VODAFONE INDIA LTD,MUMBAI vs. DCIT CIR 7(3), MUMBAI

PER VIKAS AWASTHY, JM:

This appeal by the assessee is directed against the assessment order dated 29/10/2012 passed u/s. 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 [ in short ‘the Act’,] for the Assessment Year 2008-09.

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Ground No.1: The order passed by the AO /DRP is perverse and bad in law; Ground No.2: Disallowance of deduction u/s. 80IA of the Act; Ground No.3: Disallowance of deduction u/s. 80IA of the Act on “Other Incomes” Ground No.4: Disallowance of depreciation claimed on the addition to fixed assets on account of Asset Restoration Cost(‘ARC’) obligation; Ground No.5: Disallowance u/s. 14A of the Act; Ground No.6: Disallowance of interest on loans given to subsidiaries; Ground No.7: Disallowance of interest on ‘Capital Work-in-Progress’ (‘CWIP”); Ground No.8: Collective disallowance of interest expense in excess of actual interest expense; Ground No.9: Disallowance of expenses incurred in connection with raising loans; Ground No.10: Disallowance of roaming charges under section 40(a)(ia) of the Act; Ground No.11: Non-reduction of foreign exchange gain of capital nature from profits of business; Ground No.12: Computation of Book Profit under section 115JB of the Act; Ground No. 13: Transfer Pricing Adjustment- on reimbursement of salary and related costs of seconded employees; Ground No.14: Non-grant of full credit in respect of Tax Deducted at Source; Ground No.15: Levy of interest under section 234B and 234C of the Act.

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squarely covered by the issues decided in appeals for assessment year 2006-07 and 2007-08. The ld.Counsel for the assessee furnished a chart listing the issue that are covered by the appeal of the assessee in ITA No. 216/Chandi/2011 for assessment year 2006-07 and ITA No.1173/Chandi/2011 for assessment year 2007-08. The ld.Counsel for the assessee submits that since the facts in the impugned assessment year are identical to the facts in assessment year 2006-07 and 2007-08, the submissions made in the appeal for assessment year 2006-07 and 2007-08 would equally apply to the present appeal.

The ld.Counsel pointed that only two fresh issues are involved in the present appeal and the same are in ground No.11 and 13 of the appeal.

3.1. In respect of ground No.11 of appeal relating to foreign exchange gain amounting to Rs.74.50 million.The ld.Counsel for the assessee submits that during the period relevant to the assessment year under appeal,the assessee had realized foreign exchange gain. The assessee claimed the same to be on capital account. In assessment year 2006-07 the assessee had offered loss on foreign exchange. The assessee claimed the same to be on revenue account. The claim of assessee was rejected by the Assessing Officer holding it to be capital loss. The assessee accepted the Revenue’s contention in assessment year 2006-07. Now, in assessment year 2008-09 the assessee has earned gain on foreign exchange and treated the same as capital in line with the treatment given to the loss by the Department in assessment year 2006-07. The ld.Counsel for the assessee fairly stated that the claim was first made during assessment proceedings. The Assessing Officer refused to entertain the claim of assessee. Thereafter, the assessee by way of objectionsbefore the Dispute

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Resolution Panel (DRP) made the claim.The DRP failed to adjudicate the issue. The ld.Counsel for the assessee placed on record copy of the objections filed by the assessee before the DRP. The ld.Counsel for the assessee pointed that the DRP in para-8 of the directions has recorded the issue, however, the same remain to be adjudicated.

3.2. In respect of ground No.13 elating to the transfer pricing adjustment in respect of reimbursement of salary related cost on the deputation of personnel to India,the ld.Counsel for the assessee submits, that five employees were seconded from the overseas AEs to India during the Financial Year 2007-08. The salary and related cost of the employees seconded to the assessee were paid by the overseas AEs, the assessee subsequently reimbursed the salary expenses and related cost to AEs on cost to cost basis. The TPO adopted external CUP to benchmark payment of salary and other related expenses and made adjustment of Rs.12,22,44,320/-. The assessee raised objections before the DRP. In principle the DRP concurred with the submissions of assessee that the employees were seconded by AE to India. The DRP restricted the adjustment to Rs.3,63,31,007/- stating that there is no evidence that the aforesaid amount was paid back to back and they are spent towards travel cost/reallocation cost of the five employees. The ld.Counsel for the assessee submits that secondment of employees is not in dispute anymore. The DRP has disallowed only reallocation charges. Since, the employees were seconded by the overseas AE, therefore, they have to be reallocated and for relocation cost would be involved. The employees will have to be compensated for travel cost/relocation expenses. The assessee has merely reimbursed the charges paid by the AEs. The reimbursement of relocation charges are reflected in Form No.16. The ld.Counsel for the assessee further referred to

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Rule 2BB(1)(a) of the Income Tax Rules, 1962 (in short ‘the Rules’). The ld.Counsel for the assessee pointed that Rule 2BB(1)(a) refers to the allowances granted to meet the cost of travel on tour or on transfer. Referring to section 10(14)(i) of the Act the ld. Counsel for the assessee pointed that payment of such allowances is in any case exempt. The ld.Counsel for the assessee stated that in Form No.16 Part-B all exempt income are required to be declared and in the instant case the same has been declared. Thus, no adjustment was required to be made in respect of reimbursement of relocation charges. He further pointed that salary expenses have been reimbursed on the basis of debit notes, relocation charges can also be reimbursed on the similar evidence.

4.1 In respect of ground No.11, the ld. Departmental Representative submitted that the assessee had filed claim to treat the gain on foreign exchange fluctuation in the nature of capital gain before the Assessing Officer. Since, the claim was not made in the return of income, the Assessing Officer did not entertain the claim of assessee in the light of decision rendered in the case of Goetze(India) Ltd. vs. CIT, 284 ITR 323. The ld. Departmental Representative fairly admitted that the DRP has failed to adjudicate the issue raised in ground No.11 of the present appeal.

4.2 In respect of ground No.13, the ld. Departmental Representative submits that DRP has granted substantial relief to the assessee, however, to the extent

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the assessee failed to furnish supporting evidences, therefore, the assessee’s claim was rejected bythe DRP. He further, pointed that there is no mention of reimbursement or bifurcation of expenses in transfer pricing study report, hence, the DRP was justified in rejecting the claim of assessee to the extent the assessee failed to prove genuineness of reimbursement of cost. The ld. Departmental Representative supported the findings of DRP and prayed for dismissing ground No.13 of the appeal.

FINDINGS:

The Co-ordinate Bench while deciding the appeal of assessee for assessment year 2005-06 in ITA No.5598/Mum/2017 vide order dated 28/11/2022 held that the assessee started telecommunication services after 01/04/1995 and hence, the assessee is eligible to claim deduction u/s. 80-IA(4) of the Act. Following the order of Tribunal in assessee’s own case for assessment year 2005-06, the assessee’s claim of deduction u/s. 80-IA of the

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Act was allowed in assessment year 2006-07 and 2007-08. In the impugned assessment year the assessee’s claim of deduction u/s. 80IA of the Act was rejected for the reason similar to assessment year 2006-07.Following the decision rendered in assesee’s own case for assessment year 2006-07 (supra), ground No.2 of the appeal is allowed.

7.1 The assessee’s claim of deduction u/s. 80IA in respect of interest income, miscellaneous income, cell site sharing revenue and net foreign exchange gain was rejected. We find that in assessee’s appeal for assessment year 2005-06 in ITA NO.5078/Mum/2017 decided on 28/12/2022, the Tribunal had accepted assessee’s claim of deduction u/s. 80-IA of the Act on other incomes, viz. interest income and miscellaneous income. Following the order of Co-ordinate Bench, ground No.3 of the appeal is allowed,protanto.

In assessment year 2006-07, this issue was restored back to the file of Assessing Officer for re-examination. The relevant extract of the findings of the Tribunal on this issue are as under:-

“…………Thus, what is essential for allowing the provision as revenue is (i) it should be for the purpose of business exclusively; (ii) the provision is for present obligation; and (iii) based on reliable estimates. In the present case the assessees has been able to substantiate that condition (i) & (ii) above are satisfied. The assessee has purportedly furnished working of provision before the Assessing Officer The assessee’s method of determining provision was not examined by the Assessing Officer. We deem it appropriate to restore this issue back to the file of Assessing Officer to examine the same, in accordance with law. The ground No.3 of the appeal is thus, partly allowed for statistical purpose.” In the impugned assessment year we find that the Assessing Officer has failed to examine the issue in right perspective. We deem it fit to restore the issue to

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the file of Assessing Officer for fresh adjudication in similar terms. In the result, ground No.4 of the appeal is allowed for statistical purpose.

The Assessing Officer has made disallowance of Rs.159,75,70,000/- u/s. 14A of the Act r.w.r 8D. The case of assessee is that no exempt income was earned by the assessee during the period relevant to assessment year under appeal. This fact has not been rebutted by the Department. The settled legal position is, no disallowance u/s. 14A is to be made where the assessee has not earned any exempt income during the relevant period. Thus, the disallowance u/s. 14A of the Act made by Assessing Officer is deleted and ground No.5 of the appeal is allowed.

S.No. Group Company Loans given during the year Rate of (In INR Millions) interest 1. Vodafone South Ltd. 6,281.40 Interest free 2. Vodafone Digilink Ltd. 5,850.00 Interest free 3. Vodafone Essar Cellular Ltd. 10,849.10 7.7% 4. Vodafone Spacetel Ltd. 3,855.00 8.85% 5. Vodafone Infrastructure Limited 1.00 10.50% Total 26,836.50

In the preceding assessment year i.e. 2006-07, the assessee had extended financial support to its subsidiaries including some of the subsidiaries listed herein above. The interest on loans given to subsidiaries were disallowed by the Revenue in assessment year 2006-07. The issue travelled to the Tribunal. The Tribunal after examining the facts of the case held:

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“19. Both sides heard, orders of authorities below examined. The Assessing Officer has disallowed interest free loans advanced to the sister concerns. The primary contention of the assessee is that loans have been advanced to sister concerns out of commercial expediency. It is an undisputed fact that the loans has been advanced by the assessee to the group concerns who were in the same business and are providing cellular services in different telecom circles in India. The stand of the assessee before the authorities below for providing interest free loans to subsidiaries is that the subsidiaries are in the initial years of business and require huge initial outlay of funds and the telecommunication business has long gestation period. It may not be possible for new entities to obtain entire requirement of funds from banks/financial institutions. Therefore, the assessee extended loans/advances to its subsidiaries in the initial years of business. We find merit in the explanation furnished by the assessee. The Hon’ble Supreme Court of India in S.A Builders Ltd. vs. CIT(Supra) has held that once it is established that interest free loans has been advanced to sister concerns on account of commercial expediency, the interest paid on such loans by assessee cannot be disallowed. In so far as the objection of Revenue regarding advancement of loans to a loss making group concern, we hold that it is the assessee who has the exclusive right to take a call regarding advancing of loans to the group concern, the Assessing Officer cannot sit in the arm chair of the assessee and decide to whom loan is to be extended or at what rate of interest loan is to be extended. Once the assessee has been able to establish commercial expediency for extending the loan, which in our considered view the assessee has been successful in the present case, the interest expenditure cannot be disallowed. 19.1 The assessee has further shown that to cover the interest free loans advanced to Vodafone South Limited and Vodafone Digilink Limited aggregating to Rs.830 crores, the assessee has sufficient own funds to cover the investment. The Hon'ble Bombay High Court in the case of Reliance Utilities and Power Limited (supra) has held that, where the assessee is having mixed bag of interest free funds and interest bearing funds and the assessee has made investment out of such common pool of funds, the presumption would be that the investments are made out of interest free funds available with the company provided the said funds are sufficient to meet the investments. Thus, in the facts of the case and the decisions discussed above, we find merit in ground No.5 of the appeal. The disallowance of interest expenditure on loans given to subsidiaries is directed to be deleted. The assessee succeeds on ground No.5 of the appeal.” Both sides have unanimously stated that the facts in the impugned assessment year are identical, hence, we have no hesitation in applying the same ratio for deciding the issue in the impugned assessment year. Following the order of Co-ordinate Bench(supra), the addition on account of disallowance of interest expenditure is deleted and ground No.6 of the appeal is allowed.

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We find that the Assessing Officer has disallowed interest on capital work-in- progress following the assessment order in the immediate preceding year in assessee’s own case. In assessment year 2006-07 and 2007-08 the Tribunal deleted the addition by observing as under:

“22. We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee has raised loans during the period relevant to the assessment year under appeal and has paid interest on said loans. The assessee has admittedly used borrowed funds for acquiring assets. The contention of the Revenue is that the assets acquired by the assessee are for expansion of the existing business, hence, proviso to section 36(1)(iii) of the Act gets attracted, consequently, interest paid on such borrowed capital is not allowable u/s. 36(1)(iii) of the Act. 23. Au Contraire, stand of the assessee is that purchase of asset in assessee’s case does not lead to extension of business but has merely improved quality of service.In terms of telecommunication business, expression extension is used where the business of the assessee has grown in geographical terms. It is an undisputed fact that even after having acquired new assets, the area of operation of the assessee has not extended. The assessee was providing telecommunication services in Mumbai Telecom Circle and even after substantial investment in new assets, the area of operation remain confined to Mumbai Telecom Circle. The investment in assets / Plant & Machinery/ Network equipment by the assessee have improved the quality of services, this may have resulted in increase of the subscriber base to some extent. Increase in volume of subscriber base within the same territory of operation cannot be termed as extension of business. Therefore, we do not find merit in the observations of the Assessing Officer that the interest u/s. 36(1)(iii) of the Act has to be disallowed.” [Emphasized by us]

In the impugned assessment year we find that the Assessing Officer has disallowed interest on account of capital work-in-progress expenditure for the similar reason that the loans have been utilized for substantial extension of the existing business. While deciding similar issue in assessment year 2006-07 the Co-ordinate Bench had explained meaning of extension of business in respect of Telecommunication services. Following the order of Co-ordinate Bench, the

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disallowance made by the Assessing Officer is directed to be deleted. The assessee succeeds on ground No.7 of the appeal.

The assessee has incurred expenditure for raising of loans. The Assessing Officer following the assessment order of the immediate preceding year disallowed expenditure incurred towards raising of secured and unsecured loans. The Tribunal in assessment year 2006-07 and 2007-08 deleted the disallowance qua raising of loans. The Tribunal allowed assessee’s claim by observing as under:

“26. We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee during the period relevant to assessment year under appeal has raised secured and unsecured loans. The Assessing Officer has disallowed expenditure on raising of loan for the reason that loan has been disbursed for capital expenditure and not for augmentation of the working capital and loan funds have been utilized for non-business considerations. While deciding the preceding grounds we have held that the loans have been utilized by the assessee for the purpose of business. The loans that have been advanced to the group concern are on account of business exigencies 26.1 The Hon’ble Apex Court in the case of India Cements Ltd. vs. CIT (supra) has held that expenditure on raising of loan is revenue in nature, hence, allowable. The nature of expenditure on raising of loan does not depend upon nature and purpose of loan. Hence, we have no hesitation in holding that the expenditure incurred for raising of the loan is allowable u/s.37(1) of the Act. The ground No.8 of the appeal is thus, allowed.”

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On parity of facts, following aforesaid decision of the Tribunal, ground No.9 of the assessee’s appeal is allowed.

“29. We have heard the submissions made by rival sides and have examined the orders of authorities below. One of the issue before Kolkata Bench of Tribunal in the case of Vodafone East Ltd. vs. ACIT (supra) was with respect to deduction of tax at source in respect of roaming charges paid by the assessee to other telecom operators. The Co-ordinate Bench after analyzing the facts of the case and various decisions held that the payment of roaming charges does not fall under the ambit of TDS provision either u/s. 194C or 194J of the Act, hence, addition made u/s. 40(a)(ia) of the Act was deleted. We find that the facts and the reason for making disallowance u/s.40(a)(ia) of the Act in the impugned order are similar to the case of Vodafone East Ltd.(supra). No distinction has been pointed by the Revenue in the present case. Thus, for parity of reasons, disallowance u/s. 40(a) (ia) of the Act is directed to be deleted. The assessee succeeds on ground No.9 of appeal.” Following the order of Tribunal in assessee’s own case on similar facts, ground No.10 of the instant appeal is allowed, for parity of reasons.

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fluctuations. The said loss was held to be on capital account by the Assessing Officer vide assessment order dated 05/02/2011. The assessee accepted the same. Now that in the impugned assessment year the assessee has gain on foreign exchange fluctuations, the sametreatment should be given to gains i.e. gain on foreign exchange fluctuations should be considered on capital account. Purportedly, the assessee had made claimbefore the Assessing Officer during assessment proceedings,hence, the same was not considered by the Assessing Officer. Thereafter, the assessee raised ground before the DRP in objections. The DRP recorded the ground in Para-8 of the directions, however, the same was not adjudicated. In the back drop of above facts, without delving further on the issue, we deem it appropriate to restore this issue back to the file of Assessing Officer for adjudication on merits after affording reasonable opportunity of hearing/making submissions to the assessee, in accordance with law. Thus, ground No.11 of the appeal is allowed for statistical purpose.

The Assessing Officer has disallowed deduction of provision for doubtful debts amounting to Rs.246.00 million for the purpose of computing book profits u/s. 115JB of the Act. We find that in assessment year 2006-07 similar disallowance was made by the Assessing Officer in respect of provision for doubtful debts. The Tribunal while adjudicating the issue held as under:

“32. We have heard the rival submissions and have examined the orders of authorities below. It is not in dispute that the provision made for doubtful debts amounting to Rs.218.31 million has been added back by the Assessing Officer while computing book profits u/s. 115JB of the Act by applying clause (i) of Explanation -2 to section 115JB(2) of the Act. When the assessee chose to write back the provision for doubtful debts by creating it in its P&L Account, which in the present case is Rs.326.79 million, the same would obviously be outside the ambit of provision of

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section 115JB of the Act. In fact, this is specifically provided in clause (i) of Explantion-1 to section 115JB(2) of the Act under expression “as reduced by” while computing book profit u/s. 115JB of the Act. In view of this, we direct the Assessing Officer to reduce Rs.326.79 million towards provision for doubtful debts written back while computing book profits u/s. 115JB of the Act. The assessee succeeds on ground No.10 of appeal.” The facts in the impugned assessment year are similar to assessment year 2006-07. Thus, the findings of the Tribunal on the issue would mutatis mutandis apply to the similar issue in impugned assessment year. For parity of reasons, ground No.12 of the appeal is decided in favour of the assessee.

In ground No.13 of appeal the assessee has assailed transfer pricing adjustment pertaining to reimbursement of salary and related costs on deputation of personnel by overseas AEs in India. The assessee had claimed reimbursement of salary and other related costs on employees seconded by AEs. The TPO disallowed assessee’s entire claim of Rs.13,82,44,320/-. The assessee filed objections before the DRP. The DRP held that the TPO had erred in coming to the conclusion that the employees were hired by the assessee. In fact, the employees were seconded to India by AEs of the assessee. The DRP further held that expats had actually performed services in India for which their salary costs has been cross charged. The DRP allowed reimbursement of salary and related allowances of personnel deputed to India to the extent it was found on cost to cost basis i.e. to the extent of Rs.10,19,13,313/-. In so far as the remaining amount of Rs.3,63,31,007/-, the DRP held that no evidences in the nature of back to back invoices were available. Only some debit notes were available, which the DRP refused to accept.

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17.1 The contention of the assessee is that the amount disallowed by the DRP was paid towards travel cost/relocation cost of five seconded employees. The reimbursement of salary and other allowances were allowed on debit notes, similar treatment can be given to the reimbursement of relocation costs.

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The ld. Counsel for the assessee submits that ground No.14 would be consequential to the order of Tribunal on the issues raised in ground No.1 to 13 of the appeal. The Assessing Officer is directed to re-examine and grant credit of the TDS on the basis of documents available on record and decision of the Tribunal, in accordance with law.

The assessee has assailed charging of interest u/s. 234B and 234C of the Act. Charging of interest under the aforesaid sections is mandatory and consequential, hence, ground No.15 of the appeal is dismissed.

Order pronounced in the open court on Monday the 08th day of May, 2023.

Sd/- Sd/- (M. BALAGANESH) (VIKAS AWASTHY) लेखाकार सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई/ Mumbai, �दनांक/Dated 08/05/2023 Vm, Sr. PS(O/S)

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��त�ल�प अ�े�षतCopy of the Order forwarded to :

BY ORDER, //True Copy// (Dy./Asstt.Registrar)/ Sr.Private Secretary, ITAT, Mumbai