VODAFONE IDEA LIMITED (EARLIER KNOWN AS VODAFONE INDIA LTD. WHICH STANDS MERGED WITH IDEA CELLULAR LTD. AND CONSEQUENTLY KNOWN AS IDEA LTD.),MUMBAI vs. ACIT - CIRCLE- 5 (3)(2), MUMBAI

2 Disallowance of discount extended to pre-paid distributors under section 40(a)(ia) of the Act 2.1. On the facts and in the circumstances of the case and in law, the learned DRP/AO have erred in making an addition u/s 40(a)(ia) of the Act on account of non-deduction of tax at source on the discount of INR 68, 19,45,415 extended to distributors of pre-paid services during the financial year relevant to the subject assessment year.

2.2. On the facts and in the circumstances of the case and in law, the learned DRP/AO has erred in not following latest order passed by Hon'ble Rajasthan and Karnataka High Court in the Appellant's own case [Hon'ble Rajasthan High Court decision in case of erstwhile Vodafone Digilink Limited and Hon'ble Kamataka decision in case of erstwhile Vodafone South Limited, which have since merged into the Appellant), reported as Hindustan Coca-Cola Beverages (P) Ltd 402 ITR 2 A.Y.2014-2015 539 and Bharti Airtel Ltd. v. Dy. CIT (2015) 372 ITR 33, respectively, wherein it has been categorically held that provisions of section 194H of the Act are not applicable on the discount of extended to distributors of pre-paid services.

2.3. On the facts and in the circumstances of the case and in law, the learned DRP/AO have erred in concluding that the relationship between the Appellant and its distributors is that of a "Principal and Agent' 2.4. On the facts and in the circumstances of the case and in law, the learned DRP/AO have erred in not holding that no disallowance can be made u/s 40(a)(ia) of the Act since the Appellant is of a bonafide belief that no tax was required to be deducted at source on discount extended to distributors of pre- paid services.

3. Disallowance of depreciation on 3G Spectrum 3.1. On the facts and in the circumstances of the case and in law, the learned DRP/AO has erred in disallowing the tax depreciation amounting to INR 2,61,29,65,700, claimed by the Appellant under section 32(1) of the Act for the subject AY on the written down value of capital expenditure incurred by the Appellant on acquisition of right to use 3G spectrum in AY 2011-12. 3.2. On the facts and in the circumstances of the case and in law, once the learned DRP/AQ has clearly held that one-time expenditure incurred on acquisition of 3G spectrum is capital expenditure which is in nature of 'intangible asset and also that the spectrum was de-linked from telecom license, it was axiomatic for them to allow tax depreciation under section 32 of the Act.

3.3. On the facts and in the circumstances of the case and in law, the learned DRP has erred in confirming the observation of the learned AO that right to use 3G spectrum is covered by the specific provision of 35ABB of the Act which overrides the general provision of section 32 of the Act.

4. Disallowance of payments made to IBM 4.1. On the facts and in the circumstances of the case and in law, the leamed DRP/AO has erred in disallowing service charges paid to IBM, amounting to INR 14,66,83,051 on the premise that such charges are capital in nature.

4.2. Without prejudice to the ground 4.1 above, on the facts and in circumstances of the case and in law, the learned DRP/AO has erred in not amortizing such expense as done in the books of the accounts 3 A.Y.2014-2015

5. Transfer Pricing ('TP') adjustment-General Grounds 5.1. On the facts and circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ('learned DRP") has erred in confirming the adjustments aggregating to INR 39,27,36,605 made by the Additional Commissioner of Income Tax, Transfer Pricing 4(1), Mumbai ('the learned TPO" learned AO under section 92CA of the Act.

5.2. On the facts and circumstances of the case and in law, the directions passed by the learned DRP are bad in law to the extent the same are prejudicial to the Appellant.

6. TP adjustment amounting to INR 35,97,56,258 on account of brand royalty payment made for grant of right to use of 'Vodafone' trademark and trade name 6.1. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the arm's length price (ALP) of royalty payment made to associated enterprise ('AE') for grant of right to use 'Vodafone trademark and trade name at Nil price.

6.1.1. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have violated the principle of consistency in determining the ALP of royalty payment made to AE for grant of right to use 'Vodafone trademark and trade name at Nil price.

6.1.2. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of royalty payment made to AE for grant of right to use "Vodafone' trademark and trade name at Nil price by holding that all the development, enhancement, maintenance, protection and exploitation ('DEMPE') functions (including incurrence of AMP expenses) in relation to "Vodafone trademark and trade name in India are performed by the Appellant only and the AE does not perform any functions or bear or control the risks and rewards related to DEMPE functions performed by the Appellant.

6.1.3. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of royalty payment for 'Vodafone trademark and trade name at Nil price without application of any method as prescribed under section 92C of the Act.

4 A.Y.2014-2015 6.1.4. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in rejecting the economic analysis undertaken by the Appellant using comparable uncontrolled price method ("CUP") and not considering the economic analysis undertaken by the Appellant using transactional net margin method (TNMM') to determine the ALP of the royalty payment made for grant of right to use of 'Vodafone trademark and trade name.

6.1.5. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of royalty payment for grant of right to use "Vodafone trademark and trade name at Nil price by questioning the commercial expediency of such expenditure.

7. TP adjustment amounting to INR 2,45,23,347 on account of re-imbursement of expenses to AE 7.1. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of the international transaction pertaining to reimbursements made in relation to PwC consulting charges and people survey costs at Nil price without appreciating the fact that these payments represent cost to cost reimbursement of payments made by AE on behalf of the Appellant and cannot be termed as shareholder services.

8.1.1. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in not appreciating that availing of M2M services by the Appellant from its AE is covered under the advance pricing agreement (APA) negotiated by the Appellant with the Central Board of Direct Taxes ('CBDT').

