ASSTT COMMISSIONER OF INCOME TAX, CIRCLE-3(3)(1), MUMBAI vs. RELIANCE JIO INFOCOMM LIMITED, MUMBAI

This appeal by the Revenue is directed against order dated 06/09/2022 passed by the Ld. Commissioner of Income- tax(Appeals)-National Faceless Appeal Centre(NFAC), Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2018-19, which arose from the assessment order dated 30/09/2021 passed by the Addl./Joint Reliance Jio Infocomm Ltd. 2 AY 2018-19 CIT/DCIT/ACIT/ITO, National Faceless Assessment Centre ( in CIT/DCIT/ACIT/ITO, National Faceless Assessment Centr CIT/DCIT/ACIT/ITO, National Faceless Assessment Centr short the Assessing Officer) short the Assessing Officer), raising following grounds: raising following grounds:

1. (1). "Whether on the facts and in the circumstances of (1). "Whether on the facts and in the circumstances of (1). "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee ignoring the fact that the the appeal of the assessee ignoring the fact that the the appeal of the assessee ignoring the fact that the assessee had treated the assessee had treated the same expenditure as revenue same expenditure as revenue for IT. purposes whereas for all other purposes and for IT. purposes whereas for all other purposes and for IT. purposes whereas for all other purposes and laws it has treated the expenditure as capital laws it has treated the expenditure as capital laws it has treated the expenditure as capital expenditure". expenditure". 2. (2). Whether on the facts and in the circumstance of the (2). Whether on the facts and in the circumstance of the (2). Whether on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee in respect to expenses treating it appeal of the assessee in respect to expenses treating it appeal of the assessee in respect to expenses treating it as revenue in nature, which were incurred towards as revenue in nature, which were incurred towards as revenue in nature, which were incurred towards upgradation of assets and are therefore, capital in upgradation of assets and are therefore, capital in upgradation of assets and are therefore, capital in nature and therefore not allowable as expenses us 37 of nature and therefore not allowable as expenses us 37 of nature and therefore not allowable as expenses us 37 of the IT. Act". the IT. Act". 3. (3). Whether on the facts (3). Whether on the facts and in the circumstance of the and in the circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the case and in law, the Ld. CIT(A) has erred in allowing the appeal of the assessee ignoring the fact that the appeal of the assessee ignoring the fact that the appeal of the assessee ignoring the fact that the expenses incurred towards expansion of business with expenses incurred towards expansion of business with expenses incurred towards expansion of business with enduring benefit and thus capital in nature and enduring benefit and thus capital in nature and enduring benefit and thus capital in nature and therefore not a therefore not allowable as expense u/s 37 of the IT. llowable as expense u/s 37 of the IT. Act".

2. Briefly stated facts of the case Briefly stated facts of the case are that the assessee company that the assessee company is engaged in the business of providing telecommunication and is engaged in the business of providing telecommunication and is engaged in the business of providing telecommunication and wireless telecommunication services within India. For the year wireless telecommunication services within India. For the year wireless telecommunication services within India. For the year under consideration, under consideration, the assessee filed its original return of income its original return of income under section 139(1) of the Income under section 139(1) of the Income-tax Act, 1961 ( in short tax Act, 1961 ( in short ‘the Act’) on 30/11/2018 declaring current year loss at ₹30077,92,19,721/ on 30/11/2018 declaring current year loss 30077,92,19,721/- and d book book profit profit under under section section 115JB 115 JB of of the the Act at ₹1120,41,83,998/-. The return of income was subsequently revised . The return of income was subsequently revised . The return of income was subsequently revised on 26/03/2019 for claiming on 26/03/2019 for claiming credit of additional tax deducted at additional tax deducted at Reliance Jio Infocomm Ltd. 3 AY 2018-19 source (TDS). The return of income by the assessee was selected for source (TDS). The return of income by the assessee was selected for source (TDS). The return of income by the assessee was selected for a scrutiny any statutory notices under the a scrutiny any statutory notices under the Act were issued and were issued and complied with. 2.1 During the scrutiny proceedings with Assessing Officer During the scrutiny proceedings with Assessing Officer During the scrutiny proceedings with Assessing Officer observed from the Income Income computation and disclosure computation and disclosure standards (ICDS) statement for the year under consideration statement for the year under consideration that the assessee that the assessee claimed an amount of claimed an amount of ₹14927,99,00,396/- as “expenses cap as “expenses capitalized in books- allowable as revenue for tax purpose” allowable as revenue for tax purpose” allowable as revenue for tax purpose”. The assessee explained that those are operating expenses ( those are operating expenses (viz., salaries, rent, viz., salaries, rent, professional fees, marketing expenses, power and fuel, travelling professional fees, marketing expenses, power and fuel, travelling professional fees, marketing expenses, power and fuel, travelling etc.) incurred during the year under assessment but had not been during the year under assessment but had not been during the year under assessment but had not been debited to the profit and loss account as same formed part of debited to the profit and loss account as same formed part of debited to the profit and loss account as same formed part of ‘Project Development Project Development’ expenditure and accounted as capital work in expenditure and accounted as capital work in progress in the books of accounts. It was further submitted that progress in the books of accounts. It was further submitted that progress in the books of accounts. It was further submitted that telecom assets/network of the company had already been put to ts/network of the company had already been put to ts/network of the company had already been put to use on 01/09/2016 for business purposes pursuant to launch of use on 01/09/2016 for business purposes pursuant to launch of use on 01/09/2016 for business purposes pursuant to launch of digital services by the company to its subscribers/customers. These digital services by the company to its subscribers/customers. These digital services by the company to its subscribers/customers. These expenses had not resulted in acquisition of the expenses had not resulted in acquisition of the assets sets and incurred for business operation purpose only. It was further submitted that ness operation purpose only. It was further submitted that ness operation purpose only. It was further submitted that as per the accounting policy followed by the company while as per the accounting policy followed by the company while as per the accounting policy followed by the company while preparing its financial statement, the company capitalises the preparing its financial statement, the company capitalises the preparing its financial statement, the company capitalises the assets only when they are available for use and are working in assets only when they are available for use and are working in assets only when they are available for use and are working in accordance with the quality of service (QOS) standard intended by ith the quality of service (QOS) standard intended by ith the quality of service (QOS) standard intended by the management. Till the quality of services standards are not met, the management. Till the quality of services standards are the management. Till the quality of services standards are Reliance Jio Infocomm Ltd. 4 AY 2018-19 even if the assets have been put to use, the company continues to even if the assets have been put to use, the company continues to even if the assets have been put to use, the company continues to classify those expenses, classify those expenses, under ‘project development project development’ expenditure /capital work in progress in the books of accounts in accordance pital work in progress in the books of accounts in accordance pital work in progress in the books of accounts in accordance with para 55 of Indian accounting standard (Ind with para 55 of Indian accounting standard (Ind-As) As)-16-‘Property, Plant and Equipment Plant and Equipment’. The company has continued to improve its . The company has continued to improve its network connectivity and capitalises the expenditure incurred network connectivity and capitalises the expenditure incurred network connectivity and capitalises the expenditure incurred including the operational expenses luding the operational expenses to the project development to the project development expenditure/work in progress in the books till the quality of expenditure/work in progress in the books till the quality of expenditure/work in progress in the books till the quality of services standards intended by the management are achieved. services standards intended by the management are achieved. services standards intended by the management are achieved.

