Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Vodafone Essar Digilink Ltd., New ... on 14 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: I-1: NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No. 1950/Del/2014
Assessment Year: 2009-10
DCIT, Vs. Vodafone Essar Digilink Ltd.,
Circle-17(1), C-48, Okhla Industrial Area,
New Delhi. Phase-VI,
New Delhi.
PAN: AAACA3202D
ITA No. 1169/Del/2014
Assessment Year: 2009-10
Vodafone Essar Digilink Vs. DCIT,
Ltd., C-48, Okhla Industrial Circle-17(1),
Area, Phase-VI, New Delhi
New Delhi.
PAN: AAACA3202D
(Appellant) (Respondent)
Assessee By : Shri Deepak Chopra, Advocate
Ms Manasvini Bajpai, Advocate
Department By : Shri Sanjay I Bara, CIT, DR
Date of Hearing : 08.03.2018
Date of Pronouncement : 14.03.2018
ITA Nos.1950 & 1169/Del/2014
ORDER
PER R.S. SYAL, VP:
These two cross appeals - one by the assessee and the other by the Revenue arise out of the final assessment order dated 30.01.2014 passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(1) of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2009-10.
2. The appeal of the Revenue is delayed by two days. The ld. AR did not raise any objection to the condonation of delay. As such, the delay is condoned and the appeal is admitted for hearing.
3. First ground of the Revenue's appeal is against the deletion of addition 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 2 ITA Nos.1950 & 1169/Del/2014 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. 2000-01 to 2008-09 deleting similar disallowance in the case of Vodafone Mobile Services Ltd., a sister concern of the assessee, deleted the addition. The Revenue is aggrieved against the deletion.
5. We have heard both the sides and perused the relevant material on record. It is observed that the assessee paid commission of Rs.142.32 crore to the agents in the post-paid segment of its business. The assessee furnished necessary details and also Form no.16As in 3 ITA Nos.1950 & 1169/Del/2014 respect of major payments. Despite this, the AO chose to make an ad hoc disallowance of 10% of the total commission payment. It is observed that the ld. DRP deleted the addition by relying on the order passed for the A.Ys. 2000-01 to 2008-09 in the case of sister concern of the assessee. The Revenue assailed the said order passed by the first appellate authority before the Tribunal. In DCIT vs. Vodafone Mobile Services Ltd. (2016) 176 TTJ 430 (Del), the Tribunal has upheld the deletion of addition. Relevant discussion has been made and the conclusion drawn by the Tribunal in para 9 of its order, in which deletion of such ad hoc disallowance has been upheld. No distinguishing factual feature of the assessee vis-a-vis its sister concern, namely, Vodafone Mobile Services Ltd. was placed on record by the ld. DR. Respectfully following the precedent, we uphold the impugned order in deleting the disallowance of commission amounting to Rs.14.23 crore.
6. Ground no. 2 raised by the Revenue is against the deletion of addition of Rs.17,47,28,068/- on account of Royalty WPC expenses. 4
ITA Nos.1950 & 1169/Del/2014
7. The facts of the ground are that the assessee claimed Royalty WPC expenses amounting to Rs.117.47 crore. On being called upon to justify such deduction, the assessee stated that this amount represent Spectrum charges paid by it to the Department of Telecommunications on quarterly basis as a percentage of revenue. It was submitted that every telecom operator in India, in addition to the initial operator licence fee, is required to pay spectrum royalty for the use of spectrum and microwave royalty for given microwave frequency usage on regular basis. It was further submitted that Royalty WPC was paid on revenue share basis at 2% of Adjusted gross revenue and the same was eligible for deduction. The AO treated such amount as a capital expenditure incurred to get the right to use spectrum and hence covered it under section 35ABB 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, 5 ITA Nos.1950 & 1169/Del/2014 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 of it on regular basis. It is in the nature of a revenue expenditure eligible for deduction. Thus, it cannot be construed as a capital expenditure and thus goes out of the ken of section 35ABB. It is further noticed that similar issue was argued before the Tribunal in the aforesaid case of the assessee's sister concern, namely, Vodafone Mobile Services Ltd. After considering the relevant details, the Tribunal in para 14 of its order directed to delete the addition by relying on judgment of the Hon'ble 6 ITA Nos.1950 & 1169/Del/2014 jurisdictional High Court in the case of CIT vs. FASCEL Ltd. 17 DTR 306 (2009). Since the facts and circumstances of the instant ground are mutatis mutandis similar to those considered and decided by the Tribunal in the case of Vodafone Mobile Services Ltd. (supra), respectfully following the precedent, we uphold the impugned order in deleting the disallowance. This ground fails.
9. Ground no. 3 of the Revenue's appeal is against the deletion of addition of Rs.2,52,28,036/- on account of 'Advertisement expenses.' The assessee claimed deduction for advertisement expenses amounting to Rs.97.63 lac on product launches and Rs.14.81 crore on granty signs. The AO opined that since the benefit of this expenditure would be reaped in subsequent years as well, he treated the said amount of advertisement expenses as capital. After allowing deduction @ 25%, he made an addition of Rs.2,52,28,03,617/-. The DRP got convinced with the assessee's submissions and ordered to delete the addition.
10. Having considered the arguments from both the sides and perused the relevant material on record, we find that this issue is no 7 ITA Nos.1950 & 1169/Del/2014 more res integra in view of the judgment of the Hon'ble Delhi High Court in CIT vs. Citi Financial Consumer Finance Ltd. (2011)335 ITR 29 (Del) in which advertisement expenditure has been treated as revenue. In view of the judgment of the Hon'ble jurisdictional High Court, which has been relied by the DRP, we are of the considered opinion that no interference is warranted in the impugned order on this score. This ground is dismissed.