8.1.2. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of payment for M2M services at Nil price without appreciating the nature of such services and without application of any method as 5 A.Y.2014-2015 prescribed under section 92C of the Act.

8.1.3. On the facts and circumstances of the case and in law, the learned TPO/AO/DRP have erred in determining the ALP of payment for M2M services at Nil price without considering the economic analysis undertaken by the Appellant for determining ALP of the subject payment using TNMM.

8.1.4. On the facts and circumstances of the case and in law, the learned DRP has erred in upholding the determination of ALP for subject payment at Nil price by questioning the commercial expediency of such expenditure and benefits derived by the Appellant therefrom.

All the above grounds are without prejudice to each other. The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal.

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

3. The relevant facts, in brief, are that Appellant is a company engaged, inter alia, in providing cellular telecommunication services. The Appellant filed its return of income for the Assessment Year 2014-2015 on 27/11/2014 declaring total loss of INR 474,26,15,918/-. Subsequently, the Appellant filed revised return on 27/02/2017 declaring total loss of INR 474,26,15,918/-. The case of the Appellant was selected for regular scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant has entered into international transactions with its Associated Enterprises (AEs) and therefore, a reference was made under Section 92CA(1) to the Transfer Pricing Officer (TPO) for the determination of Arm’s Length Price (ALP) of the international 6 A.Y.2014-2015 transactions. The TPO, vide order, dated 30/10/2017, passed under Section 92CA(3) of the Act proposed, inter alia, the following transfer pricing adjustments:

S.No. Nature of Transaction Amount (INR)

1 Payment of Royalty 35,97,56,258/- 2 Payment of Centralized support service (Machine to 84,57,000/- Machine) 3 PwC recharges and other reimbursement 2,45,23,347 Total 39,27,36,605/- 3.1. On 28/12/2017, the Assessing Officer passed Draft Assessment Order under Section 143(3) read with Section 92CA read with Section 144C(1) of the Act incorporating the above transfer pricing adjustment. In addition the Assessing Officer also proposed other additions/disallowances as per the provisions of the Act.

3.2. The Appellant filed objections before the DRP against the Draft Assessment Order, dated 28/12/2017. On 25/09/2018, the DRP disposed off the objections granting partial relief to the Appellant. As per the directions of the DRP, the Assessing Officer passed the Final Assessment Order, dated 30/11/2018, under Section 143(3) read with Section 92CA read with Section 144C(13) of the Act, assessing total income of the Appellant at INR. 256,40,48,850/- computed as under: Particular Amount (INR) Amount (INR)

I Income under the head business (-) 485,36,80,287/- or profession (as per computation) Add: (i) TP Adjustment 39,27,36,605 (ii) Disallowance u/s 14A 362,23,34,000 (iii) Disallowance under Section 40(a)(ia) for non deduction of 7 A.Y.2014-2015 TDS on Discount extended to prepaid distributors 68,19,45,415 (iv) Disallowance of depreciation on 261,29,65,700 spectrum fees (v) On account of payment to IBM 14,66,83,051 (vi) Less: Allowance u/s.40(a)(ia) for amount paid u/s 201(1) as per the direction of DRP (-)15,00,00,000 730,66,64,771 Taxable Income under the head 245,40,48,854 business or profession II. Income from other sources 11,10,64,370 (as per computation)/Interest Income Total Income (as per Normal 256,40,48,854 Provisions) Rounded off to 256,40,48,850 3.3. Being aggrieved, the Appellant had preferred the present appeal before the Tribunal against the Final Assessment Order, dated 30/11/2018, on the grounds reproduced in paragraph 2 above.

Ground No. 1 to 1.2 4. Ground No. 1 to 1.2 raised by the Appellant are directed against the disallowance of INR.3,62,23,34,000/- made by the Assessing Officer under Section 14A of the Act by invoking provisions contained in Rule 8D of the Income Tax Rules [for short ‘IT Rules‘].

4.1. The facts relevant for adjudication of the above grounds are that during the assessment proceedings, the Assessing Officer noted that the Appellant has earned exempt dividend income of INR 219,99,12,000/-. Therefore, the Appellant was asked to explain why disallowance should not be made under Section 14A of the Act read with Rule 8D of the IT Rules. In response, vide reply letter dated 24/08/2017, it was submitted by the Appellant that 8 A.Y.2014-2015 during the relevant previous year no fresh investments were made by the Appellant. Further, no finance cost has been incurred in relation to investments made in the prior years. The investments in the prior years were sourced from shares swap, issue of shares by way of rights issue and internal cash accruals. Further, during the relevant previous year the Appellant had earned exempt dividend income of INR.220 Crores from Indus Towers Limited. However, no expenditure was incurred in relation to earning the said dividend income. It was further contended the management/administrative expenses incurred by the Appellant during the relevant previous year were recovered by the Appellant from its subsidiaries as management support services income of INR 14 Crore. Therefore, no disallowance under Section 14A of the Act was warranted. On a without prejudice basis, it was also contended by the Appellant that even in a case where investments were made from common pool of funds it was to be presumed that the investments were made from Appellant’s own funds. It was also contended that even while applying provisions contained in Rule 8D of the IT Rules, only the investments yielding exempt income were to be taken into consideration. However, the Assessing Officer rejected the aforesaid contention of the Appellant and proceeded to compute disallowance at INR.3,62,23,34,000/- as per provisions contained in Rule 8D of the IT Rules. Thus, in the Draft Assessment Order, dated 28/12/2017, the Assessing Officer proposed disallowance of INR.3,62,23,34,000/- under Section 14A of the Act.

