2025 (10) TMI 1111 - AT - Income Tax

Transfer pricing adjustments reversed; depreciation, amortization, and asset restoration expenses allowed under s.37; s.115JB book-profit write-offs upheld

ITAT DELHI - AT largely upheld the assessee. It reversed transfer-pricing upward adjustments for brand/royalty payments, directing deletion of the TPO/AO ... TP Adjustment - Payment of brand to royalty made for obtaining the right to use of 'Vodafone' and 'Essar' trademarks and trade names - upward adjustment on the basis of related party transactions after adopting CUP method instead of TNMM - HELD THAT:- We observed that ITAT Ahmedabad Bench [2016 (11) TMI 1544 - ITAT AHMEDABAD] held a comparable un-controlled transaction instead of a controlled forms sine qua non for determining ALP of an international transaction between two associate enterprises leaving behind no scope of application of estoppel principle or acceptance of agreed prices in absence of an comparable un-controlled transaction. Revenue's vehement contentions advanced in the course of hearing seeking to invoke estoppel principle fails to convince us. We further deem it appropriate to observe at this stage that the impugned assessment year 2002-03 is the first full fledged business of year after introduction of chapter X transfer pricing provision incorporated in the act. TPO's order does not even issue a show cause notice disagreeing with assessee's TNMM method. He has rather proceeded to adopt CUP method(supra) again by ignoring the fundamental condition of applying the same. Same is the case with CIT(A) who has proceeded on revenue neutral implication without even taking into section 92(1) r.w.s. 92C and 92C(4) proviso along with rules discussed hereinabove at length. There is hardly any dispute that this chapter and the rules notified thereunder prescribe that an arms length price is not the price an assessee is charging or paying for being a party in the international transaction in question but it is the price i.e. to be paid or charged in such a comparable controlled transaction in comparison to a comparable un-controlled transaction. We repeat that the TPO has not kept in mind this fine distinction. We accordingly reverse his action on this sole legal principle CIT(A) has already deleted the impugned adjustment. We find no reason to interfere in the lower appellate order albeit on a different score as enumerated hereinabove. This Revenue's ground is declined accordingly. Thus, we direct the Learned TPO / AO to delete the transfer pricing adjustment made in respect of international transaction towards payment of royalty. Disallowance of depreciation in respect of right to use 3G Spectrum - AO disallowed the claim of depreciation and amortized the same u/s 35ABB as upheld by DRP - HELD THAT:- We find that similar issues was already considered by the ITAT Mumbai in the group case and decided the issues in favour of the assessee. Disallowance of penalty imposed by the Department of Telecommunication - AO observed that penalty is on account of non-adherence to law and not on account of contractual violation, thus disallowed the same in terms of Explanation to section 37(1) of the Act - HELD THAT:- We find that similar issues was already considered by the ITAT Mumbai in the group case and decided the issues in favour of the assessee. Disallowance of depreciation claimed on the addition to fixed assets on account of Asset Restoration Cost (“ARC”) obligation - AO rejected the contention of the Assessee and held that there was no legal obligation on the Assessee to incur the ARC and hence, the same is neither allowable u/s 37 of the Act nor it can be capitalized under the provisions of the Act - HELD THAT:- Decision of DCIT v/s. Erstwhile Vodafone Essar Digilink Ltd [2018 (6) TMI 1029 - ITAT DELHI] was appealed by the Assessee in the Hon’ble Delhi High Court [2025 (3) TMI 659 - DELHI HIGH COURT] titled Vodafone Mobile Services Ltd. v. DCIT / (Assessment Year 2009-10) and the Hon’ble High Court has, vide order dated 11.03.2025, held that the said expenses are allowable u/s 37 of the Act. Therefore, this issue stands covered in favour of the assessee by the decision of the Tribunal in the assessee’s group company’s case i.e. erstwhile “Vodafone India Limited. Disallowance in respect of liabilities written back - AO rejected the claim of the Assessee alleging that Assessee has not established that the liability was capital in nature and even if it was capital, expenditure would have been claimed in terms of depreciation - HELD THAT:- As observed from the submissions that the liability pertains to the supply of capital equipment during the years 2004 and 2008. It was agreed between the parties that the liability shall no longer be payable, therefore, the assessee written back the same. Assessee had purchased the capital equipment and capitalized the same, also utilized the same for the purpose of business during the period 2004 to 2008. Once the assessee recognizes the assets in their books, it becomes business assets. Therefore, as per the provisions of section 28(iv) of the Act, this liability is arising from