ITAT Grants Vodafone West Relief on Depreciation, Roaming Charges, Distributor Discounts and Section 80-IA Deduction

Summary: The Mumbai “J” Bench of the Income Tax Appellate Tribunal considered cross-appeals filed by Vodafone West Limited (formerly Vodafone Essar Gujarat Limited) and the Income Tax Department concerning Assessment Year 2010–11. The appeals arose from the final assessment order dated 23 February 2015, passed under Section 143(3) read with Section 144C of the Income-tax Act, 1961, pursuant to directions issued by the Dispute Resolution Panel, Ahmedabad. The assessee, engaged in providing cellular mobile telephony services in Gujarat, originally declared total income of ₹400.98 crore and subsequently revised it to ₹410.84 crore. Following various additions and disallowances, the Assessing Officer determined its income at approximately ₹654.61 crore. The Tribunal examined disputes relating to passive infrastructure transfers, network site rentals, exempt-income disallowances, roaming charges, distributor discounts, Section 80-IA deductions, telecom licence fees and transfer pricing adjustments.

A principal issue in the assessee’s appeal concerned the disallowance of depreciation of ₹31.60 crore arising from the transfer of passive infrastructure assets. Vodafone had transferred 2,932 telecom towers to Vodafone Infrastructure Limited without consideration under a scheme of demerger approved by the Gujarat High Court. The Assessing Officer treated the arrangement as a tax-avoidance transaction rather than a genuine gift and adopted a deemed consideration of ₹503.86 crore. After considering the amount already reduced by the assessee from the written-down value of its assets, the Assessing Officer made a further adjustment resulting in the depreciation disallowance. The Tribunal followed its coordinate bench’s decision in Vodafone Digilink Ltd. v. DCIT, holding that a comparable court-approved transfer of passive infrastructure assets qualified as a gift under Section 47(iii). In the absence of any material change in facts or law, it deleted the ₹31.60 crore depreciation disallowance.

The Tribunal separately examined the ₹172.90 crore disallowance of network site rentals paid to Indus Towers Limited. The assessee had paid approximately ₹210.80 crore for tower infrastructure services following the restructuring, whereas the Assessing Officer questioned the commercial justification for paying rentals on infrastructure previously owned by Vodafone. The DRP accepted that Section 40A(2)(b) was inapplicable but considered ₹172.90 crore excessive and disallowed it under Section 37(1). Vodafone argued that Indus Towers had assumed substantial responsibilities for tower operations, maintenance, power, fuel, security and related infrastructure costs, producing operational efficiencies and economies of scale. The Tribunal observed that neither the Assessing Officer nor the DRP had adequately examined these explanations or the underlying financial arrangements. Accordingly, it restored the issue to the Assessing Officer for fresh adjudication, directing examination of the supporting evidence and an adequate opportunity of hearing.

On the ₹92.75 lakh disallowance under Section 14A read with Rule 8D, the Tribunal accepted Vodafone’s contention that it had earned no exempt income during the relevant assessment year. Although the assessee held investments of ₹185.50 crore, it had received no dividend income and had claimed no exemption under Section 10(34). Following the Gujarat High Court’s decision in CIT v. Cortech Energy Pvt. Ltd. and the Tribunal’s ruling in Vodafone’s own case for Assessment Year 2009–10, the Bench deleted the disallowance. It also considered the consequential adjustment to book profits under Section 115JB. Relying on the Special Bench decision in ACIT v. Vireet Investment Pvt. Ltd., the Tribunal directed that book profits should be computed without mechanically importing the disallowance calculated under Section 14A read with Rule 8D. The assessee therefore obtained relief on both the regular tax and MAT computation issues.

The Tribunal also deleted disallowances aggregating ₹64.81 crore relating to domestic and international roaming charges. The Assessing Officer had treated roaming arrangements with other telecom operators as technical services requiring tax deduction at source under Section 194J and had consequently invoked Sections 40(a)(ia) and 40(a)(i). Vodafone maintained that roaming services were rendered through automated telecommunications systems and did not involve the requisite human intervention. Following earlier decisions in the assessee’s own case and in Vodafone East Ltd. and Vodafone Digilink Ltd., the Tribunal held that the disallowances could not be sustained. It further deleted the ₹71.83 crore disallowance of trade discounts granted to prepaid distributors. Relying on the Supreme Court’s decision in Bharti Cellular Ltd. v. ACIT, reported in (2024) 462 ITR 247, the Bench held that the discounts did not attract the TDS obligation under Section 194H in the circumstances considered.

The assessee additionally succeeded on its claim for deduction under Section 80-IA in respect of ₹3.31 crore received under the Served From India Scheme (SFIS). The Assessing Officer had rejected the deduction on the ground that the income represented an export incentive without a direct first-degree nexus to the telecommunications business. The Tribunal distinguished the language of Section 80-IA(2A), which specifically governs eligible telecommunications undertakings, from the general requirement under Section 80-IA(1). Following the Delhi High Court’s decision in PCIT v. Bharat Sanchar Nigam Ltd., it held that the narrower “derived from” test could not be applied in the same manner to deny the deduction under Section 80-IA(2A). The disallowance relating to SFIS income was consequently deleted. The additional claim concerning Section 80-IA relief on the already-deleted Section 14A disallowance was treated as academic, while the challenge to initiation of penalty proceedings under Section 271(1)(c) was dismissed as premature.