4.2. In the objections filed by the Appellant against the Draft Assessment Order, dated 28/12/2017, on this issue, the DRP agreed with the Assessing Officer and decline to issue any directions following the decision of DRP for the Assessment Year 2013-2014. Accordingly, the Assessing Officer passed the Final 9 A.Y.2014-2015 Assessment Order, dated 30/11/2018, making disallowance of INR INR.3,62,23,34,000/- under Section 14A of the Act read with Rule 8D(2)(ii)/(iii) of the IT Rules. In addition the Assessing Officer also concluded that addition made under Section 14A of the Act was also to be made to the ‘Book Profits’ (computed as per Section 115JB of the Act.)

4.3. Being aggrieved, the Appellant has carried the issue in appeal before this Tribunal.

4.4. We have considered the rival submissions and perused the material on record. We find that the DRP had rejected the objections filed by the Assessee by following the decision of DRP for the Assessment Year 2013-2014. Both the sides agreed that there is no change in facts and circumstances when compared to those prevailing in the previous year relevant to the Assessment Year 2013-2014. We find that identical issue had come up for consideration before the Tribunal for the Assessment Year 2013- 2014 and vide order, dated 22/10/2024, passed in preferred by the Assessee, the Tribunal had deleted the addition made under Section 14A of the Act in identical set of facts holding as under: “4.6. We have considered the rival submissions and perused the material on record.

4.7. It is admitted position that the Appellant has earned exempt dividend income of INR 404.98 Crores from investments made in ‘Indus Towers Limited’ during the relevant previous year. It is also admitted position that no investments were made by the Appellant during the relevant previous year. Further, it has not been disputed by the Revenue that total investments of INR 7,122.51 Cores were made by the Appellant in prior years either by share swap arrangement, or by issuance of shares by way of rights issue or by way of internal cash approvals. On perusal of paragraph 5.2.25 of the Assessment Order we find that the investments made by the Appellant as on 01/04/2012 and 31/03/2013 stood at INR 7,122.60 Crores and INR 7,122.40 Crores, respectively. At the same time the Aggregate Share Capital and Reserves & Surplus of the Appellant stood at INR 8,043.90 Crores and 7,701.10 Crores as 10 A.Y.2014-2015 on 01/04/2012 and 31/03/2013, respectively. The contention of the Appellant is that no disallowance of interest in terms of Rule 8D(2)(ii) of the IT Rules can be made in respect of interest expenses since the Appellant had sufficient own funds. On the other hand, the Assessing Officer has made proportionate disallowance of interest on the premise that the Appellant has utilised funds from common pool of funds comprising of interest bearing borrowed funds and interest free own funds for making investment yielding tax free income. We note that in the case of South Indian Bank Ltd. Vs. CIT [2021] 438 ITR 1 (SC), cited on behalf of the Appellant, it has been held by the Hon’ble Supreme Court that where the interest-free owned funds available with the assessee are more than the investments made in the tax- free securities, the presumption would be that investments in tax- free securities have been made out of interest-free own funds and proportionate disallowance of interest under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained by assessee for making investments and for other expenditure incurred for earning tax-free income. In the present case, the Revenue has failed to bring any material on record to rebut the aforesaid presumption which is in the favour of the Appellant given the facts and circumstances of the present case. Accordingly, we accept the contention of the Appellant that no disallowance under Rule 8D(2)(ii) of the IT Rules was warranted in the present case and therefore, addition of INR 406.51 Crores made by the Assessing Officer by disallowing proportionate interest cost is deleted.

4.8 As regards disallowance of INR 35.61 Crores made by the Assessing Officer under Rule 8D(2)(iii) of the IT Rules is concerned, we find that Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi Trib.) (SB) has held that for computing the disallowance under Rule 8D(2)(iii) of the IT Rules only the investments yielding exempt income are to be taken into consideration. Accordingly, we direct the Assessing Officer to re- compute the disallowance under Rule 8D(2)(iii) of the IT Rules read with Section 14A of the Act as per the decision of Special Bench of the Tribunal in the case of Vireet Investments Pvt. Ltd (supra).

4.9. As regards the adjustment in respect of addition/disallowance under Section 14A of the Act to the Book Profits computed under Section 115JB of the Act in the Final Assessment Order is concerned, we find that no such adjustment was proposed in the Draft Assessment Order. The directions received from DRP on 21/09/2017 also do not contain any directions to the Assessing Officer to make any adjustment to Book Profits computed in terms of Section 115JB of the Act. Accordingly, the adjustment made by the Assessing Officer in respect of addition/disallowance under Section 14A of the Act to the Book Profits computed under Section 115JB of the Act in the Final 11 A.Y.2014-2015 Assessment Order is deleted.” (Emphasis Supplied)

4.5. The Revenue has failed to bring on record any material to differentiate the above decision of the Co-ordinate Bench of the Tribunal either in law or on facts. Therefore, respectfully following the same, we accept the contention of the Appellant that no disallowance under Section 14A read with Rule 8D(2)(ii) of the IT Rules was warranted in the present case and therefore, addition of INR.326.6214 Crores made by the Assessing Officer by disallowing proportionate interest cost is deleted under the normal provisions.

4.6. As regards disallowance of INR.35.612 Crores made by the Assessing Officer under Rule 8D(2)(iii) of the IT Rules is concerned, we find that Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi Trib.) (SB) has held that for computing the disallowance under Rule 8D(2)(iii) of the IT Rules only the investments yielding exempt income are to be taken into consideration. Accordingly, we direct the Assessing Officer to re- compute the disallowance under Rule 8D(2)(iii) of the IT Rules read with Section 14A of the Act as per the decision of Special Bench of the Tribunal in the case of Vireet Investments Pvt. Ltd (supra).