11. The last ground of the Revenue's appeal is against the deletion of addition of Rs.31 lac. The facts apropos this ground are that the assessee claimed deduction of Rs.31 lac towards frauds committed by its customers. The AO treated this amount as not deductible u/s 37(1) and, accordingly, made an addition. The DRP 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 8 ITA Nos.1950 & 1169/Del/2014 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 Telecommunications and National Telecom Policy, 1999, the licence fee agreed with and paid up to the date of migration was treated as one time entry fee which was capitalised to be amortized u/s 35ABB. As regards the deduction of Rs.205.38 crore claimed during the year, the assessee submitted that it was a licence fee at specified percentage of the gross revenue derived by the assessee from its cellular business. It was reiterated that the 9 ITA Nos.1950 & 1169/Del/2014 recurring licence fee was not for acquiring any telecommunication licence, but, for maintenance of licence to be paid to the Government of India in terms of the new Telecom Policy. The AO observed that the assessee paid such an amount to the Government of India, Department of Telecommunications in consideration of grant of licence to operate and provide the telecommunication services and the object was acquisition of licence. He observed that as against the amount of licence fee debited in the P&L Account on accrual basis to the tune of Rs.205.38 crore, the assessee made an actual payment of Rs.173.84 crore. He held that only such an amount paid was to be amortized over the remaining seven years of licence and, hence, the assessee would be eligible for deduction under this section at 1/7th of Rs.173.84 crore, which came to Rs.24.83 crore. The excess amount of Rs.180.54 crore (Rs.205.38 crore minus Rs.24.83 crore) was held to be not allowable. However, a deduction amounting to Rs.25,99,91,404/- was actually allowed u/s 35ABB in respect of amounts similarly treated as capital expenditure in earlier years. Thus, net addition of Rs.154,54,85,884/- was made. The assessee remained unsuccessful before the DRP as well and, eventually, 10 ITA Nos.1950 & 1169/Del/2014 addition of Rs.154.54 crore was made in the impugned order, against which the assessee has approached the Tribunal.
14. After considering the rival submissions and perusing the relevant material on record, we find that the assessee entered into Licence agreement with Ministry of Communications on 28.12.1995 for Haryana Circle. Similar Licence agreements were entered into for Rajasthan and Uttar Pradesh (east) circles. The Haryana circle licence, along with the other two, was initially granted to the assessee for a period of ten years to establish, maintain and operate cellular mobile telephone service. A sum of Rs.240 crore was to be paid as Licence fee in terms of Condition no. 19 of the Licence 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 11 ITA Nos.1950 & 1169/Del/2014 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 revenue (AGR) excluding spectrum charges and for the first four years w.e.f. 01.04.2004, annual licence fee payable shall be 6% of AGR.' Clause 18.3 of the Agreement provides that 'spectrum charges shall be 2% of the AGR.' While dealing supra with ground no. 2 of the Revenue's appeal, we have dealt with spectrum charges, which amount was paid by the assessee during the year to the tune of Rs.117.47 crore. However, in the instant ground, we are concerned with a sum of Rs.205.38 crore, being, the amount debited by the assessee in its Profit & Loss Account on accrual basis. The amount of Rs.205.38 12 ITA Nos.1950 & 1169/Del/2014 crore is different from the spectrum charges paid by the assessee to the tune of Rs.117.47 crore. We have noticed from financial conditions of the new licence Agreement which provides that 'there shall be no additional entry fee from CMSPs.' However, the licensees have been required to pay the licence fee annually @ 8%/6% on adjusted gross revenue excluding spectrum charges. It is this amount which has been recorded in the books of account at Rs.205.38 crore. Thus, it is discernible from the financial conditions that for migration to the new policy from the old one, no entry fee was required to be paid. It is this amount of entry fee, which, if and when, paid by cellular mobile service providers, would be for acquisition of licence and hence capital in nature. The other regular payments made by the assessee on year-to -year basis at a specified percentage of its adjusted gross revenue are not for acquisition of licence, but, to maintain the licence already granted. Such an amount for maintenance of licence, in contradistinction to the consideration for acquisition of licence, cannot be considered as a capital expenditure, being, eligible for deduction u/s 35ABB, as has been held by the authorities below. We have noticed above that section 35ABB is attracted only in respect of 13 ITA Nos.1950 & 1169/Del/2014 capital expenditure incurred by telecommunication operators. If a particular statutory payment falls in the revenue field, the same at the outset ceases to be considered for the purposes of section 35ABB. The Hon'ble jurisdictional High Court in CIT vs. Bharti Hexacon Ltd. (2014) 265 CTR 130 (Del), considered the instant issue in an elaborate manner and held in para 42 that: "the licence fee paid or payable for the period up to 31st July, 1999, i.e., the date set out in the 1999 Policy should 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 14 ITA Nos.1950 & 1169/Del/2014 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 appeal is against the disallowance of depreciation amounting to Rs.510,79,752/- claimed on fixed assets on account of Asset restoration cost (ARC) obligation. Succinctly, the facts of this ground are that the assessee capitalised certain sums on account of ARC obligation, being, the estimated cost to be incurred at the leased and shared network sites and office premises for restoring them to their original condition at the end of the lease period. Depreciation amounting to Rs.5.10 crore was claimed on the said amount capitalised. The AO did not allow such depreciation on the ground that the amount allocated was not in the nature of an ascertained liability. The assessee's contention that it had entered into lease agreement with various owners for its office space and for 15 ITA Nos.1950 & 1169/Del/2014 setting up of cell site towers and such lease agreements put the assessee company under obligation to restore the leased premises to its original form at the time of vacating such premises, was not found to be borne out from the sample lease agreements provided by the assessee. The ld. DRP did not allow any relief to the assessee on this issue. Eventually, an addition of Rs.5.10 crore was made in the impugned order.
