TaxTMI 
TaxTMI 
2018 (6) TMI 1029
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....ddition of Rs. 14,23,29,976/- on account of commission. 4. Briefly stated, the facts of the case are that the assessee is engaged in the business of providing cellular mobile telephony services in the telecom circles of Rajasthan, Haryana and Uttar Pradesh (East). It claimed expenditure of Rs. 1,42,32,99,755/- as commission in its Profit & Loss Account. On being called upon to furnish details of commission paid to top 25 distributors, the assessee submitted such details. In support of the deduction, it was submitted that it was providing telecommunication services through two models viz., pre-paid model and post-paid model. The assessee claimed to have paid commission to its agents only under the post-paid model. The assessee furnished Form No.16As in support of payment of commission to top 25 parties. Following the view taken in the preceding years, the AO disallowed 10% of the commission expense on ad hoc basis, which resulted into disallowance amounting to Rs. 14,23,29,976/-. The assessee approached the Dispute Resolution Panel (DRP) against the addition in the draft order. The DRP got convinced with the assessee's contention and, relying on the order passed for the A.Ys. 200....
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....5ABB of the Act. After allowing depreciation @ 25%, he made an addition of Rs. 61,85,57,975/-. The DRP ordered to delete the addition, against which the Revenue has come up in appeal before the Tribunal. 8. We have heard both the sides and perused the relevant material on record. It is observed that the AO invoked the provisions of section 35ABB for making the addition. This section, in turn, provides that expenditure for obtaining licence to operate telecommunication services, in so far as it is of the nature of capital expenditure, shall be allowed as deduction for each of the relevant previous years on proportionate basis. It transpires that in order to be covered within the ambit of this provision, it is sine qua non that the expenditure for obtaining licence must be of capital nature at the first instance. If payment is in the revenue field, it goes out of purview of this provision. When we advert to the nature of royalty paid by the assessee, it clearly emerges that the same is in the nature of spectrum charges paid to Government of India as a percentage of revenue on regular basis. This payment is not meant for obtaining a licence to use spectrum, but for the actual use o....
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.... directed to delete the addition. 12. Having heard both the sides and perused the relevant material on record, we find that the deduction of Rs. 31 lac is not on account of embezzlement by employees, but, for the loss incurred due to frauds committed by the assessee's customers who did not make payments for the bills raised on them by the assessee. This loss, being incidental to carrying on business, cannot be treated as an item of non-revenue nature. We, therefore, uphold the impugned order in deleting the disallowance. This ground is dismissed. 13. The first ground of the assessee's appeal is against amortization of revenue-based licence fee. The assessee claimed deduction of Rs. 205,38,20,412/- as revenue share of the licence fee debited in the Profit & Loss Account. Apart from that, the assessee also claimed deduction for a sum of Rs. 18,74,66,473/- as amortisation of licence fee u/s 35ABB of the Act in the computation of income. On being called upon to explain as to why the sum of Rs. 205.38 crore should not be treated as capital expenditure and, hence, amortized u/s 35ABB, the assessee submitted that as per the terms of the Licence agreement with the Department of Telec....
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....cence agreement, a copy of which is placed from page 540 onwards of the paper book. The assessee was required to pay a sum of Rs. 240.00 crore from 1995 up to the financial year 2000-01 as per the details given in the Agreement. Admittedly, the assessee paid this amount. However, new Telecom Policy, 1999 came into force, whose copy is available from page 578 onwards of the paper book. Under this new Policy, cellular mobile service providers (CMSPs) were required to pay a one-time entry fee. Apart from such one-time entry fee, CMSPs were also required to pay a licence fee based on revenue share on regular basis. The assessee entered into agreement with Government of India under the new Policy on 19.11.2008, whose copy is available from page 589 onwards of the paper book. As per this Agreement, the effective date of licence was to continue as 12.12.1995. The duration of the licence was fixed as 20 years from the effective date. Part III of the Agreement contains financial condition. Clause 18.1 provides that: 'no additional entry fee shall be charged from CMSPs for migration to new policy.' Clause 18.2 provides that 'the licensee shall pay licence fee annually @ 8% of adjusted gross ....
