TaxTMI 
TaxTMI 
2026 (9) TMI 910
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....2022. The principal grievance of the Revenue is against the action of the learned CIT(A) in deleting the disallowance of Rs. 1,10,03,17,60,701, representing operational expenditure which, though capitalised in the books of account under the head Capital Work-in-Progress ("CWIP"), was claimed as revenue expenditure in computing the taxable income. The issue, therefore, is whether the accounting treatment accorded to the expenditure as part of CWIP is determinative of its character under the Act, or whether its allowability has to be adjudged independently having regard to the nature and purpose of the expenditure and the business circumstances in which it was incurred. 2. The assessee is a public limited company engaged in the business of providing digital and telecommunication services through its pan-India 4G LTE network. It holds a Unified Licence enabling it to provide various telecom services, including voice and data services, and has established a wide telecom infrastructure comprising towers, fibre, telecom equipment, electronics and allied network facilities. Its commercial operations for providing digital services had commenced in Financial Year 2016-17. During the year....
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....power supply circuits and various electronic equipment. Such expenditure was treated by the assessee as capital expenditure both in the books of account and for income-tax purposes. The present dispute does not concern those capital assets. It concerns the indirect and operational expenditure of Rs. 1,10,03,17,60,701 which, according to the assessee, was revenue in its intrinsic character but stood reflected in CWIP in the financial statements because of the accounting policy followed for determining when network assets attained the level of functionality intended by the management. Thus, the assessee's case is not one of claiming the same capital expenditure once as capital and again as revenue; the controversy is confined to the tax character of the operational and indirect costs allocated to CWIP for financial reporting purposes. 5. The accounting policy adopted by the assessee also requires some elaboration because considerable emphasis has been placed upon it by the Assessing Officer. In accordance with the accounting policy consistently followed by the assessee and having regard to paragraphs 20 and 55 of Ind-AS 16 - Property, Plant and Equipment, the assessee capitalises ....
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....ss income has to be made in accordance with the provisions of the Act. According to the assessee, therefore, an accounting entry may be a relevant circumstance, but cannot be conclusive of the legal character of an expenditure. It was specifically pointed out that the impugned operational expenditure was incurred wholly and exclusively in the course of an already set-up and running business; it did not bring any new asset into existence; it did not enhance the installed capacity or create a new profit-making apparatus; and it did not secure an enduring advantage in the capital field. The fact that such expenditure was allocated to CWIP until the management's QoS benchmarks were achieved could not, according to the assessee, convert its underlying revenue character into capital expenditure. 8. The Assessing Officer, however, was not persuaded by the aforesaid explanation. He noted that expenses under similar heads had also been debited by the assessee to the Profit and Loss Account, whereas the disputed expenditure had consciously been classified as CWIP in the books. According to him, this disclosed an apparent dichotomy in the assessee's stand. He observed that an expenditure c....
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.... and fuel, maintenance, network operations, customer service, finance and other recurring business requirements was therefore claimed to be part of the process of operating the existing profit-earning apparatus. The mere fact that the network was simultaneously being stabilised, strengthened or expanded to cater to increasing demand for voice and data services, according to the assessee, did not convert every expenditure having some connection with the network into capital outlay. 11. The learned CIT(A) examined the nature of the expenditure and the accounting policy in considerable detail. He noted that the operational expenses had been incurred for meeting the QoS parameters prescribed by the company in relation to assets which had already been installed and put to use. He accepted the assessee's explanation that such expenditure did not result in creation of a new asset of an enduring nature; rather, it facilitated improvement in the efficiency and capability of the existing operational assets. The learned CIT(A) further noticed that the disputed expenses were in the nature of regular operational expenditure incurred in the course of and for the purposes of an existing busine....