3. According to the Assessing Officer the contradictory treatment According to the Assessing Officer the contradictory treatment According to the Assessing Officer the contradictory treatment of capitalising the expenditure in the books of accounts and yet alising the expenditure in the books of accounts and yet alising the expenditure in the books of accounts and yet claiming revenue expenditure for the purpose of claiming revenue expenditure for the purpose of Income Income-tax, was not permissible because the expenditure can either be revenue or not permissible because the expenditure can either be revenue or not permissible because the expenditure can either be revenue or capital in nature and it cannot be same time be capital as far as capital in nature and it cannot be same time be capital as capital in nature and it cannot be same time be capital as books are concerned and revenue as s are concerned and revenue as far as claim of the as claim of the admissibility of the same for income tax purposes. There has to be admissibility of the same for income tax purposes. There has to be admissibility of the same for income tax purposes. There has to be uniformity of treatment of the expenditure in the books as well as uniformity of treatment of the expenditure in the books as well as uniformity of treatment of the expenditure in the books as well as for the income tax purpose. Further for the income tax purpose. Further, the Ld. Assessing Officer held Assessing Officer held that those expenses t those expenses are towards upgradation of the towards upgradation of the assets and therefore, capital in nature. The relevant finding of the Assessing capital in nature. The relevant finding of the Assessing capital in nature. The relevant finding of the Assessing Officer is reproduced as under: Officer is reproduced as under: “14.7.2 Thus the distinguishing factor between expenses 14.7.2 Thus the distinguishing factor between expenses 14.7.2 Thus the distinguishing factor between expenses claimed in P& claimed in P&L a/c under the same heads-employee employee cost,rent, professional expenses, forex loss, interest, etc cost,rent, professional expenses, forex loss, interest, etc cost,rent, professional expenses, forex loss, interest, etc and these expenses which are not claimed in P&L alc but and these expenses which are not claimed in P&L alc but and these expenses which are not claimed in P&L alc but capitalised in books and yet claimed as revenue expenses capitalised in books and yet claimed as revenue expenses capitalised in books and yet claimed as revenue expenses Reliance Jio Infocomm Ltd. 5 AY 2018-19 in Income Computation is that these are expense in Income Computation is that these are expenses incurred s incurred in connection with tower/fibre network infrastructure in connection with tower/fibre network infrastructure in connection with tower/fibre network infrastructure facilities, which are not yet meeting with the Quality of facilities, which are not yet meeting with the Quality of facilities, which are not yet meeting with the Quality of Service (QoS) standards. Thus these are expenses towards Service (QoS) standards. Thus these are expenses towards Service (QoS) standards. Thus these are expenses towards upgradation of assets and are therefore capital in nature, upgradation of assets and are therefore capital in nature, upgradation of assets and are therefore capital in nature, and also treated and also treated as such in the books and as per as such in the books and as per applicable accounting policies. In this case, the treatment applicable accounting policies. In this case, the treatment applicable accounting policies. In this case, the treatment in books and as per accounting policy reflects the true in books and as per accounting policy reflects the true in books and as per accounting policy reflects the true nature of the expenditure and thus even for Income tax nature of the expenditure and thus even for Income tax nature of the expenditure and thus even for Income tax purposes there is no reason or rationale to deviate f purposes there is no reason or rationale to deviate f purposes there is no reason or rationale to deviate from the same.” 3.1 Accordingly, in assessment order passed under section 143(3) Accordingly, in assessment order passed under section 143(3) Accordingly, in assessment order passed under section 143(3) of the Act on 30/09/2021, the Assessing Officer on 30/09/2021, the Assessing Officer on 30/09/2021, the Assessing Officer disallowed the claim of the assessee of expenditure of ₹14927,99,00,396/ claim of the assessee of expenditure of 14927,99,00,396/- as revenue expenditure. revenue expenditure.