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....d be treated as capital in nature and the balance amount payable on or after the said date should be treated as revenue." Since the amount of Rs. 205.38 crore incurred by the assessee as licence fee @ 8%/6% on adjusted gross revenue is in relation to the period after 31st July, 1999 and is not in the nature of entry fee, such amount is to be allowed as deduction in entirety in the year of incurring without invoking the provisions of section 35ABB of the Act. As the AO has made an addition of Rs. 154.54 crore on this score, we order for its deletion as the same is of the revenue nature. 15. However, it is clarified that if certain sums claimed by the assessee as revenue in the preceding or succeeding years got capitalised by the AO u/s 35ABB, then, the proportionate amount from such capitalisation should not be allowed as deduction in the later years since the full amount of such licence fee pertaining to the year under consideration is being separately allowed. The AO will verify the calculations in this regard and ensure that no double deduction is allowed in the current or earlier or later years in this regard. This ground is allowed. 16. Ground no. 2 of the assesssee's app....
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....is manifest that depreciation can be claimed only on the actual cost of asset 'which is incurred by the assessee.' There is no question of providing depreciation on a notional cost which at the most can be considered as an unascertained liability. Under these circumstances, we are of the considered opinion that the authorities below were fully justified in rejecting the assessee's claim of depreciation of Rs. 5.10 crore on the so-called asset restoration cost obligation. 18. In support of the assessee's claim that it incurred an obligation for restoration of site, a copy of an agreement dated 01.10.2010 entered into between the assessee and Upal Developers Pvt. Ltd., was placed on record which provides for monthly rent of Rs. 5,000/- and the further sum of Rs. 5,000/- per month towards 'maintenance charges.' Consequences of determination of the agreement have been set out in clause 10, which is the bedrock of the assessee's claim for asset restoration cost obligation and resultant depreciation. The relevant part of this clause provides that the assessee: "shall at its own cost restore the premises of the said building to its original state, if any damage is caused in the course ....
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.... represents the cost of installing new cell site towers to be used for providing better network to its customers. It was stated that roughly a period of three months is spent in the setting up of a tower. During the currency of such period of three months, i.e., when a tower is being set up, the costs incurred on such installation of towers are booked under the head 'Capital work-in-progress'. When installation gets completed, the amount so capitalised is transferred from the `capital work-in-progress' account to the `fixed assets' in regular course. From the above narration of factual background, it is clear that a sum of Rs. 2789.6 million represents the amounts incurred by the assessee up to the end of the year on installation of towers, whose process of installation was still on at the end of the year. In other words, this figure represents the value of assets, which have still not been used by the assessee during the year for its business purpose. The AO invoked first proviso to section 36(1)(iii) which, at the material time, read as under:- `Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing b....
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....he requirements of population residing therein. With the passage of time, it may try to reach to rural areas and still more rural areas within the same State by establishing towers for providing connectivity in such areas as well. With new towers in areas, which were hitherto not having connectivity because of lack of the coverage of adequate existing towers, the service provider will, naturally, be going in 'for extension of existing business.' With such a setting up of new towers, the service provider will increase its customer base within the existing Circle, which is nothing but an extension of existing business. 25. When we advert to the facts of the instant case, it emerges that the assessee was successful in increasing its customer base by setting up new towers, cost of which has been classified as capital work-inprogress. It is evident from the assessee's Director's Report for the year under consideration which records that: "the company has also witnessed a good level of increase in the subscriber base in all the three Circles (UPE, Rajasthan and Haryana) in which it operates. The company has further expanded its network to increase its coverage across all its Circles. ....
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....funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders' funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs. 213 crore was invested by the assessee out of its own funds and Rs. 1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs. 2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs. 418.04 crore and the assessee had also raised capital of Rs. 7.90 crore, apart from receiving interest free deposit of Rs. 10.03 crore. The assessee submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment.....