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....ness had already been set up, such recurring expenses incurred in the course of expansion and not attributable to acquisition of any capital asset were allowable as revenue expenditure; and that the manner of accounting was not determinative of their tax character. The said decision was upheld by the Hon'ble Bombay High Court in CIT v. Reliance Footprint Ltd., ITA No. 948 of 2014, dated 05.07.2017. Similar was the view taken by the Tribunal in Reliance Fresh Ltd. v. ACIT [2016] 72 taxmann.com 170 (Mumbai-Trib.), where routine expenditure incurred in connection with expansion of an already existing retail business was allowed notwithstanding its capitalization in the books; and the said decision was also upheld by the Hon'ble Bombay High Court in PCIT v. Reliance Fresh Ltd., ITA No. 985 of 2017. 14. Thus, on an overall appreciation of the nature of the expenses, the fact that the telecom business had commenced in FY 2016-17 and was being conducted on a massive commercial scale during the relevant year, the distinction between actual capital expenditure on acquisition of network assets and the indirect operational expenditure allocated to CWIP, the accounting rationale founded upo....
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.... operations had commenced in FY 2016-17 and that, during the year under consideration, the assessee had approximately 306.7 million subscribers and operational revenue of about Rs. 38,838 crore. The network was thus already installed, deployed and extensively used for earning revenue. The expenditure in question represented recurring operating costs incurred for running this existing business and consisted of interconnect charges, employee cost, professional fees, call-centre expenses, power and fuel, repairs and maintenance, other network costs, interest, selling and distribution expenditure, exchange loss, customer-service expenses, bank charges, rates and taxes, ILL expenses and travelling expenditure. He clarified that actual expenditure incurred on acquisition of antennas, fibre, routers, batteries, generators, electronic equipment and other network assets had been capitalised even for income-tax purposes and was not part of the claim presently under consideration. The dispute was confined to operating expenditure which was placed in CWIP in the books because the management's QoS benchmarks had not yet been achieved in respect of the concerned network infrastructure. He furthe....
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....ch is undergoing improvement or optimisation does not, without more, determine its capital character. What is required to be seen is whether the particular expenditure brings into existence a new asset or enlarges the fixed profit-making apparatus, or whether it represents the cost of operating and efficiently exploiting the apparatus already in existence. 19. The accounting methodology followed by the assessee itself brings out this distinction. The assessee capitalised actual expenditure incurred for acquisition and construction of telecom network assets, including antennas, radio equipment, ducts, fibre, energy meters, generator sets, routers, racks, batteries and other electronic equipment, and treated such expenditure as capital even for income-tax purposes. However, in addition thereto, it incurred a large body of indirect and recurring operational expenditure in connection with its functioning network. Under its accounting policy, operational expenditure relatable to network infrastructure which had attained the intended QoS benchmarks was charged to the Profit and Loss Account, whereas similar expenditure relatable to infrastructure which was already installed and put to....
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....mined by the view taken by the assessee in its books. Again, in Taparia Tools Ltd. v. JCIT [2015] 372 ITR 605 (SC), the Hon'ble Supreme Court reiterated that entries in the books are not determinative or conclusive and the claim has to be examined on the touchstone of the provisions of the Act. The same broad principle is reflected in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) that, where the question concerns taxability or permissible deductions, the matter has ultimately to be decided according to law and accounting practice cannot override the statutory provisions. Thus, while the assessee's capitalization of the expenses is undoubtedly relevant, it cannot foreclose an otherwise sustainable claim under section 37(1). 22. We also do not find that the test of enduring benefit, in the manner invoked by the Assessing Officer, advances the Revenue's case. In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), the Hon'ble Supreme Court explained that even where an expenditure produces an advantage which may endure for some period, the decisive consideration is whether the advantage lies in the capital field and whether there is an addition to the fi....
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.... year under consideration. Not only is the accounting policy the same, but the constituent expenditure and the factual setting are materially identical. Indeed, the assessee's business during the present year had expanded further, with a subscriber base of approximately 306.7 million and operational revenue of Rs. 38,838 crore. No material distinction in facts has been brought before us by the Revenue which would justify departure from the view taken by the coordinate bench for AY 2018-19. We are conscious that the principle of consistency cannot compel perpetuation of an erroneous view or preclude examination where the underlying facts have changed; however, where a recurring issue arising from the same accounting policy and substantially identical expenditure has been adjudicated in the immediately preceding year and there is no material change either in facts or law, judicial discipline requires that the earlier view be followed unless a cogent reason exists for taking a different course. We find none in the present case. 25. The conclusion also finds support from the decisions rendered in the assessee's group concerns. In Reliance Footprint Ltd. v. ACIT [2014] 41 taxmann.com....
