Transfer of passive infrastructure assets to Vodafone Infrastructure was a ‘Gift’ eligible for sec 47(iii) exemption

DCIT Vs Vodafone Idea Limited (ITAT Mumbai)

Conclusion: Transfer of passive infrastructure (PI) assets under a court-approved scheme of demerger without consideration qualified as a ‘gift’ under Section 47(iii), thereby legitimizing the claim of depreciation on such assets. Section 80-IA(2A) granted broad deduction for telecom undertakings; RBI-approved ECB pricing was a reliable benchmark in transfer pricing and ALP could not be determined at NIL without applying prescribed methods.

Held: Revenue had challenged the DRP’s directions on several grounds, primarily arguing that transfer of PI assets was a tax evasion scheme and not a gift, which led to the disallowance of depreciation to the tune of Rs. 26.85 crores. It also contested the allowability of Section 80IA deductions on various incidental incomes such as cell site sharing, IRU revenue, scrap sales, late payment charges, and SFIS income, arguing they were not “derived from” the eligible telecommunication business. Assessee, on the other hand, challenged multiple additions sustained by the DRP. These included the disallowance of Rs. 225.83 crores paid as network site rentals to Indus Towers under Sections 37(1) and 40A(2)(b), a Rs. 92.75 lakh disallowance under Section 14A read with Rule 8D despite no exempt income being earned, and a disallowance of Rs. 74.21 crores on roaming charges paid to domestic and overseas operators under Section 40(a)(ia) on the ground that human intervention was involved. Assessee also challenged the denial of depreciation on 3G spectrum fees and a Transfer Pricing (TP) adjustment of Rs. 16.15 crores on interest paid on External Commercial Borrowings (ECB) from its AE, Vodafone Overseas Finance Limited (VOFL). Upholding assessee’s claims on most counts, relying on precedents set by coordinate benches in the assessee’s own case for earlier assessment years. It was concluded that the transfer of PI assets constituted a genuine gift falling within the ambit of section 47(iii) of the Act, and therefore the same could not be treated as a transfer for the purposes of section 2(47). Consequently, it was held that AO was not justified in imputing any notional consideration or reducing the written down value of the block of assets, and the disallowance of depreciation was held to be unsustainable in law. Accordingly, Revenue’s ground on this issue was dismissed. Regarding depreciation issue, Tribunal held that since the demerger was sanctioned by the High Court and no loss was claimed or unintended tax advantage derived, the AO was not justified in imputing a notional sale consideration. Considering this, the depreciation disallowance was deleted by the tribunal. It was well-settled that a transfer without consideration, forming part of a court-approved scheme of demerger specifically contemplating transfer by way of gift, could not be disregarded as a colourable device. Since assessee had voluntarily reduced the written down value of the block and not claimed any capital loss, the character of the transaction as a gift under section 47(iii) was intact. Therefore, imputing notional consideration to disallow depreciation was unsustainable in law. On the issue of the TP adjustment on ECB interest, the Tribunal made seminal observations regarding the use of RBI approvals in transfer pricing benchmarks. TPO had rejected assessee’s benchmarking, re-characterized the unsecured loan as a secured loan, and made an ad-hoc 50 bps adjustment for country and currency risks. Tribunal noted that while RBI approval may not be wholly determinative of the Arm’s Length Price (ALP) in the abstract, it was certainly a highly relevant and contemporaneous benchmark. TPO’s benchmarking was found to suffer from material infirmities, including a lack of reliable comparability on the nature of the loan , purpose, tenor, and subordination. Rejecting the TPO’s approach, Tribunal held that where TPO’s comparables were deficient on critical parameters, the RBI-approved all-in-cost ceiling represented a safer and more reliable external guide than the TPO’s flawed analysis. Furthermore, Tribunal held that roaming services between telecom operators were provided through an automated process without human intervention, thus ruling out the applicability of TDS on fees for technical services. Following the Supreme Court’s decision in CIT vs. Bharti Hexacom Ltd., the Tribunal also restored the issue of the disallowance of license fees to the AO’s file, directing it to be treated as capital expenditure amortizable under Section 35ABB, rather than revenue expenditure. Tribunal deleted the depreciation disallowance on PI assets, the Section 14A disallowance, the roaming charges disallowance, the TP adjustment on ECB interest, and allowed the Section 80IA deductions on incidental incomes, while restoring the network site rental and license fee issues to the AO’s file for de novo adjudication.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross-appeals are directed against the final assessment order dated 08.02.2016, passed by the Assessing Officer under section 143(3) read with section 144C of the Income-tax Act, 1961 for Assessment Year 2011-12, in pursuance of the directions issued by the Dispute Resolution Panel-2, Mumbai under section 144C(5) vide order dated 28.12.2015.

Brief Facts of the Case

2. The assessee, M/s Vodafone West Limited, earlier known as Vodafone Essar Gujarat Limited, is a domestic company engaged in the business of providing cellular mobile telephony services in the State of Gujarat. For the year under consideration, the assessee filed its original return of income on 29.11.2011, declaring total income of Rs. 2,40,92,73,724/-. Subsequently, the assessee filed a revised return of income on 25.03.2013, declaring total income of Rs. 2,65,96,62,719/-. The assessee also declared book profit of Rs. 4,06,12,37,150/- under section 115JB of the Act.

3. The case was selected for scrutiny and notices under sections 143(2) and 142(1) of the Act were issued. Since the assessee had entered into international transactions as reported in Form No. 3CEB, a reference was made to the Transfer Pricing Officer (TPO) under section 92CA of the Act for determination of the arm’s length price of such transactions. Thereafter, the Assessing Officer passed a draft assessment order dated 31.03.2015 under section 143(3) read with section 144C(1) of the Act, proposing various additions and disallowances, including transfer pricing adjustments.

4. Aggrieved by the variations proposed in the draft assessment order, the assessee filed objections before the Dispute Resolution Panel-2, Mumbai (DRP) under section 144C(2) of the Act. The DRP, after considering the objections of the assessee and the draft order, issued its directions under section 144C(5) vide order dated 28.12.2015, granting partial relief to the assessee on certain issues and confirming the proposed variations on others.

5. In conformity with the directions of the DRP, the Assessing Officer passed the final assessment order dated 08.02.2016 under section 143(3) read with section 144C of the Act.

6. Aggrieved by the additions and disallowances sustained pursuant to the directions of the DRP, the assessee is in appeal before us. The Revenue has also filed an appeal against the same assessment order, challenging the reliefs granted by the DRP.

7. Following are the respective grounds before us:

In ITA No. 443/Ahd/2016 – Revenue’s Grounds:

1. The DRP, Mumbai has erred in law and on facts in directing the AO to consider A.Y. 1997-98 (instead of A.Y. 1996-97) as the initial assessment year in which the Assessee started providing telecommunication services.

2. The DRP, Mumbai has erred in law and on facts in directing the AO to apply amended 801A provisions applicable from A.Y. 2000-2001 and allowing deduction at the rate of 30% of profits of the current year u/s 801A of the Act.

3. The DRP, Mumbai has erred in law and on facts in deleting the disallowance of deduction u/s 801A claimed on cell site sharing revenue and IRU revenue.

4. The DRP, Mumbai has erred in law and on facts in directing to allow deduction u/s 801A of the Act on late payment charges and cheque bounce charges.

5. The DRP, Mumbai has erred in law and on facts in directing to allow deduction u/s 801A of the Act on provisions written back.

6. The DRP, Mumbai has erred in law and on facts in directing to allow deduction u/s 801A of the Act on other income.

7. The DRP, Mumbai has erred in law and on facts in directing to allow deduction u/s 801A of the Act on SFIS (Served From India Scheme) income.

8. The DRP, Mumbai has erred in law and on facts in directing the AO to allow deduction u/s 80IA of the Act on disallowance made u/s 40(a)(ia) of the Act in respect of discount offered to pre paid distributors amounting to Rs. 77,93,41,990/ -.

9. The DRP, Mumbai has erred in law and on facts in deleting the addition of Rs. 1444.8 million made on account of receipt for pre paid services which crystallized during the year itself.

10. The DRP, Mumbai has erred in law and on facts in deleting the disallowance of Rs. 176,50,23,617/ – made on account of license fees u/s 37(1) of the Act.

11. The DRP, Mumbai has erred in law and on facts in deleting the disallowance of Rs. 130,62,03,715/ – made on account of Royalty to WPC (Wireless planning commission).

12. The DRP, Mumbai has erred in law and on facts in directing to delete the proportionate disallowance on account of depreciation of 3G spectrum license.

13. The DRP, Mumbai has erred in law and on facts in deleting the addition made on account of Arm’s Length Price of international transaction as under:

13a. The DRP, Mumbai has erred in law and on facts in deleting the adjustment made in respect of the determination of ALP for royalty payments for use of brands “Essar” & “Vodafone”.

13b. The DRP, Mumbai has erred in law and on facts in accepting TNMM as the most appropriate method with the comparison being carried out at entity level, in alternative analysis.

13c. The DRP, Mumbai has erred in law by incorrect application of TNMM for benchmarking royalty payments.

13d. The DRP, Mumbai has grossly erred in law in violating the principles of natural justice by accepting the comparability analysis of the respondent, without granting an opportunity to the AO/ TPO for its examination.

13e. The DRP, Mumbai has grossly erred in law by accepting the comparability analysis of the respondent, without examining the same itself.

13f. The DRP, Mumbai has grossly erred in law by accepting the comparability analysis of the respondent, by accepting the use of multiple year data.

13g. The DRP, Mumbai has grossly erred in law and on facts by rejecting the determination of Arms Length Payment of royalty for “Essar” brand at NIL.

13h. The DRP, Mumbai has grossly erred in law and on facts by not examining the alternative contention in respect of “Essar” brand.

13i. The DRP, Mumbai has grossly erred in law and on facts by accepting the agreement provided by the respondent as comparable.

13j. The DRP, Mumbai has erred in law and on facts by rejecting the agreement provided by the AO/ TPO as comparable.

14. On the facts and in the circumstances of the case, the DRP, Mumbai ought to have upheld the order of the Assessing Officer.

In ITA No.571/Ahd/2016 – Assessee’s Grounds:

Ground no. 1 – Disallowance of depreciation amounting to Rs. 26,85,91,500/ –

1. On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP, has erred in treating the transfer of Passive Infrastructure (PI’) by the Appellant to Vodafone Infrastructure Limited (`VInL’), duly approved by the Hon’ble High Court, as a transaction purposely planned to avoid tax and thus, disallowing depreciation of Rs. 26.86 crores on PI assets.

1.1 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has grossly erred in holding that transfer of PI assets by the Appellant to VInL and thereafter, by VInL to Indus was a means to evade taxes, which would have otherwise been payable by the Appellant had the transaction been undertaken as a simple transaction between the Appellant and Indus Towers Limited (`Indus’).

1.2 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that transfer of PI assets by the Appellant to VInL without consideration does not qualify as a ‘gift’ and hence, not exempt under section 47(iii) of the Act.

1.3 On facts and circumstances and in law, the learned AO, based on the directions of the learned DRP has erred in not appreciating that in absence of any consideration received/ accrued to the Appellant, the computation mechanism provided under section 48 of the Act fails and accordingly, the charging section 45 of the Act also fails and hence, no capital gain/ income could arise in the hands of the Appellant.

1.4 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in imputing a notional sale consideration, when no such provision exists in the Act which permits the learned AO to notionally assume a consideration in absence of receipt of any consideration by the Appellant.

1.5 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in applying the provisions of section 50D of the Act, which are neither applicable to the year under consideration nor attracted where the consideration for transfer of the asset is ‘determinable’ or ‘nil’.

1.6 On the facts and in the circumstances of the case and in law, the learned AO has erred in applying the GAAR provisions prescribed under section 95 of the Act which are clearly not applicable for the year under consideration.

Ground no. 2 – Disallowance of network site rentals amounting to Rs. 225.83 crores

2. On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in disallowing the expenses of Rs. 225.83 crores paid to Indus Towers Limited (`Indus’) as ‘Network Site Rentals’ under section 37(1) of the Act and under section 40A(2)(b) of the Act.

2.1 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that there is excessive payment of Rs. 225.83 crores by the Appellant to Indus which is not ‘wholly and exclusively for the purpose of business’.

2.2 On the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in not considering the fact that significant costs which were being incurred by Appellant in the prior years for running and maintenance of such towers have reduced in the subject year since Indus took over the running and maintenance of such towers.

Ground no. 3 – Disallowance of Rs. 92,75,000 under section 14A of the Act

3. On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in applying the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (`Rules’) and disallowing expenses amounting to Rs. 92,75,000 as expenditure incurred in respect of exempt income without considering the fact that no exempt income was earned by the Appellant during the year.

Ground no. 4 – Disallowance of roaming charges amounting to Rs. 74,21,91,150

4. On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in making addition of Rs. 63,53,67,260 under section 40(a)(ia) and Rs. 10,68,23,890 under section 40(a)(i) of the Act on account of non-deduction of taxes on the national and international roaming charges respectively paid by the Appellant to other telecom operators.

4.1 On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that taxes are deductible on the roaming charges paid by the Appellant.

4.2 On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that human intervention is present in providing roaming services and ignoring the judicial precedents relied upon by the Appellant.

4.3 Without prejudice to the above ground 4 and 4.1, on the facts and circumstances of the case and in law, based on the directions of the learned DRP, the learned AO has erred in holding that human intervention is present in roaming services by placing reliance on a technical expert opinion obtained for another entity without providing any opportunity of being heard to the Appellant.

4.4 Without prejudice to the ground 4, 4.1 and 4.2, on the fact and in the circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in not giving effect to taxes paid by the recipient (based on Form 26A submitted by the Appellant) and hence, no disallowance should be made by virtue of second proviso to section 40(a)(ia) of the Act which is curative in nature and the benefit should be extended to past years.

Ground no. 5 – Disallowance of depreciation on 3G spectrum fees

5. On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in disallowing depreciation under section 32 of the Act claimed by the Appellant and making an addition of Rs. 89,86,08,746.

5.1 On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that the right to use 3G spectrum is a license to provide telecommunication service, covered by section 35ABB of the Act.

5.2 On the facts and circumstances of the case and in law, the learned AO, based on the directions of the learned DRP has erred in holding that the Appellant is not the ‘owner’ of the 3G Spectrum and what is acquired is only a ‘right to use’ the 3G Spectrum, hence, the Appellant is not eligible to claim depreciation under section 32 of the Act.