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....fund of a company was utilized for purchase of fixed assets. If an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at its disposal. Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. 30. The legal position set out in the preceding para is applicable if an assessee has a common pool of funds and some part is investment in the disputed amount. This proposition does not hold water, if a specific borrowing is made for making such an investment. When we turn to the facts of the instant case, we find that even though the shareholders' fund is more than the investment in CWIP, but no detail of secured loan is available. In the absence of such specific information, it is difficult to decide the issue at our end. The impugned order is set aside to this exte....
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.... during the process when call takes place so as to bring the payments of inter-connection charges within the ambit of 'fees for technical services' u/s 194J of the Act. It is pertinent to note that pursuant to this judgment, a detailed statement of technical experts of C-DOT was recorded in the case of Vodafone Essar Mobile Services Ltd., based on which the AO in the instant case opined that the provision of section 194J were attracted and, hence, the failure to deduct tax at source invited the wrath of section 40(a)(ia). The AO in the impugned order has also referred to the statement of Shri Tanay Kishna from C-DOT based on which he reached the conclusion that section 194J was attracted. It is pertinent to mention that when Shri Tanay Krishna was cross-examined, he admitted that no human intervention was involved in the entire process of carriage of call from one operator to another. An elaborate discussion has been made in this regard by the Kolkata Bench of the Tribunal in Vodafone East Ltd. Vs. Addl. CIT (2015) 45 CCH 373 (Kol Trib.). After discussing the issue at length, the Tribunal eventually held that the payment of roaming charges did not require any deduction of tax at so....
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....yment of fees for technical services within the meaning of section 9(1)(vii) of the Act and, hence, no deduction of tax was required u/s 194J. Ex consequenti, no disallowance u/s 40(a)(ia) is called for. We, therefore, order to delete the disallowance. 35. The next issue raised in this appeal through ground no. 5 is against the disallowance u/s 40(a)(ia) of the Act on account of discount extended to pre-paid distributors. 36. The facts apropos this ground are that the assessee, under an arrangement, transfers pre-paid talk time to its distributors at a discount and the distributors, in turn, distribute the same to the retailers. The retailers, thereafter, transfer the same to the ultimate subscribers. At each level of the distribution, the party distributing the pre-paid talk time retains a margin for its efforts and risks assumed. The assessee accounted for the revenue on the basis of consideration received from the distributors, that is, the price at which the pre-paid talk time was transferred to the distributor at a reduced price. For example, if MRP of pre-paid talk time is Rs. 100/- and the assessee sells the same to its distributor at Rs. 96/-, it accounted for the rev....
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....Cellular Ltd. (supra) holding that the discount offered by the assessee to the distributors is in the nature of commission and subject to deduction of tax at source u/s 194H of the Act. Similar view has been canvassed by the Hon'ble Kerala High Court in Vodafone Essaar Cellular Ltd. (supra). The ld. AR relied on a later decision of the Hon'ble Karnataka High Court in Bharti Airtel Ltd. Vs. CIT & Anr (2015) 372 ITR 33 (Kar), in which the AO again held that there was a principal-agent relationship between channel partners (equivalent to `Distributors' in our case) and the assessee therein. Discount/commission made to such parties was held to be liable for deduction of tax at source u/s 194H of the Act. The assessee remained unsuccessful up to the Tribunal level. When the matter came up before the Hon'ble Karnataka High Court, their Lordships held that no relationship of principal and agent was found and it was a simple case of sale of right of service. The Hon'ble High Court considered the relationship between the assessee in that case and its distributors as that of principal-to-principal and finally held that no deduction of tax at source was called for u/s 194H of the Act. While d....
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....on 40(a)(ia) of the Act has been invoked by the AO for making the extant disallowance. This section begins with a nonobstante clause and provides that no deduction shall be allowed in computing the income for an amount on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted etc. Crux of this provision is that an amount which is otherwise deductible in the computation of business income, shall not be allowed as deduction if it is an amount 'on which tax is deductible at source' and such tax has not been deducted etc. In other words, no amount should be allowed as deduction on which tax is deductible at source but has not been properly deducted etc. Section 194H falls within Chapter XVII-B. This discerns that if tax at source is deductible u/s 194H and no such deduction etc. has been made, then, the commission payment would call for disallowance under section 40(a)(ia) of the Act. It is thus crystal clear that the concerned expense, so as to call for disallowance, must in the first instance be liable for deduction of tax at source under Chapter XVII-B of the Act. If a particular expenditure does not require deduction of tax at source, then no disa....
