DCIT, NEW DELHI vs. M/S SPICE COMMUNICATION LTD., NOIDA

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘G’: NEW DELHI BEFORE SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 988/Del/2011 Assessment Year: 2006-07 Deputy Commissioner of Income Vs. M/s. Spice Communication Ltd., Tax, Circle 9(1), Room No. 163, C/o- Idea Cellular Ltd., A-68, C.R. Building, New Delhi Sector-64, Noida. GIR/PAN : AAGCS6070H (Appellant) (Respondent) And C.O. No. 77/Del/2011 [In ITA No. 988/Del/2011] Assessment Year: 2006-07 M/s. Spice Communication Ltd., Vs. Deputy Commissioner of Income C/o- Idea Cellular Ltd., A-68, Tax, Circle 9(1), Room No. 163, Sector-64, Noida. C.R. Building, New Delhi GIR/PAN : AAGCS6070H (Appellant) (Respondent) And ITA No. 801/Del/2011 Assessment Year: 2006-07 M/s. IDEA Cellular Ltd., A-68, Vs. ACIT, Circle-50(1), New Delhi Sector-64, Noida GIR/PAN : AAACB2100P (Appellant) (Respondent) Assessee by Sh. Ronak G. Doshi, CA Department by Sh. B.K. Singh, CIT(DR) Date of hearing 05.04.2016 Date of pronouncement 25.05.2016

2 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011

ORDER PER O.P. KANT, A.M.: Out of the set of thee appeals, two are respectively appeal filed by the Revenue and the Cross Objections preferred by the assessee ‘Spice Communication Ltd’ against the order dated 26/11/2010 of learned Commissioner of Income-tax (Appeals)-XII, New Delhi, for assessment year 2006-07. The third appeal is preferred by the assessee, Idea Cellular Ltd, which is successor to the ‘Spice Communication Ltd’, against the same order of the learned Commissioner of Income-tax (Appeals) for assessment year 2006-07. As the appeals and cross objections have emanated from the same impugned order, they are heard together and disposed of by this consolidated order. 2. First we take up the appeal of the Revenue in ITA No. 988/Del/2011, wherein, the grounds raised are as under: 1. On the facts and circumstances of the Ld. CIT(A) erred in law as well as on merits in deleting the addition of Rs.4,17,34,800/- made by the AO by treating 10% of expenditure of Rs.41,73,48,000/- incurred on "Advertisement & Sales Promotion as capital in nature and failed to appreciate that such expenditure also resulted partly in brand building and hence in acquisition of an intangible asset for the purposes of business. 2. On the facts andcircumstancesof the case the Ld CIT(A) erred in law as well as on merits in restricting theaddition to 25% of the management service charges paid to share holders amounting to Rs.3,26,25,000/- for being capital expenditure, in place of addition of Rs.2,77,31,250/- made by AO by treating entire management service charges as capital expenditure and failed to appreciate that entire payments made for transfer/sharing of technical know-how and Intellectual Property Rights resulted in acquisition of intangible assets for the purposes of business. 3. The appellant craves to amend modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal. 3. The facts in brief are that the assessee filed return of income for the year under consideration on 29/11/2006 declaring nil income. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income tax Act, 1961 (in short “the Act”) was issued and served within the stipulated period. During the year under consideration, the assessee company was engaged

3 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 in providing services of cellular mobile telephone in the telecom circles of Punjab and Karnataka. In the scrutiny assessment completed under section 143(3) of the Act on 24/12/2008, disallowances were made by the Assessing Officer on various accounts. On appeal, the ld. Commissioner of Income Tax (Appeals), allowed part relief to the assessee. Aggrieved, the Revenue filed appeal and assessee filed cross objection as well as appeal against the findings of the learned Commissioner of Income-tax(Appeals). 4. In ground No. 1, the Revenue challenged the deletion by the learned Commissioner of Income-tax(Appeals) of the addition made by the AO by treating 10% of expenditure incurred on advertisement and sales promotion as capital in nature. 4.1 At the outset of hearing, the ld. Authorized Representative (AR) of the assessee submitted that issue in dispute was covered in the favour of the assessee by the judgment of the Hon’ble Delhi High Court in the case of assessee itself for assessment years 2003-04, 2004-05 and 2005-06 in ITA Nos. 643/2010, 649/2010 and 680/2010 respectively. 4.2 The ld. Commissioner of Income Tax (Departmental Representative) though concurred with the submission of the learned AR, however, relied on the order of the Assessing Officer. 4.3 We have heard the rival submissions and perused the material on record including the judgment of the Hon’ble Delhi High Court in the case of the assessee for assessment years 2003-04 to 2005-06. On the issue in dispute, the Hon’ble High Court after taking into consideration precedents available decided the issue in favour of the assessee. The relevant paragraphs of the judgment are reproduced as under: “2. On the first issue, the findings recorded by the Tribunal are that the respondent/assessee is in the business of promoting mobile telephonic services since 1997 and that the market was highly competitive and required aggressive marketing. Expenses were incurred to invite customers and promote the cellular mobile service of the assessee. The advertisement and sales promotion expenses were incurred for the purposes of carrying on the business and not for creating a capital asset. Accordingly, it has been held that the CIT(A) was justified in holding that the entire expenditure

4 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 should be treated as revenue expenditure and the Assessing Officer was not right in treating 10% of the expense as capital expenses incurred towards brand building. A Division Bench of this Court had an occasion to examine the issue of advertisement expenditure in the case of Commissioner of Income Tax Vs. Adidas India Marketing, (2010) 195 Taxman 256, wherein it was held as under: “4. We find from the order of the ITAT that the Tribunal has discussed in detail the terms of Technical Assistant Agreement dated 14-2-1997, as per which the assessee was provided the technical know-how and was also allowed to use the brand name ‘Adidas’ on the products manufactured by the assessee, which are to be sold in India, Nepal and Bhutan. The Tribunal observed that merely because the assessee was paying royalty at the rate of 5 per cent to M/s. AIPL would not mean that the assessee could not incur the expenditure on advertisement to popularize the products dealt with by it in Indian market. No doubt, brand name of ‘Adidas’ is already a well-known brand which belongs to the parent company of the assessee. However, to popularize the said product in India and to promote its sale in the Indian territories, it became essential for the assessee to incur expenditure on advertising to propagate the aforesaid brand name. The benefit thereof had to necessarily accrue to the assessee as well as the main purpose of the advertisement is to augment the sales. The contention of the assessee that it was a commercial practice and commercial expediency has rightly been accepted by the Tribunal. The relevant portion of the judgment of the Tribunal dealing with this aspect is reproduced below : "17. xxx 19. In the present case, the expenditure has been incurred by the assessee in the carrying on of its business activities of manufacturing and selling the product under the brand name Adidas. The expenses are thus have the direct nexus with the sales or the business promotion of the assessee. At this stage, it is also pertinent to mention that merely because the assessee- company has been paying royalty to M/s. Adidas A.G. for the use of the brand name Adidas, that by itself cannot be a ground to disallow the assessee’s claim on account of advertisement expenses which mere made to promote the assessee’s business in India and to increase its business and the sales of the products under the brand name Adidas. The assessee was paying royalty for using brand name Adidas to the customers in various parts of India to make them aware about the nature of the products being sold by the assessee at different outlets as per assessee’s business strategy. To promote business and commerce by any businessman would certainly come within the expression of commercial expediency and no label of any oblique motive with a view to reduce tax incidence can be fastened. The activity to promote ones sales by advertising the product which were being sold by him are certainly to come within the expression "wholly and exclusively incurred for the purpose of business", which is to be considered and looked into having regard to the realities of business from the point of view of a prudent businessman and not from the point of view of a tax collector. 20. In the light of the discussions made above and having found that since the assessee had incurred the advertisement and publicity expense with a view to promote its sale of products under the brand name Adidas which were sold by the assessee, the advertisement expenses incurred by the