Ground no. 6 – Non allowance of deduction under section 801A

6. On the facts and circumstances of the case and in law, the learned AO, based on the directions of learned DRP, has erred in not allowing the deduction under section 801A of the Act on the following:

6.1 Scrap Sales income of Rs. 40,26,263

6.2 Rs. 92,75,000 disallowed under section 14A of the Act

Ground no. 7 – Transfer Pricing Adjustment of Rs. 16,15,68,785 for the interest paid on External Commercial Borrowings rECB9

7. On the facts and circumstances of the case and in law, the learned AO, based on the directions of learned DRP and learned Transfer Pricing Officer (`learned TPO’), has erred in making upward adjustment to the total income of Rs. 16,15,68,785 on account of interest paid on ECB obtained from Vodafone Overseas Finance Limited (70FL’).

7.1 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRP have erred in rejecting the specific approval granted by the Reserve Bank of India (`RBI’) for determining the arm’s length price (`ALP’) of the interest and upfront fee paid by the Appellant to its Associated Enterprise (`AE’).

7.2 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in rejecting the external search process undertaken by the Appellant for determining the ALP of international transaction pertaining to payment of interest and upfront fee by the Appellant to VOFL.

7.3 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in holding that the ALP of upfront fee paid by the Appellant cannot be determined by apportioning such fee over the tenor of the ECB facility and computing the net effective interest rate.

7.4 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRP have erred in conducting a fresh search using inappropriate search filters for determining the ALP of international transaction pertaining to payment of interest and upfront fee by the Appellant to its AE without taking into account the terms of the ECB agreement entered into by the Appellant with its AE.

7.5 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in re-characterizing the unsecured ECB facility availed by the Appellant from its AE as a secured loan and thereby erred in selecting secured loan tranches as comparable loan tranches for the purpose of determining the ALP of payment of interest and upfront fee by the Appellant to its AE.

7.6 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in rejecting the computation of country and currency risk adjustments claimed by the Appellant in its TP documentation and allowing such adjustment at 50 bps on an adhoc basis.

7.7 On the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in rejecting the subordination adjustment claimed by the Appellant.

7.8 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned TPO/ AO/ DRF’ have erred in not appreciating that the adjustment on account of payment of upfront fee, if any, should be merely restricted to the amortized amount of such upfront fee for which tax deduction has been claimed by the Appellant during financial year FY 2010-11.

Ground no. 8 – Addition of Rs. 92,75,000 disallowed under section 14A while computing book profits under section 115JB of the Act

8. On the facts and circumstances of the case and in law, the learned AO, based on the directions of learned DRP, has erred in adding back Rs. 92,75,000 disallowed under section 14A of the Act while computing book profit under section 115JB of the Act.

Ground no. 9 – Initiation of penalty proceedings under section 271(1)(c) of the Act

9. On the facts and circumstances of the case and in law, the learned AO, based on the directions of learned DRP, has erred in initiating penalty proceedings against the Appellant under section 271(1)(c) of the Act, without appreciating the fact that the Appellant had neither concealed any information nor furnished inaccurate particulars of income in its return of income.

The Appellant craves leave to add, to amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.

The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.

8. At the outset, the learned Authorised Representative (AR) for the assessee submitted that most of the issues arising in the present cross-appeals are squarely covered by the decisions of the Co-ordinate Benches rendered in the assessee’s own case for the earlier assessment years. It was submitted that the facts and circumstances of the year under consideration are identical and no distinguishing feature has been pointed out by the lower authorities so as to warrant a different view. The learned Departmental Representative (DR) fairly conceded to that.

9. In view of the aforesaid submissions of the parties, we now proceed to adjudicate the issues arising in these cross-appeals issue-wise, one by one, by taking into consideration the respective grounds raised by the assessee and the Revenue, the findings of the Assessing Officer and the directions of the DRP, and the judicial precedents.

10. We first deal with Assessee’s Appeal in ITA No. ITA 571/Ahd/2016.

Disallowance of depreciation on Passive Infrastructure assets transferred to Vodafone Infrastructure Limited – (Assessee’s Ground No. 1 and sub-grounds 1.1 to 1.6)

11. The first issue for adjudication arises from Ground No. 1 raised by the assessee, wherein the assessee has challenged the action of the Assessing Officer, taken in pursuance of the directions of the DRP, in disallowing depreciation of Rs. 26,85,91,500/- on Passive Infrastructure assets transferred by the assessee to Vodafone Infrastructure Limited.

12. The brief facts of the case pertaining to this issue, as emanating from the record, are that during the year immediately preceding the year under consideration the assessee entered into a Scheme of Demerger, whereby Passive Infrastructure (PI) assets comprising 2932 towers were transferred to M/s Vodafone Infrastructure Ltd. without any consideration. The said Scheme of Demerger was duly approved by the Hon’ble Gujarat High Court vide order dated 28.08.2012.

13. During the course of assessment proceedings, the assessee was required to show cause as to why depreciation on account of transfer of PI assets to Vodafone Infrastructure Ltd. should not be restricted and disallowed at 15 percent of the remaining block, as had been done by the Assessing Officer in Assessment Year 2010-11.

14. In response, the assessee submitted that the PI assets were transferred to Vodafone Infrastructure Ltd. voluntarily and without any consideration, and therefore such transfer was in the nature of a gift. It was contended that in view of the express provisions of section 47(iii) of the Act, the transaction would not be regarded as a transfer for the purposes of capital gains. The assessee further submitted that no loss, either capital or otherwise, had been claimed in relation to the said transfer of PI assets. It was also pointed out that the loss on transfer of PI assets amounting to Rs. 293.23 crores, which had been debited to the profit and loss account in Assessment Year 2010-11, had been added back while computing the total income for that year. The assessee further submitted that in the absence of any consideration, the tax written down value of the block of assets in which the PI assets were capitalised was not required to be adjusted. Nevertheless, in order to ensure that no unintended tax advantage was derived from the transaction, the assessee voluntarily reduced the tax WDV of the PI assets transferred to Vodafone Infrastructure Ltd. from the relevant block of assets.

15. The Assessing Officer, however, did not accept the submissions of the assessee. In the Draft Assessment Order, following the reasoning adopted in his order for Assessment Year 2010-11, which had been affirmed by the DRP, the Assessing Officer held that every transfer without consideration cannot automatically be treated as a gift and that the entire transaction must be viewed in the context of the overall restructuring of the Vodafone Group. The Assessing Officer observed that the transfer of PI assets was undertaken with the objective of consolidating the passive infrastructure assets of the Vodafone Group and another telecom operator into a single entity, thereby enabling operational synergies and reduction in operational costs. On this premise, the Assessing Officer held that the transaction was essentially a business reorganisation and not a gift. Accordingly, the Assessing Officer rejected the contention of the assessee that the transfer of PI assets was a gift covered under section 47(iii) of the Act. The Assessing Officer adopted the market value of the PI assets at Rs. 503.86 crores as the deemed sale consideration. Since the assets were depreciable assets forming part of the block of plant and machinery, the Assessing Officer reduced the written down value of the block by the said deemed consideration. Taking note of the fact that the assessee had already reduced Rs. 292.30 crores from the block of assets suo motu in Assessment Year 2010-11, the Assessing Officer further reduced an amount of Rs. 210.66 crores (Rs. 503.86 crores minus Rs. 292.30 crores) from the WDV of the plant and machinery block. Consequently, the Assessing Officer proposed a disallowance of depreciation of Rs. 31.60 crores, being 15 percent of Rs. 210.66 crores, in Assessment Year 2010-11. Giving consequential effect to the above adjustment, the Assessing Officer disallowed depreciation of Rs. 26.85 crores for the year under consideration, being 15 percent of the adjusted WDV of Rs. 179.06 crores (Rs. 210.66 crores less Rs. 31.60 crores).

16. The aforesaid addition proposed in the Draft Assessment Order was upheld by the learned DRP, following its own directions for Assessment Year 2010-11, and the objections of the assessee were rejected. Accordingly, in compliance with the directions of the learned DRP, the Assessing Officer in the Final Assessment Order disallowed Rs. 26,85,91,500/- on account of depreciation on PI assets and added the same to the total income of the assessee.

17. During the course of hearing before us, the learned AR submitted that the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010-11 in ITA No. 671/Ahd/2015 vide order dated 11.12.2025. The learned AR submitted that in the said decision the Tribunal had considered an identical addition made on account of disallowance of depreciation arising from the transfer of PI assets to Vodafone Infrastructure Ltd. and had deleted the same. The learned AR further submitted that the Tribunal, while deciding the issue in the assessee’s own case, had relied upon the decision of the Delhi Bench of the Tribunal in the case of Vodafone Digilink Ltd. vs DCIT in ITA Nos. 1073 and 1158/Del/2015 for Assessment Year 2010-11 dated 14.10.2025, wherein on identical facts the Tribunal upheld the findings of the DRP holding that the transfer of PI assets under the Scheme of Demerger constituted a gift within the meaning of section 47(iii) and therefore could not be regarded as a transfer for the purposes of section 2(47) of the Act.

18. We have carefully considered the rival submissions and perused the material available on record. We have also examined the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010-11 in ITA No. 671/Ahd/2015 dated 11.12.2025, which has been relied upon by the learned AR. We find that the issue arising in the present appeal is identical to the issue which came up for consideration before the Tribunal in the aforesaid decision.

19. The Co-ordinate Bench, while adjudicating the identical controversy relating to disallowance of depreciation on account of transfer of Passive Infrastructure assets to Vodafone Infrastructure Ltd. pursuant to a Scheme of Demerger, examined the factual matrix as well as the legal position in detail. The Tribunal noted that the transfer of PI assets had been effected without consideration and formed part of a Scheme of Demerger duly sanctioned by the Hon’ble High Court, and therefore the character of the transaction had to be examined in the light of the statutory provisions and the judicial approval accorded to the scheme.

20. The Co-ordinate Bench further observed that the Scheme of Demerger itself specifically contemplated transfer of PI assets to Vodafone Infrastructure Ltd. by way of gift. It was also noted that the Revenue had raised objections before the Hon’ble Delhi High Court contending that such transfer by way of gift was impermissible. However, those objections were rejected by the Hon’ble High Court, which held that the Revenue had failed to place any authority or rule to support its contention. In view of the said judicial approval, the Tribunal held that the transfer of PI assets forming part of the Court-approved Scheme could not be regarded as a sham transaction or colourable device.

21. The Co-ordinate Bench also took note of the fact that the assessee had not claimed any deduction for loss arising from the transfer of PI assets. On the contrary, the assessee had voluntarily reduced the tax written down value of the transferred assets from the block of plant and machinery, even though in the absence of consideration such adjustment was not statutorily required. This conduct of the assessee was considered by the Co­ordinate Bench as demonstrating that no undue tax advantage was sought to be derived from the transaction.

22. Taking these aspects into consideration, it was concluded that the transfer of PI assets constituted a genuine gift falling within the ambit of section 47(iii) of the Act, and therefore the same could not be treated as a transfer for the purposes of section 2(47). Consequently, it was held that the Assessing Officer was not justified in imputing any notional consideration or reducing the written down value of the block of assets, and the disallowance of depreciation was held to be unsustainable in law. Accordingly, the Revenue’s ground on this issue was dismissed.

23. In the present appeal before us, it is not the case of the Revenue that there is any change in the factual position or in the legal framework as compared to the earlier year. The transfer of PI assets arises from the very same Scheme of Demerger and the reasoning adopted by the Assessing Officer in the impugned assessment year is also identical to that adopted in the preceding year.

24. In view of the above factual and legal position, and respectfully following the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010­11, we hold that the disallowance of depreciation on account of transfer of PI assets is not sustainable in law.

25. Accordingly, the addition of Rs. 26,85,91,500/- made by the Assessing Officer and sustained by the DRP is directed to be deleted. Thus, Ground No. 1 raised by the assessee is allowed.

Disallowance of Network Site Rentals paid to M/s. Indus Towers Ltd.(Assessee’s Ground No. 2)

26. The next issue arising for our consideration relates to the disallowance of network site rentals paid by the assessee to M/s. Indus Towers Ltd. The brief facts of the case, as emanating from the record, are that during the course of assessment proceedings it was noticed by the Assessing Officer that the assessee had paid network site rentals amounting to Rs. 225.82 crore to M/s. Indus Towers Ltd. for the use of Passive Infrastructure (PI) assets. These PI assets had earlier been transferred by the assessee to M/s. Vodafone Infrastructure Services Ltd. with effect from 01.04.2009, which in turn was merged with M/s. Indus Towers Ltd. with effect from 01.04.2009 for Nil consideration. In view of the above, the assessee was asked to show cause as to why the payment made to M/s. Indus Towers Ltd. for use of such PI assets should not be treated as excessive or unreasonable and disallowed under the provisions of section 40A(2)(b) of the Act. After considering the submissions filed by the assessee, the Assessing Officer, in the Draft Assessment Order, held that the entire scheme of transfer of PI assets to M/s. Vodafone Infrastructure Ltd. and thereafter to M/s. Indus Towers Ltd. on the same date was structured with the intent to evade taxes and reduce the tax liability of the assessee. The Assessing Officer further observed that prior to the transfer of PI assets the assessee was earning Indefeasible Right to Use (IRU) revenue amounting to Rs. 37.9 crore from M/s. Indus Towers Ltd., whereas after transferring the PI assets for Nil consideration, the assessee was paying Rs. 225.82 crore to M/s. Indus Towers Ltd. for the use of the same assets. On the basis of the above observations, the Assessing Officer held that the expenditure of Rs. 225.82 crore incurred for the use of assets which were earlier owned by the assessee itself was only with the intention of reducing the tax liability, and therefore such payment was excessive and unreasonable within the meaning of section 40A(2)(b) of the Act. Accordingly, the Assessing Officer proposed to disallow the entire payment of Rs. 225.82 crore and add the same to the total income of the assessee.

27. In the proceedings before the DRP, the learned DRP, following its own directions for Assessment Year 2010-11, accepted the contention of the assessee that the provisions of section 40A(2)(b) were not applicable to the facts of the present case. However, the DRP held that the expenditure of Rs. 225.82 crore had not been incurred wholly and exclusively for the purposes of the business of the assessee, and accordingly directed the Assessing Officer to disallow the same under section 37(1) of the Act. In conformity with the directions of the DRP, the Assessing Officer passed the Final Assessment Order, inter alia, making the impugned addition on this issue.