17. Having heard both the sides and perused the relevant material on record, we find that the assessee entered into lease agreement with owners of various office spaces for setting up of cell site towers. As per the assessee, it was obliged to restore the site to its original condition at the expiry of the lease period. The assessee estimated a sum to be incurred on restoration and capitalised the same to the cost of cell site towers at the very threshold of entering into lease agreements. Not only this, the assessee also claimed depreciation on such estimated restoration cost capitalised. It is clear from the facts that no such cost was actually incurred by the assessee and a sum was notionally estimated and capitalised for the purpose of depreciation. Section 32(1) provides for depreciation 'on the actual cost' of block 16 ITA Nos.1950 & 1169/Del/2014 of assets in the first year and, then, on the written down value as prescribed in the provisions. Section 43(1) defines 'actual cost' to mean the actual cost of assets to the assessee reduced by that portion of the cost thereof, if any, as has been directly or indirectly made by any other person or authority. On a conjoint reading of the above provisions, it 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 17 ITA Nos.1950 & 1169/Del/2014 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 of the removal of cables, antennas or other equipments." There is absolutely no doubt on the interpretation of clause 10 of the agreement that the assessee will be obliged to incur cost at the time of determination of the agreement only if damage is caused in the course of removal of cables, antennas or other equipments and not otherwise. Damage to the premises, if any, arising on the removal of cables, antennas and other equipments, etc., can be ascertained only at the time of termination of the agreement and not at the time of entering into the agreement. Further, no obligation will be incurred if no loss is caused to the premises at the time of removal of cables etc. As such, we are of the considered opinion that the addition of Rs.5.10 crore has been rightly made. This ground is not allowed.
19. Ground no. 3 of the assessee's appeal is against the disallowance of interest on capital work-in-progress.
18
ITA Nos.1950 & 1169/Del/2014
20. The facts of this ground are that the assessee declared capital work-in-progress amounting to Rs.2789.6 million in its balance sheet. The AO observed that addition to fixed assets amounting to Rs.12828 million was made during the year, which was recorded in the Schedule of fixed assets as an item distinct from capital work-in- progress shown separately in the balance sheet. On being called upon to explain as to why interest cost incurred on such capital work-in- progress should not be disallowed in terms of proviso to section 36(1)(iii), the assessee submitted that there was no 'extension of existing business' as a result of such capital work-in-progress and, hence, disallowance of interest was not called for. The AO did not concur with the assessee's arguments. Relying on certain decisions, he held that the amount of interest incurred in respect of such capital work-in-progress should be disallowed @ 7.7% of monthly outstanding balances as per the Table given on page 43 of the assessment order. The assessee failed to convince the DRP on its line of reasoning as well. This resulted into an addition of Rs.26,45,28,627/-. The assessee is aggrieved against this addition. 19
ITA Nos.1950 & 1169/Del/2014
21. After considering the rival submissions and perusing the relevant material on record, it is first necessary to understand the nature of the capital work-in-progress capitalised in the balance sheet at Rs.2789 million. On a pertinent query, the ld. AR submitted that this amount 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. 20
ITA Nos.1950 & 1169/Del/2014 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 business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.
22. At this stage, it is relevant to mention that the words 'for extension of existing business or profession' have been omitted by the Finance Act, 2015 w.e.f. 01.04.2016. As we are dealing with the A.Y. 2009-10, such words are relevant for our purpose. A careful perusal of the section 36(1)(iii) in juxtaposition to the first proviso indicates that the amount of interest paid in respect of capital borrowed for the purposes of business or profession is deductible, but, any amount of interest paid in respect of capital borrowed for `acquisition of an asset for extension of the existing business' for any period till the date on which such asset is first put to use, shall not be allowed.
23. The ld. AR vehemently contended that the words 'for extension of the existing business or profession' bring within its ambit the 21 ITA Nos.1950 & 1169/Del/2014 acquisition of an asset which is meant for extension of the existing business and not otherwise. He submitted that the telecommunication business can be considered as `extended' only when some new Circles are added to the existing Circles in which the business is carried on. This was opposed by the ld. DR who submitted that extension can be within the existing circles de hors new circles.
24. We are not convinced with the contention advanced by the ld. AR. The words 'for extension of the existing business' presuppose that there is already a business in existence and capital is borrowed for acquisition of asset for extension of such existing business. 'Extension' can be vertical as well as horizontal. Existing telecommunication business can be extended in different forms. One of such forms can be the one described by the ld. AR in which a Cellular mobile service provider (CMSP) expands its area of business to a different Circle which was not hitherto in its reach. In the same breath, there can be an extension of existing business when a CMSP increases its reach within the allotted Circle itself by means of setting up new towers. To put it simply, if a CMSP has a licence to operate in a particular State, it may initially set up cell towers catering to 22 ITA Nos.1950 & 1169/Del/2014 urban areas for meeting the 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-in- progress. 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. During the year, the company added 5096 cell 23 ITA Nos.1950 & 1169/Del/2014 sites to enhance its network coverage closing with 14411 cell sites as at 31st March, 2009." It is evident from the assessee's Director's Report that the setting up of new cell sites has enhanced its network coverage within all the three existing Circles and the resultant customer base, which is nothing, but, an extension of existing business. We, therefore, hold that the argument advanced by the ld. AR that the setting up of new cell sites, the cost of which was capitalised in the balance sheet as Capital work in progress (CWIP), does not lead to extension of existing business, is sans merit and, hence, dismissed.
26. The ld. AR then argued that investment in CWIP was made out of own interest free funds and hence no interest can be attributed to any capital borrowed for the purpose of making such an investment. This was opposed by the ld. DR, who submitted that the assessee failed to file any such details before the AO and hence such a contention cannot be accepted at this stage.
27. Before dealing with this contention, it is worthwhile to mention that the assessee made investment of Rs. 2789.6 Million in its 24 ITA Nos.1950 & 1169/Del/2014 CWIP, which is the centre of dispute. On having a glimpse at the balance sheet of the assessee, it becomes evident that it has paid up Share capital to the tune of Rs.1011.0 Million and Reserves and Surplus for a sum of Rs.4571.8 Million. Thus, it is palpable that as against the investment of Rs. 2789.6 Million in CWIP, the assessee has its own shareholders fund for a sum of Rs. 5582.9 Million, which is roughly double the amount of Capital work in progress.
