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Income Tax Appellate Tribunal, I BENCH, MUMBAI
Per Rahul Chaudhary, Judicial Member:
This is a batch of three appeals consisting of cross appeals for the Assessment Year 2011-12 and appeal preferred by the Assessee for the Assessment Year 2012-13. Since the appeals involved common issues the same were heard together and are being disposed by way of a common order.
Assessment Year 2011-12
We would first take up take up cross appeals for the Assessment Year 2011-12 which are directed against Final Assessment Order dated, 28/01/2016, passed under Section 144C(13) read with Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] for the Assessment Year 2011-12, as per directions issued by Dispute Resolution Panel-2, Mumbai [hereinafter referred to as `the DRP′] under Section 144C(5) of the Act.
In ITA No. 884/Mum/2016, the Assessee has raised grounds of appeal in relation to the following issues: (a) Ground No. 1 to 1.2: Disallowance of INR 357,23,70,000/- under section 14A of the Act (b) Ground No. 2 to 2.2: Disallowance of INR 19,35,01,258/- being interest on Capital Work-in- Progress under Section 36(1)(iii) of the Act. (c) Ground No. 3 to 3.7: Disallowance of INR 30,95,03,786/- in respect of roaming charges under Section 40(a)(ia) of the Act (d) Ground No. 4 to 4.5: Disallowance of INR 47,17,99,596/- in respect of discount extended to pre-paid distributors under Section 40(a)(ia) of the Act (e) Ground No. 5 to 5.5: Disallowance of deduction under Section 80IA of the Act (f) Ground No. 6 to 6.3: Disallowance of deduction under Section 80-IA of the Act in respect of `Other Income' (g) Ground No. 7 to 7.2: General grounds on Transfer Pricing Adjustment (h) Ground No. 7.3 to 7.8: Transfer Pricing Adjustment of INR 22,01,14,350/- pertaining to Advertisement, Marketing and Promotion expenditure (i) Ground No. 7.9 to 7.10: Transfer Pricing Adjustment of INR 7,97,68,155/- pertaining to Brand Royalty payment made to Vodafone Ireland Marketing Limited for obtaining the right to use of Vodafone trademark and trade name (j) Ground No. 7.11 to 7.13: Transfer Pricing Adjustment of INR 1,31,43,772/- pertaining to payment for technology support charges (k) Ground No. 7.14: Transfer Pricing Adjustment of INR 93,12,637/- pertaining to Reimbursement of Expenses of salary and related cost on deputation of personnel in India. (1) Ground No. 8: Levy of interest under Section 234D and 244A of the Act (m) Ground No. 9: Incorrect computation of Book Profits under Section 115JB of the Act (n) Ground No. 10 : Non-Grant of full credit in respect of Tax Deducted at Source (TDS) (0) Ground No. 11 : Initiation of penalty proceedings under Section 271(1)(c) of the Act
In ITA No. 1919/Mum/2016, the Revenue has raised grounds of appeal in relation to the following issues: (a) Ground No. (i) & (ii): pertaining to disallowance of INR 30,95,03,786/- in respect of roaming charges under Section 40(a)(ia) of the Act (b) Ground No. (iii): pertaining to disallowance of INR 2,05,35,800/- made under Section 37 of the Act (c) Ground No. 2 to 4: general grounds
The relevant facts, in brief, are that Assessee is a company engaged, inter alia, in providing cellular services. The Assessee filed its return of income for the Assessment Year 2011-12 on 30/11/2011 declaring total income of INR 2,35,15,11,079/-. The case of the Assessee was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Assessee 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 transactions. The TPO, vide order, dated 21/01/2015, passed under Section 92CA(3) of the Act proposed, inter alia, the following transfer pricing adjustments: SNo. Additions/Disallowances Amount (INR) 1 Payment of Royalty for brand name and mark 7,97,68,155/- 2 Technology support charges 1,31,43,772/- 3 Payment for GMAC costs, PwC consulting charges and People Survey charges 4,14,86,237/- 4 Under recovery of salary expenses from AE 93,12,637/- 5 Excessive AMP expenditure 22,01,14,350/- Total 36,38,25,151/-
On 31/03/2015, the Assessing Officer passed Draft Assessment Order under Section 143(3) 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.
