While deleting the transfer pricing (TP) adjustments on brand royalty, ECB interest and AMP expenditure imposed against Vodafone Idea Limited (appellant), the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has that transfer pricing adjustments cannot be sustained where the benchmarking exercise is contrary to Chapter X of the Income Tax Act and Rule 10B of the Income Tax Rules, including where a controlled transaction is used as a CUP comparable or where AMP adjustment is made without proving the existence of an international transaction through tangible material.
The ITAT reaffirmed that consistent earlier decisions in the assessee’s own case and group concerns should be followed in the absence of any distinguishing fact or contrary higher judicial ruling. On corporate tax issues, the Tribunal held that 3G spectrum depreciation was allowable, DoT payments were compensatory and deductible under Section 37(1) of the Income Tax Act, asset restoration cost was allowable as revenue expenditure though depreciation thereon was not, and prepaid distributor discount was not commission under Section 194H of the Income Tax Act.
On brand royalty, the Division Bench comprising Anikesh Banerjee (Judicial Member) and Om Prakash Kant (Accountant Member) noted that the TPO had benchmarked the transaction by adopting the Virgin Enterprises–Virgin Mobile USA agreement, but held that a controlled transaction cannot be used as a valid comparable under the CUP Method and that ALP must be determined only by reference to comparable uncontrolled transactions in accordance with Rule 10B. Since identical adjustments had already been deleted in the assessee’s own case and group company matters, the Tribunal followed the consistent view in favour of the assessee.
On ECB interest, the Tribunal observed that although RBI approval may not be conclusive for determining ALP under Chapter X, it is a highly relevant contemporaneous benchmark. It found that the TPO’s benchmarking suffered from material infirmities because appropriate adjustments relating to country risk, currency risk, tenure, borrower profile, nature of borrowing and subordination were not duly factored in. It also accepted that upfront fee forms an integral part of borrowing cost and must be considered together with interest while determining the effective all-in-cost of the ECB facility.
On AMP expenditure, the Tribunal reiterated that the existence of an international transaction in respect of AMP expenditure cannot be inferred merely because substantial AMP spend was incurred or by applying the Bright Line Test. It held that the Revenue must establish, through tangible material, an arrangement or understanding between the assessee and its AE for incurring such expenditure. In the absence of such material, and since the expenditure was linked with the assessee’s telecom business, no separate TP adjustment could be sustained.
On 3G spectrum, the Tribunal observed that the issue was already settled in favour of the assessee in earlier years and that depreciation on the right to use 3G spectrum had consistently been allowed. On DoT payments for subscriber verification lapses, it held that earlier benches had treated such payments as compensatory in character and allowable under Section 37(1), and the Revenue had shown no change in facts or law.
On asset restoration cost, the Tribunal recorded that the Delhi High Court had upheld disallowance of depreciation but accepted the alternate plea that the expenditure was allowable as revenue expenditure under Section 37(1). Following that binding precedent, it denied depreciation but allowed the alternate deduction claim. On IBM payments, the Tribunal held that book treatment as a finance lease is not determinative for tax purposes where ownership remained with IBM, and lease rentals for use of hardware were revenue expenditure.
On discount to prepaid distributors, the Tribunal followed the Supreme Court’s ruling in Bharti Cellular Ltd. vs ACIT [(2024) 160 taxmann.com 12 (SC)], and held that such discount does not constitute commission under Section 194H, and therefore no disallowance under Section 40(a)(ia) could be made. On annual licence fee, it held that after the Supreme Court’s ruling in CIT v. Bharti Hexacom Ltd. [(2023) 458 ITR 593 (SC)], the fee is capital in nature and not allowable under Section 37(1), but the assessee’s alternate plea for recomputation of deduction under Section 35ABB required verification in light of amalgamations, licence transfers and surviving licence period.
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Briefly, the appellant/ assessee, engaged in the business of providing telecommunication services, had filed a revised return declaring nil income under the normal provisions and book profit under Section 115JB of the Income Tax Act. The appeal involved multiple transfer pricing adjustments and corporate tax disallowances, including payment of brand royalty, interest on ECBs, AMP expenditure, depreciation on 3G spectrum, DoT penalty, asset restoration cost, liabilities written back, prepaid distributor discount under Section 40(a)(ia), annual licence fee, IBM payments, TDS credit, interest under Sections 234B/234C and penalty initiation under Section 271(1)(c) of the Income Tax Act.