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....of Idea Cellular Ltd. (supra) and the disallowance would be mandated. We, therefore, hold that no disallowance can be made u/s 40(a)(ia) for a sum of Rs. 48,14,87,078/-. However the remaining amount of Rs. 82,18,74,160/- (Rs.130,33,61,238/- minus Rs. 48,14,87,078/-) is held to be rightly disallowed. This ground is allowed in part. 43. The next ground is against the disallowance of penalty paid to Department of Telecommunications (DoT) amounting to Rs. 63,83,000/-. 44. Succinctly, the facts of this ground are that the assessee paid a sum of Rs. 63,83,000/- to DoT as penalty for non-compliance. The AO observed that the penalties were levied on account of anomalies and irregularities in the Customer Identification Form (CIF) and Customer Acquisition Form (CAF). Such amount was considered as hit by Explanation 1 to section 37(1) as in the opinion of the AO, it was an expenditure incurred for a purpose which is an offence or prohibited by law. No relief was allowed by the DRP which resulted into an addition of Rs. 63.83 lac by the AO in the impugned order. The assessee has assailed this addition before the Tribunal. 45. We have heard both the sides and perused the relevant mate....
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....ed deduction on Miscellaneous income of Rs. 4,09,40,763/-; Cell hiring income of Rs. 42,85,79,640/-; Indefeasible right to use revenue of Rs. 27,21,58,951/-. The AO held that no deduction u/s 80IA could be allowed on the above four items of income. No relief was allowed by the DRP. The assessee is in appeal against the reduction in the amount of deduction u/s 80IA on account of these four items. 48. After considering the rival submissions and perusing the relevant material on record, it is noticed that sub-section (1) of section 80IA provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4), there shall be allowed a deduction of an amount equal to 100% of the profits and gains 'derived from' such business for a certain period of years. Obviously, the assessee has fulfilled the conditions of sub-section (4) as the AO has allowed deduction u/s 80IA, albeit in part. Sub-section (2A) of section 80IA assumes significance in the context of an undertaking providing telecommunication services. This sub-section reads as under :- `Notwithstanding anything contained....
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....erve as a margin money for availing credit facilities from the bank, we find that the link of such interest income with the eligible business stands established and the resultant interest income assumes the character of `Business income'. In such circumstances, income earned from such FDRs qualifies for deduction u/s 80-IA of the Act. Since details of interest income of Rs. 3.70 crore are not available on record, we set aside the impugned order on this score and remit the matter to the file of the AO with a direction to allow deduction u/s 80IA in respect of interest earned on fixed deposits meant to serve as margin money for availing credit facilities from the financial institutions. The remaining amount of interest income having no link with the business of telecommunications, which is simply on parking of surplus funds in FDRs, will remain `Income from other sources' and hence ineligible for deduction u/s 80IA. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such proceedings. 51. The next item is `Miscellaneous income' of Rs. 4.09 crore. The assessee furnished details of Miscellaneous income before the DRP vide its objections. Such details....
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....e from their commercial exploitation, in our opinion becomes `business income' qualifying for deduction in contradistinction to income from simple hiring of property retaining the character of `Income from house property'. It is, therefore, directed to be considered as eligible for deduction u/s 80IA of the Act. 53. The last item is revenue from Indefeasible right to use (IRU) amounting to Rs. 27.21 crore. The AO has admitted on page 53 of his order that IRU arrangement is similar in nature to cell site sharing arrangement. Since we have held that the income from cell site sharing is eligible for deduction u/s 80IA, as the sequitur, revenue from IRU is also eligible for the deduction. 54. Ground no.8 of the assessee's appeal is against the addition of Rs. 2,00,75,850/- made by the AO u/s 68 of the Act. 55. Briefly stated, the facts of this ground are that the assessee showed unsecured loans in its audited balance sheet at Rs. 4,45,76,609/-. On being called upon to prove the genuineness of the loans, the assessee did not furnish any confirmation or any other documentary evidence to support the fresh cash credits received during the year. The AO noticed that in case of 816 p....