5 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 assessee are to be held as incurred to facilitate the assessee’s business, and would thus be eligible for deduction while computing the assessee’s profit from business. At this stage, it is also pertinent to note that the expression "wholly and exclusively" used in section 37 of the Act would not mean "necessarily". It is for the assessee to decide whether any expenditure should be incurred to facilitate its business activities. It is also well-settled that even such expenditure incurred voluntarily and not for any necessity by are incurred for promoting the business and to earn profit, the assessee can claim deduction under section 37(1) of the Act. This was so observed by the Hon’ble Supreme Court in the case of Sasson J. David & Co. (P.) Ltd. (supra). We, therefore, reverse the order of the CIT(A) and direct the Assessing Officer to allow the assessee’s claim of deduction on account of advertisement and publicity expenses in all the three assessment years." 3. The aforesaid reasoning and ratio was approved in case of Commissioner of Income Tax Vs. Salora Internation Limited (2009) 308 ITR 199, wherein a Division Bench of this Court opined. “3. The first issue that is sought to be raised in this appeal pertains to advertising expenditure of approximately Rs 3.08 crores. According to the Assessing Officer, the expenditure were incurred for launching of its products. The Assessing Officer was of the view that such expenditure was of an enduring nature and, therefore, treated one-third as "capital expenditure" and only allowed the two-thirds of the said amount as "expenditure, to the assessee". The Commissioner of Income-tax (Appeals) allowed the entire amount after treating the expenditure as "revenue expenditure". The findings of the Commissioner of Income-tax (Appeals) were confirmed by the Income-tax Appellate Tribunal by virtue of the impugned order. Particularly, the Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such expenditure to meet the competition in the Indian market for selling its products in India. A finding was returned that unless the assessee made its products known to the market, its business would suffer. Consequently, the Tribunal held the entire expenditure on advertising to be of a revenue nature and allowed the same. The Tribunal also noted the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 wherein the Supreme Court held that there could be cases where the expenditure even if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of "enduring benefit" may break down. 4. We are of the view that the decision of the Tribunal on this aspect of the matter does not call for any interference and, therefore, no substantial question of law arises on this aspect.”

6 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 the use of the trademark by the assessee enures to the benefit of Pepsi. It is also pointed out by the learned counsels that as per clause 19 of the agreement, the assessee was to seek prior approval in respect of any advertising and sales promotion which is incurred in the trademark and trade name of Pepsi. The learned counsels also argued that the advertisement and publicity which were done by the assessee, nowhere mention the name of the assessee and exclusively name of Pepsi appeared therein, i.e., its trademark and trade address, etc., were exhibited. From this, it is sought to be argued that by specific agreement in writing, the assessee agreed to give advantage to Pepsi in respect of publicity and advertisement carried out by the assessee for Pepsi's product. In these circumstances, argued the learned counsels, the CIT(A) was justified in apportioning the expenditure and the principles laid down by the Supreme Court in the case of Sassoon & J. Davis & Co. (P.) Ltd. (supra) would not be applicable. We are unable to accept the aforesaid submission of the learned counsel for the appellant. In Sassoon & J. Davis & Co. (P.) Ltd. case (supra), the Supreme Court categorically held that when the expenditure is incurred for promoting the business to earn profits merely because from the said expenditure, some third party has benefited, cannot be a reason to disallow the expenditure. Instead of analyzing that judgment in detail, our purpose would be served by referring to a Division Bench judgment of this Court in CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377 / 121 Taxman 706 , wherein the judgment of Supreme Court in Sassoon case (supra) and some other judgments are taken note of, analysed and the principles laid down therein are succinctly culled out. Examining and interpreting the provisions of section 37 of the Act, the Court expressed that the true import of the expression "wholly or exclusively" appearing in section 37 of the Act would not mean "necessarily". Ordinarily, it was for the assessee to decide whether any expenditure was incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under relevant provision even if there was no compelling necessity to incur such expenditure. The fact that somebody, other than the assessee is benefited by the expenditure should not come in the way of an expenditure-being allowed by way of deduction under section 37 of the Act, if it otherwise satisfies the tests laid down by law. 7. The Court went into the legislative history of section 37 of the Act and pointed out that though in the Income-tax Bill, 1961, in the original section 37, as per the draft, the word "necessity" appeared was ultimately omitted and instead replaced by the word "ordinarily". Thus, for allowing the expenditure incurred under section 37(1) of the Act, the conditions which are to be satisfied are :— (a)there must be expenditure, (b)such expenditure must not be of the nature described in sections 30 to 36 of the Act, (c)the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee, (d)The expenditure must have been laid out or exclusively for the purposes or profession. 8. It was clarified by the Division Bench that the word "wholly" refers to quantum of expenditure while the word "exclusively" refers to the motive, objective and purpose of the expenditure. The Court also explained that the term "commercial expediency" is not a term of art and it means anything that serves to promote

7 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 commercial expediency and includes every means suitable to that end. While examining the issue of deductibility of such expenditure, the Court also laid down the role of the Assessing Officer therein. In no uncertain term, the Court explained that the jurisdiction of the Assessing Officer was confined to "deciding the reality of the expenditure", namely, whether the amount claimed as deduction was factually expended or laid down or whether it was wholly or exclusively for the purpose of the business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. When we apply the aforesaid test to the facts of this case, it becomes manifest that all the ingredients laid down in section 37(1) of the Act are satisfied. It is not in dispute that the expenditure is, in fact, incurred. The Assessing Officer or the CIT(A) did not question the amount incurred by the assessee on the advertisement. It is also not the case of the revenue that the expenditure is of the nature described in sections 30 to 36 of the Act. The expenditure is not capital expenditure or personal expenditure of the assessee either. It is also clear that the entire quantum of expenditure was for the purpose of business and, therefore, it is wholly for the purpose of business. We are also of the opinion that the expenditure was exclusively incurred for the purpose of the business and promote the sales by the assessee. Therefore, it was incurred wholly or exclusively for the purposes of business. 9. The agreement entered into between the assessee and Pepsi shows that the assessee was given a particular territory in Haryana, boundaries whereof are specifically defined in the agreement for the purposes of bottling, selling and distributing of the beverages. This entire territory within which the assessee was to operate, the assessee was not only supposed to bottle the beverages, it was also given rights to sell and distribute the project of the Pepsi in the defined territory during the currency of the said agreement. Naturally, therefore, in order to augment its profits in the said territory, it was the business decision of the assessee to advertise and publicize the product for maximizing its sale. The expenditure was, thus, incurred by the assessee for its own benefit. Clause 18 of the agreement authorized the assessee to undertake appropriate advertising and sales promotion activity for the beverage. If in the process, Pepsi or its trademark also benefited, that would not militate against the assessee as far as claiming the deduction under section 37 of the Act is concerned, once all the characteristics of the said provision stood satisfied.” 5. In ITA No. 978/2011 titled Commissioner of Income Tax Vs. Mono Motors Ltd., decided on 12.12.2011, this Bench held as under: “4. In view of the factual matrix which is available on record and as the Assessing Officer has not dealt with the factual matrix in detail we are not inclined to admit the present appeal. The advertisement expenses as per the findings of both the CIT (Appeals) and the Tribunal were not of capital nature. Advertisement expenses when incurred to increase sales of products are usually treated as a revenue expenditure, since the memory of purchasers or customers is short. Advertisement are issued from time to time and the expenditure is incurred periodically, so that the customers remain attracted and do not forget the product and its qualities. The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable,