4.7. We note that in the case of Vireet Investments Pvt. Ltd. (supra) the Special Bench of the Tribunal has held that while computing ‘Book Profits’ under Section 115JB of the Act, amount to be added in terms of Clause (f) of Explanation 1 to Section 115JB(2) of the Act is to be computed without resorting to computation as contemplated under Section 14A read with Rule 8D. Thus, amount for the purpose of Clause (f) of Explanation 1 to Section 115JB(2) of the Act can be computed on other reasonable basis. However, given the facts and circumstances of the present case, in order to 12 A.Y.2014-2015 put quietus to this issue, we deem it appropriate to direct the Assessing Officer to re-compute the said amount keeping in view the provisions of Clause (f) of Explanation 1 to Section 115JB(2) of the Act on a reasonable basis with the directions to restrict the same to the amount computed in terms of paragraph 4.6 above. The Assessing Officer is directed to grant to the Appellant a reasonable opportunity of being heard.

4.8. In terms of above, Ground No. 1 to 1.2 raised by the Assessee are partly allowed.

Ground No. 2 to 2.4. 5. Ground No. 2 to 2.2 raised by the Assessee is directed against the disallowance of discount extended to Pre-paid Distributors under Section 40(a)(ia) of the Act.

5.1. The relevant facts in brief are that during the relevant previous year, discount amounting to INR 68,19,45,415/- were extended by the Assessee to its distributors of pre-paid products (for short 'Pre-paid Distributors'). The discount extended represented the difference between the Maximum Retail Price (MRP) of the talk- time & pre-paid connections; and the price at which these were transferred to the Pre-paid Distributors. The Assessing Officer and the DRP were of the view that the upfront discount given by the Appellant to the Pre-paid Distributor was in the nature of ‘commission’ liable to withholding of tax at source under section 194H of the Act. Since the Appellant had failed to deduct tax at source, the Assessing Officer passed the Final Assessment Order, dated 30/11/2018, making disallowance of INR 68,19,45,415/- under Section 40(a)(ia) of the Act.

5.2. Being aggrieved, the Appellant has carried the issue in appeal before this Tribunal.

13 A.Y.2014-2015 5.3. We have considered the rival submissions and perused the material on record.

5.4. It emerges that identical issue had come up for consideration before the Mumbai Bench of the Tribunal in case of the Assessee for the Assessment Year 2009-10 [ITA No. 1121 & 1885/Mum/2014, common order dated 08/11/2023], and identical disallowance made under Section 40(a)(ia) of the Act by the Assessing Officer in respect of the upfront discount was deleted by the Tribunal holding as under: “11. The next issue urged in Ground no.9 relates to disallowance of discount extended on pre-paid cards/recharge vouchers u/s 40(a)(ia) for non-deduction of tax at source. It was brought to our notice that an identical issue was examined by the co-ordinate bench in relating to AY 2009-10 in the case of M/s Vodafone Idea Ltd (As successor to Spice Communications Ltd) and the Tribunal, vide its order dated 24-02- 2023, has held that the TDS is not deductible from the discount paid on prepaid cards. The relevant observations are extracted below:-

“3.30. In view of the above observations, we hold that the decision rendered by us in assessee’s own case for A.Y.2008-09 in dated 12/10/2022 would be squarely applicable to the facts of the assessee‟s case before us for the year under consideration also. The relevant operative portion of the said order of this Tribunal is reproduced hereunder:- “2.8.2. We find that in the case before the Co-ordinate Bench of Pune Tribunal in the case of Idea Cellular Limited vs DCIT (TDS ) in ITA Nos. 1041, 1042, 1953 -1955/Pun/2013 and ITA Nos. 1867 19 M/s. Vodafone India Ltd. 1870 /Pun/2014 dated 04/01/2017, the lower authorities had held that relationship between assessee and its distributors was Principal and Agent. It was only the Pune Tribunal which after examining the distributors agreement came to the conclusion that the relationship is that of Principal to Principal. In fact Pune Tribunal also examined the very same agreement which is the subject matter of agreement before us in the instant case before us, as it is not in dispute that all the distributors agreements are standard agreements across India. We also find that the Pune Tribunal relied on para 62 of the decision of 14 A.Y.2014-2015 Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd vs DCIT reported in 372 ITR 33 (Kar). We find that the Pune Tribunal had taken note of the fact that Hon'ble Karnataka High Court in 372 ITR 33 had distinguished all the three High Court judgements (i.e. Kerala, Calcutta and Delhi) relied upon by the ld. DR hereinabove. Effectively Pune Tribunal adopted the decision of Hon'ble Karnataka High Court. The ld. DR relied on para 64 of decision of Hon'ble Karnataka High Court and argued that it is against assessee for the first 7 months since discount is separately shown in the books of the assessee as an expenditure. In our considered opinion, what is to be seen is the broader question raised before the Hon'ble Jurisdictional High Court in Income Tax Appeal No. 1129 of 2017 dated 13/01/2020 in assessee's own case against the order of Pune Tribunal. For the sake of convenience, the entire order is reproduced hereunder:- “Heard learned counsel for the parties.

2.8.3. With regard to reliance placed by the ld. DR vehemently on the decision of Hon'ble Delhi High Court in assessee's own case reported in 325 ITR 148 (Del) is concerned, we find that the Hon'ble Karnataka High Court in 16 A.Y.2014-2015 the case of Bharti Airtel Ltd (372 ITR 33) referred supra had after considering the decision of Hon'ble Delhi High Court referred supra and decided the issue in favour of the assessee. We find that the Hon'ble Karnataka High Court had also followed the decision of Hon'ble Jurisdictional High Court in the case of Qatar Airways reported in 332 ITR 21 M/s. Vodafone India Ltd. 253 (Bom). Hence the reliance placed on the decision of Hon'ble Delhi High Court by the ld. DR does not advance the case of the revenue. In any case, the decisions of Hon'ble Delhi High Court, Hon'ble Kerala High Court and Hon'ble Calcutta High Court referred supra had been considered and distinguished by the Hon'ble Karnataka High Court referred supra.