28. Section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non- business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, 25 ITA Nos.1950 & 1169/Del/2014 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. The ld. CIT(A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders' fund was 26 ITA Nos.1950 & 1169/Del/2014 utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its own for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon'ble High Court, it was contended by the Department that the shareholders' funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon'ble High Court observed that : "In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders' fund to the tune of over Rs.172 crore was utilized for the purpose of fixed assets in terms of the balance- sheet as on March 31, 1999, is fallacious." In upholding the order of the Tribunal, the Hon'ble High Court held that: "If there be interest free funds available to an assessee sufficient to meet its investment 27 ITA Nos.1950 & 1169/Del/2014 and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available". Thereafter, the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon'ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that: "The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment". Consequently the interest was held to be deductible in full.
29. From the above judgment, it is manifest that there can be no presumption that the shareholders' 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 28 ITA Nos.1950 & 1169/Del/2014 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 extent and the AO is directed to decide this issue afresh in consonance with our foregoing observations. It is made clear that if there is some direct borrowing for investing in CWIP, then interest paid on such borrowing has to be disallowed. If, on the other hand, there is no specific borrowing, the financing of CWIP has to be treated as out of interest-free 29 ITA Nos.1950 & 1169/Del/2014 shareholders' fund. In such a scenario, no disallowance of interest can be made as the interest-free shareholders' fund would be higher than the amount of investment in CWIP.
31. The next ground is against the disallowance of Rs. 70,86,29,294 u/s 40(a)(ia) of the Act on account of `Roaming charges'.
32. The facts apropos this ground are that the assessee incurred expenditure of Rs.70,86,29,294/- on domestic roaming charges on which no deduction of tax at source was made. On being called upon to explain as to why such payment be not considered as 'fees for technical services' under section 9(1)(vii) of the Act, the assessee contended that the payments made for inter-connectivity/roaming charges did not involve any human intervention and, hence, such amount could not be considered as 'fees for technical services.' In support of its contention, the assessee relied on the judgment of the Hon'ble jurisdictional Delhi High Court in CIT vs. Bharti Cellular Ltd. (2009) 319 ITR 139 (Del) in which it has been held that the services rendered by MTNL and other telecommunication companies qua inter-connection do not involve any human interface and, hence, 30 ITA Nos.1950 & 1169/Del/2014 the same cannot be regarded as a `technical service' so as to require deduction of tax at source u/s 194J of the Act. Not convinced, the AO treated such payment as `fees for technical services' requiring deduction of tax at source and in the absence of non-deduction of tax, the disallowance was made. The assessee has come up in appeal before the Tribunal on the disallowance.
33. We have heard both the sides and perused the relevant material on record. It is noticed that the judgment relied by the assessee before the authorities below in Bharti Cellular Ltd. (supra) came up for consideration before the Hon'ble Supreme Court. Vide its judgment dated 12.08.2010, the Hon'ble Supreme Court in CIT vs. Bharti Cellular Ltd. (2011) 330 ITR 239 (SC) remanded the matter to the AO with a direction to seek expert evidence for showing if any human intervention was involved 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 31 ITA Nos.1950 & 1169/Del/2014 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 source either u/s 194C or 194I or 194J and, hence, no disallowance could be made u/s 40(a)(ia) of the Act.
34. At this stage, it is relevant to mention that after the judgment of the Hon'ble Supreme Court in CIT vs. Bharti Cellular Ltd. (supra), there is some further development of law. In Bharti Cellular Ltd., the Hon'ble Supreme Court remitted the matter to the AO for having expert opinion to ascertain if any human intervention was involved so 32 ITA Nos.1950 & 1169/Del/2014 as to consider the attractability or otherwise of the definition of 'technical services' under section 9(1)(vii) of the Act. In a later decision in CIT vs. Kotak Securities Ltd. (2016) 383 ITR 1 (SC), the Hon'ble Supreme Court, after considering its earlier decision in Bharti Cellular Ltd. (supra), observed that: "modern day scientific and technological developments tend to blur the specific human element in an otherwise fully automated process by which such service may be provided." It was held that: 'the transaction charges, which were core of dispute in that case, were paid for services fully automated in respect of every transaction.' The Hon'ble Supreme Court held that if there is certain exclusive or customised service rendered by the Stock Exchange to individual person, that would fall within the ambit of 'technical services' and, if, however, such services are available to all the members of the Stock Exchange, it will cease to be a technical service. Similar view has been reiterated in DIT (I.T.) vs. A.P. Moller Maersk A/S (2017) 392 ITR 186 (SC) in which their Lordships applied the test laid down in Kotak Securities Ltd. (supra), and held that automated software based communication system set up by the assessee for use to its agent enabling them to access customer 33 ITA Nos.1950 & 1169/Del/2014 and documents etc. was not 'fees for technical services.' It is significant to mention that the Hon'ble Karnataka High Court in CIT vs. Vodafone South Ltd. (2016) 290 CTR 436 (Kar) has considered the judgment of the Hon'ble Supreme Court in the case of Kotak Securities Ltd. (supra) and has eventually held that the roaming processes between the participating companies cannot be termed as technical services and, hence, no deduction of tax at source is required. In view of the foregoing discussion, we are satisfied that the payment of roaming charges by the assessee to other domestic players for use of their respective networks does not amount to payment 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.