8 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for all, but were a periodical expenses which had to be incurred continuously in view of the nature of the business. It was an on-going expense. Given the factual matrix, it is difficult to hold that the expenses were incurred for setting the profit earning machinery in motion or not for earning profits. 6. Keeping in view the findings recorded by the Tribunal and the nature and character of business of the respondent/assessee, we do not thing that any substantial question of law arises on the first aspect.” 4.4 In view of above, respectfully following the findings of the Hon’ble Delhi High Court in the case of the assessee itself for assessment years 2003-04 to 2005-06, we do not find any infirmity in the order of the learned Commissioner of Income-tax(Appeals) on the issue in dispute and, thus, we uphold the same. Accordingly, the ground of the Revenue is dismissed. 5. In ground No. 2, the Revenue has challenged restriction by the learned Commissioner of Income-tax(Appeals) of the addition of management services charges as capital expenditure to 25% of such charges paid to shareholders. 5.1 The Ld. AR submitted that this issue was also covered by the judgment of the Hon’ble Delhi High Court in the case of assessee itself for assessment year 2003-04, 2004-05 and 2005-06 in ITA Nos. 643/2010, 649/2010 and 680/2010 respectively. The Ld. Commissioner of Income Tax (Departmental Representative) though concurred with the submission of the learned AR, however, relied on the order of the Assessing Officer. 5.2 We have heard the rival submissions and perused the material on record including the judgment of the Hon’ble Delhi High Court in the case of the assessee for assessment years 2003-04 to 2005-06. The ground raised before the Hon’ble High Court was as under: “(iii) Payments made to Modicom Network and Distacom Communication India Ltd. under the ‘management service agreement’ and ‘technical service and operating agreements’ respectively, were entirely capital expenses and the ITAT has erred in holding that only 25% was capital expense and the balance 75% should be treated as revenue expenses.”

9 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 5.3 On the question raised, the Hon’ble High Court decided the issue in favour of the assessee. The relevant paragraph of the judgment is reproduced as under: “11. On the third aspect, the ITAT has examined the issue in great depth and detail. The Assessing Officer had treated the entire expenditure as capital expenditure. The Commissioner of Income Tax(Appeals) treated the entire expenditure under the two agreements as revenue expenditure. ITAT examined the relevant clauses of the two agreements and the services, which were required to be undertaken by the Distacom Communication and Modicom Network. After referring to relevant clauses, it was noticed that the payments made were partly towards services, which were capital in nature and partly towards services, which were revenue in nature. We have also examined the clauses of the agreement, which has been quoted in the order passed by the ITAT. This finding of the ITAT is correct. During the course of hearing, learned counsel for the Revenue also accepted part payments made by the respondent assessee under the agreements were revenue in nature. Learned counsel for the appellant however submits that the tribunal has erred in holding that only 25% should be treated as capital expenditure. The figure/percentage should be much higher. We have already noticed that the business of the respondent/assessee was set up in the year 1997. The assessment years in question are seven years after the business was set up and had commenced. In the assessment order nor in the grounds of appeal, there is reference or discussion with reference to any specific or predominant services which were rendered in the assessment year in question. Initial years normally would require substantial capital outlay and expenditure. However, once services have commenced, expenses are frequently incurred to keep the business/serviced in operation. Keeping in view the discussion made by the tribunal and the ratio applied therein, we do not find any ground to interfere with the order of the ITAT.” 5.4 In view of above, respectfully following the findings of the Hon’ble Delhi High Court in the judgment (supra), we uphold the findings of the learned Commissioner of Income-tax(Appeals) on the issue in dispute. Accordingly, the ground of the Revenue is dismissed. 6. In the result, appeal filed by the Revenue is dismissed. C.O. No. 77/Del/2011 (in ITA No. 988/Del/2011) 7. Now we take up the cross objection filed by the assessee in C.O. No. 77/Del/2011, wherein the assessee has taken following objections: “GROUND I: On the facts and circumstances of the case and in law, in the event Ground no. 1 raised by the Department is allowed and it is confirmed that expenditure incurred on "Advertising and Sales Promotion" resulted partly into brand building and hence, incurred towards acquisition of intangible asset, then the Appellant prays that depreciation be allowed at the rate of 25% as prescribed in Part B of the Appendix-I to the Income Tax Rules, 1962.

10 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011

GROUND II: On the facts and circumstances of the case and in law, in the event Ground no. 2 raised by the Department is allowed and it is confirmed that ther management service charge paid to shareholders is towards transfer/sharing of technical know-how and Intellectual property which has resulted in acquisition of intangible asset, then the Appellant prays that depreciation be allowed at the rate of 25% as prescribed in Part B of the Appendix-I to the Income Tax Rules, 1962. GROUND III: The Respondent craves leave to add, amend and/or alter any of the above Ground.” 8. We find that the cross objection of the assessee are for seeking depreciation in case the appeal of the Revenue was allowed and the expenditures in ground No. 1 and 2 of the appeal of the Revenue, treated by the AO as capital expenditure was upheld. Since in the appeal of the Revenue, we have already dismissed both the grounds of the Revenue, therefore, the cross objections of the assessee are rendered infructuous. Accordingly, we dismiss the cross objections of the assessee. 9. In the result, cross objections filed by the assessee are dismissed.

ITA No. 801/Del/2011 for AY: 2006-07 10. Now we take up the appeal of the assessee in ITA No. 801/Del/2011, wherein the assessee has raised following grounds:

“GROUND 1: DISALLOWANCE OF ROAMING CHARGES OF RS. 26,98,15,000/- 1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in confirming the action of the Additional Commissioner of Income Tax, Range-9, New Delhi (“the AO”) of disallowing deduction of roaming charges paid to different operators amounting to Rs. 26,98,15,000/- u/s. 40(a)(ia) of the Act. The Appellant prays that aforesaid disallowance be deleted. 2. GROUND 2: ADDITION OF INTEREST OF RS. 2,14,50,000/- 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (A) erred in upholding the action of the AO of making an addition of interest of Rs. 2,14,50,000/- on the security provided by the Appellant to Modicorp Global Pvt. Ltd. against the corporate guarantee provided by the latter on behalf of the Appellant. The Appellant prays that aforesaid addition be deleted. 2.