28. During the course of hearing before us, the learned AR submitted that the very objective of transferring the PI assets to M/s. Indus Towers Ltd. was to promote infrastructure sharing among telecom operators. It was submitted that the restructuring was undertaken with the intent of facilitating administration, operation and maintenance of such infrastructure by a specialised entity, thereby enabling telecom operators to benefit from economies of scale and improve the quality of services provided to customers. The learned AR further submitted that significant costs were being incurred by the assessee in earlier years for the running and maintenance of such towers, including expenses on depreciation on towers owned by the assessee, site rentals paid for towers of other telecom operators, power and fuel costs, security expenses, and repairs and maintenance. It was contended that after the transfer of PI assets, these operational responsibilities were taken over by M/s. Indus Towers Ltd., and therefore the assessee now pays network site rentals to that entity. It was further submitted that although these costs were earlier being incurred directly by the assessee, they were substantially rationalised after the restructuring, since M/s. Indus Towers Ltd. assumed responsibility for the operation and maintenance of the tower infrastructure. It was contended that the restructuring was expected to yield greater operational efficiencies in the long run, as increased tower sharing among telecom operators would reduce the overall service cost incurred by the assessee. The learned AR also submitted that earlier the assessee was receiving Rs. 37.9 crore from M/s. Indus Towers Ltd. as IRU revenue, since the assessee was allowing the use of its tower infrastructure. However, after the transfer of these towers to M/s. Indus Towers Ltd., the towers were being entirely utilised by the assessee for its telecom operations and therefore the assessee now pays Rs. 225.82 crore as network site rentals to M/s. Indus Towers Ltd.

29. The learned AR further submitted that an identical issue had arisen in the assessee’s own case for the immediately preceding Assessment Year 2010-11, wherein the Co-ordinate Bench had examined the allowability of network site rentals paid to M/s. Indus Towers Ltd. The Co-ordinate Bench, after considering the submissions of both the parties, noted the contention of the assessee that the transfer of Passive Infrastructure assets was undertaken to promote infrastructure sharing and achieve operational efficiencies, whereby the responsibility for running and maintenance of the towers was taken over by M/s. Indus Towers Ltd., resulting in the assessee paying network site rentals for use of such infrastructure. The Co-ordinate Bench observed that the various factual aspects relating to the cost structure, operational arrangements and the nature of services rendered by M/s. Indus Towers Ltd. had not been properly examined by the lower authorities, and therefore restored the matter to the file of the Assessing Officer for de novo adjudication after detailed verification of the relevant facts and submissions of the assessee.

30. On the other hand, the learned Departmental Representative submitted that the submissions made by the assessee require detailed verification on the basis of the relevant factual details, particularly in relation to the restructuring arrangement and the nature of the payments made to M/s. Indus Towers Ltd.

31. We have considered the rival submissions and perused the material available on record. We find that an identical issue had arisen in the assessee’s own case for the immediately preceding Assessment Year 2010-11, wherein the Co-ordinate Bench of the Tribunal, after considering similar submissions, held that the factual aspects relating to the restructuring arrangement, the cost structure of operating and maintaining the tower infrastructure, and the basis of charging network site rentals by M/s. Indus Towers Ltd. had not been examined by the lower authorities. The Co-ordinate Bench, therefore, restored the matter to the file of the Assessing Officer for fresh adjudication after proper verification of the relevant facts and submissions of the assessee.

32. Since the facts of the present year are identical and no distinguishing feature has been brought to our notice by the Revenue, respectfully following the decision of the Co-ordinate Bench in the assessee’s own case for the immediately preceding year, we restore this issue to the file of the Assessing Officer for de novo adjudication in accordance with law after examining the submissions and evidences that may be furnished by the assessee. Needless to state, the Assessing Officer shall afford reasonable opportunity of being heard to the assessee before deciding the issue. Accordingly, Ground No. 2 raised by the assessee is allowed for statistical purposes.

Disallowance under section 14A of the Act(Assessee’s Ground No. 3)

33. During the assessment proceedings, it was noted that the assessee has an investment in shares, which stands at Rs.1855 million, however the assessee has not disallowed any expenditure incurred for earning exempt income under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (“the Rules”). The assessee submitted that no disallowance is called for under section 14A of the Act, read with rule 8D of the Rules, as the assessee has not earned any exempt income and the investment is from its own funds. The AO, vide Draft Assessment Order, proposed disallowance of Rs.92,75,000/ -under section 14A read with Rule 8D(2) (iii) of the Rules. The learned DRP, vide its Directions, rejected the objections filed by the assessee on this issue. In conformity, the AO passed the impugned Final Assessment Order making a disallowance under section 14A of the Act.

34. During the course of hearing, the learned AR submitted that during the year under consideration the assessee had not received any dividend income from its investments and therefore no exemption under section 10(34) of the Act was claimed while filing the return of income. It was thus contended that in the absence of any exempt income, no disallowance under section 14A of the Act read with Rule 8D of the Rules could be made.

35. The learned AR further submitted that the issue is squarely covered in favour of the assessee by the decisions of the Co­ordinate Bench of the Tribunal in the assessee’s own case. In this regard, reliance was placed on the decision of the Co-ordinate Bench in DCIT vs. Vodafone West Ltd. in ITA Nos. 909 & 944/Ahd/2014, order dated 17.11.2016 for Assessment Year 2009-10, and also in DCIT vs. Vodafone West Ltd. in ITA Nos. 671 & 1634/Ahd/2015, order dated 11.12.2025 for Assessment Year 2010-11, wherein in identical circumstances the Co-ordinate Bench, following the judgment of the Hon’ble Gujarat High Court in CIT vs. Corrtech Energy Pvt. Ltd., reported in 45 taxmann.com 116 (Guj.), held that no disallowance under section 14A read with Rule 8D is warranted when the assessee has not earned any exempt income during the relevant year.

36. We find that an identical issue has been considered by the Co-ordinate Bench in the assessee’s own case for Assessment Year 2009-10 in ITA Nos. 909 86 944/Ahd/2014 vide order dated 17.11.2016, as well as in Assessment Year 2010-11 in ITA Nos. 671 86 1634/Ahd/2015 vide order dated 11.12.2025. In those decisions, the Co-ordinate Bench, following the judgment of the Hon’ble Gujarat High Court in CIT vs. Corrtech Energy Pvt. Ltd. (2014) 45 com 116 (Guj.), held that no disallowance under section 14A can be made in a year in which the assessee has not earned any exempt income.

37. Since the facts of the present year are identical and no distinguishing feature has been brought on record by the Revenue, respectfully following the decisions of the Co-ordinate Bench in the assessee’s own case as well as the binding judgment of the Hon’ble jurisdictional High Court, we hold that the disallowance made under section 14A read with Rule 8D of the Rules is not sustainable.

38. Accordingly, the disallowance of Rs. 92,75,000/- is directed to be deleted and Ground No. 3 raised by the assessee is allowed.

Disallowance of roaming charges under section 40(a)(ia) and section 40(a)(i) of the Act on account of non-deduction of tax at source(Assessee’s Ground No. 4)

39. During the year under consideration, the assessee paid an amount of Rs.74,21,91,150/- as roaming charges to domestic and overseas service providers. Out of the above roaming expenses, Rs.12,17,15,462/-pertained to international roaming charges paid to foreign companies and the balance Rs.62,04,75,688/- pertained to roaming charges paid to domestic companies. During the assessment proceedings, it was noticed that the assessee had not deducted tax at source on these payments. The AO, vide Draft Assessment Order, disagreed with the submissions of the assessee and held that during the process of carriage of calls, the intervention of a technical expert is persistently required to make the process of carriage of calls successful. It was further held that persons involved in these areas cannot be merely technicians but are professionally and highly qualified experts having good knowledge of network management, knowledge of hardware and software, knowledge of network configuration etc. as no service provider can take a risk of leaving the network system unattended when the networks are interconnected with each other during the process of carriage of calls, as the slightest fault can collapse entire system. Thus, the AO held that the human invention is required to make the process of carriage of calls successful, and the level of human intervention is of a much higher and sophisticated technical level. Accordingly, the AO held that the payment of roaming charges by the assessee to other telecom operators for the provision of roaming services to the subscribers of the assessee is subject to tax deduction at source in terms of provisions of section 1943 read with section 9(i)(vil) of the Act. As the assessee failed to deduct the tax at source, the entire expenditure towards roaming charges was proposed to be disallowed under section 40(a)(ia) and section 40(a)(i) * of the Act, added to the total income of the assessee. The detailed objections filed by the assessee on this issue were rejected by the learned DRP vide its Directions issued under section 144C(5) of the Act by following its own Directions for the immediately preceding year AY 2010-11. The AO, in conformity with the Directions issued by the learned DRP, made the impugned addition vide Final Assessment Order.

40. During the course of hearing, the learned AR submitted that the issue involved in the present ground is no longer res integra and stands squarely covered in favour of the assessee by the decisions of the Co-ordinate Benches of the Tribunal in the assessee’s own case as well as in the cases of its group concerns.

41. The learned AR submitted that an identical issue relating to disallowance of roaming charges for non-deduction of tax at source came up for consideration before the Co-ordinate Bench in the assessee’s own case in DCIT vs. Vodafone West Ltd. in ITA Nos. 909 86 944/Ahd/2014 vide order dated 17.11.2016 for Assessment Year 2009-10, and also in DCIT vs. Vodafone West Ltd. in ITA Nos. 671 86 1634/Ahd/2015 vide order dated 11.12.2025 for Assessment Year 2010-11. In the said decisions, the Co-ordinate Bench held that roaming charges paid to other telecom operators do not involve human intervention in the technical sense so as to fall within the scope of fees for technical services, and consequently no tax was required to be deducted at source under the relevant provisions of the Act. Accordingly, the Co-ordinate Bench deleted the disallowance made under section 40(a)(ia).The learned AR further submitted that the Co-ordinate Bench, while deciding the issue in the assessee’s own case, had followed the decision of the Co-ordinate Bench in the case of the assessee’s sister concern Vodafone East Ltd. in ITA No. 1864/Kol/2012, wherein on identical facts it was held that roaming services between telecom operators are provided through an automated and standardised process without human intervention, and therefore the payments made for such services cannot be characterised as fees for technical services. The learned AR also placed reliance on the decision of the Co-ordinate Bench in the case of another group concern, Vodafone Digilink Ltd. vide order dated 14.10.2025, wherein under identical circumstances the Co-ordinate Bench deleted the disallowance of roaming charges made on account of non-deduction of tax under section 194J of the Act. On the basis of the above judicial precedents, the learned AR submitted that the disallowance made by the Assessing Officer under section 40(a)(ia) and section 40(a)(i) is unsustainable in law, and therefore the same deserves to be deleted. It was further submitted that if this ground of appeal is allowed in favour of the assessee, the additional ground of appeal raised by the assessee would become academic in nature.

42. We have considered the rival submissions and perused the material available on record. We find that the issue relating to disallowance of roaming charges for non-deduction of tax at source has been consistently decided in favour of the assessee by the Co-ordinate Benches in the assessee’s own case for Assessment Years 2009-10 and 2010-11. In the said decisions, the Co-ordinate Bench, following the decision in the case of Vodafone East Ltd. as well as other group entities, held that the roaming services between telecom operators are rendered through an automated and standardised process without any human intervention, and therefore the payments made for such services cannot be characterised as fees for technical services so as to attract the provisions of tax deduction at source.

43. Since the facts of the present year are identical and no distinguishing feature has been brought on record by the Revenue, respectfully following the decisions of the Co-ordinate Benches in the assessee’s own case as well as in the cases of its group concerns, we hold that the disallowance made under section 40(a)(ia) and section 40(a)(i) of the Act is not sustainable.

44. Accordingly, the addition made by the Assessing Officer on account of disallowance of roaming charges is directed to be deleted.

Disallowance of depreciation on 3G Spectrum Fees(Assessee’s Ground No. 5)

45. The brief facts of the case pertaining to this issue, as emanating from the record, are that during the year under consideration the assessee acquired 3G Spectrum and treated the spectrum fees paid for the same as an intangible asset. The value of the said asset was reported in the Tax Audit Report at Rs. 1,198,14,49,951/-. The assessee claimed depreciation at the rate of 12.5 percent, being half of the prescribed rate of 25 percent under section 32 of the Act, amounting to Rs. 149,76,81,244/-, on the ground that the asset had been acquired and put to use for less than 180 days during the year. Further, the assessee capitalised interest expenditure of Rs. 123,92,61,917/- incurred in connection with the payment of the 3G spectrum fees in terms of the provisions of section 43(1) of the Act.

46. During the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish a detailed note on the acquisition of the spectrum licence along with supporting documentary evidence and to justify the claim of depreciation. The assessee was also required to explain as to why the capital expenditure incurred towards acquisition of spectrum fees should not be amortised under section 35ABB of the Act, which deals with deduction in respect of expenditure incurred for acquiring telecommunication licences. The assessee submitted that the spectrum acquired constituted an intangible asset eligible for depreciation under section 32, and therefore the claim of depreciation was in accordance with the provisions of the Act. The Assessing Officer, however, did not accept the submissions of the assessee. In the Draft Assessment Order, the Assessing Officer held that the capital expenditure incurred for acquisition of 3G spectrum was required to be amortised under section 35ABB of the Act over the period of 20 years for which the spectrum licence had been allocated, instead of allowing depreciation under section 32 of the Act as claimed by the assessee. The detailed objections filed by the assessee on this issue were rejected by the learned DRP vide its directions issued under section 144C(5) of the Act. Consequently, the Assessing Officer, in conformity with the directions of the DRP, made the impugned disallowance in the Final Assessment Order.

47. During the course of hearing before us, the learned AR submitted that the issue involved in the present ground is squarely covered in favour of the assessee by several decisions of the Co-ordinate Benches of the Tribunal in the cases of the assessee’s group entities, wherein depreciation on 3G spectrum has been allowed as an intangible asset under section 32 of the Act. In support of the above contention, reliance was placed on the following decisions:

i. Order dated 18.02.2025 passed by the Tribunal in the case of erstwhile Vodafone India Limited for Assessment Year 2014-15 (ITA No. 316/ Mum/ 2019);

ii. Order dated 24.10.2025 passed by the Tribunal in the case of erstwhile Vodafone Digilink Limited (ITA No. 8361/Del/ 2019);

iii. Order dated 22.10.2024 passed by the Tribunal in the case of erstwhile Vodafone India Limited for Assessment Year 2013-14 (ITA No. 6671/Mum/2017);

iv. Consolidated order dated 17.05.2024 passed by the Tribunal in the case of erstwhile Vodafone India Limited for Assessment Year 2012-13 (ITA No. 2834/Mum/ 2017);

v. Order dated 28.08.2020 passed by the Tribunal in the case of erstwhile Vodafone India Ltd. for Assessment Year 2011-12 (ITA No. 3327/ Mum/ 2018);

vi. Decision of the Tribunal in the case of erstwhile Idea Cellular Ltd. (now merged with the assessee) vs. PCIT (ITA No. 360/Mum/2016).