2.8.4. We further find that the Hon'ble Rajasthan High Court in the case of Hindustan Coca Cola Beverages (P) Ltd vs CIT III Jaipur reported in 402 ITR 539 (Raj) which had rendered a comprehensive judgement on the impugned issue together with various other assesses including Idea Cellular Ltd (assessee herein). The relevant Income Tax Appeal Nos. 168/2015, 169/2015, 170/2015 and 171/2015 which were admitted by the Hon'ble Rajasthan High Court on 18/10/2016 relates to assessee herein for Rajasthan Circle in respect of the identical issue. The question no.1 raised before the Hon'ble Rajasthan High Court is as under:-

“Idea Cellular 58. As the agreement is produced, issues are answered in favour of assessee in the departmental appeals. 59. Even the contention which has been raised by the counsel for the assessee that the final tax is paid by the Distributor and not by the agent, the revenue is not at loss in any form. ……………………… 17 A.Y.2014-2015

2.8.6. The ld. DR before us placed heavy reliance on the decision of Hon'ble Supreme Court in the case of Union of India vs Association of Unified Telecom Service Providers of India and Others reported in (2020) 3 SCC 525 dated 24/10/2019 to drive home the point that the assessee had erred in accounting the discounted price of sales as its revenue when sim cards are sold to distributors. We have gone through the said decision and we find that the said decision was rendered in the context of determination of Annual Gross Revenue for the purpose of fixing the licence fee payable to Government by the telecom service providers. It further held that while reckoning the Gross Revenues, no deduction would be available such as discount, commission etc. First of all, we have already held that the assessee had not made any payment of discount to the distributors. In any case, we have already held that the entries in the books of accounts are not determinative of tax liability of an assessee by placing reliance on various decisions of Hon'ble Apex Court. Those decisions still rule the field as they were not overruled by the latest Supreme Court decision relied upon supra by the ld. DR. It is trite law that though the decision of Hon'ble Apex Court would be binding as per Article 141 of the Constitution of India, still the judgement of the Hon'ble Supreme Court should be understood from the issue raised before it. In our considered opinion, this decision has got absolutely nothing to do with the applicability of provisions of section 194H of the Act. Hence we hold that the reliance placed by the ld. DR on the said decision is grossly misplaced.

2.8.7. The ld. DR before us vehemently submitted that the orders of Hon'ble Rajasthan High Courts and Hon'ble Jurisdictional High Courts and Hon'ble Karnataka High Court had not attained finality as they had been appealed by the 18 A.Y.2014-2015 revenue before the Hon'ble Supreme Court. This argument of the revenue, in our considered opinion, cannot be a deterrent for this Tribunal to follow those High Court orders. We find that the similarly worded distribution agreement had been subject matter of adjudication and examination by the Hon'ble Rajasthan High Court and Hon'ble Jurisdictional High Court wherein the Hon'ble High Courts had taken a categorical view that the relationship between assessee and distributor is only that of Principal to Principal. Hence this finding cannot be disturbed by this tribunal by respectfully following the judicial hierarchy. Infact no contrary materials on facts were even brought on record by the revenue before us to disturb the findings of Hon'ble High Courts. Hence we have no hesitation in holding that the relationship between assessee and distributor is only that of Principal to Principal and not that of Principal to Agent and accordingly there is no obligation for the assessee to deduct tax at source in terms of section 194H of the Act.

2.8.8. In view of the aforesaid observations and findings given thereon, we do not deem it fit to adjudicate other arguments advanced by the ld. AR on the applicability of second proviso to section 40(a)(ia) read with section 201 of the Act, as it would become academic in nature. This aspect of the issue is left open.”

3.31. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the sale of prepaid sim cards/recharge vouchers by the assessee to distributors cannot be treated as commission/discount to attract the provisions of section 194H of the Act and hence there cannot be any obligation on the part of the assessee to deduct tax at source thereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. Accordingly, the Ground No. II raised by the assessee is allowed. The Ground No. I raised by the assessee is only supporting the Ground No. II for furnishing of additional evidences, the adjudication of which becomes academic in nature. Hence Ground No. I is also allowed.” (Emphasis Supplied) 11.1 Facts being identical, following the above said decision of the coordinate bench in the case of M/s Vodafone Idea Ltd (As successor to Spice Communications Ltd), we hold that the assessee is not liable to deduct tax at source from the discount paid on prepaid sim card/recharge vouchers. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(ia) of the Act.”

19 A.Y.2014-2015 5.5. On perusal of above extract of the decision of the Co-ordinate Bench of the Tribunal it can be seen that the Tribunal had concluded that tax was not required to be withheld under Section 194H of the Act from the upfront discount offered to Pre-paid Distributors, and consequently, no disallowance could be made under Section 40(a)(ia) of the Act for failure to deduct tax at source. The above decision of the Tribunal has been followed by the Co-ordinate Benches of the Tribunal while deciding identical issue in favour of the Appellant in appeal preferred for the Assessment Years 2011-2012 & 2012-13 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order dated 17/05/2024] and for the Assessment Year 2013-2014 [ITA No.6671/Mum/2017, dated 22/10/2024].

5.6. Both the sides agree that there is no change in facts and circumstances, therefore, respectfully following the above decisions of the Tribunal in the case of the Appellant, the disallowance of INR 68,19,45,415/- made under Section 40(a)(ia) of the Act in respect of the upfront discount extended to Pre-paid Distributors is deleted. Ground No. 2. to 2.4. raised by the Appellant are allowed.

Ground No. 3 to 3.3. 6. Ground No. 3 to 3.3 raised by the Appellant pertains to disallowance of depreciation on 3G Spectrum.