11 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 GROUND 3: DIRECTION TO THE AO TO CALCULATE EXCESS DEPRECIATION ON WAIVER OF LIABILITY RS. 2,54,05,000/- On the facts and circumstances of the case and in law, the learned CIT(A) erred in 1. holding that the cost of the Network Equipment has been inflated to the extent of Rs. 2,54,05,000/- and further erred in directing the AO to rework and disallow the excess depreciation if any claimed by the Appellant on this account. The Appellant prays that aforesaid direction to the AO be deleted. 2. GROUND 4: DISALLOWANCE OF PENALTY AND INTEREST OF RS. 10,56,46,000/- On the facts and circumstances of the case and in law, the learned CIT(A) erred in 1. upholding the action of the AO of disallowing the penalty and interest amounting to Rs. 10,56,46,000/- paid to the Department of Tele-communication on the alleged ground that it is a statutory violation and not contractual violation. 2. The Appellant prays that aforesaid disallowance be deleted. GROUND 5: DISALLOWANCE OF DEPRECIATION OF RS. 5,48,55,250/- 1. On the facts and circumstances of the case and in law, the learned CIT(A)erred in confirming the action of the AO of disallowing depreciation amounting to Rs.5,48,55,250/- on certain fixed assets forming part of the block of assets on the alleged ground that once these assets have been retired from active use, they cannot be termed to have been in passive use. 2. The Appellant prays that aforesaid disallowance be deleted. GROUND 6: NOT ALLOWING DEDUCTION OF PROVISIONS OF RS. 36,67,000/- On the facts and circumstances of the case and in law, the learned CIT (A) erred in 1. not allowing deduction of provision for TDS of Rs. 1,09,835/- and provision for interest on excess utilisation of input service credit of Rs. 35,56,714/- aggregating to total provision of Rs. 36,67,000/- claimed by the Appellant. The Appellant prays that the deduction of provision be allowed as claimed by the 2. Appellant. GROUND 7: ADDITION OF THE PROVISION FOR DOUBTFUL DEBTS AND DOUBTFUL ADVANCES FOR COMPUTING BOOK PROFIT U/S. 115JB OF THE ACT 1. On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the action of the AO of adding back the provision for doubtful debts amounting to Rs. 10,70,26,000/- and provision for doubtful advances amounting to Rs. 1,20,30,000/- for the purpose of computing book profit u/s. 115JB of the Act. The Appellant prays that aforesaid disallowance be deleted. 2. GROUND 8: NOT ALLOWING DEDUCTION OF PROVISIONS OF RS. 36,67,000/- FOR COMPUTING BOOK PROFIT U/S. 115JB OF THE ACT On the facts and circumstances of the case and in law, the learned CIT (A) 1. erred in

12 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 confirming the action of the AO of not allowing deduction of provisions made by the Appellant of Rs. 36,67,000/- for the purpose of computing book profit u/s. 115JB of the Act. 2. The Appellant prays that the deduction of provision be allowed for computing book profit u/s. 115JB of the Act. GROUND 9: The Appellant craves leave to add, alter, amend or delete the above grounds of appeal either before or at the time of hearing.” 11. At the outset, the assessee referred to the petition dated 18.04.2012 for admission of the additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 (in short “the ITAT Rules”) and submitted that Spice Communication Ltd stands merged with the Idea Cellular Ltd. and the assessee was not sure that employees of the Spice Communication Ltd. submitted the documents at serial No. 4 to 13, 15, 16, 18 and 19 of the paper book before the Assessing Officer. According to the learned Authorized Representative, these documents are vital and go to the root of the matter for deciding grounds No. 1 to 4 and 6 of the assessee’s appeal and, therefore, the same may be admitted. The learned CIT(DR) did not object to the admission of these documents as additional evidence. 12. We have heard the rival submission in regard to the admission of additional evidence and find that these documents are relevant to deciding the various grounds of appeal. In the case of Rajmoti Industries Vs. ITO (52 ITD 286), the Allahabad Bench of the Tribunal after analyzing the decision of the Hon’ble Supreme Court as well as other High Courts held that the additional evidence should be admitted, if it is a vital and essential for the purpose of consideration of the subject matter of appeal and to arrive at final and ultimate decision in a fair and just manner. Respectfully following the above decision, we admit the additional evidence under Rule 29 of the ITAT Rules. 13. In ground No. 1, the assessee has challenged the disallowance under section 40(a)(ia) of the Act for non-deduction of tax at source (TDS) on roaming

13 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 charges of Rs. 26,98,15,000/- paid to other telecom operators. According to the Assessing Officer, the roaming charges paid to other operators were in the nature of fee for technical services and, therefore, liable for tax deducted at source under section 194J of the Act. The AO held that the roaming services involved use of highly technical and sophisticated equipment and other mobile service providers were obliged to keep their infrastructure in operating condition for availing such services. As no tax was deducted by the assessee on such roaming charges paid, the AO disallowed the expenditure of Rs. 26,98,15,000/- under section 40(a)(ia) of the Act. The learned Commissioner of Income- tax(Appeals) held that the assessee failed to submit any documentary evidence with regard to the fact that no human intervention was required in the whole process of roaming service. 13.1 Before us, the learned Authorized Representative of the assessee submitted that no human intervention was required in the entire process of roaming charges except maintenance of the equipments. He further submitted that process in the inter-connect and roaming services are similar except the difference that interconnect services are utilized for connecting customers of different service providers in same Telecom Circle, whereas the roaming services are utilized for connecting customers of same or different service providers in Telecom Circle other than home telecom circle. In support of the contention, the learned AR relied on the order of the Tribunal Delhi Bench in the case of Bharti Airtel Limited Vs. ITO (TDS), New Delhi reported in (2016) 67 taxmann.com 223 (Delhi-Trib) and decision of Tribunal Bangalore Bench in the case of assessee itself for assessment year 2009-10 to 2012-13 in ITA No. 648 to 651/Bang/2014. Without prejudice to the above arguments, the learned AR submitted that TDS was not applicable in respect of year-end provisions following the decision of the special bench of the Tribunal in the case of M/s Marylin Shipping and Transports Vs. ACIT in ITA No. 477/Viz/2008 and the judgment of Hon’ble Allahabad High Court in the case of CIT Vs. Vector