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....e file of the AO for a fresh decision. We order accordingly and direct him to decide this issue afresh. The assessee is also directed to furnish all the relevant details/information as called for by the AO to satisfy himself as to the genuineness of the transactions. If the assessee again fails to furnish necessary details as called for, the AO will be entitled to draw an adverse inference against the assessee. 58. The next ground is against disallowance of brand royalty of Rs. 11,47,16,908/-. 59. The facts of this ground are that the assessee reported two international transactions in Form no. 3CEB including 'Payment of Royalty fee for use of trade name and mark' amounting to Rs. 11,47,16,908/-. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO noticed that the assessee paid royalty amounting to Rs. 7,64,77,939/- to Vodafone Ireland Marketing Ltd. for use of the brand name 'Vodafone' and Rs. 3,82,38,969/- to M/s Rising Group Ltd. for use of brand name 'Essar'. The TPO observed that the Agreements for payment of royalty with both the parties were made effective from 29.06.2007. U....
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....ively. The TPO has simply brushed aside the assessee's contention for use of the brands and determined Nil ALP of the international transaction on the premise that : `Essar as a group has no history of success in telecom sector all over the world and especially in India. Thus Essar has never been a name to reckon with in the telecommunication sector'. As regards the payment of royalty for the use of brand `Vodafone', the TPO determined Nil ALP by holding on page 15 of his order that : `payment of royalty to Vodafone also did not bring the assessee any additional benefit'. Thus, it is overt that the TPO has determined Nil ALP of the international transaction of payment of royalty for use of the brand names on the reasoning that no benefit accrued to the assessee or the assessee did not pay any royalty for the use of brand in the past. 62. Simply because no royalty was paid in the past can be no reason to treat the ALP of royalty at Nil in later years. Chapter-X of the Act dealing with the transfer pricing provisions, contemplates making a comparison of the international transaction with the comparable uncontrolled transactions. If such a comparison demonstrates that the payment u....
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.... 66. We further find that the assessee used only one foreign comparable instance in which royalty at the rate of 7% of net sales was paid by Forward Industries Inc., USA to Motorola Inc. USA. This is not a comparable instance because of the functional dissimilarity. Motorola Inc. is in the business of designing and selling wireless network infrastructure equipments, such as, cellular transmission base stations and signal amplifiers. Motorola's home and broadcast network products include set-top boxes, digital video-recorders, and network equipment used to enable video broadcasting, computer telephony and high definition television. As against this, the assessee is engaged in providing cellular mobile telephony services. There can be no comparison of a company dealing in hardware with a company providing telephony services. Pre-requisite for application of the CUP method is that there must be a complete identity between the international transaction and the uncontrolled transaction, with which comparison is sought to be made. When we examine the nature of the international transaction under consideration and the transaction between Forward Industries Inc., USA to Motorola Inc. USA....
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....of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman & Wakefield (supra). In these circumstances, we set aside the impugned order on this score and send the matter to the file of AO/TPO for deciding it in conformity with the above discussion and the law laid down by the Hon'ble jurisdictional High Court in the aforenoted case. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such proceedings....
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....nd Whirlpool etc. and, hence, the matter should be restored for a fresh determination. It was submitted that there is no blanket rule of the AMP expenses as a non-international transaction. He further stated that the Hon'ble High Court in Whirlpool (supra) has made certain observations, which should be properly weighed for ascertaining if an international transaction of AMP expenses exists. It was argued that the Tribunal in several cases has restored this issue to the file of TPO to be decided afresh in the light of the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and others. He also relied on still another judgment dated 28.1.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11) in which the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. He still further referred to three later judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. VS. CIT (dt. 14.9.2016), Pr. CIT VS. Toshiba India Pvt. Ltd. (dt. 16.8.2016) and Pr. CIT VS. Bose Corporation (India) P....