48. The learned AR submitted that in the aforesaid decisions, the Co-ordinate Bench has consistently held that spectrum licence represents an intangible asset eligible for depreciation under section 32 of the Act, and therefore the action of the Assessing Officer in seeking to amortise the expenditure under section 35ABB is not sustainable in law.

49. We have carefully considered the rival submissions and perused the material available on record. The issue involved in the present ground relates to the allowability of depreciation on 3G spectrum fees claimed by the assessee as an intangible asset under section 32 of the Act, as against the stand of the Assessing Officer that the expenditure is required to be amortised under section 35ABB of the Act.

50. We find that an identical issue has been considered by various Co-ordinate Benches of the Co-ordinate Bench in the cases of the assessee’s group entities, wherein it has been consistently held that the right to use telecom spectrum represents an intangible asset eligible for depreciation under section 32 of the Act. In the decisions relied upon by the learned AR, including those in the cases of Vodafone India Limited, Vodafone Digilink Limited and Idea Cellular Ltd., the Co-ordinate Bench has examined the nature of spectrum rights and held that such rights constitute business or commercial rights of similar nature, falling within the scope of intangible assets specified in section 32(1)(ii) of the Act.

51. The Co-ordinate Bench in those cases further held that the provisions of section 35ABB, which provide for amortisation of expenditure incurred for acquiring a telecommunication licence, are not applicable where the assessee claims depreciation on spectrum rights as an intangible asset forming part of the block of assets. Accordingly, the claim of depreciation on 3G spectrum has been allowed by the Co-ordinate Bench in those decisions.

52. The Revenue has not brought to our notice any contrary decision of any higher judicial forum nor pointed out any distinguishing feature in the facts of the present case as compared to the cases relied upon by the assessee.

53. In view of the consistent judicial view taken by the Co­ordinate Benches of the Tribunal in the cases of the assessee’s group companies, and in the absence of any distinguishing material placed before us, we respectfully follow the aforesaid decisions and hold that the assessee is entitled to claim depreciation on 3G spectrum fees under section 32 of the Act.

54. Accordingly, the action of the Assessing Officer in seeking to amortise the expenditure under section 35ABB and in disallowing the depreciation claimed by the assessee is not sustainable in law. The Assessing Officer is therefore directed to allow the depreciation claimed by the assessee on 3G spectrum fees. Thus, Ground No. 5 raised by the assessee is allowed.

Non-allowance of deduction under section 801A of the Act (Assessee’s Ground No. 6 and sub-grounds 6.1 and 6.2)

55. The next issue arising for our consideration pertains to the denial of deduction under section 801A of the Act in respect of certain items of income. The assessee has challenged the action of the Assessing Officer, in pursuance of the directions of the learned DRP, in not allowing deduction under section 801A on the following:

– Scrap sales income of Rs. 40,26,263/-; and

– Amount of Rs. 92,75,000/- disallowed under section 14A of the Act.

56. During the course of assessment proceedings, the Assessing Officer observed that the assessee had included scrap sales income of Rs. 40,26,263/- while computing the profits eligible for deduction under section 801A of the Act. The Assessing Officer noted that the assessee had not furnished any explanation to justify the inclusion of the said income as being derived from the eligible business undertaking. Accordingly, the Assessing Officer proposed to exclude the aforesaid amount from the eligible profits in the Draft Assessment Order. The Assessing Officer further observed that such income does not have a direct nexus with the business of the undertaking and therefore cannot be regarded as income “derived from” the eligible business. Against the Draft Assessment Order, the assessee filed objections before the DRP. However, the learned DRP did not issue any specific direction on this issue in its order dated 28.12.2015. In view thereof, the Assessing Officer, in the Final Assessment Order passed under section 143(3) read with section 144C(13) of the Act, proceeded to exclude an amount of Rs. 40,26,263/- being scrap sales income from the profits eligible for deduction under section 80IA of the Act.

57. The learned AR submitted that the issue relating to inclusion of scrap sales income of Rs. 40,26,263/- in the eligible profits for the purpose of deduction under section 80IA of the Act is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for Assessment Year 2010-11 in ITA No. 1634/Ahd/2015, wherein the Co-ordinate Bench has allowed the claim of the assessee. The learned AR further placed reliance on the decision of the Co­ordinate Bench in assessee’s own case for Assessment Year 2009-10 in ITA No. 909/Ahd/2014, wherein, following the judgment of the Hon’ble Delhi High Court in PCIT vs. BSNL Ltd. (73 taxmann.com 98), it was held that in the case of an undertaking engaged in providing telecommunication services, the restrictive interpretation of the expression “derived from” is not applicable in view of the non obstante clause in section 80IA(2A), and consequently, the entire business income of the undertaking qualifies for deduction under section 80IA of the Act. It was further submitted that a similar view has been taken in the case of the assessee’s group entity, namely, erstwhile Vodafone India Ltd. for Assessment Year 2005-06, wherein the Co-ordinate Bench has upheld the eligibility of such income for deduction under section 80IA.

58. The learned AR also submitted that although the learned DRP has not issued specific directions on the issue of scrap sales, it has, in principle, decided similar issues relating to other income in favour of the assessee by holding the same to be eligible for deduction under section 80IA of the Act, and therefore, the action of the Assessing Officer in excluding scrap sales income is unsustainable.

59. Without prejudice, it was further contended that in the event the disallowance under section 14A is sustained, the same ought to be considered while computing the eligible profits for the purpose of deduction under section 80IA of the Act.

60. We have heard the rival submissions and perused the material available on record. The limited controversy in the present ground relates to the exclusion of scrap sales income of Rs. 40,26,263/- from the profits eligible for deduction under section 80IA of the Act.

61. At the outset, we note that an identical issue has been considered by the Co-ordinate Bench of the Co-ordinate Bench in assessee’s own case for Assessment Year 2010-11 in ITA No. 1634/Ahd/2015. The Co-ordinate Bench, after examining the scheme of section 80IA and in particular the distinction between sub-section (1) and sub-section (2A), and following the decision rendered in the case of the group concern, has held that income arising from the business of telecommunication services, including other incidental income, is eligible for deduction under section 80IA of the Act.

62. In the present case also, the income from scrap sales has arisen in the course of carrying on the telecommunication business of the assessee and forms part of its business receipts. In view of the above binding precedent in assessee’s own case and in absence of any distinguishing facts brought on record by the Revenue, we find no justification in excluding the same from the eligible profits.

63. Further, as regards the alternative contention relating to disallowance under section 14A, it is an admitted position that the said disallowance has already been deleted while adjudicating Ground No. 3 of the present appeal. Accordingly, the said aspect does not survive for separate adjudication in the context of computation of deduction under section 80IA.

64. In view of the above, we hold that the scrap sales income of Rs. 40,26,263/- is eligible for deduction under section 80IA of the Act. The action of the Assessing Officer in excluding the same is therefore set aside. Accordingly, Ground No. 6 of the assessee’s appeal is allowed.

Transfer Pricing Adjustment of Rs. 16,15,68,785/- on account of interest paid on External Commercial Borrowings (ECB) (Assessee’s Ground No. 7)

65. The next issue for our consideration relates to the upward transfer pricing adjustment of Rs. 16,15,68,785/- made on account of interest and upfront fee paid by the assessee on External Commercial Borrowings (ECB) availed from its Associated Enterprise, namely Vodafone Overseas Finance Limited (VOFL).

66. During the year under consideration, the assessee had entered into an international transaction with its AE in respect of availing ECB facility and had paid interest along with upfront fee. The assessee benchmarked the said transaction by conducting an external Comparable Uncontrolled Price (CUP) analysis and claimed that the interest rate, including the effect of upfront fee, was at arm’s length. The assessee also contended that the ECB had been availed with due approval from the Reserve Bank of India and therefore the pricing was in conformity with regulatory norms.

67. However, the learned Transfer Pricing Officer rejected the benchmarking analysis undertaken by the assessee and conducted a fresh search for comparable loan transactions. While doing so, the TPO, inter alia, re-characterized the unsecured ECB facility as a secured loan, selected comparables accordingly, and determined a lower arm’s length interest rate. The TPO further rejected the method adopted by the assessee for amortisation of upfront fee and instead considered the same separately while computing the effective interest rate. The TPO also did not accept the adjustments claimed by the assessee on account of country risk, currency risk and subordination, and allowed only a restricted adjustment of 50 basis points on an ad hoc basis. Based on such analysis, the TPO proposed an adjustment, which was incorporated by the Assessing Officer in the Draft Assessment Order.

68. The objections filed by the assessee before the learned DRP were rejected, and the adjustment was sustained. Consequently, the Assessing Officer, in conformity with the directions of the DRP, made the impugned addition of Rs. 16,15,68,785/- in the Final Assessment Order.

69. Aggrieved, the assessee is in appeal before us, raising the aforesaid grounds challenging the determination of arm’s length price, rejection of benchmarking analysis, re-characterization of the transaction, and denial of appropriate adjustments.

70. The learned AR submitted that the assessee had entered into an External Commercial Borrowing (ECB) agreement with its Associated Enterprise, namely Vodafone Overseas Finance Limited, for availing a loan facility amounting to JPY 15.23 billion. The said agreement was amended and restated on 22.03.2010 and was duly approved by the Reserve Bank of India on 31.03.2010. Pursuant to such approval, disbursements were made during the year and the interest was paid within the all-in-cost ceiling of LIBOR plus 500 basis points, as prescribed by the RBI.

71. It was submitted that since the approval granted by the RBI was specific in nature, the assessee had adopted the same as a valid Comparable Uncontrolled Price for benchmarking the international transaction. Without prejudice, the assessee had also carried out an external benchmarking analysis using Reuters Loan Connector database, wherein comparable loan tranches were identified and it was demonstrated that the effective interest rate paid by the assessee, being LIBOR plus 500 basis points, was lower than the arm’s length interest spread of comparable uncontrolled transactions.

72. The learned AR further submitted that the TPO erred in rejecting the RBI approval as a CUP without appreciating that the regulatory approval inherently factors market conditions, credit risk, tenure and other commercial parameters. In this regard, reliance was placed on judicial precedents, including the decision of the Hon’ble Karnataka High Court in the case of CIT vs. GE India Technology Centre (P.) Ltd. (125 taxmann.com 168) and decisions of the Co-ordinate Bench in the cases of Ion Exchange (India) Ltd.(ITA No.5109/Mum/2013) and Firmenich Aromatics India Pvt. Ltd. (107 taxmann.com 535), wherein it has been held that interest rates approved by RBI can be regarded as being at arm’s length.

73. The learned AR also submitted that the TPO erred in rejecting the benchmarking analysis on untenable grounds. It was contended that the comparable data was selected in accordance with Rule 10B(4) having regard to the market conditions prevailing at the time of entering into the ECB agreement. Even if the TPO’s approach of restricting the data to the relevant financial year is accepted, the revised comparables would still reflect a higher arm’s length spread than the rate actually paid by the assessee, thereby establishing that the transaction is at arm’s length.

74. With regard to the characterization of the loan, the learned AR submitted that the ECB facility is an unsecured loan, as evidenced from the audited financial statements and supporting documents. The TPO erred in re-characterizing the same as a secured loan merely on the basis of alleged guarantee, without appreciating the actual terms of the arrangement. It was further submitted that the TPO has incorrectly considered the purpose of the loan as a relevant factor, whereas in commercial practice, the interest rate is determined based on factors such as creditworthiness, tenure, security and prevailing market conditions, and not on the end-use of funds. No material has been brought on record by the TPO to justify any variation on this account.

75. On the issue of adjustments, the learned AR submitted that the assessee had duly furnished detailed workings for country risk and currency risk adjustments based on reliable databases including Reuters EIKON. However, the TPO arbitrarily allowed an ad hoc adjustment of 50 basis points without assigning any cogent reasons and without appreciating that country risk and currency risk are distinct parameters requiring independent consideration. Further, it was contended that the ECB facility is subordinated in nature, which increases the risk borne by the lender. The AE had agreed not to receive principal and interest payments during the period of subordination, thereby assuming higher risk. The assessee, based on a bond yield analysis, computed a subordination adjustment of 1.03%, which was unjustifiably rejected by the TPO. It was submitted that the comparables selected by the TPO pertain to senior debt, whereas the assessee’s borrowing is subordinated, thereby rendering the comparison inappropriate.

76. On the issue of upfront fee, the learned AR submitted that the same has to be amortized over the tenure of the ECB facility, and the RBI itself, while prescribing the all-in-cost ceiling, has taken into account the interest rate along with the amortized portion of upfront fee. Therefore, the approach adopted by the TPO in treating the upfront fee separately is erroneous.

77. Without prejudice, it was submitted that the ECB facility was utilized for acquisition of 3G spectrum, which has been capitalized as an intangible asset, and interest incurred prior to put-to-use has also been capitalized. Accordingly, even if any adjustment is to be made, the same ought to be restricted only to the amortized portion of the upfront fee claimed during the year and not the entire amount.

78. On the aforesaid basis, the learned AR submitted that the international transaction of payment of interest and upfront fee on ECB is at arm’s length and the impugned adjustment made by the TPO/AO/DRP is liable to be deleted.

79. We have carefully considered the rival submissions, perused the transfer pricing order, the directions of the learned DRP, the material placed in the paper book, and the judicial precedents relied upon by the learned AR.

80. At the outset, the basic facts are not in dispute. The assessee had entered into an ECB arrangement with its Associated Enterprise, namely VOFL, for availing a JPY denominated borrowing facility of JPY 15.23 billion. The agreement, as amended and restated on 22.03.2010, was specifically approved by the Reserve Bank of India on 31.03.2010. The contractual interest was at LIBOR plus 460 basis points and, after considering the apportionment of the upfront fee of 220 basis points over the loan tenure, the effective all-in-cost worked out to LIBOR plus 500 basis points, which was within the RBI approved ceiling. The assessee, therefore, first relied upon the RBI approval and, in addition, undertook an external benchmarking search on Reuters LPC Loan Connector database and arrived at comparable spreads higher than the effective rate paid by it. The TPO, however, rejected both the RBI based benchmarking and the external search undertaken by the assessee, conducted a fresh search, treated the arm’s length rate at LIBOR plus 385 basis points, and accordingly proposed the impugned adjustment. The learned DRP has substantially upheld the approach of the TPO.