4. On further appeal, the asse On further appeal, the assessee explained before the Ld. CIT(A) ssee explained before the Ld. CIT(A) that assessee was a new entrant in the telecom sector and therefore that assessee was a new entrant in the telecom sector and therefore that assessee was a new entrant in the telecom sector and therefore it was required to continuously invest in the stabilising its network it was required to continuously invest in the stabilising its network it was required to continuously invest in the stabilising its network connectivity as well as to set up additional tower, fibre and other connectivity as well as to set up additional tower, fibre and other connectivity as well as to set up additional tower, fibre and other infrastructural facilities to strengthen in its network connectivity al facilities to strengthen in its network connectivity for al facilities to strengthen in its network connectivity handling huge demand for data, huge demand for data, video and voice services. After and voice services. After considering the submission of the assessee considering the submission of the assessee, the Ld. CIT(A) deleted Ld. CIT(A) deleted the disallowance made by the Assessing Officer observing as under: the disallowance made by the Assessing Officer observing as under: the disallowance made by the Assessing Officer observing as under: “11.3 On perusal of the accounting policies, annual report On perusal of the accounting policies, annual report On perusal of the accounting policies, annual report and other material placed on record, it is observed that, and other material placed on record, it is observed that, and other material placed on record, it is observed that, the appellant capitalizes the assets as and when they are the appellant capitalizes the assets as and when they are the appellant capitalizes the assets as and when they are available for use and are working in accordance with the available for use and are working in accordance with the available for use and are working in accordance with the Quality of Service (QoS Quality of Service (QoS) standards intended by the ) standards intended by the management. Consequently, the indirect / operational management. Consequently, the indirect / operational management. Consequently, the indirect / operational expenses relating to period prior to the stage of meeting expenses relating to period prior to the stage of meeting expenses relating to period prior to the stage of meeting the Quality of Service (QoS) standards as intended by the the Quality of Service (QoS) standards as intended by the the Quality of Service (QoS) standards as intended by the Reliance Jio Infocomm Ltd. 6 AY 2018-19 management, is considered as "project development management, is considered as "project development management, is considered as "project development expenditure" and disclosed under "Capital Work re" and disclosed under "Capital Work-in- re" and disclosed under "Capital Work Progress", irrespective of the fact that the asset had Progress", irrespective of the fact that the asset had Progress", irrespective of the fact that the asset had already been put to use. This was done in accordance already been put to use. This was done in accordance already been put to use. This was done in accordance with relevant Paras 20 and 55 of Ind with relevant Paras 20 and 55 of Ind-AS 16 - Property, Plant and Equipment, followed by the appellant, is n Plant and Equipment, followed by the appellant, is n Plant and Equipment, followed by the appellant, is noted to read as follows: to read as follows: "Para 20: Recognition of costs in the carrying amount of an "Para 20: Recognition of costs in the carrying amount of an "Para 20: Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item of property, plant and equipment ceases when the item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be item is in the location and condition necessary for it to be item is in the location and condition necessary for it to be capable capable capable of operating of operating in of operating in in the the the manner manner intended by manner intended by intended by management. management. For example, the following costs are not included in the For example, the following costs are not included in the For example, the following costs are not included in the carrying amount of an item of property, plant and carrying amount of an item of property, plant and carrying amount of an item of property, plant and equipment. (a) costs incurred while an item capable of operating in the (a) costs incurred while an item capable of operating in the (a) costs incurred while an item capable of operating in the manner intended by management has yet to be brought manner intended by management has yet to be brought manner intended by management has yet to be brought into use or is operated at less than full capcity; s operated at less than full capcity; (b) initial operating losses, such as those incurred while (b) initial operating losses, such as those incurred while (b) initial operating losses, such as those incurred while demand for the item's output builds up; and demand for the item's output builds up; and (c) costs of relocating or reorganising part or all of an (c) costs of relocating or reorganising part or all of an (c) costs of relocating or reorganising part or all of an entity's operations. entity's operations.