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....revenue of Rs. 38,838 crore; actual expenditure incurred for acquisition and construction of telecom assets was separately capitalised even for tax purposes; the disputed amount represented indirect and operational expenditure allocated to CWIP under the accounting policy until the concerned network infrastructure attained management-prescribed QoS parameters; the Assessing Officer has not identified any specific capital asset brought into existence by the disputed operational expenditure; nor has he demonstrated by a head-wise examination that the recurring expenses in question constituted cost of acquisition or creation of a capital asset. His conclusion rests predominantly upon the manner of presentation in the financial statements and the broad proposition that the expenses facilitated network improvement/upgradation. In our considered view, these circumstances are insufficient to displace the revenue character of expenditure otherwise incurred in the course of operating an established business. 28. We may also observe that the magnitude of the claim, though substantial, cannot influence its juridical character. The amount involved is more than Rs. 1,100 crore, but the quest....
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....icated hereinbefore. Here, the Assessing Officer has disallowed a sum of Rs. 66,65,41,174 under section 40(a)(i) on the premise that payments made by the assessee to certain non-resident telecom operators for voice termination services, bandwidth services and operation and maintenance services constituted "royalty" and/or "fees for technical services" and were, therefore, chargeable to tax in India. According to the Assessing Officer, the assessee ought to have deducted tax at source under section 195 and, having failed to do so, the corresponding expenditure was liable to be disallowed. The learned CIT(A), however, deleted the disallowance holding that the payments represented consideration for standard telecommunication/interconnect services and were not taxable as royalty or FTS under the applicable DTAAs. It is this deletion which forms the subject matter of the present Revenue appeal. 32. The relevant chronology leading to the reassessment may briefly be set out. The assessee had originally filed its return of income on 29.11.2019 declaring loss of Rs. 19,400,76,14,494 under the normal provisions of the Act and book profit of Rs. 3,988,64,90,408 under section 115JB. The ori....
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....x character, it would be apposite to first set out the service-wise and recipient-wise breakup. The payments made during the relevant previous year were as under: Nature of payment RJIPL RJIUK Voice Termination Services Rs. 19,62,15,994 Rs.8,39,13,042 Bandwidth Services Rs.15,47,82,016 - Annual Operation & Maintenance Services Rs.9,07,41,670 - Total Rs.44,17,39,680 Rs.8,39,13,042 RJIUK RJIUS Total Rs.8,39,13,042 Rs.14,08,88,454 Rs.42,10,17,490 - - Rs.15,47,82,016 - - Rs.9,07,41,670 Rs.8,39,13,042 Rs.14,08,88,454 Rs.66,65,41,176 The assessment order has proceeded with a disallowance of Rs. 66,65,41,174. The marginal arithmetical difference in the aggregate appearing in the service-wise statement does not affect the controversy before us, which concerns the tax character of these payments and the consequent invocation of section 40(a)(i). 35. The three categories of services, though falling broadly within the telecom ecosystem, are functionally distinct. Voice termination services involve the termination of voice traffic delivered by one operator to another at designated interconnection po....
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....e, are thereby rendered to the assessee. 38. The assessee further explained that once the interconnection arrangement is operational, the actual carriage and termination of telecom traffic takes place automatically through the network systems and does not require human intervention in relation to each transaction. Any servicing, repairs, maintenance or technical intervention that may occasionally be required is undertaken by personnel of the service provider for operating its own network. The assessee does not contract for the services of any identified engineer, technician or technical personnel deployed by the foreign operator. In the case of voice termination, consideration is determined broadly by usage and destination and bears no relation to the number or expertise of persons engaged by the overseas operator. Similarly, in bandwidth services, though the charges may be contractually fixed, the assessee neither controls nor is concerned with the cost structure, equipment configuration or manpower deployed by the provider. Thus, according to the assessee, the use of sophisticated technology by the service provider cannot be equated with rendition of technical services to the ....