81. The first objection of the TPO, which has also weighed with the learned DRP, is that the RBI approval cannot be considered as CUP for benchmarking the transaction. In our view, the legal position is that RBI approval may not be conclusive of arm’s length price by itself, and the transfer pricing authorities are not barred from examining the international transaction merely because the borrowing is RBI approved. To that extent, the broad proposition canvassed by the TPO cannot be faulted. However, that is not the end of the matter. The Karnataka High Court in GE India Technology Centre (P.) Ltd. has clearly held that RBI approval with regard to the rate of interest is a relevant factor while determining the arm’s length rate of interest, and that the rate of interest has to be determined with reference to the rate prevailing at the time of availing the loan. The High Court further upheld the Co-ordinate Bench’s view that the Revenue could not make a departure in one year when the same rate stood accepted in other years.

82. A similar approach is found in Ion Exchange (I) Ltd., where the Mumbai Bench affirmed the view that, when the TPO’s adjustments were founded on hypothetical assumptions and without proper comparable circumstances, the proper benchmark for foreign currency lending was the rate prescribed by RBI in its ECB Master Circular, namely LIBOR plus the relevant spread depending upon the tenure of the borrowing. In Firmenich Aromatics India Pvt. Ltd., the Mumbai Bench again held that where the TPO benchmarked ECB interest on the basis of an average of 46 entities from Bloomberg database without clarity regarding the nature of the loan, whether secured or unsecured, the tenure, and the purpose of borrowing, such comparables could not be treated as valid, and in such circumstances the ALP of ECB interest could be more accurately determined by following the rate fixed by RBI.

83. Thus, the correct legal position which emerges is that though RBI approval is not an automatic substitute for transfer pricing analysis, it is certainly a relevant and weighty factor in the case of ECB borrowings, particularly where the TPO’s own benchmarking suffers from serious infirmities. It is, therefore, necessary to examine whether the search undertaken by the TPO in the present case can be said to furnish a more reliable benchmark than the contemporaneous RBI approved all-in-cost.

84. On such examination, we find considerable force in the submissions of the learned AR that the search carried out by the TPO does not satisfy the standard of comparability required under the Act and the Rules. The assessee had objected that the TPO ignored the actual terms of the ECB agreement, rejected the unsecured character of the borrowing, treated a guaranteed borrowing as secured, did not properly apply the borrower-region filter, applied country and currency risk adjustments only on an ad hoc basis, and declined the subordination adjustment despite the documented subordination of the VOFL facility. The TPO order itself shows that the comparability process underwent repeated shifts. Revolver loans, initially included, had eventually to be removed. This altered the spread used by the TPO. Such revision itself indicates that the set of comparables was not robust at inception.

85. More importantly, the reasoning of the Mumbai Bench in Firmenich Aromatics India Pvt. Ltd. applies with full force here. The Co-ordinate Bench there held that where the TPO’s discussion does not show whether the data for the proposed comparables included the nature of loan, whether secured or unsecured, the period of loan, and the purpose for which the loan was granted, such benchmarking cannot be treated as valid. The Co-ordinate Bench also noted that relevant data available with the TPO had not been provided to the assessee. The very same infirmities are visible in the present case. The TPO has proceeded on the footing that the assessee’s loan was effectively secured because of guarantees. The assessee, however, specifically demonstrated that a guaranteed loan does not ipso facto become a secured loan and that even in the database relied upon, there were instances of guaranteed loans still classified as unsecured. The assessee also pointed out that its ECB was cross-guaranteed but not secured by collateral, and that the audited financial statements as well as the RBI-related documentation described the borrowing as unsecured. The TPO has brushed aside these objections, but has not brought any cogent material to show that the lender had recourse to any collateral security which would justify treating the borrowing as a secured loan in the strict sense. In transfer pricing, a guaranteed unsecured borrowing cannot be casually equated with a secured borrowing backed by collateral, because the risk profile is materially different.

86. We also find merit in the grievance of the assessee regarding the treatment of the purpose filter. The TPO observed that the purpose of loan is an important criterion, yet the final analysis does not convincingly demonstrate that the comparables used were functionally similar in this regard. The assessee’s case was that the ECB was availed for import of capital goods and payment of 3G licence fee, that is, for a specific long-term corporate purpose, whereas the TPO faulted the assessee for not applying the filter while at the same time not showing that his own final comparables matched the purpose and tenor of the subject borrowing. A benchmark that does not satisfactorily address the purpose, maturity, security profile, currency and subordination characteristics cannot override a contemporaneous regulatory approval issued for the same borrowing.

87. As regards the use of multiple year data, we are of the view that the TPO was justified in stating that Rule 10B(4) generally mandates the use of current year data and that earlier year data can be used only if the assessee demonstrates that it reveals facts which could influence transfer pricing determination. To that extent, the objection of the Revenue has substance. However, this aspect by itself does not validate the final benchmark adopted by the TPO. Even if we proceed on the basis that the assessee cannot succeed solely on its original multiple-year search, the matter does not conclude in favour of the Revenue, because the TPO still had the burden to adopt a sound and reliable comparable set. The failure of the assessee’s primary search on account of Rule 10B(4), even if assumed, does not automatically make the TPO’s search sacrosanct.

88. On the issue of country risk and currency risk, we find that the TPO has granted only 50 basis points on an ad hoc basis. The assessee had claimed that it had separately computed these adjustments on the basis of Reuters EIKON data and had submitted screenshots and workings in support thereof. The TPO rejected the computation, observing that complete data was not furnished. Yet, despite holding the data inadequate, he still granted a composite 50 basis points adjustment without any discernible methodology. This approach is internally inconsistent. If the assessee’s data was insufficient, the TPO ought either to have called for complete particulars and examined them or rejected the claim on a reasoned basis. A flat composite adjustment for two distinct risk factors, without analytical foundation, cannot be treated as a reliable transfer pricing exercise.

89. The position becomes even more problematic when one considers the assessee’s claim for subordination adjustment. The record shows that the assessee had produced audited financial statements showing the VOFL facility as subordinated and had also explained that VOFL had agreed not to receive principal and interest payments until the loan ceased to be subordinated or the senior lenders had been repaid. The assessee further undertook a bond search and computed, after adjustments, a spread difference of about 1.03% between senior unsecured and subordinated unsecured bonds. The TPO rejected the claim, not because the subordination did not exist, but because he did not have data regarding whether the comparable loan tranches were themselves subordinated or not. The learned DRP has also upheld the rejection on the same reasoning. In our considered view, this very reasoning militates against the validity of the TPO’s comparables. If the TPO’s final comparable set does not carry adequate information regarding such a critical economic feature as subordination, the same cannot be treated as a dependable benchmark for a borrowing whose subordination is admittedly documented. The absence of data on this aspect does not justify denying the assessee’s claim while simultaneously retaining the comparables as valid. On the contrary, it exposes the incompleteness of the TPO’s search.

90. We also find merit in the assessee’s submission regarding the treatment of upfront fee. The assessee’s case consistently has been that the upfront fee is part of the borrowing cost and cannot be viewed as an independent transaction. The RBI approval itself fixed the all-in-cost ceiling after taking into account the contractual interest and the one-time upfront fee. The RBI Master Circular, as referred to by the assessee, also indicates that all-in-cost includes interest and other fees and expenses in foreign currency, barring specifically excluded items. Further, section 2(28A) gives an expansive meaning to “interest” so as to include any service fee or other charge in respect of monies borrowed or debt incurred. In these circumstances, the approach of the assessee in aggregating the upfront fee with interest and spreading it over the tenure to compute the effective borrowing cost has greater commercial and economic realism. The TPO has accepted aggregation in principle but rejected amortisation on the ground that the transaction must be benchmarked in the same year. In our view, where the fee is an inherent part of the cost of a multi-year borrowing, evaluating it over the tenor of the facility is not only commercially sound but also aligns with the RBI’s all-in-cost framework. At any rate, the TPO’s approach of treating the effective rate paid by the assessee as higher merely because the upfront fee is not spread over the loan tenure does not accord with the real economics of the transaction.

91. Having thus examined the infirmities in the TPO’s search, we now turn to the proper benchmark. The assessee’s effective all-in-cost, after considering the amortized upfront fee, was LIBOR plus 500 basis points, which was specifically approved by RBI in relation to this very ECB. The regulatory approval was granted on 31.03.2010 with reference to the contemporaneous market environment and the terms of the borrowing. In GE India Technology Centre (P.) Ltd., the Karnataka High Court held that RBI approval in respect of the rate of interest is a relevant factor while determining the rate of interest, and that the rate prevailing at the time of availing the loan is the relevant benchmark. The relevant part (para 9) of the judgement is reproduced below:

“It is equally well settled that rate of interest should be determined on the basis of rate of interest prevailing at the time of availing the loan. From perusal of the order passed by the Tribunal, it is evident that Tribunal has taken into account the rate of interest and the approval given by the Reserve Bank of India with regard to rate of interest is a relevant factor while determination of the rate of interest.”

“It is also pertinent to mention here that the rate of interest has been accepted by the Assessing Officer for the earlier assessment years… Therefore, the revenue cannot be allowed to make a departure in case of rate of interest for the relevant assessment year.”

92. In Ion Exchange (I) Ltd., the Co-ordinate Bench upheld the RBI ECB circular as an appropriate benchmark where the TPO’s assumptions as to credit rating and transaction cost were not supportable. In Firmenich Aromatics India Pvt. Ltd., the Co-ordinate Bench specifically held that where the TPO’s ECB comparables were deficient in basic parameters, the arm’s length rate could be more accurately determined by following the interest rate fixed by RBI in respect of ECB loan.

93. In the present case, we are of the considered view that these authorities squarely support the assessee’s contention that once the TPO’s comparables are found to be deficient on critical parameters and the borrowing is a specific ECB approved by RBI with a stated all-in-cost ceiling, the RBI approved ceiling constitutes the safest and most reliable external guide for testing arm’s length nature. We clarify that we are not holding that RBI approval, by itself and in every case, forecloses a transfer pricing examination. What we hold is that, in the facts of the present case, where the TPO’s benchmarking is not shown to be more reliable and suffers from material deficiencies, the contemporaneous RBI approved all-in-cost cannot be discarded.

94. We also note that the learned DRP, while upholding the TPO’s search, has merely recorded that the assessee’s search yielded an average spread of LIBOR plus 1118 basis points and that the TPO’s search yielded LIBOR plus 335 basis points, which after 50 basis points adjustment resulted in LIBOR plus 385 basis points. The DRP then simply states that the search undertaken by the TPO and the ALP determined by him are upheld. In our view, such summary approval does not answer the specific objections raised by the assessee regarding security classification, borrower-region filter, revolver loans, subordination, the arbitrary nature of the 50 basis points adjustment, and the propriety of amortizing the upfront fee. On these important aspects, the learned DRP has not furnished an independent reasoning.

95. In view of the foregoing discussion, we hold as under:

i. The RBI approval cannot be regarded as wholly determinative of ALP in the abstract, but it is a highly relevant contemporaneous benchmark for ECB borrowing.

ii. The TPO’s benchmarking suffers from material infirmities, including lack of reliable comparability on the nature of loan, secured versus unsecured character, purpose, tenor, borrower-region, country and currency risk, and subordination.

iii. The TPO’s rejection of the assessee’s subordination claim, solely for want of similar data in the comparables, itself reveals the incompleteness of the comparable set.

iv. The upfront fee is part of the borrowing cost and, in the facts of the present case, has to be considered along with interest while determining the effective all-in-cost.

v. The effective all-in-cost of LIBOR plus 500 basis points, being within the specific RBI approved ceiling for this very ECB, represents a more reliable arm’s length benchmark than the one adopted by the TPO.

96. Accordingly, the transfer pricing adjustment of Rs. 16,15,68,785/- made on account of interest and upfront fee paid on ECB obtained from VOFL is directed to be deleted.

97. Even otherwise, and without prejudice, we may observe that if at all any adjustment were to survive on account of upfront fee, the same could only be restricted to the amortized portion for which tax deduction has actually been claimed during the year, since the borrowing was utilised for acquisition of 3G spectrum and the related borrowing costs were capitalised. However, in view of our primary conclusion deleting the entire adjustment, this alternative contention does not survive for separate adjudication.

98. Accordingly, Ground No. 7 and sub-grounds 7.1 to 7.8 raised by the assessee are allowed.

Addition of Rs. 92,75,000/- under section 14A while computing book profit under section 115JB(Assessee’s Ground No. 8)

99. On perusal of the assessment order and the directions of the learned DRP, it is observed that the Assessing Officer made a disallowance of Rs. 92,75,000/- under section 14A of the Act while computing income under the normal provisions. Subsequently, while computing the book profit under section 115JB, the Assessing Officer added back the said amount to the net profit as per Profit 86 Loss Account.

100. The learned DRP has upheld the action of the Assessing Officer in making such adjustment while computing book profits.

101. The learned AR submitted that the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case for A.Y. 2010-11 in ITA No. 671/Ahd/2015, wherein it has been held that no addition under section 14A can be made while computing book profit under section 115JB.It was further submitted that, without prejudice, reliance is also placed on the decision of the Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd. (2017) 188 TTJ 1 (Del) (SB), wherein it has been categorically held that disallowance computed under section 14A read with Rule 8D cannot be added while computing book profits under section 115JB of the Act.

102. We have carefully considered the rival submissions and perused the material available on record. At the outset, it is pertinent to note that while adjudicating Ground No. 3, we have already examined the disallowance made under section 14A of the Act in detail. After considering the factual position and the judicial precedents, the disallowance of Rs. 92,75,000/- has been deleted in entirety. In view of the same, the very foundation for making any corresponding adjustment while computing book profit under section 115JB does not survive. Once the disallowance under section 14A itself has been held to be unsustainable, there remains no basis for its inclusion, directly or indirectly, in the computation of book profit.

103. Even otherwise, it is a settled legal position that the computation of book profit under section 115JB is governed strictly by the provisions of Explanation 1 to section 115JB, and only those adjustments which are specifically provided therein can be made. The disallowance computed under section 14A cannot be automatically imported into clause (f) of Explanation 1, as has been held by the Special Bench in ACIT vs. Vireet Investment Pvt. Ltd. (2017) 188 TTJ 1 (Del) (SB). Further, we also note that the issue is covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case for earlier assessment years, wherein similar addition made under section 115JB on account of section 14A disallowance has been deleted.

104. Thus, on both counts:

i. the disallowance under section 14A itself having been deleted, and

ii. the settled legal position that section 14A disallowance cannot be mechanically added while computing book profit, the addition made by the Assessing Officer and sustained by the DRP cannot be upheld.