6.1. We have head both the sides and perused the material on record pertaining to this issue. It is admitted position that during the Financial Year 2010-11 the Appellant had paid charges for allotment of right to commercially utilize the 3G spectrum allotted to it for a period of 20 years in the telecom circle of Mumbai. Since the right to use 3G spectrum did not entitle a the Appellant to provide telecom services for which a telecom license was 20 A.Y.2014-2015 required, the Appellant treated such right as an 'Intangible Asset' for the purpose of Section 32 of the Act and accordingly, tax depreciation was claimed on such capitalized cost. According to the Appellant, the allowability of depreciation of such right was examined by the Assessing Officer in the assessment proceedings for Assessment Year 2011-12, [i.e year of acquisition of right to use spectrum] and after due examination, tax depreciation as claimed by the Appellant was allowed. However, for the Assessment Year 2014-15, while passing the Draft Assessment Order, dated 28/12/2017, the Assessing Officer disallowed the depreciation of INR 2,61,29,65,700/- claimed by the Appellant and allowed the Appellant to amortized the same under Section 35ABB of the Act. In the objections filed by the Appellant against the Draft Assessment Order on the above issue, the DRP declined to grant any directions and concluded that the Assessing Officer had rightly amortized the expense of 3G spectrum over the period for which the spectrum was allocated to the Appellant. As per the directions of the DRP the Assessing Officer passed Final Assessment Order, dated 30/11/2018, denying claim of depreciation in respect of 3G Spectrum Charges and allowing amortization to the Appellant.

6.2. Being aggrieved the Appellant is now in appeal before this Tribunal.

6.3. We have considered the rival submission and perused the material on record. It is admitted position that 3G spectrum charges were paid by the Appellant during the previous year 2010-11 relevant to the Assessment Year 2011-12. For the Assessment Year 2011- 12, the depreciation in respect of spectrum charges as claimed by the Appellant was allowed by the Assessing Officer. Subsequently, order of revision was passed under Section 263 of the Act on the ground that depreciation in respect of the 3G spectrum charges 21 A.Y.2014-2015 was incorrectly allowed to the Appellant by the Assessing Officer and that the Appellant could only be allowed the benefit of amortization. In appeal preferred against the aforesaid order passed under Section 263 of the Act for the Assessment Year 2011-12, the Mumbai Bench of the Tribunal concluded that depreciation in respect of 3G spectrum charges was correctly allowed by the Assessing Officer [vide order dated 28/08/2020, passed in holding as under: “29. Accordingly, we can safely conclude that on the merits of the issue, the Mumbai Bench of the ITAT in the case of Idea Cellular Ltd. (ITA No. 360/Mum/2016) has already held that the provisions of section 35ABB are not applicable on the cost of acquisition of the 3G Spectrum and no specific arguments have been made on the said decision of the ITAT on the merits of the issue by the Revenue.

1 Vodafone India Ltd. Vs. Principal Commissioner of Income Tax-8 22 A.Y.2014-2015

It was further highlight that the Jurisdictional Tribunal in the case of Tata Teleservices Maharashtra Limited (ITA 3567/Mum/2016 and 4392/Mum/2017), for AYs 2011-12 and 2012-13, has followed the decision of Idea Cellular (supra) and directed the AO to allow the 23 A.Y.2014-2015 depreciation claim under section 32(1)(ii) of the Act in respect of the amount paid to DOT for purchase of 3G spectrum and quashed the order passed u/s 263 of the Act by the learned CIT.” (Emphasis Supplied)

6.4. Reliance was placed on the above decision of the Co-ordinate Bench of the Tribunal while deciding identical issue in favour of the Appellant in appeal for the Assessment Year 2011-2012 & 2012-2013 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order 17/05/2024] and Assessment Year 2013-2014 dated [ITA No.6671/Mum/2017, dated 22/10/2024].

6.5. Both the sides agree that there has been no change in facts and circumstances. Therefore, respectfully following the above decisions of the Tribunal, we delete the disallowance of INR.261,29,65,700/- and direct the Assessing Officer to allow depreciation in respect of the 3G spectrum charges capitalize by the Appellant under Section 32(1)(ii) of the Act. Thus, Ground No. 3 to 3.3 raised by the Appellant are allowed.

Ground No. 4 to 4.2 7. Ground No. 4 to 4.2 raised by the Appellant are directed against the disallowance of deduction of INR.14,66,83,051/- claimed by the Assessee.

7.1. It has been stated that the Appellant had entered into a service agreement with IBM whereby IBM was under obligation to provide end-to-end information technology services and solutions to the Appellant for a period of five years which included providing IT support as well as provision of IT hardware on an operating lease basis. In the return of income for the relevant assessment year the Appellant claimed deduction for service charges of INR.14,66,80,051/- in respect of service charges paid/payable to IBM. During the assessment proceedings, the Assessing Officer noted that the Appellant had capitalized these expenses in the 24 A.Y.2014-2015 books of accounts. However, in the return of income the Appellant had claimed deduction for these expenses as revenue expenditure. Therefore, in the Draft Assessment Order the Assessing Officer proposed disallowance of the aforesaid service charge paid/payable to IBM observing that the aforesaid amount was capitalized in the books of accounts. According to the Assessing Officer there was no provision in the Act permitting the Appellant to claim deduction for expenditure in case the same was not claimed in the books of accounts. Further, Assessing Officer was of the view that service charge was paid/payable to IBM for a period of five years and therefore, the aforesaid expenditure was in the nature of pre-paid expenditure pertaining to the next four years for which deduction could not have been allowed during the relevant previous years under mercantile system of accounting followed by the Appellant. The objections filed by the Appellant before DRP on this issue were rejected on the ground that Appellant had failed to demonstrate before the DRP the exact nature of the expenses. Accordingly, in the Final Assessment Order disallowance of INR.14,66,82,051/- was made by the Assessing Officer.