The Assessee filed objections before the DRP against the Draft Assessment Order, dated 31/03/2015. On 22/12/2015, the DRP disposed off the objections granting partial relief to the Assessee. As per the directions of the DRP, the Assessing Officer passed the Final Assessment Order, dated 28/01/2016, under Section 143(3) read with Section 144C(13) of the Act, assessing total income of the Assessee at INR 478,20,94,710/- computed as under: Particulars Amount (INR) Amount (INR) Income under the head business or profession (as per revised computation) (-) 185,73,18,001 Disallowance under Section 14A 357,23,70,000 Disallowance of Interest on Capital Work-In- Progress 19,35,01,258 Disallowance under Section 40(a)(ia) for non deduction of TDS on Roaming Charges & on Discount extended to prepaid distributors 244,72,76,991 Penalty payment DoT disallowed under Section 37(1) 2,05,35,800 TP Adjustment 36,38,25,151 Total Disallowances 659,75,09,200 474,01,91,199 Taxable income under the head business or profession Income from Other Sources (as per revised computation) Interest on fixed deposit 4,19,03,514 4,19,03,514 Total income 478,20,94,713/- Total income (as per Normal Provisions) 478,20,94,713 Rounded off to 478,20,94,710/-
Being aggrieved the Assessee had preferred the present appeal against the Final Assessment Order, dated 28/01/2016, on the grounds reproduced in paragraph 2.1 above. Ground No. 1
Ground No. 1 raised by the Assessee is directed against the order of CIT(A) confirming the disallowance of INR 357,23,70,000/- 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'].
During the assessment proceedings, the Assessee 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, it was submitted by the Assessee that no exempt income was earned by the Assessee during the relevant previous year and therefore no disallowance under Section 14A of the Act was warranted. However, the Assessing Officer rejected the aforesaid contention of the Assessee and proceeded to compute disallowance at INR 357,23,70,000/- as per provisions contained in Rule 8D of the IT Rules and made disallowance of the said amount under Section 14A of the Act.
In the objections filed by the Assessee against the Draft Assessment Order, dated 31/03/2015, the DRP agreed with the Assessing Officer and decline to issue any directions. Accordingly the Assessing Officer passed the Final Assessment Order, dated 28/01/2016, making disallowance of INR 357,23,70,000/- under Section 14A of the Act.
Being aggrieved, the Assessee has carried the issue in appeal before us.
We have heard the rival contentions and perused the material on record. It is admitted position that no exempt income earned by the Assessee during the relevant previous year. It has been contended by the Assesses that in absence of exempt income, disallowance under Section 14A of the Act was not warranted. We find merit in the aforesaid contention of the Assessee. In the absence of any exempt income arising in the relevant previous year, no occasion to make any disallowance under Section 14A of the Act can arise [Principal Commissioner of Income-tax Vs. Red Chillies Entertainment Pvt. Ltd.: [2020] 116 taxmann.com 770 (Bombay)[20-08-2019].
In the case of the Assessee, for the Assessment Year 2008-09 [ITA No. 6718/Mum/2012, dated 08/05/2023] and 2009-2010 [ITA No. 3425/Mum/2014, dated 24/02/2023] the Tribunal had deleted disallowance under Section 14A of the Act as the Assessee did not earn any exempt income during the corresponding previous years.
In view of the above, the disallowance of INR 357,23,70,000/- made by the Assessing Officer under Section 14A of the Act is deleted Ground Number No. 1 raised by the Assessee is allowed. Ground No. 2
Ground No. 2 raised by the Assessee pertains to disallowance of interest expenses of INR 19,35,01,258/-
During the assessment proceedings, the Assessing Officer noted that in the relevant previous year the Assessee had substantially expanded its existing business which was evident from the significant capital work-in-progress. Since the capital work in progress was not put to use, no deduction could be allowed for the interest on borrowed funds used for capital work in progress. Further, there was substantial addition to the fixed assets base of the Assessee. However, according to the Assessing Officer, as per the provisions of Section 36(1)(iii) of the Act, interest paid on capital borrowed for acquisition of assets for extension of business was not allowed as a deduction. Accordingly, the Assessing Officer proposed disallowance on an ad-hoc basis by applying a notional interest rate of 11% on the month-wise balances in CWIP account. Thus, the Assessing Officer proposed disallowance of INR 19,35,01,258/- under Section 36(1)(iii) of the Act read with proviso thereto in the Draft Assessment Order, dated 31/03/2015.
