DCIT Vs Vodafone Essar Digilink Ltd. (ITAT Delhi)
Summary: The Delhi Bench I-1 of the Income Tax Appellate Tribunal, comprising Vice President R.S. Syal and Judicial Member Kuldip Singh, decided cross-appeals filed by DCIT and Vodafone Essar Digilink Ltd. for Assessment Year 2009–10 in ITA Nos. 1950/Del/2014 and 1169/Del/2014. The appeals arose from the final assessment order dated 30 January 2014. The Revenue’s appeal, delayed by two days, was admitted after condonation. By its order pronounced on 14 March 2018, the Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal, addressing commission, spectrum royalty, advertising expenditure, licence fees, depreciation, interest, TDS, Section 80-IA deductions and transfer pricing adjustments.
On the Revenue’s appeal, the Tribunal upheld deletion of an ad hoc disallowance of ₹14,23,29,976, representing 10% of post-paid distributor commission, because the assessee had produced relevant details and Form 16A certificates and the issue was covered by the decision in DCIT v. Vodafone Mobile Services Ltd. It also held that recurring wireless planning and coordination spectrum royalty charges paid as a percentage of revenue were revenue expenditure rather than capital costs for obtaining a licence under Section 35ABB. Following CIT v. Fascel Ltd., it sustained relief on that issue. The Tribunal further upheld deletion of advertising expenditure disallowance, relying on CIT v. Citi Financial Consumer Finance Ltd., and allowed ₹31 lakh of losses caused by customer frauds as incidental to business.
The assessee’s principal licence-fee dispute concerned ₹205.38 crore paid or accrued as revenue-share licence fees under the telecom licensing regime. The Assessing Officer treated the payment as capital expenditure subject to amortisation under Section 35ABB and made a net addition of ₹154.54 crore. Examining the National Telecom Policy, 1999, and licence terms, the Tribunal distinguished the one-time entry fee paid to acquire a licence from recurring payments to maintain an existing licence. Applying CIT v. Bharti Hexacom Ltd. as cited in the order, it held that the recurring fee was revenue expenditure deductible in the year incurred, and deleted the addition. It directed the Assessing Officer to prevent any double deduction through amortisation allowed in other years.
On asset restoration costs, the assessee had capitalised estimated obligations to restore leased cell sites and office premises and claimed depreciation of approximately ₹5.10 crore. The Tribunal rejected the claim because the estimated restoration costs had not actually been incurred and any liability depended on damage occurring when the premises were vacated. Under Sections 32(1) and 43(1), depreciation could not be allowed on a merely notional cost. A separate interest disallowance of ₹26,45,28,627 on capital work-in-progress for new cell towers was remanded. Although the installation of additional towers could amount to extension of existing business under the then-applicable proviso to Section 36(1)(iii), the assessee’s interest-free shareholders’ funds exceeded its investment in the work-in-progress. The Assessing Officer was directed to examine whether specific borrowings had financed the assets before deciding the disallowance.
The Tribunal deleted the disallowance of ₹70,86,29,294 relating to domestic roaming charges under Section 40(a)(ia). It considered the jurisprudence on technical services, including CIT v. Bharti Cellular Ltd., CIT v. Kotak Securities Ltd., DIT v. A.P. Moller Maersk A/S and CIT v. Vodafone South Ltd. The Tribunal found that ordinary inter-operator roaming arrangements did not constitute fees for technical services within Section 9(1)(vii) and therefore did not attract TDS under Section 194J. With no requirement to deduct tax, the consequential disallowance under Section 40(a)(ia) could not survive.
The dispute concerning discounts on prepaid talk-time supplied to distributors involved a disallowance of ₹130,33,61,238 under Section 40(a)(ia) for non-deduction of tax under Section 194H. The Tribunal noted conflicting High Court decisions on whether the distributor margin was commission, including CIT v. Idea Cellular Ltd., Vodafone Essar Cellular Ltd. v. ACIT and Bharti Airtel Ltd. v. CIT. It followed the jurisdictional Delhi High Court’s ruling in principle but also gave effect to the Rajasthan High Court’s judgment in the assessee’s own TDS proceedings. Consequently, it deleted the disallowance to the extent of ₹48,14,87,078 and sustained the remaining ₹82,18,74,160. Separately, it deleted ₹63.83 lakh paid to the Department of Telecommunications for contractual non-compliance, holding that the payment was not a penalty for an offence or a purpose prohibited by law within Explanation 1 to Section 37(1).
On the deduction under Section 80-IA, the Tribunal examined interest on fixed deposits, miscellaneous receipts, cell-site hiring income and revenue from indefeasible rights of use. It distinguished receipts directly derived from eligible telecommunications operations from those without the required nexus. It held that income from sharing cell sites was eligible for the deduction and extended the same treatment to indefeasible-right-to-use revenue because the arrangements were similar. On another issue, an addition of ₹2,00,75,850 under Section 68 arising from deposits attributed to 816 distributors was remanded for fresh verification. The Tribunal clarified that receipt through banking channels alone did not establish the identity, capacity and genuineness of creditors and required the assessee to furnish the supporting evidence.
The remaining transfer pricing grounds concerned brand royalty of ₹11,47,16,908 paid for the Vodafone and Essar names and an AMP adjustment of ₹284,68,27,994. The brand royalty issue was restored for fresh consideration in accordance with the Tribunal’s reasoning and the applicable Delhi High Court decision. The AMP adjustment was also remanded to determine first whether an international transaction actually existed; only if established could its arm’s length price be computed. The Tribunal directed exclusion of selling expenses from AMP expenses in any necessary benchmarking exercise. It also directed verification of TDS and MAT credits, treated interest as consequential and the penalty-initiation ground as premature. The Revenue’s appeal was dismissed and the assessee’s appeal was partly allowed.
Cases Discussed
- DCIT v. Vodafone Mobile Services Ltd. — (2016) 176 TTJ 430 (ITAT Delhi)
- CIT v. Fascel Ltd. — 17 DTR 306 (Delhi High Court)
- CIT v. Citi Financial Consumer Finance Ltd. — (2011) 335 ITR 29 (Delhi High Court)
- CIT v. Bharti Hexacom Ltd. — (2014) 265 CTR 130 (Delhi High Court)
- CIT v. Reliance Utilities and Power Ltd. — (2009) 313 ITR 340 (Bombay High Court)
- CIT v. Bharti Cellular Ltd. — (2011) 330 ITR 239 (Supreme Court)
- CIT v. Kotak Securities Ltd. — (2016) 383 ITR 1 (Supreme Court)
- DIT v. A.P. Moller Maersk A/S — (2017) 392 ITR 186 (Supreme Court)
- CIT v. Vodafone South Ltd. — (2016) 290 CTR 436 (Karnataka High Court)
- CIT v. Idea Cellular Ltd. — (2010) 325 ITR 148 (Delhi High Court)
- Vodafone Essar Cellular Ltd. v. ACIT — (2010) 332 ITR 255 (Kerala High Court)
- Bharti Airtel Ltd. v. CIT — (2015) 372 ITR 33 (Karnataka High Court)
- Maruti Suzuki India Ltd. v. CIT — (2015) 129 DTR 25 (Delhi High Court)
- CIT v. Whirlpool of India Ltd. — (2015) 94 CCH 156 (Delhi High Court)