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....g reopening, according to the assessee, were not independently adjudicated. However, on the substantive issue of disallowance under section 40(a)(i), the learned CIT(A) accepted the assessee's contention and deleted the addition. 42. While doing so, the learned CIT(A) examined the character of the payments under the applicable DTAAs and held that consideration for the telecom/interconnect services could not be regarded either as royalty or as FTS. He accepted that the assessee was receiving standard telecom connectivity/interconnect services and was not granted possession, control or dominion over the network, equipment or process employed by the overseas operators. The fact that the foreign operators necessarily deployed sophisticated equipment and technology for rendering the service did not, in his view, amount to conferring upon the assessee a right to use such equipment or process. Similarly, on the issue of FTS/FIS, he found that no technical knowledge, experience, skill, know-how or process was made available to the assessee so as to enable it to independently apply the technology thereafter. In respect of O&M also, the learned CIT(A) accepted that the activity represente....
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....roceedings and has subsequently been examined in the hands of the recipient entities themselves. In RJIUS for AY 2020-21 in ITA No. 2991/Mum/2023, the Tribunal held that receipts towards voice termination services were in the nature of business profits and could not be brought to tax in India either as FTS or royalty under the Act and the India-USA DTAA. Further, in the cases concerning RJIPL and RJIUS for AY 2019-20 in ITA Nos. 7827 & 7828/Mum/2025, the Tribunal considered receipts towards voice termination, bandwidth and O&M services and held that the same were not taxable as royalty and/or FTS under the applicable India-Singapore and India-USA DTAAs. Thus, according to the assessee, the very receipts which constitute the subject matter of the present withholding controversy have already been examined from the standpoint of chargeability in the hands of the recipients. 46. Before us, the learned DR relied upon the reasoning of the Assessing Officer and the section 201 order and submitted that the services cannot be regarded as mere routine commercial facilities divorced from the sophisticated technical architecture underlying them. According to him, voice termination and bandw....
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.... the principal issue which now falls for our consideration is whether, having regard to the true nature of voice termination, bandwidth and O&M services, the applicable statutory and treaty provisions and the judicial precedents governing substantially identical payments, the sums in question were chargeable to tax in India so as to attract section 195 and, consequently, section 40(a)(i). We shall now proceed to examine this issue on merits. ITA No. 3541/Mum/2026 49. We have heard the rival submissions and carefully considered the material placed before us, the reasoning of the Assessing Officer and the learned CIT(A), the nature of the contractual services and the judicial precedents relied upon by the parties. At the threshold, it needs to be borne in mind that the disallowance under section 40(a)(i) is only a consequence of an antecedent obligation to deduct tax under section 195. Section 195 does not fasten a withholding obligation merely because a payment is made to a non-resident; the sum paid must be chargeable to tax in India under the Act, read with the applicable DTAA where its provisions are more beneficial in terms of section 90(2). Therefore, the enquiry cannot c....
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.... such equipment; it cannot exclude the service provider or other customers from its use; nor is any particular equipment earmarked exclusively for the assessee. The responsibility for selection, operation, configuration, maintenance and repair of the equipment remains throughout with the foreign telecom operator. In such circumstances, the fact that the service cannot be rendered without deployment of sophisticated telecom equipment does not transform the consideration for the service into consideration for the use or right to use such equipment. 52. The Revenue's alternative characterization of the payments as consideration for use of a process also encounters the same fundamental difficulty. Undoubtedly, carriage and termination of voice or data traffic involve a complex technological process. However, what is relevant under the treaty is not merely whether a process is employed somewhere in rendering the service, but whether consideration is paid for the use or right to use the process contemplated by the royalty article. The technological processes through which the foreign operator routes, carries and terminates traffic remain embedded within its own network. The assessee n....
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....ork. The assessee does not seek or receive the services of any identified technical personnel of the overseas operator for each call or transmission. Repair, maintenance, configuration and management of the foreign network are undertaken by the service provider as part of its own obligation to keep its network functional. The consideration paid by the assessee is for connectivity/termination and is not consideration for deployment of engineers or for furnishing technical advice, consultancy or expertise to the assessee. 55. The principle that mere use of sophisticated technology does not, by itself, constitute rendition of technical services has been consistently applied in the context of telecom and connectivity arrangements. The judicial authorities relied upon by the assessee, including Bharti Cellular Ltd., Pacific Internet (India) (P.) Ltd., Bharat Sanchar Nigam Ltd. and Siemens Ltd., proceed substantially on the distinction between a standard automated telecom facility and technical services rendered to a customer. The essential enquiry is not whether technical expertise exists somewhere behind the service which in a modern telecom network it undoubtedly does but whether s....
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....question is whether technical knowledge or capability is made available to the assessee; there is nothing on record to demonstrate any such transfer. The O&M payment, therefore, cannot be characterised as FTS merely because technical expertise is necessarily employed by RJIPL in maintaining its own service-delivery infrastructure. 58. At this stage, it becomes relevant to notice that the issue is not being examined by us in an uncharted field. The taxability of substantially the same categories of payments has repeatedly arisen in the assessee's own proceedings. In relation to bandwidth services rendered by RJIPL/RJIUK, the Tribunal has, in the earlier assessment years, consistently held that the consideration cannot be brought to tax as royalty/FTS and that the assessee consequently had no obligation to deduct tax at source. The record before us refers, inter alia, to the Tribunal's orders for AY 2016-17 in ITA No. 936/Mum/2026, AY 2018-19 in ITA No. 5780/Mum/2018, and AY 2019-20 in ITA No. 2866/Mum/2022. In the order relating to AY 2019-20, the Tribunal, following the earlier years and the higher judicial authorities, specifically concluded that there was no obligation on....
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.... would warrant a departure from those findings. 61. The aforesaid conclusion is further fortified by the judicial development in DDIT (IT) v. Vodafone Idea Ltd. [2025] 173 taxmann.com 695 (SC). The Hon'ble Supreme Court dismissed the Revenue's Special Leave Petition against the judgment of the Hon'ble Karnataka High Court reported in 475 ITR 189, wherein payments made to non-resident telecom operators for interconnect services and transfer of capacity in foreign jurisdictions were held not to attract deduction of tax at source. This line of authority is consistent with the fundamental distinction which we have noticed hereinbefore: a telecom operator availing connectivity/interconnection from another operator receives a standard telecom service; the technological network and infrastructure employed for rendering that service remain those of the service provider and do not, merely by reason of the service arrangement, become equipment or process used by the customer in the sense contemplated by the royalty provisions. 62. We may also refer to the Tribunal's reasoning in the assessee's own earlier proceedings concerning the treaty treatment of O&M services. While examining Arti....
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....s in India. Further, by virtue of section 90(2), where the treaty is more beneficial to the non-resident, the treaty provisions prevail for determining chargeability. Therefore, once the payments fall outside the royalty and FTS/FIS articles and no PE exists in India, the receipts cannot be brought to tax here. 65. This conclusion necessarily determines the operation of section 195. The withholding obligation under that provision is predicated upon the payment containing a sum chargeable to tax in India. It is not a mechanism for deduction from every payment made to a non-resident irrespective of chargeability. In the present case, once the consideration for voice termination, bandwidth and O&M services is found not taxable as royalty or FTS/FIS under the applicable DTAAs and, in the absence of a PE, is also not taxable as business profits under Article 7, there was no obligation upon the assessee to deduct tax at source under section 195. 66. The consequence under section 40(a)(i) follows inexorably. That provision cannot operate in isolation from the underlying withholding obligation. If tax was not deductible under section 195 because the payment was not chargeable to tax ....