business. Therefore, the submission of the LdAR is not acceptable. With regard toreliance in the case law Mahindra & Mahindra Ltd [2018 (5) TMI 358 - SUPREME COURT] the facts are, the loan was waived for acquiring the capital assets. The facts are distinguishable to the facts of the present case, in the given case, the assets were purchased and capitalized, this will not take the character of loan transactions rather it is business liability. Therefore, the ground raised by the assessee is dismissed. Disallowance of discount extended to pre-paid distributors under section 40(a)(ia) - Non deduction of TDS u/s 194H - HELD THAT:- This issue is squarely covered in favour of the assessee in Bharti Cellular Ltd. [2024 (3) TMI 41 - SUPREME COURT] and Appellant’s own case for A.Y. 2012-13 [2024 (6) TMI 1433 - ITAT DELHI] Disallowance of roaming charges u/s 40(a)(ia) - non deduction of TDS - HELD THAT:- This issue is squarely covered in favour of the assessee in Vodafone South Ltd. [2016 (8) TMI 422 - KARNATAKA HIGH COURT] Appellant’s own case for A.Y. 2012-13 [2024 (6) TMI 1433 - ITAT DELHI] AND M/s Tata Teleservices [2022 (6) TMI 129 - DELHI HIGH COURT]. Disallowance on account of capitalization of license fees u/s. 37(1) - We find that this issue is decided against the assessee by the decision of CIT Vs. Bharti Hexacom Ltd. [2023 (10) TMI 786 - SUPREME COURT]. Disallowance in respect of payments made to IBM - We observed that the assessee no doubt pays lease rent as finance lease and accordingly capitalized the same by following the AS 19, we observed that the various precedents of this issue indicate that as far as Income Tax is concerned, the lease payments are considered as revenue expenditure whether they are operating or finance lease, they are allowed as revenue expenditure. Thus, we direct the AO to allow the finance lease paid by the assessee on the assets acquired from IBM as revenue expenditure. Disallowance on account of capitalisation of royalty – WPC expenses - This issue is squarely covered in favour of the assessee by the decision of Vodafone West Limited” (earlier known as Fascel Limited”) by the Hon’ble Delhi High Court [2008 (12) TMI 743 - DELHI HIGH COURT]. This issue has also been decided in favour in the assessee own case by the Hon’ble Delhi High Court [2016 (11) TMI 1702 - DELHI HIGH COURT]. Upward adjustment on account of Miscellaneous expenditure written off for computing book profits u/s 115JB - Assessee (along with its erstwhile entities except one entity) had filed a demerger scheme ('Demerger Scheme') for transfer of their Passive Infrastructure ('PI') assets to Vodafone Infrastructure Limited ('VInfL') with effect from 01.04.2009 - Hon’ble Supreme Court in the case of HCL Comnet Systems and Services Ltd [2008 (9) TMI 18 - SUPREME COURT] has again held that the Assessing Officer only has power to examine whether the books of accounts are duly certified by the authorities under the Companies Act and does not have jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent of the explanation. It is relevant to observe that the DRP accepted that the subject adjustment made in the instant case does not fall under any of the clauses of Explanation 1 to Section 115JB of the Act, yet it preceded to uphold the action of the AO. Therefore, in our considered view, the miscellaneous expenses carried forward in the erstwhile balance sheet of the merged entities are properly written off by the assessee by following and aligning the accounting standard regularly followed by it and which was also declared in their financial statement. Further, the relevant amount written off by the assessee does not fall any of the clauses of adjustments mentioned under explanation 1 to the section 115JB of the Act. Therefore, we are inclined to allow the ground raised by the assessee in this regard. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer-pricing adjustment to disallow/limit brand royalty payments (Vodafone / Essar) and adopt CUP comparables based on related-party agreements was sustainable. 2. Whether fees paid for acquisition/right to use 3G spectrum qualify as capital expenditure forming intangible asset eligible for depreciation under section 32, or are exigible to amortisation under section 35ABB / 35ABA. 3. Whether penalty paid to the licensing authority (Department of Telecommunication) for non-compliance of license terms is allowable as business/contractual expenditure (Section 37) or is disallowable under the Explanation to Section 37(1) as statutory penalty. 4. Whether estimated Asset Restoration Cost (ARC) obligation recorded and capitalized forms part of actual cost of a capital asset and is eligible for depreciation, or is an unascertained/ non-allowable expenditure. 5. Whether reversal/write-back of liabilities (relating to prior supply of capital equipment) gives rise to income taxable under section 41(1) or value of benefit/perquisite taxable under section 28(iv), and the effect on block WDV/depreciation. 