55. Depreciation of an asset begins 55. Depreciation of an asset begins when it is available for when it is available for use, i.e. when it is in the location and condition necessary use, i.e. when it is in the location and condition necessary use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by for it to be capable of operating in the manner intended by for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the management. Depreciation of an asset ceases at the management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held fo earlier of the date that the asset is classified as held fo earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as sale (or included in a disposal group that is classified as sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date held for sale) in accordance with Ind AS 105 and the date held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. Therefore, depreciation that the asset is derecognised. Therefore, depreciation that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired does not cease when the asset becomes idle or is retired does not cease when the asset becomes idle or is retired from active use unless from active use unless the asset is fully depreciated. the asset is fully depreciated. However, under usage methods of depreciation the However, under usage methods of depreciation the However, under usage methods of depreciation the depreciation charge can be zero while there is no depreciation charge can be zero while there is no depreciation charge can be zero while there is no production" 11.4 Having regard to the nature of business of the 11.4 Having regard to the nature of business of the 11.4 Having regard to the nature of business of the appellant, I find merit in the submission of the appellant appellant, I find merit in the submission of the appellant appellant, I find merit in the submission of the appellant that, the company was required to undertake continuous at, the company was required to undertake continuous at, the company was required to undertake continuous Reliance Jio Infocomm Ltd. 7 AY 2018-19 efforts to improve its network / connectivity, as its efforts to improve its network / connectivity, as its efforts to improve its network / connectivity, as its subscribers were not able to get adequate experience of subscribers were not able to get adequate experience of subscribers were not able to get adequate experience of seamless connectivity across networks due to congestion seamless connectivity across networks due to congestion seamless connectivity across networks due to congestion in Point of interconnect (POl) and Mo in Point of interconnect (POl) and Mobile number portability bile number portability (MP) issue. From the facts on record, it is noted that since (MP) issue. From the facts on record, it is noted that since (MP) issue. From the facts on record, it is noted that since the Quality-of of-Service Standards, set by the management Service Standards, set by the management for some of its installed assets, were not met, although it for some of its installed assets, were not met, although it for some of its installed assets, were not met, although it had been put to use, entries were passed in books of had been put to use, entries were passed in books of had been put to use, entries were passed in books of accounts counts classifying classifying these these expenses expenses under under 'project development expenditure' and disclosing it as 'capital development expenditure' and disclosing it as 'capital development expenditure' and disclosing it as 'capital work-in-progress'. This was done in accordance with the progress'. This was done in accordance with the progress'. This was done in accordance with the above IndAS above IndAS-16 which was mandatorily to be followed by 16 which was mandatorily to be followed by the appellant for preparing the books of the appellant for preparing the books of accounts in accounts in accordance accordance accordance with with with Companies Companies Companies Act, Act, Act, 2013. 2013. 2013. The The The said said said Accounting Standards is however not binding while Accounting Standards is however not binding while Accounting Standards is however not binding while computing income under the provisions of the Act. Instead, computing income under the provisions of the Act. Instead, computing income under the provisions of the Act. Instead, what is relevant is to examine the nature of expenditure to what is relevant is to examine the nature of expenditure to what is relevant is to examine the nature of expenditure to ascertain whether it is capit ascertain whether it is capital or revenue in nature. In al or revenue in nature. In view of the above, it is first considered necessary to view of the above, it is first considered necessary to view of the above, it is first considered necessary to examine the nature of expenditure which was capitalized examine the nature of expenditure which was capitalized examine the nature of expenditure which was capitalized and is claimed as deduction from the business profits. On and is claimed as deduction from the business profits. On and is claimed as deduction from the business profits. On perusal of the details of expenses, it is noted as follows: perusal of the details of expenses, it is noted as follows: perusal of the details of expenses, it is noted as follows:

1.

1. Interconnect Expenses of Rs.2,036 crs: It is noted 1. Interconnect Expenses of Rs.2,036 crs: It is noted 1. Interconnect Expenses of Rs.2,036 crs: It is noted that these were usage that these were usage-based charges paid to the based charges paid to the other telecom operators in whose network the call / other telecom operators in whose network the call / other telecom operators in whose network the call / message of the Jio subscribers get terminated. This message of the Jio subscribers get terminated. This message of the Jio subscribers get terminated. This fee was paid as per the TRAI regulations. It fee was paid as per the TRAI regulations. It fee was paid as per the TRAI regulations. It therefore cannot be said to be incurred for creation therefore cannot be said to be incurred for creation therefore cannot be said to be incurred for creation of new asset or upgradation of asset. of new asset or upgradation of asset. 1. 1.

1. Employee Employee Employee cost cost cost of of of Rs.1,380 Rs.1,380 Rs.1,380 crores crores crores and and and Professional Fees of Rs.2085 Professional Fees of Rs.2085 crores - These costs These costs are not to comprises of Salary and related costs of are not to comprises of Salary and related costs of are not to comprises of Salary and related costs of employees, outsourced M employees, outsourced Manpower cost, legal and anpower cost, legal and other professional cost relating to those installed other professional cost relating to those installed other professional cost relating to those installed tower/fibre network infrastructure facilities whose tower/fibre network infrastructure facilities whose tower/fibre network infrastructure facilities whose Q0S was yet to be met. It neither resulted in creation Q0S was yet to be met. It neither resulted in creation Q0S was yet to be met. It neither resulted in creation of new asset or upgradation of the existing asset. of new asset or upgradation of the existing asset. of new asset or upgradation of the existing asset.