In the Revenue’s appeal, the Tribunal considered several disputes concerning the scope and computation of deduction under Section 80-IA. It upheld Assessment Year 1997–98 as the initial assessment year for the assessee’s telecommunications undertaking, following earlier decisions in Vodafone’s own cases. The Tribunal also sustained the DRP’s direction permitting the application of the amended Section 80-IA provisions and the deduction at 100% of eligible profits. Other contested items included foreign exchange gains, cell-site sharing revenue, indefeasible right-to-use (IRU) revenue, bad debts written back and miscellaneous income. The Tribunal largely followed earlier rulings involving the assessee while deciding these questions. Revenue’s objections concerning the consequential Section 80-IA treatment of roaming charges and prepaid distributor discounts became academic because the underlying disallowances had already been deleted. The issue concerning receipts from prepaid services was restored for fresh examination.

The Revenue also challenged the treatment of telecom licence fees, Wireless Planning Commission (WPC) royalty, interest on capital work-in-progress and brand royalty payments. Regarding annual licence fees paid to the Department of Telecommunications, the Tribunal applied the Supreme Court’s decision in CIT v. Bharti Hexacom Ltd. and directed reconsideration in accordance with the governing legal position and the assessee’s computations. However, it upheld the deletion of disallowance relating to approximately ₹97.58 crore of WPC royalty expenditure, following earlier decisions that treated recurring spectrum usage charges separately from licence acquisition expenditure. The Tribunal also considered the Revenue’s challenge concerning interest attributable to work-in-progress. On transfer pricing, it upheld the deletion of the adjustment relating to brand royalty payments made to overseas associated enterprises, following the decision in Vodafone’s own case for the preceding assessment year and the requirement that the comparable uncontrolled price method must be supported by appropriate uncontrolled transactions. Ultimately, both the assessee’s appeal and the Revenue’s appeal were partly allowed for statistical purposes. The order was pronounced on 11 December 2025.

Cases Discussed

• Vodafone Digilink Ltd. Vs DCIT (ITAT Delhi), ITA Nos. 1073 and 1158/Del/2015, Dated 14 October 2025 — Relied upon regarding the transfer of passive infrastructure assets as a gift, roaming charges and prepaid distributor discounts.
• Lakshmanaswami Mudaliar Vs Life Insurance Corporation of India — 33 Comp Cas 420 (Supreme Court) — Referred to concerning a company’s power to make gifts when authorised by its memorandum of association.
• CIT Vs Tibruz Mustafa Bilgen — (1986) 157 ITR 723 (Madras High Court) — Cited for the distinction between an actual gift and a deemed gift under Section 47(iii).
• DCIT Vs Vodafone West Ltd. — ITA Nos. 909 and 944/Ahd/2014, order dated 17 November 2016 — Earlier decision in the assessee’s own case concerning Section 14A, roaming charges and other tax issues.
• CIT Vs Cortech Energy Pvt. Ltd. — 45 taxmann.com 116 (Gujarat High Court) — Relied upon for deletion of Section 14A disallowance where no exempt income was earned.
• Vodafone East Ltd. — ITA No. 1864/Kol/2012 — Referred to regarding TDS on roaming charges paid to other telecommunications operators.
• Bharti Cellular Ltd. Vs ACIT — (2024) 462 ITR 247 (Supreme Court) — Relied upon for holding that Section 194H did not apply to the relevant trade discounts given to prepaid distributors.
• PCIT Vs Bharat Sanchar Nigam Ltd. — (2016) 388 ITR 371 (Delhi High Court) — Relied upon for interpreting Section 80-IA(2A) and the deduction available to eligible telecommunications undertakings.
• ACIT Vs Vireet Investment Pvt. Ltd. — (2017) 58 ITR (Trib.) 313 (Delhi ITAT Special Bench) — Relied upon for computing book profits under Section 115JB without importing the Section 14A read with Rule 8D calculation.
• Vodafone Essar Gujarat Ltd. Vs ACIT — ITA No. 1361/Ahd/2009, order dated 29 January 2010 — Followed for identifying AY 1997–98 as the initial assessment year for Section 80-IA deduction.
• CIT Vs Deversons Industries Ltd. — (2015) 55 taxmann.com 189 (Gujarat High Court) — Relied upon for allowing Section 80-IA deduction on foreign exchange gains.
• ACIT Vs Shyam Telelinks Ltd. — (2013) 31 taxmann.com 239 (Delhi ITAT) — Considered for recognition of revenue relating to unused prepaid talk time.
• CIT Vs Shyam Telelinks Ltd. — (2019) 101 taxmann.com 218 (Delhi High Court) — Considered regarding accounting for prepaid talk time when it expires.
• CIT Vs Bharti Hexacom Ltd. — [2023] 155 taxmann.com 322 (Supreme Court) — Applied in examining the treatment of telecom licence fees.
• CIT Vs Fascel Ltd. — (2009) 221 CTR 305 (Delhi High Court) — Relied upon regarding deductibility of WPC royalty payments.
• Dresser-Rand India Pvt. Ltd. Vs ACIT — ITA No. 8753/Mum/2010 — Cited regarding commercial expediency and the Transfer Pricing Officer’s role.
• CIT Vs EKL Appliances Ltd. — Delhi High Court — Relied upon regarding commercial necessity and the arm’s length price of expenditure.
• Technimont ICB Pvt. Ltd. Vs ACIT — (2012) 24 taxmann.com 28 (Mumbai ITAT, Third Member) — Considered regarding the use of controlled transactions as comparables under the CUP method.
• Pino Bisazza Glass Pvt. Ltd. Vs ACIT — ITA No. 2587/Ahd/2012 — Referred to regarding the requirement for an uncontrolled comparable transaction.