7.2. Being aggrieved, the Appellant is now in appeal before this Tribunal.

7.3. We have heard both the sides and perused the material on record.

7.4. It was vehemently contended on behalf of the Appellant that the sole reason for disallowing deduction of service charges claimed by the Appellant was that the said expenditure was capitalized in the books of accounts. It was also submitted that identical expenditure has been allowed as deduction in the preceding assessment years. In absence of any change in the facts and circumstances, there was no reason for the Assessing Officer to 25 A.Y.2014-2015 depart from the view taken in respect of service charges paid/payable under the same service agreement with IBM in the preceding assessment years. It was further submitted that the finding returned by the Assessing Officer and DRP that the expenditure incurred was for a period of five years and included prepaid expenditure for next 4 years was factually incorrect as the service charges were payable annually.

7.5. Per contra Learned Departmental Representative placed reliance upon the order passed by the Assessing Officer/DRP and highlighted the fact that the Appellant had failed to demonstrate before the DRP the exact nature of expenses with supporting evidences.

7.6. Having considered the rival submission and on perusal of material on record we find merit in the contention advanced on behalf of the Appellant that the claim of deduction made by the Appellant cannot be rejected merely on the ground that the expenditure under consideration was capitalized in the books of accounts of the Appellant. We find that the underlying agreement between the Appellant and IBM is not on record. Accordingly, we deem it appropriate to remand this issue back to the file of the Assessing Officer. The Appellant is directed to file the relevant agreement, invoices and other supporting documents before the Assessing Officer. The Assessing Officer is directed to allow a deduction for service charges amounting Ito NR.14,66,82,051/- paid/payable to IBM in case on verification of the aforesaid agreement and supporting documents the Assessing Officer is satisfied that the aforesaid payment is in the nature of annual maintenance charge or annual operating lease rental paid/payable by the Appellant to IBM for the relevant previous year. In terms of the aforesaid Ground No. 4 to 4.2 raised by the Appellant are allowed for statistical purposes.

26 A.Y.2014-2015 Ground No. 5 to 5.2 8. Ground No. 5 to 5.2 raised by the Appellant are general grounds relating to transfer pricing adjustment which do not require separate adjudication. Accordingly, Ground No. 5 to 5.2 are dismissed as being general in nature.

Ground No. 6 to 6.1.5 9. Ground No. 6 to 6.1.5. raised by the Appellant pertains to transfer pricing adjustment of INR 35,97,56,258/- made in respect of the payment of brand royalty for obtaining the right to use of Vodafone trademark and trade name.

9.1. During the relevant previous year, the Appellant made royalty payments of INR 35,97,56,258/- [computed @ 1 % of net revenue] to its AE [i.e., Vodafone Sales and Services Limited (VSSL)] for grant of right to use "Vodafone" trademark and trade name. The Appellant contended that as per Comparable Uncontrolled Price Method (for short ‘CUP Method’) the royalty payment was at arm’s length since on analysis of the comparables selected, the Appellant found that the mean of the royalty payments being made under comparable third-party arrangements was 1.25% which was more than the rate of royalty payment made by the Appellant to its AE. However, the TPO was not convinced. The TPO noted that Assessment Year 2009-10 till Assessment Year 2012-13, the Appellant used to pay royalty to VSSL upto rate of 0.70%. TPO noted that the Appellant had adopted CUP Method for benchmarking royalty transactions which according to the TPO was not the Most Appropriate Method. The TPO also rejected all the comparables selected by the Appellant on account of significant differences in the functions, geography and level of operations. The TPO observed that the Appellant was performing Development, Enhancement, Maintenance, Protection and Exploitation functions (for short ‘DEMPE functions’) for the 27 A.Y.2014-2015 brand in India and was bearing the related costs and risks. No compensation was received by the Appellant for the aforesaid DEMPE functions either presently or at the time of termination of agreement. In view of the aforesaid, the TPO concluded that no independent third party would pay royalty for the use of trade name and trademark and therefore, the TPO arrived at ALP of ‘Nil’ for the transaction under consideration.

9.2. The objections filed by the Appellant on this issue did not yield favourable results as the DRP declined to give any direction and therefore, in the Final Assessment Order, dated 30/11/2018, transfer pricing adjustment of INR 35,97,56,258/- was made by the Assessing Officer in respect of royalty payment.

9.3. The Appellant is now before this Tribunal challenging the above transfer pricing addition.

9.4. When the issue was taken up for hearing both the sides submitted that issue relating to the transfer pricing adjustment related to royalty payment made by the Appellant for the for the Assessment Year 2011-12 and 2012-2013 [ITA No.884/Mum/2016 & dated 17/05/2024] and Assessment Year 2013- 14 [ITA No.6671/Mum/2017, dated 22/10/2024] had also come up for consideration before the Tribunal. For all the three assessment years, the Tribunal had remanded the issue back to the file of TPO/Assessing Officer with directions. We find that similar approach has been adopted by the Appellant and the TPO/Assessing Officer in the Assessment Year 2013-2014. As was the case in the preceding three assessment years, the benchmarking done by the Appellant using the CUP Method has been rejected by the TPO. The TPO rejected the comparables selected by the Appellant on account of significant differences in the functions, geography and level of operations. It has been 28 A.Y.2014-2015 submitted on behalf of the Appellant that the corroborative benchmarking using Transaction Net Margin Method (TNMM) had also not been considered by the Assessing Officer and the DRP. Given the aforesaid factual matrix and keeping in view the fact that for the three preceding Assessment Years 2011-12 to 2013- 14 the issue of benchmarking of the royalty transaction has been remanded back to the file of the TPO/Assessing Officer, we deem it appropriate to remand this issue back to the file of TPO/Assessing Officer with the directions to decide the issue of transfer pricing adjustment in relation to international transaction of royalty payment afresh after granting the Appellant reasonable opportunity of being heard. The Appellant is directed to file before the TPO/Assessing Officer such documents/details/report as the Appellant may deem fit to support the contention that the royalty payment made by the Appellant to its AE are at arm’s length while the TPO is directed to examine the same afresh for determining the ALP and made consequent transfer pricing adjustment, if any, as per law. All the rights and contentions of both the sides are left open. In terms of aforesaid, Ground No. 6 to 6.1.5 raised by the Appellant are allowed for statistical purposes.