34
ITA Nos.1950 & 1169/Del/2014
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 revenue of Rs.96/-. The AO opined that the assessee should have accounted for Rs.100/- as its revenue and the amount of Rs.4/- as an item of expense under the head 'Commission' to the distributors. It was further proposed that the said amount of commission was covered under the TDS provisions liable for deduction of tax at source u/s 194H of the Act. The assessee contended that there was no principal- agent relationship with the distributors and, hence, there was no payment of any commission. The AO, after considering certain 35 ITA Nos.1950 & 1169/Del/2014 clauses of the Distributorship agreement, held that the relationship between the assessee and its distributors was of principal and agent and, hence, the provisions of section 194H were attracted. In reaching this conclusion, the AO relied on the judgment of the Hon'ble jurisdictional High Court in CIT vs. Idea Cellular Ltd. (2010) 325 ITR 148 (Del), in which it has been held that the transaction between a cellular operator and pre-paid market associates, similar to the distributors in our case, whereby SIM cards etc. are ultimately sold to the subscribers through the latter, does not amount to 'sale of goods' and, hence, the discount offered by the assessee to the distributors is commission liable for deduction of tax at source u/s 194H. He further took assistance from another judgment of the Hon'ble Kerala High Court in Vodafone Essaar Cellular Ltd. Vs. ACIT (2010) 332 ITR 255 (Ker) wherein similar view has been taken treating the amount as falling within the definition of 'commission' u/s 194H of the Act. Since the assessee did not deduct tax at source, the AO, in the draft order, proposed the disallowance of Rs.130,33,61,238/- u/s 40(a)(ia) of the Act. No relief was allowed by the Dispute Resolution Panel (DRP). This is how, the AO made an 36 ITA Nos.1950 & 1169/Del/2014 addition of Rs.130.33 crore in the impugned order. The assessee is aggrieved against this disallowance.
37. We have heard both the sides and perused the relevant material on record. There is no dispute on the nature of transaction. We have seen above, by way of an illustration, that the assessee transferred pre- paid talk time etc. with MRP of Rs.100/- to its distributors, say, at Rs.96. It is the differential amount of Rs.4/-, which has formed the subject matter of disallowance at Rs.130.33 crore. The AO has relied on the judgment of the Hon'ble jurisdictional High Court in the case of Idea 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 37 ITA Nos.1950 & 1169/Del/2014 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 deciding the issue in favour of the assessee, the Hon'ble Karnataka High Court also considered the judgment of the Hon'ble Delhi High Court in Idea Cellular Ltd. (supra) and that of the Hon'ble Kerala High Court in Vodafone Essaar Cellular Ltd. (supra). From these decisions, it is manifest that there is an apparent contradiction in the view taken by different High Courts. It is further an admitted position that the issue has yet to be finally settled by the Hon'ble Summit Court.
38. It goes without saying that all the authorities working under the jurisdiction of a particular Hon'ble High Court are bound by its decision, notwithstanding a contrary view available from other Hon'ble High Courts. The assessee's corporate jurisdiction falls under 38 ITA Nos.1950 & 1169/Del/2014 the Hon'ble Delhi High Court. It is, ergo, held that the ratio decidendi of Idea Cellular (supra), being a decision of the Hon'ble jurisdictional High Court, will have precedence over other contrary decisions, notwithstanding the fact that it is beneficial to the Revenue. In that view of the matter, we are unable to countenance the contention of the ld. AR that a view favourable to the assessee, rendered by the Hon'ble Karnataka High Court, should be adopted.
39. It has been brought to our notice that an order u/s 201(1) of the Act was passed treating the assessee as in default for non-deduction of tax at source u/s 194H on the commission of Rs.48,14,87,078/- for the instant year with tax demand of Rs.6,65,54,033/- in respect of the Rajasthan circle, which is a part on the amount that has been disallowed by the AO. A copy of such order dated 17.01.2011 has been placed on record. The ld. AR contended that since the default occurred at the Rajasthan Circle, the Income-tax Authorities, acting under the TDS jurisdiction of the Hon'ble Rajasthan High Court, passed the order u/s 201(1), which also came to be upheld by the Tribunal. A copy of the Tribunal order dated 29.08.2013 in ITA No. 239/Jp/2012 was also placed on record. He submitted that the assessee 39 ITA Nos.1950 & 1169/Del/2014 along with several other cellular operators challenged their respective orders similarly passed u/s 201(1). A copy of the judgment of the Hon'ble Rajasthan High court dated 11.07.2017 was filed in which order, inter alia, passed against the assessee u/s 201(1) of the Act has been set aside by holding that the provisions of section 194H are not attracted.
40. Section 40(a)(ia) of the Act has been invoked by the AO for making the extant disallowance. This section begins with a non- obstante 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 40 ITA Nos.1950 & 1169/Del/2014 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 disallowance can be made. An expense will not be liable for deduction of tax at source, where either the AO himself considers it as not liable for tax deduction or where he considers it otherwise, but the appellate authorities overturn such a view of the AO. In a nutshell, where an expense in ultimate analysis is not liable for deduction of tax at source, the provisions of section 40(a)(ia) cannot be triggered/applied.