1. Rent of Rs.2,895 cr 1. Rent of Rs.2,895 crores and Rates & Taxes of Rs. ores and Rates & Taxes of Rs. 28 crores 28 crores - This is noted to comprise of rent towards This is noted to comprise of rent towards network towers and facilities (like AG1, AG2, AG3) network towers and facilities (like AG1, AG2, AG3) network towers and facilities (like AG1, AG2, AG3) and annual taxes paid to local authorities/ and annual taxes paid to local authorities/ and annual taxes paid to local authorities/ Reliance Jio Infocomm Ltd. 8 AY 2018-19 Government, which are recurring in nature and Government, which are recurring in nature and Government, which are recurring in nature and therefore cannot be said to cap therefore cannot be said to capital in nature. ital in nature.

1. Power and Fuel of Rs.1,496 crores 1. Power and Fuel of Rs.1,496 crores - It comprises It comprises of cost towards Electricity and Fuel for network of cost towards Electricity and Fuel for network of cost towards Electricity and Fuel for network towers and facilities (like AG1, AG2, AG3) relating to towers and facilities (like AG1, AG2, AG3) relating to towers and facilities (like AG1, AG2, AG3) relating to those installed tower/fibre network infrastructure those installed tower/fibre network infrastructure those installed tower/fibre network infrastructure facilities whose QOS was yet to b facilities whose QOS was yet to be met. It neither e met. It neither resulted in creation of new asset or upgradation of resulted in creation of new asset or upgradation of resulted in creation of new asset or upgradation of the existing asset. the existing asset.

1. Repairs and Maintenance of Rs.558 crores - It is 1. Repairs and Maintenance of Rs.558 crores 1. Repairs and Maintenance of Rs.558 crores noted to comprise of routine Operational and noted to comprise of routine Operational and noted to comprise of routine Operational and Maintenance cost for Tower Infrastructure, Fibre Maintenance cost for Tower Infrastructure, Fibre Maintenance cost for Tower Infrastructure, Fibre Infrastructure and o Infrastructure and other Facilities (like AG1, AG2, ther Facilities (like AG1, AG2, AG3) which did not result in creation of any new AG3) which did not result in creation of any new AG3) which did not result in creation of any new asset.

1. Other Network Cost of Rs.29 crores - This 1. Other Network Cost of Rs.29 crores 1. Other Network Cost of Rs.29 crores comprises of Bandwidth Charges, GSAT charges, comprises of Bandwidth Charges, GSAT charges, comprises of Bandwidth Charges, GSAT charges, network co network co-location expenses. By its nature, it is not location expenses. By its nature, it is not in capital field. in capital field.

1. Foreign Exchange Difference Loss of Rs.465 oreign Exchange Difference Loss of Rs.465 oreign Exchange Difference Loss of Rs.465 crores crores - This loss pertains to foreign currency This loss pertains to foreign currency borrowings for acquisition of indigenous assets and borrowings for acquisition of indigenous assets and borrowings for acquisition of indigenous assets and it pertains to the period after the assets are put to it pertains to the period after the assets are put to it pertains to the period after the assets are put to use. Accordingly, the said loss in noted to be use. Accordingly, the said loss in noted to be use. Accordingly, the said loss in noted to be revenue in na revenue in nature.

1. Interest of Rs.2,967 crores and Bank Charges of 1. Interest of Rs.2,967 crores and Bank Charges of 1. Interest of Rs.2,967 crores and Bank Charges of Rs.81 crores: The comprises of interest in respect of Rs.81 crores: The comprises of interest in respect of Rs.81 crores: The comprises of interest in respect of capital borrowed for acquisition of assets and capital borrowed for acquisition of assets and capital borrowed for acquisition of assets and relating to the period after the assets are put to use. relating to the period after the assets are put to use. relating to the period after the assets are put to use. It is therefore evidently It is therefore evidently revenue in nature.

1. Selling & Distribution Expenses of Rs.329 crores - 1.

1. Licence Fee / Spectrum Usage Charges of Rs.23 1. Licence Fee / Spectrum Usage Charges of Rs.23 1. Licence Fee / Spectrum Usage Charges of Rs.23 crores crores - This is noted to be usage-based license / based license / Reliance Jio Infocomm Ltd. 9 AY 2018-19 spectrum fees which is recurring in nature and spectrum fees which is recurring in nature and spectrum fees which is recurring in nature and therefore revenue expenditure. therefore revenue expenditure.

