum fees was allowed as an intangible asset, while section 80IA deduction was allowed on ancillary telecom receipts including scrap sales, site sharing, IRU revenue and related income. The transfer pricing adjustment on ECB interest and upfront fee was deleted, telecom licence fee was held subject to amortisation under section 35ABB, and royalty-related objections were rejected.
Depreciation on telecom spectrum as intangible asset - expenditure on Network Site Rentals - Addition u/s 14A and addition u/s 115JB - Tax deduction at source on roaming charges - Depreciation on 3G Spectrum Fees - deduction under section 80IA was allowable on scrap sales - Arm's length price of ECB interest and upfront fee - Brand royalty benchmarking under transfer pricing - Applicability of amended provisions of section 80-IA - scope of amended section 80-IA provisions - Revenue recognition of prepaid telecom services - Allowability of Annual telecom licence fee - Spectrum usage charges paid to WPC as Recurring operational expenditure - TP Adjustment on account of payment of brand royalty Depreciation on passive infrastructure assets transferred under a court-approved demerger - Gift of passive infrastructure assets - Depreciation on block of assets - HELD THAT: - The Tribunal followed the co-ordinate bench decision in the assessee's own case for the preceding year [2025 (12) TMI 1280 - ITAT MUMBAI] and held that the transfer of passive infrastructure assets, effected without consideration under a High Court approved scheme, constituted a genuine gift falling within section 47(iii). Since the transaction could not be treated as a transfer for capital gains purposes, the Assessing Officer was not justified in imputing notional consideration or reducing the written down value of the block, and the consequential depreciation disallowance had no legal basis. [Paras 22, 23, 24, 25] The depreciation disallowance on passive infrastructure assets was deleted. Disallowance of Network Site Rentals - Business expenditure verification - HELD THAT: - The Tribunal noted that, in the assessee's own case for the immediately preceding year 2010–11 [2025 (12) TMI 1280 - ITAT MUMBAI] the co-ordinate bench had found that the lower authorities had not properly examined the factual aspects relating to the restructuring arrangement, the operating and maintenance cost structure of tower infrastructure, and the basis on which network site rentals were charged. As the facts for the present year were stated to be identical, the same course was followed. [Paras 31, 32] The issue was restored to the Assessing Officer for de novo adjudication after proper verification and opportunity of hearing. Addition u/s 14A without exempt income - HELD THAT: - Following the co-ordinate bench decisions in the assessee's own case for Assessment Year 2009–10 [2016 (11) TMI 1544 - ITAT AHMEDABAD], as well as in Assessment Year 2010–11 [2025 (12) TMI 1280 - ITAT MUMBAI] and the judgment in Corrtech Energy Pvt. Ltd. [2014 (3) TMI 856 - GUJARAT HIGH COURT] the Tribunal held that, in a year in which the assessee had not earned any exempt income, disallowance under section 14A read with Rule 8D was not permissible. [Paras 36, 37, 38] The section 14A disallowance was deleted. Disallowance of roaming charges u/s 40(a)(ia) and section 40(a)(i) - non-deduction of tax at source - HELD THAT: - The Tribunal followed the consistent view taken in the assessee's own case for Assessment Year 2009–10 [2016 (11) TMI 1544 - ITAT AHMEDABAD] and also for Assessment Year 2010–11 [2025 (12) TMI 1280 - ITAT MUMBAI] and in group concern decisions that roaming services between telecom operators are rendered through an automated and standardised process without human intervention in the technical sense relevant for characterising the payment as fees for technical services. On that basis, the disallowance under sections 40(a)(ia) and 40(a)(i) for non-deduction of tax at source was held to be unsustainable. [Paras 42, 43, 44] The disallowance on roaming charges was deleted. Depreciation on 3G Spectrum Fees - Telecom spectrum rights - Depreciation on intangible assets - Section 35ABB versus section 32 - Whether right to use 3G spectrum was eligible for depreciation as an intangible asset and not to be amortised under section 35ABB? - HELD THAT: - Relying on co-ordinate bench decisions in the cases of group entities, the Tribunal held that telecom spectrum rights constitute business or commercial rights of similar nature falling within section 32(1)(ii). It further held that section 35ABB did not apply where the assessee claimed depreciation on spectrum rights forming part of the block of intangible assets. The determinative principle applied was that the spectrum right is an intangible asset eligible for depreciation under section 32. [Paras 50, 51, 52, 53, 54] The Assessing Officer was directed to allow depreciation on 3G spectrum fees. Deduction u/s 80-IA for scrap sales - Telecommunication business income - HELD THAT: - The Tribunal followed the co-ordinate bench decision in the assessee's own case and held that, having regard to the scheme of section 80-IA and particularly the distinction between sub-section (1) and sub-section (2A), income arising from the telecommunication business, including incidental business receipts such as scrap sales, qualifies for deduction. Since the section 14A disallowance had already been deleted, the alternative claim linked to that disallowance did not survive. [Paras 61, 62, 63, 64] Deduction under section 80-IA on scrap sales was allowed. TP Adjustment - interest paid on External Commercial Borrowings (ECB) - RBI approval as benchmark - Upfront fee as borrowing cost - HELD THAT: - The Tribunal held that, though RBI approval is not conclusive of arm's length price in every case, it is a relevant and weighty contemporaneous benchmark for ECB borrowings. On facts, the TPO's benchmarking was found deficient on critical comparability parameters including secured versus unsecured character, purpose, tenor, borrower region, country and currency risk, and subordination. The Tribunal further held that the upfront fee formed part of the borrowing cost and had to be considered with interest in determining the effective all-in-cost. Since the RBI approved all-in-cost for the very borrowing was found more reliable than the TPO's defective comparable set, the effective rate within that approved ceiling was accepted as arm's length. [Paras 92, 93, 94, 95, 96] The transfer pricing adjustment on ECB interest and upfront fee was deleted. Book profit adjustment