Ground No.7 and 7.1 10. Ground No. 7 to 7.1 raised by the Appellant pertains to transfer pricing adjustment pertaining to reimbursement of expenses.

10.1. During the relevant previous year, the AEs of the Appellant cross charged salary cost of personnel seconded to India and who worked under the supervision, management and control of the Appellant. Subsequently, the Appellant reimbursed these expenses incurred by its AEs on cost to cost basis. Out of the aforesaid expenses, the TPO determined the ALP for the payments pertaining to GMAC Costs, PwC Consulting and people survey cost aggregating to INR.2,45,23,347/- as ‘Nil’. Since, the 29 A.Y.2014-2015 DRP declined to grant any relief in objections filed by the Appellant against the Draft Assessment Order proposing the aforesaid transfer pricing adjustment, the Final Assessment Order was passed making the transfer pricing addition of INR.2,45,23,347/-. Being aggrieved, the Appellant has carried the issue in appeal before this Tribunal.

10.2. Having heard the rival submission and on perusal of the record we find that this is a recurring issue. Both the sides agreed that for the Assessment Year 2008-09 and 2009-10, in identical facts and circumstances, this issue was restored to the file of TPO/Assessing Officer with directions. The relevant extract of the decision of Mumbai Bench of the Tribunal in the case of the Appellant for the Assessment Year 2009-2010 [ITA No. 1121 & 1885/MUM/2014, dated 08/11/2023] read as under:

“13. The next issue urged by the assessee in ground no.10.3 relates to the transfer pricing adjustment made in respect of reimbursement of salary and related costs on deputation of personnel to India.

13.1 The assessee had claimed reimbursement of salary and other related costs incurred on employees seconded by Associated Enterprises. The TPO determined ALP of the same at NIL. The Ld DRP allowed in part. We notice that an identical issue was examined by the co-ordinate bench in the assessee’s own case in 2008-09 in dated 08-05-2023 and the matter was restored to the file of AO/TPO with the following observations:-

18. In the instant case, the DRP in principle has accepted the fact that the payments were made towards reimbursement of salary and related cost of seconded employees on cost to cost basis and thus allowed substantial part of assessee’s claim. However, Rs.3,63,31,007/- has been disallowed for the reason that the assessee has not been able to substantiate back to back payment of the said amount. Once it has been accepted that the five employees were seconded to India by overseas AEs, the relocation of those employees to India is a consequential step. There would be cost attached to relocation of such employees. The 30 A.Y.2014-2015 said cost has either to be borne by the AE or the assessee. This fact can be determined from the terms and conditions of secondment of employees. In case relocation costs/travel costs are borne by the assessee, the same deserves to be allowed if they are reimbursed on cost to cost or are paid directly to the seconded employees. Taking into consideration entire facts, we deem it appropriate to restore this issue back to the file of Assessing officer for re- examination. The assessee is directed to furnish relevant documents to substantiate that the costs disallowed by the DRP were in fact cost paid by the assessee towards relocation/travel of the seconded employees. The assessing officer shall decide this issue after affording reasonable opportunity of hearing/to make submissions to the assessee, in accordance with law. Ergo, ground no.13 of the appeal is allowed for statistical purpose.

13.2 The facts available in this year, being identical, following the decision rendered by the co-ordinate bench in the assessee’s own case in AY 2008-09, we restore this issue to the file of AO/TPO with similar directions.”

10.3. The above decision was relied upon by the Tribunal while restoring identical issue back to the file of TPO/Assessing Officer with directions in appeal preferred by the Appellant for the Assessment Years 2011-2012 & 2012-13 [ITA No.884/Mum/2016 & 2834/Mum/2017, common order dated 17/05/2024] and for the Assessment Year 2013-2014 [ITA No.6671/Mum/2017, dated 22/10/2024].

10.4. In view of the above, we deem it appropriate to grant to the Appellant another opportunity to substantiate its claim that the INR.2,45,23,347/- were incurred in relation to the employees deputed with the Appellant and that the same, having being recovered on cost to cost basis from the Appellant, was at arm’s length. The Appellant is directed to furnish relevant documents/details to substantiate its claim. The TPO/Assessing Officer shall grant reasonable opportunity of hearing to the Appellant and shall decide the issue in accordance with law after taking into consideration the details/documents furnished by the 31 A.Y.2014-2015 Appellant and as per the directions issued by the Tribunal in the case of the Appellant for the Assessment Year 2008-09 in dated 08/05/2023. In terms of the aforesaid, we restore this issue to the file of TPO/Assessing Officer with the aforesaid directions. Ground No.7 and 7.1 raised by the Appellant in appeal are allowed for statistical purposes.

Ground No.8 and 8.1.4. 11. Ground No. 8 to 8.1.4 raised by the Appellant pertains to payment of centralized support services [Machines to Machine Charges]. In view of the statement made by the Learned Authorised Representative for the Appellant Ground No. 9 to 9.1 12. Ground No. 9 to 9.1 raised by the Appellant pertains to initiation of penalty proceedings under Section 271(1)(c)of the Act and the same is dismissed as being premature.