14 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 Shipping Services Private Limited reported in 357 ITR 642. He further, relying on the decision in the case of Narang Overseas Private Limited Vs. ACIT reported in 111 ITD 1 submitted that in case of diverging views, view favourable to assessee should be considered. 13.2 On the other and the Ld. CIT(DR) relying on the orders of the authorities below submitted that it was not possible to extend the roaming services without human intervention . 13.3 Heard the rival submissions and perused the material on record including the cases relied upon by the parties. We find that issue in dispute has already been decided by the Tribunal Bangalore Bench in the case of the assessee itself in ITA Nos. 648 to 651/Bang/2014 for assessment years 2009-10 to 2012-13, the relevant paragraphs of which are reproduced as under: “12. Ground No.V regarding non-deduction of tax at source u/s 194J on roaming charges paid to other telecom operators by treating the same as fee for technical services. We have heard the learned AR of the assessee as well as the learned departmental representative and considered the relevant material on record. The learned AR of the assessee submitted that these charges paid for roaming connectivity by the other operators to the assessee’s subscriber cannot be treated as fee for technical services as there is no human intervention in providing such roaming services by the telecom operators. In support of his contention, he has relied upon the following judgments: i) Bharti Hexacom Ltd. vs. ITO(TDS-II) – ITA No.656/JP/2010 dt.12/06/2015 – Trib. Jaipur ii) M/s. Dishent Wireless Ltd. vs. DCIT – ITA Nos. 320 to 329/MDS/2014 dt.20/07/2015 – Trib. Chennai iii) Idea Cellular Ltd. vs. ITO (TDS) – ITA Nos.94- 96/JP/2013 and 917/JP/2012 dt.24/07/2015 – Trib. Jaipur) On the other hand, learned departmental representative has submitted that the AO has considered the statement of the expert in respect of the nature of services provided by the operator for roaming facility to the roaming subscriber of the other service provider. He has relied upon the orders of the authorities below. 13. We have considered the rival submissions as well as the relevant material on record. It is pertinent to note that the issue was initially decided by the Hon’ble Delhi High Court in the case of CIT vs. Bharti cellular Ltd. (175 Taxman 573) whereby the Hon’ble High Court held that the roaming charges paid by the operator to other operator is not in the nature of fee for technical services (FTS). The revenue carried the matter to the Hon’ble Supreme Court. The Hon’ble Supreme Court in the case of CIT vs. Bharati Cellular Ltd.(193 Taxman 97) has observed that the issue can be decided after the expert’s opinion on the point whether any human intervention is required for

15 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 providing interconnected roaming services by other cellular operators. The relevant observations of the Hon’ble Supreme Court in para. 7 to 10 are as under: “7. The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the interconnect agreement enables M/s Bharti Cellular Ltd. to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the "capacity" of each service provider fixed when interconnect agreements are arrived at ? For example, we are informed that each service provider is allotted a certain "capacity". On what basis such "capacity" is allotted and what happens if a situation arises where a service provider’s "allotted capacity" gets exhausted and it wants, on an urgent basis, "additional capacity"? Whether at that stage, any human intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasize that these types of matters cannot be decided without any technical assistance available on record. 8. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s Bharti Cellular Ltd. and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to respondent No. 1, s. 194J of the Act is not attracted in the case of "revenue sharing contract". According to respondent No. 1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute "fees" under s. 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal. 9. In short, the above aspects need reconsideration by the AO. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian companies and multinational corporations, we are of the view that the cases herein are required to be remitted to the AO(TDS). 10. Accordingly, we are directing the AO(TDS) in each of these cases to examine a technical expert from the side of the Department and to decide the matter within a period of four months. Such expert(s) will be examined (including cross-examined) within a period of four weeks from the date of receipt of the order of this Court. Liberty is also given to respondent No. 1 to examine its expert and to adduce any other evidence.” Thus, the Hon’ble Supreme Court directed the AO in each of the cases to examine the technical expert from the side of the department and to decide the matter. Though the AO, while deciding the issue has considered the statement of the expert who was

16 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 examined in the case of Bharti Cellular, however, we note that in the case of Bharti Hexacom Ltd. (supra), Jaipur Bench of this Tribunal has decided this issue by giving a finding that no intervention is required for providing the roaming facility to the other operators/subscribers. We further note that in the case of Idea Cellular Ltd. vs. ITO (supra) Jaipur bench of the Tribunal again considered an identical issue in paras.2 to 4 as under: “2. The ld. counsel for the assessee at the outset contends that the issues in question is squarely covered by the Hon'ble ITAT, Jaipur Bench decision in the case of M/s Bharti Hexacom Limited Vs. ITO (TDS)-II, Jaipur in ITA No. 656/JP/2010 order dated 12/06/2015, which 3 ITA 94 to 96/JP/2013 & 917/JP/2012 - Idea Cellular Ltd. Vs. ITO(TDS) has considered the issue about the payment of roaming charges to telecom operators in great details and held that such payment does not amount to fee for technical services and not liable for TDS u/s 194J. The Hon'ble ITAT has held as under:- "We have heard the rival contentions of both the parties and perused the material available on the record. After going through the order of the Assessing Officer, ld CIT(A); submissions of the assessee as well as going through the process of providing roaming services; examination of technical experts by the ACIT TDS, New Delhi in the case of Bharti Cellular Ltd.; thereafter cross examination made by M/s Bharti Cellular Ltd.; also opinion of Hon'ble the then Chief Justice of India Mr. S.H. Kapadia dated 03/09/2013 and also various judgments given by the ITAT Ahmadabad Bench in the case of Canara Bank on MICR and Pune Bench decision on Data Link Services. We find that for installation/setting up/repairing/servicing/maintenance capacity augmentation are require human intervention but after completing this process mere interconnection between the operators is automatic and does not require any human intervention. The term Inter Connecting User Charges (IUC) also signifies charges for connecting two entities. The Coordinate Bench also considered the Hon'ble Supreme Court decision in the case of Bharti Cellular Ltd. in the case of i-GATE Computer System Ltd. and held that Data Link transfer does not require any human intervention and charges received or paid on account 4 ITA 94 to 96/JP/2013 & 917/JP/2012_ Idea Cellular Ltd. Vs. ITO(TDS) of this is not fees for technical services as envisaged in Section 194J read with Section 9(1)(vii) read with Explanation- 2 of the Act. In case before us, the assessee has paid roaming charges i.e. IUC charges to various operators at Rs. 10,18,92,350/-. Respectfully following above judicial precedents, we hold that these charges are not fees for rendering any technical services as envisaged in Section 194J of the Act. Therefore, we reverse the order of the ld CIT(A) and assessee's appeal is allowed on this ground also. It is contended that the facts, circumstances and issues of appeals in question are similar to M/s Bharti Hexacom Limited judgment (supra). 3. The ld DR is heard, who supported the order of the Assessing Officer. 4. We have heard the rival contentions of both the parties and perused the material available on the record. The issue about levy of TDS U/s 194J on

17 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 the roaming charges paid by the telecom operators to service providers and applicability of Section 194J has been considered in detail by this very Bench in the case of M/s Bharti Hexacom Limited (supra). After considering the issues in detail, it has been held that there is no human intervention involved in providing these services, therefore, roaming charges paid by the assessee do not amount to fee for technical services U/s 194J of the Act read with Section 91(vii). Following our own judgment, we are upholding the order of the ld CIT(A) holding that the assessee is not liable for TDS u/s 194J, interest thereon and consequently not being the assessee in default. The orders of ld. CIT(A) are uphold.” Thus it is clear that the Jaipur bench has given a finding of fact that no intervention is required for providing roaming facility and consequently the roaming charges paid by the assessee to other service providers cannot be treated as fees for technical services. Accordingly, following the orders of the co-ordinate bench, we are of the view that the assessee cannot be held as the assessee in default for non deduction of tax at source on the roaming charges paid to other service provider. This ground of the assessee is allowed.”