41. Coming back to the facts of the instant case, we find that although the AO held the applicability of section 194H, but the Hon'ble Rajasthan High Court has reversed such a view to the extent of Rs.48,14,87,078/- and nothing has been brought on record to demonstrate that the judgment of the Hon'ble Rajasthan High Court has been modified or reversed by the Hon'ble Supreme Court. 41
ITA Nos.1950 & 1169/Del/2014
42. Por una parte, there is a decision of the Hon'ble jurisdictional High Court in the Idea Cellular Ltd. (supra) providing that the transaction of the nature under consideration is hit by section 194H, por otra parte, there is a judgment of the Hon'ble Rajasthan High Court in the assessee's own case, holding that the provisions of section 194H are not attracted on the part of total commission disallowed by the AO u/s 40(a)(ia) of the Act. Whereas, in the context of the assessee and to the extent of the amount on which the Rajasthan High Court has held that no deduction of tax at source is warranted, the judgment of the Hon'ble Delhi High Court in Idea Cellular Ltd. is in rem, but the judgment of the Hon'ble Rajasthan High Court is in personam. Once the Hon'ble Rajasthan High Court has erased the liability of the assessee by holding that the provisions of section 194H are not attracted on a part of the amount under consideration, in our considered opinion, such part of commission cannot be construed as a sum 'on which tax is deductible at source under Chapter XVII-B', so as to bring it within the sweep of section 40(a)(ia) of the Act, calling for any disallowance. It is, therefore, held that to the extent the Hon'ble Rajasthan High Court treated the 42 ITA Nos.1950 & 1169/Del/2014 assessee as not in default u/s 201(1) due to non-applicability of section 194H, the provisions of section 40(a)(ia) will not be attracted. The remaining amount of commission, on which the liability u/s 201(1) has not been set aside, would be governed by the judgment of the Hon'ble jurisdictional High Court in the case 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 43 ITA Nos.1950 & 1169/Del/2014 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 material on record. The AO has correctly recorded that penalty of Rs.63.83 lac was paid by the assessee on account of anomalies and irregularities in CIF and CAF. For giving a hue of penalty to such an amount as magnetized under Explanation 1 to section 37(1) of the Act, the AO referred to the provisions of section7(3) and section 20 of the Indian Telegraphs Act, 1885. We have gone through the relevant provisions of the Indian Telegraphs Act, 1885 and find that anomalies and irregularities in CIF and CAF are not covered under any of the specific provisions of the Indian Telegraphs Act. Rather, such penalties were imposed for non-compliance with the contractual obligations under the Licence agreement. As the payment by the assessee is not for an offence, nor is it prohibited by law, the same being failure to comply with the contractual obligations, cannot fall 44 ITA Nos.1950 & 1169/Del/2014 within the domain of Explanation 1 to section 37(1) of the Act. Similar issue came up for consideration before the Kolkata Bench of the Tribunal in the case of Vodafone East Ltd. (supra). The Tribunal has held in para 10.5 of its order that the amount paid under similar circumstances cannot be disallowed under Explanation 1 to section 37(1) of the Act. No contrary decision has been brought to our notice by the ld. DR. Respectfully following the precedent, we hold that the addition of Rs.63.83 lac has been wrongly made and the same is directed to be deleted.
46. The next ground is against the disallowance of deduction u/s 80IA on certain items of income.
47. The facts apropos this ground are that the assessee claimed deduction u/s 80IA of the Act. On perusal of the computation of deduction, the AO noticed that such deduction was also claimed in respect of certain receipts which were not `derived from' the activity of the nature provided u/s 80IA, i.e., Telecommunication services, whether basic or cellular. The AO considered the mandate of section 80IA in holding that only the income derived from telecommunication 45 ITA Nos.1950 & 1169/Del/2014 services was eligible for deduction. It was found that the assessee earned interest income of Rs.5.19 crore on fixed deposits which was claimed as deductible u/s 80IA(4) in the original return. However, in the revised return, the assessee reduced the eligible interest income by Rs.1.49 crore and claimed deduction on the remaining amount of Rs.3.70 crore. Similarly, the assessee also claimed 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. 46
ITA Nos.1950 & 1169/Del/2014 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 in sub-section (1) or sub- section (2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub-section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years.
(emphasis supplied by us)
49. It is pertinent to note that sub-section (2A) applies to an undertaking providing telecommunication services. The assessee is, admittedly, engaged in providing telecommunication services and, hence, covered by sub-section (2A) of section 80IA. This sub-section opens with a non-obstante clause qua sub-sections (1) and (2) of section 80IA and provides that the deduction shall be allowed on 'the profits and gains of the eligible business.' When we read sub-section (2A) in juxtaposition to sub-section (1) of section 80IA, the position which emerges is that whereas sub-section (1) allows deduction of 47 ITA Nos.1950 & 1169/Del/2014 'the profits and gains derived from such business', sub-section (2A) allows deduction of 'the profits and gains of eligible business.' The use of the expression 'derived from' in sub-section (1) has been dispensed with in sub-section (2A). On a conjoint reading of sub- sections (1) and (2A) of section 80IA, it becomes vivid that in the case of an undertaking providing telecommunication services, deduction shall be allowed of the profits and gains of the eligible business. Such profits and gains of the eligible business need not necessarily be derived from the eligible business. It is sufficient if the income qualifies as `Business income' of the eligible undertaking. With the above understanding of the provisions of sub-section (2A), we will now venture to examine the deductibility or otherwise of the four items under section 80-IA of the Act.
50. The first item is interest income earned by the assessee on fixed deposits amounting to Rs.3.70 crore. This amount is separate from interest income of Rs.1.49 crore from the fixed deposits which were made out of surplus funds. The ld. AR contended that the interest income of Rs.3.70 crore and odd was earned on FDRs meant for availing credit facilities from the financial institutions. To the extent 48 ITA Nos.1950 & 1169/Del/2014 the FDRs were obtained to serve 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 have been incorporated on pages 153 49 ITA Nos.1950 & 1169/Del/2014 and 154 of the appeal set file, which is a part of the objections before the DRP. The details indicate the nature of Miscellaneous income of Rs.4.09 crore - Bounced cheque charges of Rs.14 lac; Late payment charge of Rs.2.18 crore; Bad debts written back of Rs.98 lac; Scrap sale of Rs.55 lac; Premium number sale of Rs.16.32 lac; Cheque bounce charges Rs.4.09 lac; Post paid plan revenue of Rs.2.69 lac and two other small amounts of Customers refund written back and Insurance claim. From a detailed narration of the above charges recovered by the assessee given on pages 153 onwards, it becomes palpable that the same are received during the course of business of telecommunication. Even though these are not derived from the eligible business, but, they are in the nature of profits and gains of eligible business. The same, in our considered opinion, qualify for deduction u/s 80IA of the Act.