6. Whether discounts extended to pre-paid distributors constitute 'commission' attracting withholding obligation under section 194H and disallowance under section 40(a)(ia) for failure to deduct TDS. 7. Whether roaming charges payable to other operators are subject to withholding obligations and disallowance under section 40(a)(ia) for non-deduction of TDS. 8. Whether amounts described as license fee/license-maintenance payments (WPC-royalty / spectrum-related recurring payments) are revenue-deductible under section 37 or are capital in nature and to be capitalised. 9. Whether payments to IBM described/classified under accounts (finance lease / capitalised assets) are revenue deductible (lease rentals) or capitalisable and to be amortised; and whether accounting classification (AS-19) is determinative. 10. Whether an amount written off in post-merger accounting (miscellaneous expenditure arising from court-approved demerger schemes and subsequently aligned under AS-14) could be adjusted back for computation of book profits under section 115JB beyond items permitted by Explanation 1. 11. Whether certain other grounds (13-16) required remand for factual verification. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Transfer-pricing adjustment on brand/royalty payments Legal framework: Chapter X (sections 92-92F) and Rules (Rule 10B) prescribe arms' length price determination and the sequence/selection of most appropriate method (CUP, TNMM, etc.). Precedent treatment: Coordinate tribunal decisions (Ahmedabad bench and others) hold that CUP requires comparable uncontrolled transactions (not internal/related-party agreements) and that TNMM may be appropriate where direct CUP comparables are absent; prior decisions of the assessee's group were cited in favour of the assessee. Interpretation and reasoning: The Tribunal found the TPO/AO relied on controlled related-party agreements (or internal comparables) to adopt CUP or to select a particular related-party comparable (Virgin), contrary to Rule 10B requirement that CUP comparables be uncontrolled transactions between independent parties. The revenue failed to distinguish facts from cases where CUP can legitimately be applied; coordinate Bench precedent and group rulings supported treating the TNMM/other methods as appropriate and rejecting internal controlled comparables. Ratio vs. Obiter: Ratio - where CUP is applied, the comparable must be an uncontrolled transaction; internal/related party agreements cannot be used as CUP comparables. Obiter - factual comments on identity of specific comparables. Conclusion: Transfer pricing adjustment of Rs. 1,20,54,47,020 was directed to be deleted; royalty payments accepted (i.e., no upward adjustment) following tribunal precedent and methodological rules. Issue 2 - Depreciation on 3G spectrum fees Legal framework: Section 32 allows depreciation on assets owned by the taxpayer; section 35ABB / 35ABA (as introduced later) deal with amortisation of license fees for telecommunication - applicability depends on statutory insertion dates. Accounting classification as intangible asset is relevant for accounts but tax treatment governed by the Act. Precedent treatment: Tribunal decisions in group cases (consolidated orders for erstwhile group entities and other ITAT/HC orders) decided in favour of allowing depreciation/amortisation as claimed by the assessee for relevant years. Interpretation and reasoning: The Tribunal noted spectrum fees were treated as capital expenditure and shown as intangible asset in audited financials; provisions providing for amortisation of licence fees (section 35ABA) were not in force for the year under consideration. Following group precedents and facts, the Tribunal found disallowance was not sustainable. Ratio vs. Obiter: Ratio - where statutory amortisation provisions are not in force and the fee is capital in nature and recorded as intangible asset, depreciation claim under section 32 is allowable as per precedent. Obiter - observations on future statutory amendments. Conclusion: Disallowance of depreciation of Rs. 12,47,17,47,967 was overturned; ground allowed in favour of the taxpayer. Issue 3 - Penalty paid to licensing authority (DOT) Legal framework: Section 37(1) disallows expenditures which are capital or personal; Explanation to section 37(1) excludes statutory penalties from allowance. Distinction between contractual liability and statutory penalty determines deductibility. Precedent treatment: Tribunal and High Court precedents in group cases supported allowability where payments are contractual liabilities and not statutory penalties; decisions cited (group precedents) favored assessee. Interpretation and reasoning: The Tribunal accepted that the payment arose under contractual liability under licence agreements and was incurred as a business/contractual expense necessary for conduct of business. Reliance on group precedents led to treating the expense as allowable under section 37 rather than falling within Explanation to section 37(1). Ratio vs. Obiter: Ratio - contractual penalties/compensations payable under agreements may be deductible if not statutory penalties; assessing officer must distinguish statutory fines from contractual obligations. Obiter - factual dependency on