13.4 Respectfully, following the decision of the ITAT, Bangalore bench (supra), we hold that roaming charges paid by the assessee to other service providers are not in the nature of fee for technical services and accordingly the assessee cannot be held in default for not deducting tax at source on roaming charges paid to other service providers. As we have already upheld that the assessee is not liable for tax deduction at source on roaming charges, we are not adjudicating on other arguments taken without prejudice. Accordingly, this ground of the assessee is allowed. 14. In ground No. 2, the assessee has challenged the upholding of addition of interest of Rs. 2,14,50,000/- made by the AO on the security provided by the assessee to Modicorp global private limited. 14.1 The facts in respect of the issue in dispute are that the Assessing Officer observed amount of Rs. 14,30,00,000/- given to Modicorp Global Private Limited by the assessee. It was explained by the assessee that said amount was an interest free security for providing corporate guarantee to the equipment vendor, Viz., ZTE against equipment purchased from the latter and the assessee also paid guarantee commission of Rs. 2,45,141/- to the Modicorp. It was further explained that the security amount was granted on account of business

18 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 expediency and in consideration of guarantee issued by that company, for which no interest was agreed to be charged by the assessee. According to Assessing Officer, when the assessee has already paid guarantee commission to MCorp for providing corporate guarantee, there was no justification for extending interest free loan to MCorp. The Assessing Officer held that the loan was not for the purpose of business and the interest on diversion of borrowed funds for non- business purpose was not allowable as business expenditure. He further relying on the various decisions quoted in his order, disallowed the proportionate interest at the rate of 15% on interest free loan to MCorp, which amounted to Rs. 2,14,50,000/- as interest attributable to diversion of business funds for non business purpose. The learned Commissioner of Income-tax(Appeals) observed that the purchase of equipment from M/s. ZTE itself was also of the almost same the price of the loan extended to MCorp and there was thus no justification in making payment of guarantee commission as well as providing interest-free loan to MCorp and thus he held that transfer of fund was not for the purpose of business, accordingly upheld the disallowance of interest of Rs. 2,14,50,000/-. 14.2 At the time of hearing, the Authorized Representative drawn our attention to the page 207 of the paper book, which is part of agreement to the purchase of equipments between the assessee and the seller, i.e., M/s ZTE Corporation and submitted that submission of unconditional Corporation guarantee by the parent company of the assessee was one of the condition of the agreement and accordingly the assessee made interest free security deposit on various dates to the parent company as mentioned on page 261 of the paper book. The Ld. AR submitted that the security was paid due to commercial expediency and therefore no disallowance for not charging interest could be made following the judgment of the Hon’ble Apex Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax, (2007) 288 ITR 1 (SC). Further, the ld. AR also relied on judgment of the Hon’ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs.

19 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 CIT 379 ITR 347 and the judgment of the Hon’ble Delhi High Court in the case of CIT Vs. Dalmia Cement Bharat Ltd. (2009) 183 taxmann 422. 14.3 On the other hand, ld. CIT (DR) relying on the order of the authorities below submitted that the assessee was paying interest to the seller of equipments on one hand and paid commission to the parent company for the issue of corporate guarantee, there was no business justification for extending interest free security to the parent company of amount almost equivalent to the amount of purchase for equipments from ZTE Corporation, thus, the business expediency of extending interest free security could not be established and accordingly submitted that disallowance of proportionate interest might be upheld. 14.4 We have heard the rival submissions and perused the material on record. In the case of S.A. Builders Ltd. (supra), the AO observed that the assessee had transferred a huge amount of Rs. 82 lakhs to its subsidiary company M/s. SAB Credits Ltd. out of the cash credit account of the assessee in which there was a huge debit balance. He, therefore, held that since the assessee had diverted its borrowed funds to a sister-concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed. Accordingly, he disallowed a sum of Rs. 5,66,729/-. The Hon’ble apex court, however, held as under:

“31. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated

20 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 above, we have to see the transfer of the borrowed funds to a sister- concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. “ 14.5 In the case of Dalmia Cements Bharat Ltd (supra), the Hon’ble Delhi High Court following the judgment of the Hon’ble Supreme Court in the case of SA builders Ltd (supra) held as under:

“7. In view of the aforesaid ratio as laid down by the Supreme Court in the S.A. Builder's case (supra) and the fact that it has not been the stand of the Revenue and the onus so discharged that the loan was given for any personal benefit for any director or for any other personal reason, clearly the loan given by the assessee company to its subsidiary company was for the purpose of business and commercial expediency and therefore the AO was not justified in disallowing the claim of interest for being debited as a revenue expenditure. Additionally, though not necessary in view of the law as laid down in S.A. Builders's case (supra) we note that the judgment in Tin Box Company's case (supra) clearly holds that it was necessary for the Revenue to point out any specific interest-bearing borrowed funds, which have been diverted to the sister concern and which the Revenue has failed to do so in the facts of this case.” 14.6 In view of the ratios laid down above, when we advert to the facts of the case, we find that the Revenue has not been able to substantiate that the interest free security was actually for any personal benefit of any of the director or any other personal reason and simultaneously the Revenue also failed to point out

21 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 any specific interest-bearing funds diverted to the parent company. In view of the above facts, we are of the opinion that the Revenue has not succeeded in demonstrating that the interest free security was not for the purpose of business expediency. Accordingly, we reverse the finding of the learner Commissioner of Income-tax( Appeals) on the issue in dispute and hold that the interest free security given to the parent company was in accordance to the business expediency and thus no disallowance for proportionate interest is required in the case of the assessee. The ground of the assessee is accordingly allowed.

15.1 The facts in respect of the issue in dispute are that the assessee purchased certain network equipments from Motorola Inc and capitalized in the books of accounts but the liability to the extent of Rs. 2,54,05,000/- was disputed with assessee and, accordingly, it was waived by M/s Motorola Inc. The assessee was of the view that the written back of the liability on account of purchase of capital asset was capital receipt and not subject to tax, nor the provisions of section 41 of the Act were applicable as no deduction was claimed by the assessee in earlier years. However, the AO was of the view that the depreciation was claimed by the assessee on the amount of liability written back and therefore the assessee obtained benefit in respect of remission of liability and thus liable to section 41 (1) of the Act and accordingly he added the said sum to the income of the assessee. The CIT appeal, however, held that though the purchase of asset was not a trading liability, but he held that the cost of the asset was inflated by the assessee entity because the assessee disputed the consideration as demanded by seller and never paid such amount, therefore, the actual cost of the asset would be the price determined vide the settlement made between the purchaser and seller. He, accordingly, directed the Assessing

22 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 Officer to re-work the excess depreciation, if any claimed by the assessee on the account of waiver of the liability and disallow the same.

15.2 Before us learned Authorized Representative of the assessee submitted that the depreciation is allowed on block of asset and therefore no adjustment could be made to the block of asset. In support of his contention, he relied on judgment of the Hon’ble Supreme Court in the case of CIT versus Tata Iron and steel company limited (1998) 98 taxmann 459 (SC), wherein it is held that the cost of the asset and the cost of the raising money for purchase of asset are two different and independent transaction and therefore even if the assessee did not repay the loan, it would not alter the cost of the asset. The learned AR also relied on the decision of the Tribunal Mumbai bench in the case of DCIT Vs. Essar Steels Ltd reported in 40 taxmann.com 537 (Mumbai–Trib) and Tribunal Visakhapatnam bench in the case of coastal Corporation limited versus Joint Commissioner of Income-tax, reported in (2008) 118 TTJ 563 (VISAKHA) .