under section 115JB - Section 14A disallowance in MAT computation - HELD THAT: - The Tribunal held, first, that once the disallowance under section 14A itself had been deleted, the basis for any corresponding adjustment in the computation of book profit ceased to exist. It further held that computation under section 115JB is confined to the specific adjustments provided in Explanation 1 and that the section 14A disallowance cannot be mechanically imported into the MAT computation, following Vireet Investment Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] [Paras 102, 103, 104, 105] The addition made in the computation of book profit under section 115JB was deleted. Initial assessment year u/s 80-IA - Commencement of telecommunication services - HELD THAT: - The Tribunal followed the co-ordinate bench decision in the assessee's own case and held that mere licence acquisition or preparatory infrastructure activity does not amount to starting the business of providing telecommunication services. The relevant test is actual commencement of telecommunication services, which, on the admitted facts, occurred only on 24.01.1997. The principle of consistency was also applied in the absence of any change in facts. [Paras 115, 116, 117, 118, 119] A.Y. 1997-98 was upheld as the initial assessment year for section 80-IA. Applicability of amended provisions of section 80-IA - Option for ten consecutive years - scope of amended section 80-IA provisions introduced from A.Y. 2000-01 - HELD THAT: - Following the co-ordinate bench ruling in the assessee's own case, the Tribunal held that undertakings which started providing telecommunication services on or after 01.04.1995 are entitled to exercise the option available under the amended scheme for claiming deduction for any ten consecutive years out of the specified period. Since the assessee fell within that category, the amended provisions were held applicable. [Paras 124, 125, 126, 127, 128] The direction to apply the amended section 80-IA provisions was upheld. Eligible profits of telecommunication undertaking - Section 80-IA(2A) - Cell site sharing revenue, IRU revenue, late payment charges, cheque bounce charges, provisions written back, port charges, miscellaneous receipts and SFIS income eligibility for deduction under section 80-IA. - HELD THAT: - Across these categories, the Tribunal applied the consistent principle from the assessee's own cases and related decisions that, for telecommunication undertakings, section 80-IA(2A) operates as a special provision and the expression governing eligible profits is not to be narrowly restricted in the same manner as under section 80-IA(1). Income intrinsically connected with or arising from the telecommunication business, including commercial exploitation of telecom infrastructure, customer-related charges, reversal of business liabilities, operational receipts and export-linked SFIS benefit, formed part of eligible business income. [Paras 167, 171, 172, 173, 174] The Revenue's challenge to deduction under section 80-IA on those receipts was rejected. Revenue recognition of prepaid services - Accrual of prepaid telecom receipts - HELD THAT: - The Tribunal held that income from prepaid services accrues when the services are rendered or when the corresponding liability ceases, such as on expiry of prepaid vouchers. At the same time, to avoid escapement, verification was necessary on whether revenue relating to expired vouchers had been recognised and offered to tax in subsequent years. [Paras 183, 184] The issue was restored to the Assessing Officer for limited verification of subsequent tax recognition. Annual telecom licence fee - Capital versus revenue expenditure - Amortisation under section 35ABB - whether Annual licence fee paid under the telecom licence regime was capital in nature and had to be dealt with under section 35ABB? - HELD THAT: - Applying the binding law declared in Bharti Hexacom Ltd [2023 (10) TMI 786 - SUPREME COURT] the Tribunal held that even annual variable licence fees paid by telecom operators are capital in nature and are required to be amortised under section 35ABB. Since the DRP had allowed the claim as revenue expenditure, that view could not survive after the Supreme Court ruling in in Bharti Hexacom Ltd.[supra] [Paras 191, 192, 193, 194] The issue was restored to the Assessing Officer to recompute the disallowance and amortisation in accordance with section 35ABB and the Supreme Court ruling. Spectrum usage charges paid to WPC - Recurring operational expenditure - Payments made to the Wireless Planning Commission for use of spectrum as capital or revenue expenditure - HELD THAT: - Following the assessee's own case and the view based on Fascel Ltd. [2008 (12) TMI 743 - DELHI HIGH COURT] the Tribunal held that recurring payments to WPC, computed as a percentage of revenue and incurred for use of spectrum in the course of telecom operations, do not result in acquisition of a capital asset or enduring benefit and are therefore allowable as revenue expenditure. [Paras 199, 200, 201] The deletion of disallowance on WPC royalty was upheld. TP Adjustment on account of payment of brand royalty by the assessee to its Associated Enterprises - MAM - CUP with uncontrolled comparables - ALP at nil - HELD THAT: - The Tribunal followed the co-ordinate bench decision in the assessee's own case [2025 (12) TMI 1280 - ITAT MUMBAI] and held that CUP cannot be applied on the basis of controlled or related-party agreements, since Rule 10B requires comparison with uncontrolled transactions. It further held that determination of arm's length price at nil, without proper application of a prescribed method and without valid comparability analysis, is legally unsustainable. The TPO's role is confined to determining ALP and not to disregarding the transaction for want of perceived commercial benefit. [Paras 215, 216, 217, 218, 219] The deletion of the transfer pricing adjustment on brand royalty was upheld. Final Conclusion: The assessee's appeal was substantially allowed, with relief granted on depreciation on passive infrastructure assets, section 14A, roaming charges, 3G spectrum depreciation, section 80-IA on scrap sales, ECB transfer pricing adjustment, and section 115JB adjustment, while the penalty ground was dismissed as premature and the network site rental issue was remanded. The Revenue's appeal largely failed, except that the prepaid services issue and the annual licence fee issue were restored to the Assessing Officer for limited verification and recomputation in accordance with law.