105. In view of the above, we hold that the addition of Rs. 92,75,000/- made while computing book profit under section 115JB is unsustainable and is hereby directed to be deleted. Ground No. 8 raised by the assessee is allowed.

Initiation of penalty proceedings under section 271(1)(c)(Assessee’s Ground No. 9)

106. The assessee has challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. This ground is premature in nature and does not call for adjudication at this stage. Accordingly, the same is dismissed.

107. Now we deal with Revenue’s appeal in ITA No. 443/Ahd/2016.

Ground No. 1 – Determination of Initial Assessment Year under section 80-IA

108. The issue arising in Ground No. 1 of the Revenue’s appeal pertains to the determination of the initial assessment year for the purpose of deduction under section 80-IA of the Act.

109. The brief facts, as emanating from the record, are that the assessee was incorporated on 14.03.1995 and obtained the certificate of commencement of business on 04.04.1995. Thereafter, the assessee entered into an agreement with the Government on 11.01.1996 for providing telecommunication services in the State of Gujarat. It is observed that the assessee undertook activities relating to setting up of infrastructure during the period from January 1996 to January 1997 and ultimately commenced commercial operations on 24.01.1997. Accordingly, the assessee contended before the Assessing Officer that the first year of operation should be considered as A.Y. 1997-98.

110. The Assessing Officer, however, relying upon the assessment order for A.Y. 2006-07, held that the initial year of operation was A.Y. 1996-97.

111. On objections raised by the assessee, the learned DRP, following the decision of the Co-ordinate Bench in the assessee’s own case for A.Y. 2006-07 as well as its own directions for A.Ys. 2009-10 and 2010-11, held that the assessee had commenced its operations in A.Y. 1997-98 and accordingly directed the Assessing Officer to treat the same as the initial assessment year for the purpose of section 80-IA of the Act.

112. The learned AR submitted that the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench in the assessee’s own case. It was submitted that in Vodafone Essar Gujarat Ltd. vs. ACIT in ITA No. 1361/Ahd/2009, order dated 29.01.2010 for A.Y. 2006-07, the Co-ordinate Bench has categorically held that since the assessee had started providing telecommunication services during the period relevant to A.Y. 1997-98, the said year is to be considered as the initial assessment year for the purpose of section 80-IA of the Act. The learned AR further submitted that the aforesaid decision has been consistently followed by the Co-ordinate Bench in the assessee’s own case for subsequent assessment years, including A.Ys. 2009-10 and 2010-11. It was also pointed out that most recently, the Co-ordinate Bench in assessee’s own case for A.Y. 2010-11, vide order dated 11.12.2025, has again decided the issue in favour of the assessee by holding A.Y. 1997-98 as the initial year of operation.

113. Accordingly, it was contended that the direction of the DRP in treating A.Y. 1997-98 as the initial assessment year does not call for any interference.

114. We find that the identical issue has been examined in detail by the Co-ordinate Bench in the assessee’s own case for A.Y. 2006-07. The Co-ordinate Bench, after appreciating the entire factual matrix including the date of incorporation, grant of license, installation of infrastructure, and actual commencement of commercial operations, has categorically held that mere obtaining of license or commencement of preparatory activities does not amount to “starting of providing telecommunication services” within the meaning of section 80-IA(4)(ii) of the Act.

115. The relevant findings of the Co-ordinate Bench are reproduced as under:

“Mere receipt of license to provide telecommunication services without any infrastructure or resources would not result in providing telecommunication services… the company has not commenced its commercial services during the year… the assessee did not start providing telecommunication services in the period relevant to the AY 1996-97. “

“The company started their commercial operations… only on 24-01­1997 and accordingly, sales and service revenue was reflected for the first time… These evidences lead only to one conclusion that the assessee did not start providing telecommunication services in the period relevant to the AY 1996-97.”

“There was no good and justifiable cause to take a different view… without there being any change in the factual position… the assessee started providing telecommunication services only in the period relevant to the AY 1997-98.” (para 6.3)

116. From the above, it is evident that the Co-ordinate Bench has clearly distinguished between:

i. setting up of infrastructure and preparatory activities, and

ii. actual commencement of telecommunication services.

117. The Co-ordinate Bench has held that the relevant test under section 80-IA is the actual start of providing telecommunication services, which in the present case admittedly took place only on 24.01.1997, falling in A.Y. 1997-98.Further, the Co-ordinate Bench has also emphasized that in the absence of any change in facts, the Revenue cannot take a contrary stand in subsequent proceedings, thereby invoking the principle of consistency.

118. We also note that the aforesaid decision has been consistently followed in the assessee’s own case for subsequent assessment years including A.Ys. 2009-10 and 2010-11, and no contrary decision of any higher forum has been brought on record.

119. In view of the above, and respectfully following the binding decision of the Co-ordinate Bench in the assessee’s own case, we find no infirmity in the direction of the learned DRP in holding that the initial assessment year for the purpose of section 80-IA is A.Y. 1997-98. Accordingly, Ground No. 1 raised by the Revenue is dismissed.

Ground No. 2 – Applicability of amended provisions of section 80-IA

120. The issue under consideration is whether the assessee is entitled to claim deduction under section 80-IA in terms of the amended provisions introduced by the Finance Act, 1999 w.e.f. 01.04.2000.

121. The Assessing Officer held that the assessee had commenced providing telecommunication services in A.Y. 1996­97 and, therefore, the provisions of section 80-IA as applicable at that point of time would govern the assessee’s claim. Accordingly, the AO rejected the contention of the assessee that the amended provisions of section 80-IA are applicable and denied the benefit of deduction in terms of the amended scheme.

122. The learned DRP, following the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2006­07 as well as its own directions for A.Ys. 2009-10 and 2010-11, held that the assessee is entitled to the benefit of the amended provisions of section 80-IA. Accordingly, the DRP directed the Assessing Officer to apply the amended provisions applicable from A.Y. 2000-01 and to allow deduction under section 80-IA at the prescribed rate on the profits of the year under consideration.

123. We find that the identical issue has been examined by the Co-ordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2006-07. The Co-ordinate Bench, after considering the scheme of section 80-IA(4)(ii) as amended, has categorically held that the option to claim deduction for any 10 consecutive years out of 15 years is available even to those undertakings which commenced telecommunication services on or after 01.04.1995.

124. The relevant findings of the Co-ordinate Bench, as relied upon by the learned AR, are reproduced as under:

“…we are of the opinion that the assessee was justified in exercising option in terms of the amended provisions, especially when the provisions of sec. 80IA(4)(ii) clearly stipulate that the option is available even to those undertakings which had started providing telecommunication services on or after 1.4.1995… such restrictive interpretation does not emerge from the amended provisions… the assessee having exercised option in the period relevant to the AY 1997­98… would not disentitle it from claiming deduction under the substituted provisions…” ( para 12.8)

125. From the above, it is evident that the Co-ordinate Bench has rejected the stand of the Revenue that the amended provisions would not apply to undertakings which commenced operations prior to A.Y. 2000-01.

126. Further, we note that in Ground No. 1 hereinabove, it has already been held that the assessee commenced its telecommunication services in A.Y. 1997-98. Thus, the assessee squarely falls within the category of undertakings which started providing telecommunication services after 01.04.1995 and is therefore eligible to exercise the option under the amended provisions.

127. We also find that the aforesaid decision has been consistently followed by the Co-ordinate Bench in the assessee’s own case for subsequent assessment years including A.Ys. 2009­10 and 2010-11, and no contrary material has been brought on record by the Revenue.

128. In view of the above, and respectfully following the decision of the Co-ordinate Bench in the assessee’s own case, we find no infirmity in the direction of the learned DRP in directing the Assessing Officer to apply the amended provisions of section 80-IA and allow deduction accordingly. Accordingly, Ground No. 2 raised by the Revenue is dismissed.

Ground No. 3 – Deduction under section 80-IA of the Act in respect of cell site sharing revenue and IRU revenue

129. The issue arising in Ground No. 3 of the Revenue’s appeal pertains to whether the assessee is entitled to deduction under section 80-IA of the Act in respect of cell site sharing revenue and IRU revenue received during the year under consideration.

130. The Assessing Officer held that the income earned from cell site sharing represents income from leasing of infrastructure/assets such as towers and related facilities. According to the AO, such activity does not fall within the scope of “profits and gains derived from eligible business” as envisaged under section 80-IA(4) of the Act. It was further held that the assessee is not engaged in the business of leasing of assets and that the income from sharing infrastructure with other operators is not directly derived from the activity of providing telecommunication services. Accordingly, the AO denied the deduction under section 80-IA in respect of such income.

131. The learned DRP, following the decisions of the Co-ordinate Bench of the Tribunal in the assessee’s own case for earlier assessment years, held that the cell site sharing revenue and IRU revenue are intrinsically connected with the telecommunication business carried on by the assessee. Accordingly, the DRP directed the Assessing Officer to allow deduction under section 80-IA of the Act on such income. In conformity with the directions of the DRP, the AO allowed the claim in the final assessment order.

132. The learned AR submitted that the issue is squarely covered in favour of the assessee by the decisions of the Co-ordinate Bench in the assessee’s own case as well as in the case of its group concerns. It was submitted that in assessee’s own case for A.Y. 2009-10, the Co-ordinate Bench has allowed deduction under section 80-IA on income earned from sharing of passive infrastructure and cell sites. The Co-ordinate Bench, after considering the nature of such income and the provisions of section 80-IA(2A), rejected the contention of the Revenue that such income is in the nature of leasing income and not derived from eligible business.

133. The relevant findings of the Co-ordinate Bench, as relied upon by the learned AR, are reproduced as under:

“…the above ‘derived from’ criteria does not apply in case of an undertaking providing telecommunication services in view of the fact that section 80-IA(2A) starts with a non obstante clause treating the same as a separate species… We thus find no merit in this substantive ground. It is accordingly rejected.” (para 10)

134. The learned AR further submitted that similar findings have been rendered by the Co-ordinate Bench in the case of assessee’s sister concern (Vodafone Digilink Ltd.. reported in [2018] 92 com 234), wherein it has been held that income from cell site sharing has a direct nexus with the telecommunication business carried on by the assessee.

135. In this regard, reliance was placed on the following observations:

“…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… income from their commercial exploitation… becomes ‘business income’ qualifying for deduction…”

136. It was thus submitted that the income from sharing of cell sites and passive infrastructure is intrinsically linked to the telecommunication operations of the assessee and is therefore eligible for deduction under section 80-IA of the Act.

137. The learned AR further submitted that the aforesaid position has been consistently followed by the Co-ordinate Bench in the assessee’s own case for subsequent assessment years, including A.Y. 2010-11 vide order dated 11.12.2025.

138. Accordingly, it was contended that the direction of the learned DRP allowing deduction under section 80-IA on such income does not call for any interference.

139. We note that the identical issue has been examined by the Co-ordinate Bench of the Tribunal in the assessee’s own case for earlier assessment years as well as in the case of its sister concerns. The Co-ordinate Bench has consistently held that income arising from sharing of passive infrastructure such as cell sites is intrinsically linked to the telecommunication business carried on by the assessee.

140. It has been observed that cell sites and related infrastructure are tools of the assessee’s business, and any income arising from commercial exploitation of surplus capacity of such infrastructure retains the character of business income derived from telecommunication services. The Co-ordinate Bench has further held that in the case of telecommunication undertakings, section 80-IA(2A) operates as a special provision and the restrictive interpretation of “derived from” cannot be applied in a narrow sense.

141. We also note that the aforesaid view has been consistently followed in the assessee’s own case for subsequent assessment years, including A.Y. 2010-11, and no distinguishing facts or contrary judicial precedent has been brought on record by the Revenue.

142. In view of the above, and respectfully following the binding decisions of the Co-ordinate Bench in the assessee’s own case, we find no infirmity in the direction of the learned DRP in allowing deduction under section 80-IA of the Act on cell site sharing revenue and IRU revenue. Accordingly, Ground No. 3 raised by the Revenue is dismissed.

Ground No. 4 – Issue deduction under section 80-IA of the Act in respect of late payment charges and cheque bounce charges.

143. The issue arising in Ground No. 4 of the Revenue’s appeal pertains to whether the assessee is entitled to deduction under section 80-IA of the Act in respect of late payment charges and cheque bounce charges.

144. The Assessing Officer held that the income from late payment charges and cheque bounce charges is not derived from the eligible business of providing telecommunication services and, therefore, such income is not eligible for deduction under section 80-IA of the Act.

145. The learned DRP, following its directions in assessee’s own case for earlier assessment years, directed the Assessing Officer to allow deduction under section 80-IA of the Act on late payment charges and cheque bounce charges, holding that such income forms part of the business income of the assessee.

146. The learned AR submitted that the issue is squarely covered in favour of the assessee by judicial precedents as well as decisions of the Co-ordinate Bench in assessee’s own case. It was submitted that late payment charges and cheque bounce charges are in the nature of trading receipts arising from the core business of providing telecommunication services and, therefore, are eligible for deduction under section 80-IA of the Act.

147. Further reliance was placed on the decision of the Co­ordinate Bench in assessee’s own case for A.Y. 2009-10, wherein, following the decision of the Hon’ble Delhi High Court in PCIT vs. BSNL Ltd. (381 ITR 371), it has been held that in view of section 80-IA(2A), which begins with a non obstante clause, the restrictive interpretation of the expression “derived from” is not applicable in the case of telecommunication undertakings, and accordingly, all business income having nexus with such undertaking qualifies for deduction.

148. On perusal of the nature of the receipts, we find that late payment charges are recovered from customers for delay in payment of telecom bills and are compensatory in nature, while cheque bounce charges are also recovered in the course of billing and realization of dues. These receipts arise directly from the assessee’s core activity of providing telecommunication services and are intrinsically linked to its business operations.

149. We further note that the Hon’ble jurisdictional High Court in Nirma Industries Ltd.[283 ITR 402], as recorded by the DRP, has held that interest or similar receipts from trade debtors constitute business income and cannot be treated differently while computing deduction under Chapter VI-A. The ratio laid down therein supports the assessee’s claim that such receipts retain the character of business income.

150. We also find that the Co-ordinate Bench in the assessee’s own case for earlier assessment years, following the decision of the Hon’ble Delhi High Court in PCIT vs. BSNL Ltd., has held that in view of section 80-IA(2A), the restrictive interpretation of the expression “derived from” does not apply in the same manner to telecommunication undertakings and that income having proximate nexus with the eligible business qualifies for deduction.