1. Other Expenses of Rs.557 crores 1. Other Expenses of Rs.557 crores - The appellant The appellant has pointed out that these expenses include has pointed out that these expenses include has pointed out that these expenses include administration administration administration costs, costs, costs, meeting meeting meeting and and and conference conference conference charges, membership fees, books and periodicals, charges, membership fees, books and periodicals, charges, membership fees, books and periodicals, warehouse charges, office rent, vehicle hiring warehouse charges, office rent, vehicle hiring warehouse charges, office rent, vehicle hiring charges, travelling fees, customer service expenses charges, travelling fees, customer service expenses charges, travelling fees, customer service expenses which has been apportioned to the installed assets ch has been apportioned to the installed assets ch has been apportioned to the installed assets whose QOS parameters are yet to be met. These whose QOS parameters are yet to be met. These whose QOS parameters are yet to be met. These indirect expenses cannot be said to result in creation indirect expenses cannot be said to result in creation indirect expenses cannot be said to result in creation of any new asset or benefit of enduring nature. of any new asset or benefit of enduring nature. of any new asset or benefit of enduring nature. Accordingly, it is noted to be in revenue field. Accordingly, it is noted to be in revenue field. Accordingly, it is noted to be in revenue field. 11.5 In view of the above, I find merit in the contention of ew of the above, I find merit in the contention of ew of the above, I find merit in the contention of the appellant that, the indirect/ operational expenses the appellant that, the indirect/ operational expenses the appellant that, the indirect/ operational expenses incurred to meet the QOS parameters set by the company incurred to meet the QOS parameters set by the company incurred to meet the QOS parameters set by the company in relation to its installed assets did not result in creation in relation to its installed assets did not result in creation in relation to its installed assets did not result in creation of any new asset of enduring nat of any new asset of enduring nature, but it resulted in ure, but it resulted in improving the efficiency and capability of the already improving the efficiency and capability of the already improving the efficiency and capability of the already installed and put to use assets. It was in the nature of installed and put to use assets. It was in the nature of installed and put to use assets. It was in the nature of regular operational expenses incurred in the course and regular operational expenses incurred in the course and regular operational expenses incurred in the course and for the purposes of business. On these facts therefore, I for the purposes of business. On these facts therefore, I for the purposes of business. On these facts therefore, I am of the view that the findings recorded by the AO that, the view that the findings recorded by the AO that, the view that the findings recorded by the AO that, the operational expenditure were incurred towards up the operational expenditure were incurred towards up the operational expenditure were incurred towards up- gradation and improvement of assets, is erroneous and gradation and improvement of assets, is erroneous and gradation and improvement of assets, is erroneous and unjustified. 11.6 In the assessment order the AO is found to have laid 11.6 In the assessment order the AO is found to have laid 11.6 In the assessment order the AO is found to have laid emphasis on the fact that emphasis on the fact that the assessee had debited same the assessee had debited same items of expenses in Profit & Loss Account and the same items of expenses in Profit & Loss Account and the same items of expenses in Profit & Loss Account and the same item of expenses were classified as project development item of expenses were classified as project development item of expenses were classified as project development expenditure" and disclosed under "Capital Work expenditure" and disclosed under "Capital Work expenditure" and disclosed under "Capital Work-in- Progress", Progress", Progress", which which which according according according to to to him him him showed showed showed the the the contradiction in th contradiction in the approach of the assessee. The AO e approach of the assessee. The AO accordingly held that, when the appellant itself had accordingly held that, when the appellant itself had accordingly held that, when the appellant itself had capitalized these expenses in books of accounts, then it capitalized these expenses in books of accounts, then it capitalized these expenses in books of accounts, then it could not be permitted to take a contradictory stand and could not be permitted to take a contradictory stand and could not be permitted to take a contradictory stand and claim the same expenditure as revenue in nature for claim the same expenditure as revenue in nature for claim the same expenditure as revenue in nature for income-tax purposes. Having examined the submissions of tax purposes. Having