In the objections filed by the Assessee against the Draft Assessment Order before the DRP it was contended on behalf of the Assessee that during the relevant previous year the Assessee had made certain additions to its fixed assets in order to meet the demand for its services and as part of continuous process to improve the quality and reach of its services. The acquisition of such fixed assets by the Assessee was from, both, interest bearing funds as well as own funds and the purpose of acquisition was to assist the Assessee in carrying on its existing operations and not for the purpose of expansion/extension of business. Further, the Assessee routed all additions to fixed assets through the capital work in progress account and therefore, has month-end balance pending capitalisation. Proviso to Section 36(1)(iii) of the Act applied only where there is 'extension of business'. In the present case, the Assessee continued to operate only in one telecom circle. Therefore, there was no 'extension of business', and hence, proviso to Section 36(1)(iii) of the Act was incorrectly invoked by the Assessing Officer. However, DRP did not find merit in the aforesaid and agreeing with the Assessing Officer, declined to issue any directions. Accordingly the Assessing Officer passed the Final Assessment Order, dated 28/01/2016, making disallowance of 19,35,01,258/- under Section 36(1)(iii) of the Act.
Being aggrieved the Assessee has carried the issue in appeal before the Tribunal.
We have considered the rival submissions and perused the material on record. It emerges that in identical facts and circumstances, vide common order dated 16/03/2023 passed in appeals for the Assessment Year 2006-07 [ITA No 216/CHANDI/2011] & 2007-08 [ITA No. 1173/Mum/2011], the Tribunal had decided identical issue in the favour of the Assessee and allowed deduction for interest on borrowed funds use for purchase of assets and capital work in progress. The relevant extract of the aforesaid decision of the Tribunal reads as under:
“20. In ground No.6 & 7 of appeal the assessee has assailed disallowance of interest Rs.1,63,96,415/- on Capital Work-in- Progress and disallowance of interest Rs.38,70,010/- on ECB. The Id. Counsel for the assessee submits that the assessee has acquired fixed assets from the borrowed capital during the year relevant to the assessment year under appeal. The assets were acquired not for the purpose of extension of its existing business but to provide better quality of services to the customers. The Assessing Officer while disallowing interest on capital work-in- progress and interest on ECB has erred in holding that the assessee has extended its existing business, by making substantial addition to the fixed asset base of the company. The Assessing Officer on wrong appreciation of facts has erred in coming to the conclusion that interest paid on capital borrowed is for acquisition of assets for extension of business, hence, not allowable as deduction u/s. 36(1)(iii) of the Act. The Id. Counsel for the assessee asserted that the assessee has utilized borrowed funds for the purpose of carrying out its existing operations more efficiently. The expenditure on capital work-in- progress was for facilitating its existing operations and not in connection with extension of its existing operations. The investments in network assets is a continuous process to improve quality of services for its subscribers, hence, the assets acquired cannot be construed for extension of existing business operations. In telecommunication business the extension of business mean expansion beyond geographical area, where telecommunication services are rendered. The assessee is providing telecommunication services in Mumbai Telecom Circle and even after acquiring new assets the geographical area of operation remain confined to Mumbai Telecom Circle. The Id. Counsel for the assessee in support of his submissions placed reliance on the following decisions: (i) DCIT vs. Core Healthcare TTJ 170 (Hyd-Trb) XX XX
Per contra, the Id. Departmental Representative vehemently defending the assessment order submitted that the assessee had acquired loans and raised ECBs for expansion of business. With the acquisition of new assets, the subscriber base of the assessee has increased, the increase in subscriber base is also an extension of business. Therefore, proviso to section 36(1)(iii) of the Act is attracted. The Id. Departmental Representative referred to the findings of the Assessing Officer in para 5.4 to 5.6 of the assessment order. The Id. Departmental Representative pointed that there has been substantial addition in the fixed assets of the assessee under the head `Plant and Machinery'. This shows that there has been substantial expansion of the existing business by the assessee. The Id. Departmental Representative further pointed to the observations of the Assessing Officer in para 5.6 of the impugned order that capital work-in-progress has not been utilized for the purpose of business during the year under consideration, hence, interest expenses on capital workin- progress is not allowable as deduction.