151. In the present case, the impugned receipts are directly connected with the telecommunication services rendered by the assessee and form part of its operational income. No distinguishing feature has been brought on record by the Revenue to take a different view.

152. In view of the above, and respectfully following the binding judicial precedents and decisions of the Co-ordinate Bench in the assessee’s own case, we find no infirmity in the direction of the learned DRP in allowing deduction under section 80-IA of the Act on late payment charges and cheque bounce charges. Accordingly, Ground No. 4 raised by the Revenue is dismissed.

Ground No. 5 – Deduction under section 80-IA of the Act in respect of provisions written back, which are offered to tax under section 41(1) of the Act.

153. The issue arising in this ground pertains to whether the assessee is entitled to deduction under section 80-IA of the Act in respect of provisions written back, which are offered to tax under section 41(1) of the Act.

154. The Assessing Officer held that the provisions written back represent income in respect of which deduction had already been claimed in earlier years and, therefore, the assessee is not entitled to claim deduction again under section 80-IA of the Act. Accordingly, the AO denied the deduction on such income.

155. The learned DRP, following the decision of the Co-ordinate Bench in the case of Radha Madhav Industries vs. ITO [ITA No. 1935/ Ahd/ 2007] , directed the Assessing Officer to allow deduction under section 80-IA on provisions written back, holding that such income forms part of business income of the eligible undertaking.

156. The learned AR submitted that the issue stands covered in favour of the assessee by the directions of the learned DRP as well as judicial precedent. It was pointed out that the learned DRP, while adjudicating the issue, has followed the decision of the Co-ordinate Bench in the case of Radha Madhav Industries vs. ITO (supra), wherein it has been held that income arising on account of write back of provisions, being in the nature of business income, is eligible for deduction under Chapter VI-A. Accordingly, the learned DRP directed the Assessing Officer to allow deduction under section 80-IA of the Act on provisions written back, and the Assessing Officer has passed the final assessment order in conformity with the said directions. It was thus submitted that the impugned issue is squarely covered in favour of the assessee and does not call for any interference.

157. We find that the provisions written back represent reversal of liabilities which had arisen in the course of the assessee’s telecommunication business and were allowed as deduction in earlier years. Upon cessation of such liabilities, the same have been brought to tax as business income under section 41(1) of the Act. Thus, such income is nothing but business income of the eligible undertaking. The contention of the Assessing Officer that deduction cannot be allowed again is not tenable, inasmuch as the allowability of deduction under section 80-IA is to be examined with reference to the nature of income in the year under consideration. Once the income is assessable as business income of the eligible undertaking, the same forms part of profits and gains derived from such undertaking.

158. We further note that the learned DRP has allowed the claim by following the decision of the Co-ordinate Bench in the case of Radha Madhav Industries, wherein it has been held that write back of provisions, being in the nature of business income, is eligible for deduction under Chapter VI-A.

159. In the present case, no material has been brought on record by the Revenue to demonstrate that the provisions written back do not pertain to the eligible business of the assessee.

160. In view of the above, we find no infirmity in the direction of the learned DRP in allowing deduction under section 80-IA of the Act on provisions written back. Accordingly, Ground No. 5 raised by the Revenue is dismissed.

Ground No. 6 – Deduction under section 80-IA of the Act in respect of other income, including port charges and miscellaneous receipts.

161. The issue arising in Ground No. 6 of the Revenue’s appeal pertains to whether the assessee is entitled to deduction under section 80-IA of the Act in respect of other income, including port charges and miscellaneous receipts.

162. During the year under consideration, the assessee claimed deduction under section 80-IA of the Act in respect of Port charges of Rs. 1,94,02,302/-, and Others Rs. 69,946/-.The Assessing Officer held that such income does not have a direct nexus with the business of providing telecommunication services and, therefore, is not eligible for deduction under section 80-IA of the Act. Accordingly, the claim of deduction was disallowed.

163. The learned DRP accepted the submissions of the assessee and held that the impugned income has arisen directly from the telecommunication business carried on by the assessee and is therefore eligible for deduction under section 80-IA of the Act. The AO, in conformity with the directions of the DRP, allowed the claim in the final assessment order.

164. It was submitted by learned AR that the Co-ordinate Bench of the Tribunal in assessee’s own case for Assessment Year 2010­11 and in case of assessee’s sisters concern in Vodafone Digilink Ltd., cited supra, for the Assessment Year 2010-11, after noting the difference in language of the provisions of section 80-IA(2A) and section 80-IA(1) directed the AO to grant the benefit under section 80-1A of the Act in respect of other income. It was further submitted that the Co-ordinate Bench in the assessee’s own case for the AY 2009-10 (supra) relying on the decision of the Delhi High Court in the case of PCIT Vs BSNL Ltd. reported in (2016) 381 ITR 371 (Delhi) has decided this issue in favour of the assessee.

165. We find that the identical issue has been examined by the Co-ordinate Bench of the Tribunal in the assessee’s own case as well as in the case of its sister concern. The Co-ordinate Bench, after analysing the scope of section 80-IA(2A), has held that in the case of telecommunication undertakings, the provision operates as a special code and the restrictive interpretation of the expression “derived from” as contained in section 80-IA(1) is not applicable in the same manner.

166. In the present case, the impugned income has not been shown by the Revenue to be independent of or unconnected with the business operations of the assessee. On the contrary, the consistent view taken in assessee’s own case is that such income forms part of business income eligible for deduction.

167. In view of the above, and respectfully following the decisions of the Co-ordinate Bench in the assessee’s own case, we find no infirmity in the direction of the learned DRP in allowing deduction under section 80-IA of the Act on such income. Accordingly, Ground No. 6 raised by the Revenue is dismissed.

Ground No. 7 – Deduction under section 80-IA of the Act in respect of income earned under the Served from India Scheme (SFIS).

168. During the year under consideration, the assessee received an amount of Rs.2.58 Crores as SFIS income. Under the said scheme, the Government issues scripts on export of services, which can be utilised for payment of duty levied on imports made by the assessee. Further, the scripts issued by the Government hold certain value and the import duty payable by the assessee gets deducted from the value of the scripts. Thus, the assessee claimed that the said income pertains to the duty benefit availed by utilising the scripts issued to the assessee on export of services. Accordingly, the assessee claimed a deduction on the said income under section 80-IA of the Act on the basis that the same has accrued directly in the course of the telecommunication business. The assessee held that the SIFS is in the nature of incentive and the income an sing from the same is in the nature of “export incentive”. The Assessing Officer held that the SFIS income is in the nature of an incentive granted by the Government and does not arise from the core business activity of providing telecommunication services. Accordingly, the same was held to be not eligible for deduction under section 80-IA of the Act.

169. The learned DRP accepted the contention of the assessee and held that the SFIS income is intrinsically linked to the export of services carried out by the assessee and, therefore, forms part of the business income derived from the telecommunication undertaking. Accordingly, the DRP directed the Assessing Officer to allow deduction under section 80-IA of the Act.

170. It was submitted by learned AR that the Co-ordinate Bench of the Tribunal in assessee’s own case for Assessment Year 2010­11 and in case of assessee’s sisters concern in Vodafone Digilink Ltd., cited supra, for the Assessment Year 2010-11, after noting the difference in language of the provisions of section 80-IA(2A) and section 80-IA(1) directed the AO to grant the benefit under section 80-1A of the Act in respect of other income. It was further submitted that the Co-ordinate Bench in the assessee’s own case for the AY 2009-10 (supra) relying on the decision of the Delhi High Court in the case of PCIT Vs BSNL Ltd. reported in (2016) 381 ITR 371 (Delhi) has decided this issue in favour of the assessee.

171. It is not in dispute that the SFIS benefit is granted by the Government only upon export of services and is directly linked with the business activities carried on by the assessee. The benefit is in the nature of duty credit, which reduces the cost of imports required for the business operations of the assessee.

172. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case as well as in similar matters has consistently held that where an income arises out of or is intrinsically connected with the business of the eligible undertaking, the same forms part of eligible profits for the purpose of section 80-IA of the Act. Further, in the context of telecommunication undertakings, section 80-IA(2A) operates as a special provision and the scope of eligible income is broader, as has been held in earlier years while relying on judicial precedents including the decision of the Hon’ble Delhi High Court in the case of PCIT vs. BSNL Ltd.

173. In the present case, the SFIS income arises only on account of export of telecommunication services rendered by the assessee and, therefore, has a direct and proximate nexus with the business of the undertaking. The Revenue has not brought on record any material to demonstrate that such income is independent of or unconnected with the business activity of the assessee.

174. In view of the above, we find no infirmity in the direction of the learned DRP in allowing deduction under section 80-IA of the Act on SFIS income. Accordingly, Ground No. 7 raised by the Revenue is dismissed.

Ground No. 8 – Allowability of deduction under section 80-IA of the Act in respect of disallowance made under section 40(a)(ia) on account of discount offered to prepaid distributors.

175. Ground No. 8 raised by the Revenue pertains to the allowability of deduction under section 80-IA of the Act in respect of disallowance made under section 40(a)(ia) on account of discount offered to prepaid distributors.

176. It is observed that the Assessing Officer had made disallowance under section 40(a)(ia) of the Act on account of discount offered to prepaid distributors. The assessee, before the learned DRP, challenged the said disallowance and, without prejudice, also sought consequential deduction under section 80-IA of the Act.

177. The learned DRP, however, deleted the disallowance itself by holding that the assessee was not liable to deduct tax at source on such discount and, therefore, no disallowance under section 40(a)(ia) was warranted. It is an admitted position that the Revenue has not challenged the said finding of the DRP.

178. In view of the above, the very foundation for adjudicating the allowability of deduction under section 80-IA on such disallowance does not survive. Accordingly, Ground No. 8 raised by the Revenue is dismissed as academic.

Ground No. 9 This issue pertains to whether the receipts from prepaid services are liable to be taxed in the year of receipt or are to be treated as advance and recognized as income on the basis of actual rendering of services.

179. During the year under consideration, the assessee received an amount of Rs 1,444.80 million from its prepaid customers, which was declared as an advance in its balance sheet, as the services were not rendered during the year under consideration. As per the assessee, it recognises revenue from telecom services on the basis of actual usage of its network by the customer and the services actually rendered to the customer, which is in accordance with the mercantile system of accounting, generally accepted accounting principles, accounting standards notified under the Companies Act, and the provisions of section 145 of the Act.

180. The Assessing Officer, vide Draft Assessment Order held that the customers in the “prepaid service” have to pay the amount for purchase of “recharges”, and the said amount is non­refundable even if the services could not be ultimately utilised by the customers. The AO further held that even where a customer opts to cancel the service offered by the assessee, the unutilized balance is non-refundable and, thus, the amount paid is towards the outright purchase of “recharges” and not an advance to be set off against future use of the service. The AO held that the assessee acquired the absolute right to utilise the amount so received and thus the income from “prepaid services” crystallises as soon as the customer makes payment. Accordingly, the AO, vide Draft Assessment Order, proposed to add the entire amount at Rs.1,444.80 Million towards “prepaid services” in the year under consideration.

181. The learned DRP, following its directions for the AY 2010­11, allowed the objections raised by the assessee and held that the assessee is engaged in the business of providing telecommunication services and once the assessee sells its SIM cards and prepaid vouchers, its liability arises to provide the telecommunication services throughout the validity period. Thus, the learned DRP held that even if the amount collected by the assessee on the sale of prepaid vouchers is not refundable, the assessee is still required to provide services during the validity period of prepaid vouchers, and it cannot discontinue to provide services within this period. In conformity, the AO, inter alia, passed the impugned Final Assessment Order.

182. The learned AR submitted that an identical issue arose in the assessee’s own case for Assessment Year 2010-11, wherein the Co-ordinate Bench restored the matter to the file of the Assessing Officer with a direction to verify whether the revenue pertaining to expired prepaid vouchers has been offered to tax in the subsequent years.

183. We have carefully considered the rival submissions and perused the material available on record. The Assessing Officer treated the entire receipt from prepaid customers as income of the year on the ground that the amount is non-refundable and, therefore, income accrues at the time of receipt. The learned DRP, however, accepted the contention of the assessee that such receipts are in the nature of advance, as the assessee is under an obligation to provide telecommunication services during the validity period of the prepaid vouchers. The learned AR has further submitted that an identical issue arose in the assessee’s own case for Assessment Year 2010-11, wherein the Co-ordinate Bench restored the matter to the file of the Assessing Officer with a direction to verify whether the revenue pertaining to expired prepaid vouchers has been offered to tax in the subsequent years.

184. We find merit in the submission of the learned AR. The fundamental principle is that income from prepaid services accrues only when the services are rendered or when the corresponding liability ceases, such as in the case of expiry of prepaid vouchers. At the same time, it is necessary to ensure that the income is duly offered to tax in the appropriate year. In the interest of justice and to ensure proper verification of facts, we deem it appropriate to restore this issue to the file of the Assessing Officer with a limited direction to verify whether the revenue relating to expired prepaid vouchers has been recognized and offered to tax by the assessee in the subsequent years. If the same has been duly offered to tax, no addition shall be made in the year under consideration. However, in case any portion of such receipts has not been offered to tax in subsequent years, the Assessing Officer shall take appropriate action in accordance with law. Accordingly, Ground No. 9 raised by the Revenue is allowed for statistical purposes.

Ground No. 10 – Disallowance made by the Assessing Officer on account of license fees paid by the assessee to the Department of Telecommunication (DoT).

185. During the year under consideration, the assessee claimed license fees amounting to Rs.205,91,94,220/- paid to DoT as deduction under section 37(1) of the Act. Further, an amount of Rs. 25,26,41,322/- in respect of earlier years payment was claimed under section 35ABB of the Act. As per the assessee, it entered into a license agreement with the Government of India on 11.06.1996 for obtaining the right to operate and provide the telecom service in the State of Gujarat. Since the license fees paid under the said agreement was for acquiring the telecom license, the assessee claimed that it capitalized the same in its books of account and appropriate deduction was claimed in the return of income in accordance with the provisions of section 35ABB of the Act. Subsequently, the Government announced the New Telecom Policy, 1999, applicable with effect from 01.08.1999, under which it granted an option to the telecom companies to migrate from a fixed license fees to a revenue sharing regime. Accordingly, in terms of the migration package issued by the Ministry of Telecommunication, Government of India, the license fees were bifurcated into two components, i.e., a) onetime entry fees, which would be the license fees dues payable by the existing licensees upto 31.07.1999, and b) with effect from 01.08.1999, the license fees were payable as a percentage of gross revenue on an annual recurring basis. Accordingly, the license fees capitalised by the assessee were claimed as a deduction under section 35AAB of the Act and the license fees which were paid not for acquiring the license but to maintain the license for each year on the basis of revenue sharing were claimed as a deduction under section 37(1) of the Act.