nature of licence and enforcement mechanism. Conclusion: Disallowance of Rs. 21,39,94,348 was reversed; ground allowed. Issue 4 - Asset Restoration Cost (ARC) capitalisation and depreciation Legal framework: AS-29 (Provisions, Contingent Liabilities and Contingent Assets) requires recognition of provision where obligation exists; section 43(1) defines actual cost; section 32 allows depreciation on assets owned. Whether ARC forms part of cost of a capital asset depends on attribution and legal/contractual obligation. Precedent treatment: Accounting standards/case law accept that where a restoration obligation is directly attributable to acquisition/bringing asset into use, the estimated cost/provision may form part of cost; tribunal precedents and group HC decisions addressed similar facts. Interpretation and reasoning: The Tribunal found lease agreements created a present legal obligation to restore sites; AS-29 compels making provision; the ARC is directly attributable to the cost of acquiring/creating the asset (installation of cell sites) and therefore could be capitalised and depreciated. Alternate plea as revenue was also acceptable if not capitalised. Ratio vs. Obiter: Ratio - where a legal/contractual restoration obligation exists and the cost is directly attributable to bringing the asset into use, the ARC provision may be capitalised and depreciation allowed. Obiter - remarks on timing of actual cash outflow. Conclusion: Disallowance of depreciation of Rs. 2,36,69,878 on ARC was reversed; ground allowed. Issue 5 - Written-back liabilities (capital creditors) and taxability under section 41(1) / 28(iv) Legal framework: Section 41(1) taxes escapements where allowed deduction in earlier years is recovered; section 28(iv) taxes value of benefits/perquisites arising from business. Whether reversal of capital creditors (previously capitalised) generates taxable income depends on nature of original liability and use of assets. Precedent treatment: Authorities relied on Binjrajka and other decisions distinguishing reversal of capital liabilities (capital creditors) from trading liabilities; Supreme Court precedent (Mahindra & Mahindra) on waiver of loan for capital assets was discussed and found distinguishable. Interpretation and reasoning: The Tribunal found the written-back liabilities related to supply of capital equipment that had been capitalised and used; reversal of such capital creditor does not fall within section 41(1) (which refers to loss/expenditure/trading liabilities) and is not a benefit/perquisite under section 28(iv) in the absence of consideration for rendering business/professional services. However, the DRP directed AO to recompute WDV to disallow depreciation previously claimed; Tribunal analyzed facts and distinguished Supreme Court loan-waiver authority. Ratio vs. Obiter: Ratio - reversal of capital creditors for capitalised assets is not taxable under section 41(1); impact on depreciation and WDV requires adjustment under normal block provisions rather than immediate taxation as business income. Obiter - distinguishing facts from loan-waiver jurisprudence. Conclusion: Claim that amount cannot be taxed under section 41(1) accepted in principle; the addition under section 28(iv) dismissed; necessary recomputation/directional adjustments to WDV addressed as per DRP guidance and law; assessee's ground in this respect succeeded in part (DRP direction on WDV noted but section 41(1) taxation rejected). Issue 6 - Discounts to prepaid distributors and withholding under section 194H / disallowance under section 40(a)(ia) Legal framework: Section 194H imposes TDS on commission and brokerage; section 40(a)(ia) disallows expenditure where TDS obligations are not complied with. Precedent treatment: Apex Court and coordinate bench decisions (Bharti Cellular Ltd. and group precedents) clarified scope of 'commission' and applicability of withholding obligations to distributor discounts in telecom context. Interpretation and reasoning: Tribunal relied on Supreme Court and appellate precedents holding that distributor discounts of the character involved do not constitute commission attracting section 194H, and thus failure to deduct TDS does not attract disallowance under section 40(a)(ia). Ratio vs. Obiter: Ratio - where discount to distributors is not in nature of commission, section 194H/TDS obligations do not arise and section 40(a)(ia) cannot be invoked. Obiter - fact-sensitive characterisation. Conclusion: Disallowance of Rs. 6,6,47,91,228 under section 40(a)(ia) was reversed; ground allowed. Issue 7 - Roaming charges and withholding (section 40(a)(ia)) Legal framework: Same as Issue 6 - withholding obligations depend on nature of payment; prior DRP and tribunal orders in related assessment years considered. Precedent treatment: Coordinate benches and jurisdictional High Court orders (Tata Teleservices and others) have ruled in favour of assessees on identical facts; the assessee's subsequent practice of deducting TDS in later years is noted. Interpretation and reasoning: Tribunal followed earlier DRP/tribunal conclusions for identical factual