1 XX XX
We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee has raised loans during the period relevant to the assessment year under appeal and has paid interest on said loans. The assessee has admittedly used borrowed funds for acquiring assets. The contention of the Revenue is that the assets acquired by the assessee are for expansion of the existing business, hence, proviso to section 36(1)(iii) of the Act gets attracted, consequently, interest paid on such borrowed capital is not allowable u/s. 36(1)(iii) of the Act.
Au Contraire, stand of the assessee is that purchase of asset in assessee's case does not lead to extension of business but has merely improved quality of service. In terms of telecommunication business, expression extension is used where the business of the assessee has grown in geographical terms. It is an undisputed fact that even after having acquired new assets, the area of operation of the assessee has not extended. The assessee was providing telecommunication services in Mumbai Telecom Circle and even after substantial investment in new assets, the area of operation remain confined to Mumbai Telecom Circle. The investment in assets / Plant & Machinery/ Network equipment by the assessee have improved the quality of services, this may have resulted in increase of the subscriber base to some extent. Increase in volume of subscriber base within the same territory of operation cannot be termed as extension of business. Therefore, we do not find merit in the observations of the Assessing Officer that the interest u/s. 36(1)(iii) of the Act has to be disallowed.”
Respectfully following the above decision of the Tribunal in the case of the Assessee, the disallowance of interest expenses of INR 19,35,01,258/- made by the Assessing Officer under section 36(1)(iii) of the Act is deleted. Ground No. 2 raised by the Assessee is allowed. Ground No. 3
Ground No. 3 raised by the Assessee is directed against the disallowance of roaming charges made by the Assessing Officer under section 40(a)(ia) of the Act.
During the relevant previous year, the Assessee incurred domestic roaming charges amounting to INR 1,97,54,77,395/-. The roaming charges were paid by the Assessee to telecom operators towards roaming services provided by such operators to the subscribers of the Assessee. According to the Assessing Officer even though the process of carriage of calls was fully automated and no human intervention was involved, there was an element of human intervention at the time of setup, monitoring, fault identification etc and therefore, the Assessing Officer was of the view that the roaming charges were subject to tax deduction at source in terms of Section 194) of the Act. Since the Assessee had failed to deduct tax at source in compliance with the provisions of Section 194J of the Act, the Assessing Officer made disallowance of INR 1,97,54,77,395/-. in respect of roaming charges invoking provisions contained in Section 40(a)(ia) of the Act in the Draft Assessment Order, dated 31/03/2015.
In the objections filed by the Assessee on this issue, the DRP granted partial relief and directed the Assessing Officer to follow the directions of DRP for the Assessment Year 2010-11. Accordingly, in the Final Assessment Order, dated 28/01/2016, the Assessing Officer made disallowance of INR 30,95,03,786/- under Section 40(a)(ia) of the Act (as against the disallowance of INR 1,97,54,77,395/- proposed in the Draft Assessment Order) in respect of roaming charges.
Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.
We have considered the rival submissions and perused the material on record.