examined the submissions of tax purposes. Having examined the submissions of the assessee, this reasoning given by the AO is found to assessee, this reasoning given by the AO is found to assessee, this reasoning given by the AO is found to be untenable. On the given facts, it is noted that, although be untenable. On the given facts, it is noted that, although be untenable. On the given facts, it is noted that, although the items of expenses debited in P&L Alc and capitalized the items of expenses debited in P&L Alc and capitalized the items of expenses debited in P&L Alc and capitalized Reliance Jio Infocomm Ltd. 10 AY 2018-19 under 'project development under 'project development expenditure were the same, expenditure were the same, but the appellant had provided cogent reasoning for such but the appellant had provided cogent reasoning for such but the appellant had provided cogent reasoning for such classification. It was brought to notice that, classification. It was brought to notice that, (a) where the (a) where the operational expenses were continued to be incurred in operational expenses were continued to be incurred in operational expenses were continued to be incurred in relation to the installed tower/fibre network infrastruct relation to the installed tower/fibre network infrastruct relation to the installed tower/fibre network infrastructure facilities, which have already met the quality of service facilities, which have already met the quality of service facilities, which have already met the quality of service parameters as intended by the management, the same parameters as intended by the management, the same parameters as intended by the management, the same was debited to the Profit & Loss Alc in the books of was debited to the Profit & Loss Alc in the books of was debited to the Profit & Loss Alc in the books of account, but (b) where the operational expenses were account, but (b) where the operational expenses were account, but (b) where the operational expenses were incurred in relation to those install incurred in relation to those installed tower/fibre network ed tower/fibre network infrastructure facilities, which were yet to achieve the infrastructure facilities, which were yet to achieve the infrastructure facilities, which were yet to achieve the Quality of Service (QoS) standards as intended by the Quality of Service (QoS) standards as intended by the Quality of Service (QoS) standards as intended by the management, the same management, the same management, the same were classified as project were classified as project were classified as project development expenditure and disclosed under Capital development expenditure and disclosed under Capital development expenditure and disclosed under Capital Work-in-Progress. It i Progress. It is thus noted that the appellant had s thus noted that the appellant had indeed indeed indeed explained explained explained the the the reasons reasons reasons for for for difference difference difference in in in classification in the books, which according to me, was not classification in the books, which according to me, was not classification in the books, which according to me, was not correctly appreciated by the AO. correctly appreciated by the AO.” 4.1 In support of the finding, the Ld. CIT(A) relied on the decision support of the finding, the Ld. CIT(A) relied on the decision support of the finding, the Ld. CIT(A) relied on the decision ’ble Supreme Court in the case of Empire Jute Co. Ltd Empire Jute Co. Ltd of the Hon’ble Supreme Court in the case of Vs CIT ( 124 ITR 1);Kedarnath Jute Mfg Co. Ltd Vs CIT (82 ITR Vs CIT ( 124 ITR 1);Kedarnath Jute Mfg Co. Ltd Vs CIT (82 ITR Vs CIT ( 124 ITR 1);Kedarnath Jute Mfg Co. Ltd Vs CIT (82 ITR 363) and Taparia Tools Limited Vs JCIT (55 taxmann.com 361) Taparia Tools Limited Vs JCIT (55 taxmann.com 361) Taparia Tools Limited Vs JCIT (55 taxmann.com 361). The Ld. CIT(A) further relied on the decisions of the Tribunal The Ld. CIT(A) further relied on the decisions of the Tribunal The Ld. CIT(A) further relied on the decisions of the Tribunal in the case of (i) Reliance Footprint Limited Vs (i) Reliance Footprint Limited Vs Mumbai Bench in the case of ACIT (41 taxmann.com 553) ACIT (41 taxmann.com 553), which has been further , which has been further upheld by the Hon’ble Bombay High Court in of 2014 dated ITA No. 948 of 2014 dated the Hon’ble Bombay High Court in 05/07/2017. (ii) Reliance Fresh Ltd. Vs ACIT (72 taxmann.co. ii) Reliance Fresh Ltd. Vs ACIT (72 taxmann.co. ii) Reliance Fresh Ltd. Vs ACIT (72 taxmann.co. 170), which has been furthe , which has been further upheld by the Hon’ble Bombay High Hon’ble Bombay High Court in ITA No. 985 of 2017 Court in ITA No. 985 of 2017. The Ld. CIT(A) also justified his . The Ld. CIT(A) also justified his finding in view of the rule of consistency as in the immediately finding in view of the rule of consistency as in the immediately finding in view of the rule of consistency as in the immediately preceding assessment year preceding assessment year no disallowance was made by the was made by the Assessing Officer in respect of t Assessing Officer in respect of the identical expenses claimed. he identical expenses claimed.