52. Third item is `Cell site sharing' revenue of Rs.42,85,79,640/-. This income was earned by the assessee on sharing the available spare space/capacity on its telecommunication cell sites with other telecom operators for setting up their respective antennas and placing microwave and BTS equipments. We find that there is a direct link of 50 ITA Nos.1950 & 1169/Del/2014 such income with the eligible business of providing telecommunication services. The ld. DR likened such hire charges to the earning of rental income from letting out property and contended that the same cannot be considered as profits and gains of business of telecommunications. In our view, this analogy drawn by the ld. DR is not correct. We are concerned with a situation in which income has resulted from sharing of surplus space on cell sites with other telecom operators. The cell sites are the tools of the assessee's business, without which its business cannot run. If there remains some surplus space on such business tools, which is let out by the assessee, the resultant income will be income from the business of telecommunications. Example of simplicitor hiring of building cited by the ld. DR is not germane to the issue. Such a rental income would obviously fall under the head `Income from house property' and would not be eligible for deduction. Since the underlying assets in the situation under consideration are cell towers, which are in the nature of tools of the assessee's business, income from their commercial exploitation, in our opinion becomes `business income' qualifying for deduction in contradistinction to income from simple hiring of 51 ITA Nos.1950 & 1169/Del/2014 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 parties, neither there were complete addresses nor even the PANs mentioned in the 52 ITA Nos.1950 & 1169/Del/2014 tax audit report. The assessee showed to have received Rs.25,000/- each from 803 parties; Rs.50,000/- each from 9 parties and Rs.1 lac each from four parties. Total amount from these 816 parties came at Rs.2.00 crore and odd. The AO treated the same as unexplained cash credit u/s 68 in the draft order. The assessee contended before the DRP that these 816 creditors were its `Distributors' who deposited security through banking channel. The DRP accepted the assessee's contention and held that no addition should be made in case the identity of these persons to whom regular commission/discount was paid, was established. The AO was directed to verify the claim of the assessee in this regard.
56. In the consequential proceedings, the assessee furnished PAN details only in respect of 264 cases. Even in such cases where PAN details were furnished, the assessee did not furnish any address. The assessee's contention that the amount of security deposits were received through banking channel and, hence, they should per se be considered as genuine, was turned down by the AO. This resulted into an addition of Rs.2.00 crore against which the assessee has come up before the Tribunal.
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57. Having heard both the sides and perused the relevant material on record, it is seen that the assessee claimed to have received security deposits from its `distributors' to whom commission etc. was also paid. We agree with the view point of the AO that a mere receipt of an amount through banking channel cannot prove the genuineness of credit in terms of section 68 of the Act. The assessee is not only required to prove identity and capacity of the creditor, but also genuineness of transactions so as to escape the clutches of section 68 of the Act. Adverting to the facts of the instant case, we find that the claim of the assessee of having received such amounts from Distributors has not been corroborated before the AO and hence the same cannot be accepted. The ld. AR contended that the necessary details are available for production and one more opportunity be granted to it. Considering the totality of the facts and circumstances of the instant case, we are of the considered opinion that it would be in the fitness of things if the impugned order on this score is set aside and the matter is restored to the 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 54 ITA Nos.1950 & 1169/Del/2014 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. Under these Agreements, both the companies allowed the assessee to 55 ITA Nos.1950 & 1169/Del/2014 use their respective trademarks, viz., Vodafone and Essar. Both the companies agreed not to charge any royalty till 31.05.2008. After 31.05.2008, the assessee was required to pay royalty @ 0.15% of net service revenue to Rising Group Ltd. for use of brand name 'Essar' and @ 0.30% to Vodafone Ireland for use of brand name 'Vodafone.' The assessee adopted a comparable instance of payment of royalty @ 7% of net sale of Forward Industries Inc., USA to Motorola Inc., USA, for trade mark licence for use of Motorola signature and logo. The assessee claimed that since the payment @ 0.15% and 0.30% for use of brand names, Essar and Vodafone, was lower than 7% paid by Forward Industries Inc., USA to Motorola Inc., USA, its international transactions were at ALP.
60. The TPO accepted the use of the CUP, as was also employed by the assessee, as the most appropriate method. He, however, did not treat payment of royalty @7% of the net sales of Forward Industries Inc., USA to Motorola Inc., USA, as comparable because of the functional dissimilarity. Considering the fact that the assessee was not earlier paying royalty for use of Essar and Vodafone trademarks up to 31.05.2008, the TPO determined Nil ALP of the international 56 ITA Nos.1950 & 1169/Del/2014 transaction of payment of royalty. In support of his decision, he held that the assessee did not justify royalty rate and, further, there was no cost benefit analysis and no economic benefit was derived by the assessee. The DRP did not interfere with the draft order passed by the AO incorporating Nil ALP of the international transaction of payment of royalty, against which the assessee has come up in appeal before the Tribunal.
61. We have heard both the sides and perused the relevant material on record. The assessee used `Vodafone Essar' brands as is apparent from page 13 of the TPO's order on which some photographs have been reproduced and it has been mentioned at the bottom: `A Vodafone Essar Company'. When we look at the name of the assessee, being `Vodafone Essar Digilink Limited', there remains no doubt whatsoever that the assessee did use the brand names Essar and Vodafone and such a payment is a bona fide transaction. It is for the use of such brands that the assessee paid royalty to Rising Groups Ltd. and Vodafone Ireland Marketing Ltd. at the rate of 0.15% and 0.30% respectively. The TPO has simply brushed aside the assessee's contention for use of the brands and determined Nil ALP of the 57 ITA Nos.1950 & 1169/Del/2014 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 under the international transaction is at ALP in comparison with the other comparable uncontrolled transactions, then the transacted value of the international transaction has to be accepted. A 58 ITA Nos.1950 & 1169/Del/2014 comparison has to be made with comparable uncontrolled transactions and not with the assessee's past practice. So this reasoning of the TPO, as affirmed by the DRP, is not sustainable.