We note that in the identical facts and circumstances, the Tribunal has, vide order dated 08/11/2023 passed in appeals for the Assessment Year 2009-10 [ITA No 1121/Mum/2014,] decided this issue in the favour of the Assessee and deleted the disallowance of roaming charges under Section 40(a)(ia) of the Act. The relevant extract of the aforesaid decision of the Tribunal reads as under:
“10. The next issue urged in Ground no.8 relates to disallowance of roaming charges u/s 40(a)(ia) of the Act for non- deduction of tax at source. We notice that an identical disallowance made in AY 2006-07 and 2007-08 u/s 40(a)(ia) of the Act. The co-ordinate bench has deleted the disallowance with the following observations:- “27. In ground No.9 of appeal, the assessee has assailed disallowance of roaming cost u/s. 40(a)(ia). The Id. Counsel for the assessee submits that during the year under consideration the assessee incurred expenses on roaming charges. Payments are made to other telecom operators to enable subscribers of the assessee to make or receive calls originating/ terminating on other telephone networks. Roaming service is in the nature of automated services and no human intervention for switch over to the network of other telecom operators while in roaming is warranted. The Assessing Officer made disallowance u/s. 40(a)(ia) of the Act on the pretext that the provisions of section 194C and/or section 194J of the Act are attracted on CIT, 156 ITD 337. 18 M/s. Vodafone India Ltd.
The Id. Departmental Representative vehemently operators. The Co-ordinate Bench after analyzing the facts of the case and various decisions held that the payment of roaming charges does not fall under the ambit of TDS provision either u/s. 194C or 194J of the Act, hence, addition made u/s. 40(a)(ia) of the Act was deleted. We find that the facts and the reason for making disallowance u/s.40(a)(ia) of the Act in the impugned order are similar to the case of Vodafone East Ltd.(supra). No distinction has been pointed by the Revenue in the present case. Thus, for parity of reasons, disallowance u/s. 40(a) (ia) of the Act is directed to be deleted. The assessee succeeds on ground No.9 of appeal." The above said decision has been followed in the assessee's own case in AY 2008-09 also. Accordingly, following the decision rendered in the earlier years, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance."
Respectfully following the above decision of the Tribunal in the case of the Assessee for the preceding Assessment Year 2009- 10, which in-turn followed the decision of the Tribunal in the case of the Assessee for the Assessment Year 2006-07 and 2007-08, the disallowance of INR 30,95,03,786/- made under Section 40(a)(ia) of the Act in respect of roaming charges is deleted. Ground No. 3 raised by the Assessee is allowed. Ground No. 4
Ground No. 4 raised by the Assessee is directed against the disallowance of discount extended to pre-paid distributors under section 40(a)(ia) of the Act.
During the relevant previous year, discount amounting to INR 47,17,99,596/- were extended by the Assessee to its distributors of pre-paid products ('pre-paid distributors'). According to the Assessee. The pre-paid distributors were appointed on Principal to Principal basis. The discount extended represents the difference between the Maximum Retain Price (MRP) of the talk- time and pre-paid connections and the price at which these are transferred to the pre-paid distributors. No payment or credit was made by the Assessee to its pre-paid distributors. In fact, it was the pre-paid distributors who make a payment to the Assessee for transferring pre-paid talk time and connections and accordingly the discount extended was not income earned by the distributors.
In the Draft Assessment Order, dated 31/03/2015, the Assessing Officer proposed disallowance under Section 40(a)(ia) of the Act on the upfront discount extended to the pre-paid distributors by terming the arrangement as 'Principal to Agent instead of 'Principal to Principal' basis certain clauses in the agreement on exclusivity right to inspect and treated upfront discount given to distributor as commission liable for withholding under Section 194H of the Act.
The objections filed by the Assessee on this issue were rejected by the DRP. Accordingly the Assessing Officer passed the Final Assessment Order dated 28/01/2016 making disallowance of INR 47,17,99,596/- under Section 40(a)(ia) of the Act in respect of disallowance of discount extended to pre-paid distributors under section 40(a)(ia) of the Act.
Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.
We have considered the rival submissions and perused the material on record.
Having considered the rival submissions and on perusal of the record we find that identical issue has been decided by the Mumbai Bench of the Tribunal in the case of the Assessee for the Assessment Year 2009-10 in ITA No. 1121/Mum/2014 and ITA No. 1885/Mum/2014, vide order dated 08/11/2023. The relevant extract of the aforesaid order read 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 ITA No.3425/Mum/2014 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:-