15.3 On the other hand, the Ld. CIT(DR) relying on the judgment of the Delhi High Court in the case of Steel Authority of India Limited Vs. Commissioner of Income Tax, reported in 20 taxmann.com 198 (Delhi), wherein the claim of depreciation disallowed by the AO to the extent of loans waived off by the government was upheld by the Hon’ble High Court, submitted that the action of the ld. CIT(A) in directing the Assessing Officer to rework the excess depreciation claimed by the assessee was in accordance to law.

15.4 We have heard the rival submissions and perused the material on record in respect of the issue in dispute. We find that in the case of CIT Vs. Tata Iron and Steel Co. Ltd (supra) the question before the Hon’ble Apex Court was that whether the part of the gain on account of foreign exchange fluctuation, which was gain on capital account, went to reduce the ‘actual cost’ of the depreciable

23 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 assets for computing depreciation for the assessment year 1960-61 ? The Hon’ble Apex Court answered the question as under:

“3. Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan, it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non- repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs.” 15.5 But we find that in the case of the assessee in hand , the purchase price of the asset has been reduced by the vendor in settlement process and thus facts of the case in hand are different from the facts of the case of Tata Iron and Steel company Ltd (supra), therefore in our opinion the ratio of the said case will not be applicable over the facts of the case of the assessee in hand.

15.6 In the case of DCIT Vs. Essar Steel Limited (supra) also, the issue of waiver of the loan utilized for acquisition of plant and machinery was involved and the Assessing Officer held that waiver of loan would reduce cost of plant and machinery as per section 43(1) and accordingly partly disallowed depreciation by reducing for waiver of loan from written down value of plant and machinery on block of assets, however, the Tribunal held that depreciation was granted on full value of the written down value. Similarly, in the case of Coastal Corporation Limited Vs. Joint Commissioner of Income-tax (supra) the Tribunal held that waiver of principal portion of loan amount, which has not

24 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 been claimed as deduction in any of the years by the assessee, would not amount to remission of a trading liability so as to attract section 41 (1) of the Act.

15.7 In the case of Steel Authority of India Ltd. Vs. Commissioner of Income Tax (supra) cited by the Revenue, the Hon’ble Jurisdictional High Court held that if the loan had been granted towards a part of the cost of the assets, the waiver of loan would reduced the cost of the set also. The relevant part of finding of the Hon’ble Court is as under:

“12. We are unable to accept the contention of the assessee that the case is not covered by the main provisions of Section 43(1) because of the treatment given by the assessee in its books of account. We have earlier noticed that in the books of account, the assessee had actually reduced the cost/WDV of the assets by the amount of the loans waived by the Government of India. In the returns, however, the depreciation was claimed without reducing the loans from the cost/WDV of the assets. It is true that the manner in which entries are made in the books of account is not conclusive of the question, which has to be resolved on a true interpretation of the provisions of law. However, the real nature of a transaction can be understood by reference to the contemporaneous act of the parties, which would throw considerable light on their true intention and their understanding of the transaction. It is therefore not impermissible to look into the entries made in the books of account, in the absence of any other evidence. They show that the assessee understood the receipt of the loans from the Government as having been given towards meeting a part of the cost of the assets. The waiver cannot, therefore, have a different effect on such intention. The intention of the parties, as reflected by the accounts of the assessee, appears to be that the loans had been granted towards a part of the cost of the assets. It is also to be noted that the assessee is a Government of India undertaking and the loans have been given by the Government of India from the SDF. It is apparent to us that even when the loans were granted, they were granted towards cost of the assets. The assessee's case is, therefore, caught within the mischief of Section 43(1) itself and in this view of the matter it may not be necessary to examine the impact of Explanation 10 to the Section inserted with effect from 1.4.1999. For the same reason it is also not necessary to refer to the other judgments cited on behalf of the assessee.” 15.8 We find that facts of the case in hand are different from the cases cited by the assessee because in those cases it was the loan amount which was waived and which is different from the cost of price of the asset acquired and depreciation on which was claimed by the assessee. In the case in hand, it is the purchase price which has been reduced by the vendor in the process of settlement, which goes to reduce the actual cost of the asset, therefore, in our

25 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 view there is no infirmity in the finding of the learned Commissioner of Income- tax(Appeals) on the issue in dispute. Accordingly, we uphold the same. The ground of the appeal is dismissed.

26 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 section 37(1) of the Act. In the case of the assessee in hand, the relevant clause of the license agreement is reproduced as under: “20.8 In case, the total amount paid as quarterly Licence Fee for the 4 (four) quarters of the financial year, falls short by more than 10% of the payable Licence Fee, it shall attract a penalty of 150% of the entire amount of short payment. However, if such short payment is made good within 60 days from the last day of the financial year, no penalty shall be imposed. This amount of penalty shall be payable within 15 days of the date of signing the audit report on the annual accounts, failing which interest shall be further charged per terms of Condition 20.5.” 16.4 Thus, we find that the penalty was in respect of delay in payment of the license fee and it was not for infringement of any statuary law. Accordingly, in our opinion, the explanation to section 37(1) of the Act is not applicable on the penalty and interest paid by the assessee to the DOT, and thus the ground of the appeal of the assessee is allowed. 17. In ground No. 5, the assessee has challenged the disallowance of depreciation of Rs. 5,48,55,250/-. The Assessing Officer observed that the assessee retired Mobile Switching Centres (MSCs) and related assets, the depreciation on the same was claimed by the assessee. The assessee contested that those MSCs were not written off from the books of account and according to the concept of block of assets, the depreciation was admissible on the written down value of the set forming part of “block of assets”. However the Assessing Officer disallowed the depreciation of Rs. 5,48,55,250/- on the assets of Rs. 21,94,21,000/- not in use. The ld. CIT(A) held that when the asset cannot be used, the question of allowing depreciation on those assets did not arise, and accordingly, he confirmed the action of the Assessing Officer. 17.1 Before us, the learned Authorized Representative of the assessee relying on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Oswal Agro Mils Ltd reported in (2011) 197 taxmann 25 (Delhi) submitted that once an asset has become part of block of asset, it is entitled for the depreciation even if it was lying in passive use.

27 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 17.2 On the other hand, the ld. CIT(DR) relied on the findings of the authorities below. 17.3 We have heard the rival submission and perused the material on record. The Hon’ble jurisdictional High Court in the case of CIT Vs. Oswal Agro Mills Ltd (supra) has decided the issue of depreciation on the asset which are part of block of asset and not put to use as under: “28. Thus, for the assessment year 1998-99, the WDV of any block of assets shall be the aggregate of the WDV of all the assets falling within that block of assets at the beginning of the previous year. From this, the adjustment has to be made for the increase or reduction in the block of assets during the year under consideration. The deduction from the block of assets has to be made in respect of any asset, sold discarded or demolished or destroyed during the previous year. 29. As per amended section 32, deduction is to be allowed - “In the case of any block of assets, such percentage on the written down value thereof as may be prescribed”. Thus, the depreciation is allowed on block of assets, and the revenue cannot segregate a particular asset therefrom on the ground that it was not put to use. 30. With the aforesaid amendment, the depreciation is now to be allowed on the written down value of the ‘block of assets’ at such percentage as may be prescribed. With this amendment, individual assets have lost their identity and concept of ‘block of assets’ has been introduced, which is relevant for calculating the depreciation. It would be of benefit to take note of the Circular issued by the revenue itself explaining the purpose behind the amended provision. The same is contained in CBDT Circular No. 469, dated 23-9-1986, wherein the rationale behind the aforesaid amendment is described as under: “6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture.” 31. It becomes manifest from the reading of the aforesaid Circular that the Legislature felt that keeping the details with regard to each and every depreciable assets was time consuming both for the assessee and the Assessing Officer. Therefore, they amended the law to provide for allowing of the depreciation on the entire block of assets instead of each individual asset. The block of assets has also been defined to include the group of assets falling within the same class of assets.”