63. In so far as the use of the `Benefit test' for determining the ALP of such services at Nil is concerned, it is noticed that the Hon'ble Punjab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016)380 ITR 307 (P&H) has held that the question whether a transaction is at an arm's length price or not is not dependent on whether the transaction results in an increase in the assessee's profit. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm's length price. A further question that may arise is whether the arm's length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee's claim, it is not determinative of the same. It went on to hold that business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is 59 ITA Nos.1950 & 1169/Del/2014 whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits.
64. Reverting to the facts of the extant case, it is established beyond doubt that brand names of Essar and Vodafone have in fact been used by the assessee, which deciphers that the international transaction entered in to by the assessee with its AEs was genuine and bona fide.
65. It is manifest that the TPO applied the CUP method for determining the ALP of the international transaction. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instance as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the use of brand by the assessee vis-à-vis that paid by other comparables in similar uncontrolled circumstances.
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. 60
ITA Nos.1950 & 1169/Del/2014 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, it is manifested that there is no comparison whatsoever between the two. That apart, it is a transaction between two foreign parties and hence cannot be considered for comparing an international transaction with the Indian assessee as a tested party. We, therefore, disapprove the 61 ITA Nos.1950 & 1169/Del/2014 comparable transaction used by the assessee for benchmarking the international transaction of payment of royalty for use of brands.
67. That apart, it is noticed that the action of the TPO in determining Nil ALP of the international transaction on the ground that no benefit accrued to the assessee and then the AO making addition simply on the basis of recommendation of the TPO, is not in accordance with the judgment of the Hon'ble jurisdictional High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), in which it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such service exists or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. As the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee 62 ITA Nos.1950 & 1169/Del/2014 were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.
68. When we come back to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of the international transaction at Rs.11.47 crore and odd, inter alia, by holding that no benefit was received by the assessee and hence no payment on this score was warranted. The AO in his draft order has taken the ALP of the international transaction at Nil on the basis of such recommendation of the TPO without carrying out any independent investigation for the deductibility or otherwise of such payment in terms 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 63 ITA Nos.1950 & 1169/Del/2014 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.
69. Ground no.10 is against the addition of Rs.284,68,27,994/- on account of transfer pricing adjustment of Advertising, Marketing and Promotion (AMP) expenses.
70. The facts apropos this ground, as recorded by the TPO on page 16 onwards of his order, are that the assessee incurred huge amount of AMP expenses which was for the promotion of brand owned by the AEs. Applying the bright line test, the TPO proposed transfer pricing 64 ITA Nos.1950 & 1169/Del/2014 adjustment amounting to Rs.284,68,27,994/-. The DRP upheld the order passed by the TPO. The AO made the addition in the impugned order, against which the assessee has come up in appeal.
71. The ld. AR contended that the incurring of AMP expenses is not an international transaction at all and, hence, there can be no question of determining the arm's length price of this transaction or making any addition thereon. He relied on the judgments of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. & Another vs. CIT (2015) 129 DTR 25 (Del) and CIT vs. Whirlpool of India Ltd. (2015) 94 CCH 156 DEL-HC to contend that the AMP expenses could not be considered as an international transaction. In the light of these judgments and some other Tribunal orders, it was submitted that there was no international transaction of AMP expenses on the basis of principles laid down in these judgments and, hence, the entire exercise of determining its ALP and, consequently, making transfer pricing adjustment, be set aside.
72. Au contraire, the ld. DR relied on the judgment of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) 65 ITA Nos.1950 & 1169/Del/2014 Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) in which AMP expenses have been held to be an international transaction and the matter of determination of its ALP has been restored. He also relied on a later judgment of the Hon'ble jurisdictional High Court in Yum Restaurants (India) P. Ltd. vs. ITO (2016) 380 ITR 637 (Del) and 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. It was argued that the judgments in the case of Yum Restaurants and Sony Ericson (for AY 2010-11) delivered in January, 2016 are later in point of time to the earlier judgments in the case of Maruti Suzuki and 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 66 ITA Nos.1950 & 1169/Del/2014 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) Pvt. Ltd. (dt. 23.8.2016) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). The ld. DR argued that the Hon'ble Delhi High Court in its earlier decision in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) has held AMP expenses to be an international transaction. It was argued the matter should be restored for a fresh determination. 67
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73. We have heard the rival submissions and perused the relevant material on record. We find that when the TPO held AMP expenses to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of the Hon'ble jurisdictional High Court as discussed above and certain others delivered later on as well, which are now available for consideration. Respectfully following the predominant view taken in several Tribunal orders of co-ordinate benches, we are of the considered opinion that it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments after allowing a reasonable opportunity of being heard to the assessee.
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74. However, it is made clear that if the ALP of the AMP expenses comes up for determination, then Selling expenses should not be considered as a part of AMP expenses. In this regard, the Hon'ble jurisdictional High Court has consistently held that Selling expenses cannot be included in the ambit of AMP expenses. There is not even a single order in which the selling expenses have been directed to be included in the overall AMP expenses. Simply because the Department has not accepted the judgments of the Hon'ble jurisdictional High Court and SLPs have been admitted, the binding nature of such judgments is not mitigated in any manner. Unless the Hon'ble Supreme Court reverses the judgment of a High Court, the same holds the field and remains binding on all the authorities working under its jurisdiction. It is, therefore, directed that selling expenses should be excluded from the overall purview of the AMP expenses for the benchmarking exercise, if necessity arises.
75. Ground no.11 is against non-granting of full credit in respect of TDS and Ground no.12 is against non-granting of Minimum Alternate 69 ITA Nos.1950 & 1169/Del/2014 Tax (MAT) credit. The AO is directed to verify the assessee's claim in this regard and allow the necessary credit, if available.
76. The other ground on the charging of interest is consequential and on the initiation of penalty proceedings u/s 271(1)(c) is premature.
77. In the result, the appeal of the Department is dismissed and that of the assessee is partly allowed.
The order pronounced in the open court on 14.03.2018.
Sd/- Sd/-
[KULDIP SINGH] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 14th March, 2018.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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