matrix, and applied consistent precedent reasoning to hold that disallowance was not sustainable. Ratio vs. Obiter: Ratio - identical factual issues previously adjudicated in favour of a taxpayer bind the present decision absent distinguishing facts. Obiter - comments on later compliance practice. Conclusion: Disallowance of Rs. 4,54,75,74,959 under section 40(a)(ia) was reversed; ground allowed. Issue 8 - Capitalisation of license fees (WPC-royalty) claimed as revenue under section 37 Legal framework: Distinction between capital and revenue expenditure; section 37 permits revenue deductions; Supreme Court authority (Bharti Hexacom) clarifies capital/revenue treatment of license-related payments and consequences. Precedent treatment: Supreme Court decision favoured revenue/capital characterisation that in similar facts required capitalisation; tribunal precedent allowed amortised deduction to extent attributable to the year. Interpretation and reasoning: Having regard to Supreme Court authority, the Tribunal held the payment to be capital in nature and therefore confirmed the addition of the full claimed sum; however, the assessee is entitled to deduction to the extent of amortised amount pertaining to the year as permitted by precedents. Ratio vs. Obiter: Ratio - where higher court has held license payments capital in nature, assessing authority must treat them as capital; annual amortisation deduction may be allowed to extent provided by law/precedent. Obiter - allocation mechanics. Conclusion: Addition of Rs. 9,31,78,54,060 was confirmed (ground dismissed), subject to allowance of amortised deduction for the year per applicable law. Issue 9 - Payments to IBM (finance lease / capitalisation v. revenue deduction) Legal framework: AS-19 classification of leases vs tax law where ownership, contractual terms and substance determine tax treatment; CBDT circular and case law hold accounting classification not determinative of tax consequence; lessee may not be entitled to depreciation; lease rentals may be revenue deductible under section 37. Precedent treatment: Tribunal, High Court decisions (Minda Corporation, Rajshree Roadways, other coordinate decisions) hold that even finance lease payments may be revenue deductible depending on substantive ownership and contractual rights. Interpretation and reasoning: Tribunal examined substance over form: IBM retained legal/beneficial ownership; payments essentially for use of hardware; accounting finance-lease classification did not mandate capitalisation for tax purposes. Following coordinate precedent, the Tribunal treated the payments as revenue deductible lease rentals. Ratio vs. Obiter: Ratio - accounting characterisation as finance lease does not conclusively determine tax treatment; where beneficial ownership remains with lessor, lease payments are revenue deductible. Obiter - emphasis on detailed factual assessment of ownership rights. Conclusion: Disallowance of Rs. 77,37,57,192 (net) was reversed; finance lease payments to IBM to be allowed as revenue expenditure (ground allowed). Issue 10 - Upward adjustment to book profits under section 115JB for miscellaneous expenditure written off post-merger Legal framework: Section 115JB (MAT) and Explanation 1 prescribe limited adjustments to accounting profits; Supreme Court authorities (Apollo Tyres, HCL Comnet) restrict AO's power to modify net profit beyond specified adjustments where accounts are certified under Companies Act; AS-14 requires uniform accounting policies on amalgamation. Precedent treatment: Supreme Court authorities clearly limit AO to Explanation-listed adjustments; group facts showed court-approved demerger/amalgamation schemes specifying accounting treatment adopted in audited statements. Interpretation and reasoning: The Tribunal found that the write-off arose from court-approved demerger schemes and later alignment under AS-14 during amalgamation; the amount debited to P&L was in line with approved accounting policies and audited financials. Since the adjustment did not fall within Explanation 1 to section 115JB(2), AO/DRP lacked jurisdiction to make the MAT addback. Ratio vs. Obiter: Ratio - MAT book profit computation cannot be adjusted by AO beyond the statutory list in Explanation 1 where accounts are certified; adjustments to accounting treatment arising from court-approved schemes and AS-14 alignment are to be respected. Obiter - fact dependence on nature of scheme and certification. Conclusion: Upward addition of Rs. 18,79,70,00,000 to book profits under section 115JB was disallowed; ground allowed in favour of the assessee. Issue 11 - Grounds 13-16 (remand for factual verification) Legal framework: Where issues are fact-sensitive and require fresh evidence/verification, remand to assessing officer for adjudication on facts and application of law is appropriate. Interpretation and reasoning: Tribunal found these grounds required further factual enquiry and therefore remitted them to the AO for verification and decision according to law. Conclusion: Grounds remitted to AO for factual verification and adjudication; allowed for statistical purpose.