186. The AO, vide Draft Assessment Order, disagreed with the submissions of the assessee and held that the fees paid to keep a license in force as an enduring benefit since the assessee has obtained a right to operate the telecommunication services for a period upto FY 2015-16. The AO further held that, except for a change in the mode of computation of license fees, the nature of payment remained the same from the commencement of business, and the assessee has acquired a greater enduring benefit. Accordingly, the AO held that the nature of payment clearly indicates that the assessee has acquired an asset or an advantage of enduring benefit, though the payments are recurring. Accordingly, the AO proposed to disallow the treatment of license fees paid during the year as revenue expenditure and, after appropriate deduction under section 35ABB of the Act, an amount of Rs. 176,50,23,617/- was proposed to be added to the total income of the assessee.

187. The learned DRP, vide its Directions, following the decision of the Co-ordinate Bench of the Co-ordinate Bench in assessee’s own case for the Assessment Year 2006-07, held that the license fees paid by the assessee on a revenue sharing basis are allowable as revenue expenditure deductible under section 37(1) of the Act. Accordingly, the learned DRP directed the AO to delete the proposed addition of license fees paid on a revenue-sharing basis.

188. The learned AR submitted that the issue relating to allowability of license fees is now squarely covered by the decision of the Hon’ble Supreme Court in the case of CIT vs. Bharti Hexacom Ltd. (2023) 155 com 322.It was submitted that the Co-ordinate Bench of the Co-ordinate Bench in the case of the assessee’s sister concern, Vodafone Digilink Limited, vide order dated 14.10.2025, after considering the aforesaid judgment of the Hon’ble Supreme Court, has held that even the annual variable license fees paid by telecom operators under the New Telecom Policy, 1999 is capital in nature and is required to be amortised under section 35ABB of the Act.

189. The learned AR further submitted that though earlier the assessee had claimed such variable license fees as revenue expenditure under section 37(1) of the Act, in view of the binding decision of the Hon’ble Supreme Court, the same is now required to be treated as capital expenditure eligible for amortisation under section 35ABB of the Act. It was further contended that the aforesaid judgment does not result in permanent disallowance but only leads to timing difference, as the expenditure would be allowed over the remaining period of license on amortisation basis, including consequential relief for earlier years. The learned AR also pointed out that the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010-11 has followed the decision in Vodafone Digilink Limited and adopted a similar approach.

190. During the course of hearing, the learned AR furnished a detailed working in accordance with the decision of the Hon’ble Supreme Court in Bharti Hexacom Ltd., and submitted that the disallowance, if computed on such basis, would be restricted to Rs. 80,58,94,432/-. It was thus prayed that the matter may be decided in terms of the aforesaid judgment and the Assessing Officer may be directed to verify the working and compute the disallowance accordingly.

191. We have carefully considered the rival submissions and perused the material available on record. It is observed that the issue relating to allowability of license fees now stands settled by the judgment of the Hon’ble Supreme Court in CIT vs. Bharti Hexacom Ltd. wherein it has been held that even the annual license fees paid by telecom operators is capital in nature and is to be amortised under section 35ABB of the Act. The Co-ordinate Bench in the case of the assessee’s sister concern as well as in assessee’s own case for subsequent year has followed the aforesaid judgment and directed the Assessing Officer to compute the disallowance accordingly, after granting amortisation benefit.

192. In the present case also, the learned AR has furnished the working of disallowance in accordance with the aforesaid judgment.

193. In view of the binding decision of the Hon’ble Supreme Court, the order of the learned DRP allowing the claim as revenue expenditure cannot be sustained.

194. Accordingly, we restore this issue to the file of the Assessing Officer with a direction to compute the disallowance of license fees in terms of section 35ABB of the Act, in accordance with the judgment of the Hon’ble Supreme Court in Bharti Hexacom Ltd., after verifying the working furnished by the assessee. Ground No. 10 raised by the Revenue is allowed for statistical purposes.

Ground No. 11 – Disallowance on account of royalty paid by the assessee to the Wireless Planning Commission (WPC).

195. The issue arising in Ground No. 11 of the Revenue’s appeal pertains to whether the disallowance made by the Assessing Officer on account of royalty paid by the assessee to the Wireless Planning Commission (WPC) is liable to be deleted.

196. During the course of assessment proceedings, it was observed that the assessee had incurred expenditure of Rs. 152,39,04,334/- towards payment made to the Wireless Planning Commission (WPC), a wing of the Department of Telecommunication, for use of spectrum. The said payment was made on a quarterly basis as a percentage of revenue and was claimed by the assessee as revenue expenditure under section 37(1) of the Act on the ground that it was incurred for carrying on telecommunication operations. The Assessing Officer, however, did not accept the contention of the assessee and held that the said payment partakes the character of capital expenditure, being in the nature of payment for acquiring the right to operate telecommunication services. Accordingly, the Assessing Officer treated the expenditure as falling within the scope of section 35ABB of the Act and allowed deduction only to the extent permissible thereunder, resulting in disallowance of Rs. 130,62,03,715/-.

197. The learned DRP, following the decision of the Hon’ble Delhi High Court in the case of CIT vs. Fascel Ltd.[(2009) 221 CTR 305], held that the payment made to WPC is in the nature of revenue expenditure incurred for use of spectrum and not for acquisition of any capital asset. Accordingly, the DRP directed the Assessing Officer to delete the disallowance. In conformity with the said directions, the Assessing Officer passed the final assessment order allowing the claim of the assessee.

198. The learned AR submitted that the issue under consideration is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010-11.It was submitted that the Co-ordinate Bench, vide order dated 11.12.2025, following the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Fascel Ltd., held that the payment made to WPC towards spectrum usage charges is revenue in nature and allowable as deduction under section 37(1) of the Act. Accordingly, it was contended that since the issue is covered by binding judicial precedent in the assessee’s own case, the order of the learned DRP directing deletion of the disallowance deserves to be upheld.

199. We find that an identical issue has been considered by the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2010-11, wherein, following the aforesaid judgment of the Hon’ble Delhi High Court, the disallowance was deleted.

200. The payment made to WPC is on a recurring basis, computed as a percentage of revenue, and is incurred for the use of spectrum in the course of carrying on telecommunication business. Such payment does not result in acquisition of any capital asset or enduring benefit but is in the nature of operational expenditure. No distinguishing facts have been brought on record by the Revenue to take a different view.

201. In view of the above, and respectfully following the binding judicial precedent in the assessee’s own case, we find no infirmity in the direction of the learned DRP in allowing the claim of the assessee. Accordingly, Ground No. 11 raised by the Revenue is dismissed.

Ground No. 12 – Proportionate disallowance on account of depreciation of 3G spectrum license.

202. The issue arising in Ground No. 12 of the Revenue’s appeal pertains to the deletion of proportionate disallowance on account of depreciation of 3G spectrum license. It is observed that the issue involved in the present ground is interconnected with Ground No. 5 raised in the assessee’s appeal. The adjudication of the issue relating to depreciation on 3G spectrum license has already been undertaken while deciding the corresponding ground of the assessee.

203. While adjudicating Ground No. 5 of the assessee’s appeal, we held that the right to use telecom spectrum constitutes an intangible asset eligible for depreciation under section 32 of the Act and that the provisions of section 35ABB are not applicable in such circumstances. Since the learned DRP has deleted the proportionate disallowance by following the same line of reasoning, and we have already upheld the allowability of depreciation on 3G spectrum fees while deciding the assessee’s ground, the present ground raised by the Revenue does not survive. Accordingly, Ground No. 12 raised by the Revenue is dismissed.

Ground No. 13 to 13(j) – Deletion of transfer pricing adjustment made by the Assessing Officer/TPO on account of payment of brand royalty by the assessee to its Associated Enterprises.

204. The facts emerging from the records are such that the assessee, pursuant to an agreement entered into with Vodafone Ireland Marketing Ltd. (“VIML”) for the use of the brand name and trademarks/trade name “Vodafone” agreed to pay a royalty to VIML. Similarly, pursuant to an agreement entered into with Rising Groups Ltd. (“RGL”), the assessee agreed to pay royalty for the use of the brand name “Essar”.

205. Accordingly, during the year under consideration, the assessee paid brand royalty fees amounting to Rs. 19,56,00,335/- to VIML and royalty of Rs. 9,49,25,253/- to RGL for the use of brand name “Vodafone” and “Essar”, respectively. As these royalties were paid to the associated enterprises, the assessee benchmarked the international transaction of payment of brand royalty by considering the Comparable Uncontrolled Price (“CUP”) method as the most appropriate method. Since the royalty paid by the assessee for the use of “Vodafone” and “Essar” trademarks, respectively was @ 0.70% and 0.35% of the net service revenue, the assessee claimed the same to be at arm’s length as compared to the uncontrolled comparable transactions wherein the royalty was paid in the range of 0.75% to 7.00% within arithmetic mean of 2.69% for the usage of trademarks or trade names, corporate endorsement or brand or logo. As the international transaction with regard to payment of royalty by the assessee to VIML and RGL was inextricably linked to the assessee’s business, alternatively, the assessee also undertook a detailed economic analysis using Transactional Net Margin Method (“TNMM”) as the secondary method for the purpose of benchmarking.

206. Pursuant to the reference by the AO under section 92CA(1) of the Act, the Transfer Pricing Officer (“TPO”), vide order dated 29.01.2015, passed under section 92CA(3) of the Act, rejected the comparable instances chosen by the assessee by adopting CUP as the most appropriate method. As regards the royalty paid to RGL for the use of the brand name “Essar”, the TPO held that the assessee has not provided a quantification of the benefits received by it from the use of ‘Essar’ trademark and trade name. The TPO further held that in the geographical region of Gujarat, the brand “Essar” is not associated with telecommunication services from the perspective of a common layman. Accordingly, the TPO rejecting the submissions of the assessee, held that the arms’ length price of royalty paid for “Essar” brand is Nil. As regards the royalty paid for the use of the brand “Vodafone”, the TPO, following the approach adopted in the preceding year, considered the agreement between Virgin Enterprises Ltd. and Virgin Mobile USA LLC to be a comparable transaction. Since the royalty under this agreement was paid @ 0.25% of the gross sales, the TPO held that this rate has to be considered as arms’ length price for the royalty to be paid for “Vodafone” brand. In the alternative, the TPO held that if the royalty payment for “Essar” brand is not required to be calculated at Nil, then the combined payment by the assessee, i.e., Rs. 29,05,25,588/- which comes to 1.05% of gross sales, needs to be benchmarked against the payment of arms’ length price of 0.25%.

207. The learned DRP, following it Directions of the AY 2009-10 and 2010-11, allowed the objections raised by the assessee on this issue. In conformity, the AO, passed the impugned Final Assessment Order on this issue.

208. The learned AR reiterated that the transfer pricing adjustment made by the TPO by determining the arm’s length price (ALP) of royalty payment at Nil is not sustainable in law.

209. It was submitted that identical issue has been consistently decided in favour of the assessee in earlier years by the Co­ordinate Bench of the Tribunal. Reliance was placed on the Co­ordinate Bench’s orders in assessee’s own case for Assessment Years 2009-10 and 2010-11, wherein it has been held that transfer pricing adjustment based merely on related party agreements, without proper benchmarking, is not justified. The learned AR further submitted that similar view has also been taken in the case of the assessee’s group entity, namely Vodafone Digilink Limited, for Assessment Years 2009-10 and 2010-11, wherein the Co-ordinate Bench deleted the adjustment on account of royalty payment by holding that determination of ALP at Nil without applying any of the prescribed methods is impermissible.

210. Reliance was also placed on judicial precedents wherein it has been held that the ALP of a transaction cannot be determined at Nil in the absence of application of one of the prescribe methods under the Act. In this regard, the following decisions were cited:

• CIT vs. Lever India Exports Ltd. (2007) 292 CTR 393 (Bom)
• CIT vs. Johnson & Johnson Ltd. (2017) 297 CTR 480 (Bom)
• CIT vs. Kodak India Pvt. Ltd. (2016) 288 CTR 46 (Bom)
• CIT vs. SI Group India Ltd. (2019) 265 Taxman 204 (Bom)
• CIT vs. Cushman and Wakefield India Pvt. Ltd. (2014) 367 ITR 730 (Del)

211. It was thus contended that the adjustment made by the TPO by determining ALP at Nil, without undertaking any benchmarking exercise as prescribed under section 92C of the Act, is contrary to law and liable to be deleted.

212. Accordingly, it was prayed that the order of the learned DRP deleting the transfer pricing adjustment on account of royalty payment be upheld.

213. We find that an identical issue has been considered by the Co-ordinate Bench in the assessee’s own case for Assessment Year 2010-11 in ITA No. 1634/Ahd/2015. The Co-ordinate Bench, after detailed examination of the statutory provisions, categorically held that adoption of CUP method based on controlled transactions or related party agreements is contrary to the fundamental requirement of Rule 10B, which mandates comparison with uncontrolled transactions. It was further held that determination of ALP at Nil without applying any of the prescribed methods in a proper manner is legally unsustainable.

214. The Co-ordinate Bench also observed that the role of the TPO is confined to determination of arm’s length price and not to question the commercial expediency of the expenditure or to disregard the transaction itself in absence of valid benchmarking. Further, the Co-ordinate Bench emphasized that CUP method cannot be applied by relying on controlled transactions, as the same defeats the statutory scheme of transfer pricing provisions.

215. In the present case, we find that the approach adopted by the TPO suffers from the very same infirmities as noted by the Co-ordinate Bench. The ALP has been determined at Nil without any proper comparability analysis and by disregarding the benchmarking undertaken by the assessee, which is impermissible in law.

216. Further, the learned DRP, after appreciating the factual matrix and legal position, has deleted the adjustment by following binding judicial precedents, including decisions in the assessee’s own case and group entities, wherein it has been consistently held that such determination of ALP at Nil is unsustainable.

217. The Revenue has not brought on record any distinguishing feature nor any contrary binding judicial precedent to warrant a different view.

218. In view of the above discussion, and respectfully following the decision of the Co-ordinate Bench in the assessee’s own case, we uphold the order of the learned DRP in deleting the transfer pricing adjustment on account of payment of brand royalty.

219. Accordingly, Grounds No. 13 and 13(a) to 13(j) raised by the Revenue are dismissed.

220. In view of the foregoing discussion and issue-wise adjudication, both the appeals are partly allowed for statistical purposes.

Order pronounced in the open court on 02.04.2026.