28 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 17.4 We find from the facts of the case that assessee has not written off the concerned assets and the same remained temporarily out of active use. In the circumstances, respectfully following the judgment of the Hon’ble Jurisdictional High Court in the case of Oswal Agro Mills limited (supra), the depreciation on the mobile switching centres (MSCs) and related assets is allowable to the assessee. Accordingly, we allow the ground of appeal. 18. In ground No. 6, the assessee has challenged not allowing deduction of provision of Rs. 36,67,000/-. According to the Assessing Officer, the provision was of contingent liability and, therefore, same were disallowed. The Ld. CIT(A) held that a sum of Rs. 1,09,835/- was on account of provisions related to TDS on management fees and sum of Rs. 35,56,714/- was on account of interest on excess utilisation of input services, which being in violation of the stated Rules, was not allowable under section 37 of the Act. 18.1 Before us the ld. Authorized Representative submitted that these provisions were already disallowed by the assessee and, therefore, it was not required to again make addition by the Assessing Officer and accordingly requested for restoring the matter for verification of the Assessing Officer. The learned CIT (DR) also did not object on the proposition of the ld. AR. 18.2 Having heard the rival submissions on the issue in dispute, we agree with the proposition of the learned Authorized Representative of the assessee and restore the issue to the file of the Assessing Officer for verification of the fact whether the provision of Rs. 36,67,000- are already disallowed by the assessee in the return of income, and if so, then no addition is required to make in the case of the assessee. Accordingly, the ground of the appeal is allowed for statistical purpose. 19. In ground No. 7, the assessee challenged the finding of the learner CIT-A in upholding the action of the AO of adding back the provisions for doubtful debt amounting to Rs. 10,70,26,000/- and provision for doubtful advances amounting to Rs. 1,20,30,000/- for the purpose of computing book profit under

29 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 section 115JB of the Act. The learned Commissioner of Income-tax(Appeals) held that since the provision of section 115JB had been amended with retrospective effect from 01/04/2001 any provision for diminution in the value of any asset is not allowable and accordingly upheld the action of the Assessing Officer. 19.1 Before us, the learned Authorized Representative of the assessee submitted that in view of the retrospective amendment w.e.f. 01/04/2001 the provisions for doubtful debt and advances are liable for tax under section 115JB of the Act, however, in view of the judgment of the Hon’ble High Court of Karnataka in the case of CIT Vs. Kirloskar Systems Ltd. reported in 40 taxmann.com 124 (Karnataka) not to charge the interest on the advance tax as per the amended provisions of section 115JB of the Act.. 19.2 The learned CIT (DR), on the other hand, relied on the orders of the lower authorities. 19.3 We have heard the rival submissions and perused the material on record. In the case of CIT Vs. Kirloskar Systems Ltd, Hon’ble High Court of Karnataka has held as under: “2. The Apex Court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 (SC) has held that the assessee is entitled to the benefit of rejection under Section 36(1)(vii) of the Income Tax Act, 1961 (for short 'the Act) when there is an actual write off by the assessee in its book. This Court in the case of CIT v. Yokogawa India Ltd. [2012] 204 Taxman 305/17 taxmann.com 15 (Kar.) has held adjustment of provision for bad and doubtful debts is reduced from the loans and advances or the debtors from the assets side of the balance sheet, the Explanation to Section 115JA and JB is not at all attracted. Therefore, after the Explanation the assessee is now required not only to debit the P and L account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. This Court in the case of CIT v. Jupiter Bio-Science Ltd. [2013] 352 ITR 113/[2011] 202 Taxman 80/13 taxmann.com 161 (Kar.) has held the assessee is liable to pay advance tax as per the amended provisions of Section 115JB of the Act for the relevant period. However, he is not liable to pay interest on the amount due as per the amended provisions. However, he has not paid the advance tax as per the provisions existing prior to the amendment. Hence, he is liable to pay interest on the said amount deducting the difference of the tax paid. The Apex Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) has held that an assessee who is maintaining the accounts on mercantile system, a liability already accrued, though to

30 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. Therefore for that, reason it was held that the gratuity payable and encashment of earned leave is not a contingent liability and provision thereof is deducted. In the light of the settled principles laid down by the Apex Court, no substantial questions of law arise for consideration in this appeal. Accordingly, the appeal is dismissed.” 19.4 In view of above, we find it appropriate to restore the matter to the file of AO to follow the findings of the Hon’ble High Court of Karnataka in the case of Kirloskar Systems Ltd (supra) and decide the liability of interest on the advance tax corresponding to tax liability under section 115JB of the Act. Accordingly, this ground of appeal is allowed for statistical purpose. 20. In ground No. 8, the assessee has challenged the finding of the learned Commissioner of Income-tax(Appeals) in confirming the action of the AO in not allowing deduction of provision made by the assessee of Rs. 36,67,000/- for the purpose of computing book profit under section 115JB of the Act. The learned Commissioner of Income-tax(Appeals) held that provision of any kind was not allowable in expenditure under the Income Tax Act and, therefore, the Assessing Officer was justified in not allowing deduction of Rs. 36,67,000/- 20.1 Before us, the learned Authorized Representative of the assessee submitted that the deduction was allowable in view of the findings of the Hon’ble Apex Court in the case of Apollo Tyres Ltd. Vs. Commissioner of Income Tax reported in 255 ITR 273 (SC). 20.2 On the contrary, the learned CIT(DR) relied on the findings of the authorities below. 20.3 We have heard the rival submissions and perused the material on record. We find that for computing regular income the learned Authorized Representative has accepted disallowance of the provisions of Rs. 36,67,000/-. In the circumstances, the provision for liabilities also need to be added further to the book profit as per the amended explanation (1)(c) of section 115JB of the

31 ITA Nos. 988 & 801/Del/2011 & C.O. No. 77/Del/2011 Act. Accordingly, we uphold the action of the learned Commissioner of Income- tax(Appeals) on the issue in dispute. The ground of the appeal is dismissed. 21. Accordingly, appeal of the assessee is allowed partly for statistical purposes. 22. In the result, the appeal in ITA No. 988/Del/2011 by the Revenue and the cross objections in C.O. No. 77/Del/2011 by the assessee are dismissed, and the appeal in ITA No. 801/Del/2011 of the assessee is allowed partly for statistical purposes. The decision is pronounced in the open court on 25th May, 2016.

Sd/- Sd/- (I.C. SUDHIR) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 25th May, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi