M/S VODAFONE ESSAR LTD.,MUMBAI vs. ADDL. CIT, CHANDIGARH

Since, the grounds raised in both the appeals germinate from same set of facts, these appeals are taken up together for adjudication and are decided by this common order. For the sake of convenience the appeals are decided in seriatim of assessment year.

The gist of grounds raised by the assessee in appeal are as under:-

Apart from above grounds of appeal, the assessee raised additional ground of appeal vide application dated 14/02/2013 however, the same was subsequently withdrawn by the assessee vide application dated 06/05/2013.

Ground No.1 and 2 of appeal are inter connected, hence, taken up together for adjudication.

Shri Salil Kapoor appearing on behalf of the assessee submitted that the assessee is eligible to claim deduction u/s. 80IA of the Act, the issue has been decided by the Tribunal in assessee’s own case for the immediate preceding Assessment Year i.e. Assessment Year 2005-06 in by the Revenue decided on 28/11/2022. The ld.Counsel for the assessee submits that the Tribunal vide aforesaid order held that the assessee / appellant commenced telecommunication services after 01/04/1998, hence, is eligible to claim deduction u/s.80IA of the Act.

Shri Anand Mohan representing the Department vehemently defended the impugned order. However, the ld. Departmental Representative fairly stated that the assessee’s eligibility to claim deduction u/s. 80IA of the Act and deduction u/s. 80IA on ‘other incomes’ has been considered by the Tribunal in assessee's own case for Assessment Year 2005-06.

Both sides heard. The Assessing Officer disallowed assessee’s claim of deduction u/s. 80IA of the Act primarily for the reasons; the assessee had set up its business prior to 01/04/1995 and assessee has been formed by way of splitting up / re-construction of business. The above issues have already been decided by the Tribunal in appeal by the Department in assessee’s case for assessment year 2005-06 vide order dated 28/11/2022(supra). The Tribunal has held that the assessee started telecommunication services after 01/04/1995 and hence, eligible for deduction u/s. 80IA(4) of the Act. The Co- ordinate Bench further held that even if the assessee’s undertaking is formed after merger/re-construction there would be no impediment to claim deduction u/s. 80IA of the Act in the light of CBDT Circular No.5 of 2005. Following the order of Tribunal in assessee’s own case for assessment year 2005-06 ground No.1 of appeal is allowed.

In ground No.2 of appeal the assessee has claimed deduct ion u/s.80IA in respect of income from ‘Other Incomes’ The Tribunal in in appeal by the assessee for 2005-06 (supra) has accepted assessee’s claim of deduction u/s. 80IA of the Act on ‘other incomes’ viz. interest income and miscellaneous income, by placing reliance on the decision in the case of Bharat Sanchar Nigam Limited reported as 156 ITD 847 (Del-Trib) Hence, ground No.2 of the present appeal is allowed for parity of reasons.

The ld.Counsel for the assessee narrating the facts in respect of the issue submits – the assessee entered into licence agreement with owners of premises for installing telecom towers on their premises. The clause -11 of licence agreement cast an obligation on the assessee to restore the leased premises to its original form at the time of vacating the premises/removal of towers. The ld.Counsel for the assessee referred to one of the sample licence agreement at page 222 of the Paper Book. The ld.Counsel for the assessee submits that the liability for restoring the premises to its original conditions arises as soon as the assessee enters into an agreement with the owner of the premises. The asset restoration cost is the estimated cost to be incurred at the leased and shared network sites and office premises to restore them to their original condition at the end of the lease period and the same is recognized as per Accounting Standard (AS) -29. The assessee claimed depreciation amounting to Rs.63.60 lacs on ‘ARC’ obligation capitalized during the year as the provision made is in effect directly attributable to the cost of acquisition of capital. The ld.Counsel for the assessee fairly submits that the Delhi Bench of Tribunal in assessee’s Group concern, DCIT vs. Vodafone Essar Digilink Ltd., 170 ITD 430 (Del-Trib) has rejected assessee’s claim of depreciation of capitalized amount. The ld.Counsel for the assessee further pointed that the assessee has filed an appeal against the said order of Tribunal before the Hon’ble Delhi High Court in Income Tax Appeal No.660 of 2018. The Hon’ble High Court has admitted the question of law on this issue vide order dated 01/06/2018 and the said appeal of the assessee is pending for final adjudication.

Rebutting the arguments advanced on behalf of the Department, the ld.Counsel for the assessee submits that clause-23 of the agreement is unrelated to restoration of damage caused to the structure at the time of installation or thereafter at the time of removal of telecom tower. He further asserted that the decisions on which reliance has been placed by the ld. Departmental Representative has already been considered by the Hon’ble Madras High Court in the case of Vedanta Ltd.(supra).

We have heard the submissions made by rival sides and have examined the orders of authorities below. The ld. Counsel for the assessee has made three propositions for allowing provision for ARC. The first proposition is, that the same be considered as capital in nature and the assessee be allowed depreciation on capitalized amount. This proposition has already been rejected by the Delhi Bench of Tribunal in assessee’s group concern M/s. Vodafone Essar Digilink Ltd.(supra). Though the assessee has filed appeal against the decision of Tribunal before Hon’ble Delhi High Court, the appeal of the assessee has been admitted, however, no stay is operative against the Tribunal order. Therefore, the first proposition of the assessee is rejected.

We find no prohibition or negation for making a provision for meeting such a future obligation and such a provision being treated as a revenue expenditure under Section 37(1) of the Act. The Hon'ble Supreme Court in the case of Calcutta Company Limited clearly held that the words Lay (laid out) or Expend includes expendable in future also, which has been quoted by us above. The making of a Provision by an Assessee is a matter of good business or commercial prudence and it is to set apart a fund computed on scientific basis to meet the expenditure to be incurred in future. There is no time frame or limitation prescribed for the said provisions to be actually spent. Merely because in the context like the one involved in this case, the contract period was long viz., 25 years, which too now stands extended by period of ten years or more and therefore the actual work of site restoration may happen after 35 years depending upon the actual exploration of oil reserves and the Site restoration would be undertaken only if there is no longer some oil to be explored or drawn out and, therefore, it cannot be said that the provision made for the three Assessment Years presently at the beginning of the Contract period was irrational or an disallowable expenditure. The question of commercial expediency is a usual business and the economic decision to be taken by the Assesee and not by the Revenue Authorities and therefore the provision made on a reasonable basis, cannot be disallowed under Section 37(1) of the Act, unless it can be said to be have no connection with the business of the Assesee. The words wholly and exclusively for the purpose of business is a sufficient safeguard and check and balance by the Revenue Authorities to test and verify the creation of provisions for meeting a liability by the Assessee in future and its connectivity with the business of the Assessee. Assuming that such set apart provision is not actually spent in future or something less is spent on Site Restoration, nothing prevents Revenue Authorities and Assessee himself to offer it back for taxation in such future year, the unspent Provision to be brought back to tax as per Section 41(1) of the Act.” [Emphasized by us] 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.

The ld.Counsel for the assessee submits that during the period relevant to assessment year under appeal, the assessee has not received any income exempt from tax on the investments made. Hence, no disallowance u/s. 14A is warranted. To support his contention the ld.Counsel for the assessee placed reliance on the decision in assessee's own case in for Assessment Year 2008-09 decided on 12/10/2022.

Per contra, the ld. Departmental Representative placed reliance on the assessment order.

Both sides heard. It is an unrebutted fact that during the period relevant to the assessment year under appeal, the assessee has not earned any income exempt from tax on the investments. It is no more resintegra that no disallowance u/s. 14A of the Act is warranted where the assessee has not earned any exempt income during the relevant period. We further observe that the Assessing Officer has made disallowance invoking provisions of Rule 8D. The provisions of Rule 8D are effective from assessment year 2008-09. In the impugned assessment year Rule 8D has no application.[Re. Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, 328 ITR 81 (Bom).] Hence, ground No.4 of the appeal is allowed.

Per contra, ld. Departmental Representative vehemently defended the impugned order. The ld. Departmental Representative submits that the assessee failed to substantiate business consideration with the subsidiaries to whom loans were advanced. The ld. Departmental Representative further submitted that Vodafone South Limited to whom loans were advanced were running into huge losses. The assessee failed to show prudence in advancing interest free loans to loss making company.

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.

In ground No.6 & 7 of appeal the assessee has assailed disallowance of interest Rs.1,63,96,415/- on Capital Work-in-Progress and disallowance of interest Rs.38,70,010/- on ECB. The ld. Counsel for the assessee submits that the assessee has acquired fixed assets from the borrowed capital during the year relevant to the assessment year under appeal. The assets were acquired not for the purpose of extension of its existing business but to provide better quality of services to the customers. The Assessing Officer while disallowing interest on capital work-in-progress and interest on ECB has erred in holding that the assessee has extended its existing business, by making substantial addition to the fixed asset base of the company. The Assessing Officer on wrong appreciation of facts has erred in coming to the conclusion that interest paid on capital borrowed is for acquisition of assets for extension of business, hence, not allowable as deduction u/s. 36(1)(iii) of the Act. The ld. Counsel for the assessee asserted that the assessee has utilized borrowed funds for the purpose of carrying out its existing operations more efficiently. The expenditure on capital work-in-progress was for facilitating its existing operations and not in connection with extension of its existing operations. The investments in network assets is a continuous process to improve quality of services for its subscribers, hence, the assets acquired cannot be construed for extension of existing business operations. In telecommunication business the extension of business mean expansion beyond geographical area, where telecommunication services are rendered. The assessee is providing telecommunication services in Mumbai Telecom Circle and even after acquiring new assets the geographical area of operation remain confined to Mumbai Telecom Circle. The ld. Counsel for the assessee in support of his submissions placed reliance on the following decisions:

Per contra, the ld. Departmental Representative vehemently defending the assessment order submitted that the assessee had acquired loans and raised ECBs for expansion of business . With the acquisition of new assets, the subscriber base of the assessee has increased, the increase in subscriber base is also an extension of business. Therefore, proviso to section 36(1)(iii) of the Act is attracted. The ld. Departmental Representative referred to the findings of the Assessing Officer in para 5.4 to 5.6 of the assessment order. The ld. Departmental Representative pointed that there has been substantial addition in the fixed assets of the assessee under the head ‘Plant and Machinery’. This shows that there has been substantial expansion of the existing business by the assessee. The ld. Departmental Representative further pointed to the observations of the Assessing Officer in para 5.6 of the impugned order that capital work-in-progress has not been utilized for the purpose of business during the year under consideration, hence, interest expenses on capital work- in-progress is not allowable as deduction.

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.

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.

The ld. Counsel for the assessee submits that during the period relevant to the assessment year under appeal, the assessee incurred following expenditure in relation to raising of loans:

The ld. Departmental Representative submits that the secured and unsecured loans raised have been utilized for non-business consideration. Hence, the expenses incurred to raise the loans have been rightly disallowed u/s. 37(1) of the Act.

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.

In ground No.9 of appeal, the assessee has assailed disallowance of roaming cost u/s. 40(a)(ia). The ld.Counsel for the assessee submits that during the year under consideration the assessee incurred expenses on roaming charges. Payments are made to other telecom operators to enable subscribers of the assessee to make or receive calls originating / terminating on other telephone networks. Roaming service is in the nature of automated services and no human intervention for switch over to the network of other telecom operators while in roaming is warranted. The Assessing Officer made disallowance u/s. 40(a)(ia) of the Act on the pretext that the provisions of section 194C and/ or section 194J of the Act are attracted on payments made to other telecom operators. The ld.Counsel for the assessee submitted that the issue is squarely covered by the decision of Kolkata Bench of the Tribunal in the case of Vodafone East Ltd. vs. Addl. CIT, 156 ITD 337.

The ld. Departmental Representative vehemently placed reliance on the assessment order and the observations of DRP on the issue and prays for dismissing ground No.9 of the appeal.

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.

On the other hand, ld. Departmental Representative placed reliance on the assessment order and prayed for dismissing the appeal of assessee.

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 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.

In ground No.11 of appeal, the assessee has assailed initiation of penalty proceedings u/s. 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, accordingly, ground No.11 of the appeal is dismissed.

The assessee in ground No.12 has assailed levy of interest u/s. 234B, 234C & 234D of the Act. Charging of interest under aforesaid sections is mandatory and consequential, hence, ground No.12 of the appeal is dismissed.

In the result, appeal by assessee is partly allowed in the terms aforesaid.

Both sides are unanimous in stating that the grounds raised by the assessee in appeal for assessment year 2007-08 and the facts germane to said grounds are identical to the facts in assessment year 2006-07.

The gist of grounds raised by the assessee in appeal for 2007-08 is asunder:

All the issues raised in aforesaid grounds of appeal have been adjudicated by us while deciding the appeal of assessee in (supra). The findings given therein on various issues would Mutatis Mutandis apply to the grounds raised in the instant appeal. For parity of reasons, the appeal of the assessee for assessment year 2007-08 is partly allowed.

To sum up, appeals of assessee for assessment year 2006-07 and 2007- 08 are partly allowed in the terms aforesaid.