Reliance Jio Infocomm Ltd. 11 AY 2018-19

In the grounds raised, the revenue has challenged deletion of the , the revenue has challenged deletion of the disallowance mainly on the disallowance mainly on the basis that expenses were incurred basis that expenses were incurred towards upgradation of the towards upgradation of the assets and same were for enduring and same were for enduring benefit to the assessee and therefore capital in nature, hence not benefit to the assessee and therefore capital in nature benefit to the assessee and therefore capital in nature allowable expense under section 37 of the allowable expense under section 37 of the Act.

6. We have heard rival submission of the parti We have heard rival submission of the parties on the issue in es on the issue in dispute and perused the relevant material on record including the dispute and perused the relevant material on record including the dispute and perused the relevant material on record including the detailed financial statements filed on behalf of the assessee. The detailed financial statements filed on behalf of the assessee. The detailed financial statements filed on behalf of the assessee. The issue in dispute is regarding character of the expenses of issue in dispute is regarding character of the expenses of issue in dispute is regarding character of the expenses of ₹14927,99,00,396/- which inter alia consist of Interconnect of Interconnect charges (Rs.2,036 Crores); 2,036 Crores); Employee Cost (Rs.1,380 Crores); Employee Cost (Rs.1,380 Crores); Professional Fees including call cluding call centre expenses (Rs. 2,085 Crores) Rs. 2,085 Crores) ;Rent (Rs. 2,895/- Crores);Power and Fuel ( Crores);Power and Fuel (Rs. 1496 Crores);Repair Rs. 1496 Crores);Repair and Maintainence (Rs. 55 Rs. 558 Crores); Other network Cost ( work Cost (Rs. 29 Crores) ;Interest (Rs. 2,967/ Crores) ;Interest (Rs. 2,967/-) Rs. Selling and Distribution Expenses ing and Distribution Expenses (Rs. 329 Crores) ;Other expenses ( 329 Crores) ;Other expenses (Rs. 376 Crores) ; Rs. 376 Crores) ; License fee/ spectrum uses charges ( spectrum uses charges (Rs. 23 crores) ; exchange loss ( s. 23 crores) ; exchange loss (Rs. 465 Crores); Customer Service Expenses (Rs. s); Customer Service Expenses (Rs. 59 Crores) 59 Crores), Bank Charges (Rs. 81 Crores), Rates and Taxes ( (Rs. 81 Crores), Rates and Taxes (Rs. 28 Crores) ; ILD expesnes ( Rs. 28 Crores) ; ILD expesnes (Rs. 62 Crores) and Travelling expenses( rores) and Travelling expenses(Rs. 62 Crores). 6.1 We find that Assessing Officer has nowhere denied that We find that Assessing Officer has nowhere denied that We find that Assessing Officer has nowhere denied that expenditure in question has been incurred for the purpose of the expenditure in question has been incurred for the p expenditure in question has been incurred for the p Reliance Jio Infocomm Ltd. 12 AY 2018-19 business. He has also not denied that those expenses are routine in also not denied that those expenses are routine in also not denied that those expenses are routine in nature and same would gene nature and same would generally be classified as revenue rally be classified as revenue Expenditure as per the provisions of the Expenditure as per the provisions of the Act. The business of the . The business of the assessee has already been set up and assessee has commenced assessee has already been set up and assessee has assessee has already been set up and assessee has providing digital services to its customers providing digital services to its customers. The revenue from the revenue from the same as also been recognised in books of accounts and offered for same as also been recognised in books of accounts and offered for same as also been recognised in books of accounts and offered for the tax. In such circumstances, the expenses which are incurred for the tax. In such circumstances, the expenses which are incurred for the tax. In such circumstances, the expenses which are incurred for running the business are revenue expenditure f running the business are revenue expenditure for the purpose of or the purpose of income tax irrespective of the treatment of the same by the assessee income tax irrespective of the treatment of the same by the assessee income tax irrespective of the treatment of the same by the assessee in its books of accounts. Before us the in its books of accounts. Before us the Ld. Ld. Departmental Representative could not substantiate as how the expenses could not substantiate as how the expenses could not substantiate as how the expenses incurred for day-to-day business are for upgradation o day business are for upgradation of the asset day business are for upgradation o and of enduring benefit. and of enduring benefit. Though the assessee has treated those Though the assessee has treated those expenses in its books of accounts as capital expenditure following expenses in its books of accounts as capital expenditure following expenses in its books of accounts as capital expenditure following the Indian accounting standard, but these expenses, list of which the Indian accounting standard, but these expenses, list of which the Indian accounting standard, but these expenses, list of which has been reproduced above have been incurred in relation to has been reproduced above have been incurred in has been reproduced above have been incurred in services provided to existing customers, and therefore same being services provided to existing customers, and therefore same being services provided to existing customers, and therefore same being incurred wholly and exclusively for the purpose of the business, incurred wholly and exclusively for the purpose of the business, incurred wholly and exclusively for the purpose of the business, deserve to be allowed in terms of section 37(1) of the Act. We find deserve to be allowed in terms of section 37(1) of the deserve to be allowed in terms of section 37(1) of the that identical nature of expenses have been a that identical nature of expenses have been allowed by the Tribunal llowed by the Tribunal in the case of another two companies namely Reliance Footprint Reliance Footprint in the case of another two companies namely Limited (supra) and (supra) and Reliance Fresh Ltd (supra), which have been (supra), which have been further upheld by the Hon’ble Bombay High Court. The finding up further upheld by the Hon’ble Bombay High Court. The finding up further upheld by the Hon’ble Bombay High Court. The finding up the Tribunal in the case of in the case of Reliance Footprint Limited rint Limited (supra) has Reliance Jio Infocomm Ltd. 13 AY 2018-19 already been reproduced by the Ld. CIT(A) in para 11.2 of the already been reproduced by the Ld. CIT(A) in para 11.2 of the already been reproduced by the Ld. CIT(A) in para 11.2 of the impugned order and therefore we are not repeating the same. The impugned order and therefore we are not repeating the same. The impugned order and therefore we are not repeating the same. The relevant finding of the Hon’ble Bombay High Court in the case of relevant finding of the Hon’ble Bombay High Court in the case of relevant finding of the Hon’ble Bombay High Court in the case of Reliance Foot Print Limited (supra) in I Reliance Foot Print Limited (supra) in of 2014 is TA No. 948 of 2014 is reproduced as under: reproduced as under: “6. We have considered the submissions canvassed by the We have considered the submissions canvassed by the We have considered the submissions canvassed by the learned counsel for the respective parties. learned counsel for the respective parties.

7. It is not relevant as to how the Assessee shows a It is not relevant as to how the Assessee shows a It is not relevant as to how the Assessee shows a particular income or expenditure in the books of account. particular income or expenditure in the books of account. particular income or expenditure in the books of account. In the present case, the Commissioner (Appeals) and the present case, the Commissioner (Appeals) and the present case, the Commissioner (Appeals) and the Tribunal has Tribunal has specifically on appreciation of factual matrix specifically on appreciation of factual matrix arrived at a conclusion arrived at a conclusion that the expenditure are directly that the expenditure are directly identifiable with the operations and identifiable with the operations and maintenance of the maintenance of the existing stocks i.e. with existing stocks i.e. with regard to the payment of regard to the payment of salary, travelling and conveyance allowance, telephone expenses, travelling and conveyance allowance, telephone expenses, travelling and conveyance allowance, telephone expenses, professional fees paid, audit fee and other miscellaneous professional fees paid, audit fee and other miscellaneous professional fees paid, audit fee and other miscellaneous expenses.

Reliance Jio Infocomm Ltd. 14 AY 2018-19