Judgment summary
This appeal by Vodafone Idea Limited, successor of Vodafone Mobile Services Limited, was directed against the final assessment order passed under section 143(3) read with section 144C of the Act on 31/10/2019, pursuant to directions of the Dispute Resolution Panel-2, New Delhi dated 20/09/2019, for Assessment Year 2015-16 (para 1).
The Assessing Officer had assessed income at INR 66,32,09,19,130 against a returned income of INR 16,92,86,95,773 (para 1, Ground 1). The appeal raised transfer pricing grounds relating to royalty, External Commercial Borrowings (ECB) interest and Advertisement, Marketing and Promotion (AMP) expenditure, as well as multiple corporate tax grounds.
The Tribunal, following a consistent line of coordinate bench decisions in the assessee's own case and in cases of group entities, allowed most of the assessee's grounds, deleting the disputed transfer pricing adjustments and several disallowances, while upholding or remanding a smaller number of issues.
Background
The assessee is engaged in the business of providing telecommunication services. For the year under consideration, it filed a revised return declaring Nil income under normal provisions and book profit of Rs.514,85,93,299/- under section 115JB (para 2).
Since the assessee had entered into international transactions with its Associated Enterprises, the AO referred the matter to the Transfer Pricing Officer under section 92CA(1). The TPO proposed transfer pricing adjustments, and the AO passed a draft assessment order under section 143(3) read with section 144C(1) (para 2.1).
The assessee objected before the DRP, which issued directions under section 144C(5) dated 20/09/2019. Pursuant to these directions, the AO passed the final assessment order dated 31/10/2019, against which the assessee appealed (paras 2.2, background section).
Core dispute
The dispute concerned transfer pricing adjustments of Rs.5,72,83,20,370/- on payment of brand royalty to Vodafone Sales and Services Ltd. (Ground 2), Rs.1,22,31,14,408/- on interest paid on ECBs from Vodafone Overseas Finance Ltd. and Vodafone Investments Luxembourg SARL (Ground 3), and Rs.9,29,52,69,832/- on alleged excessive AMP expenditure benchmarked using the Bright Line Test under a Residual Profit Split Method approach (Ground 4).
Corporate tax grounds concerned disallowance of depreciation of INR 20,57,50,02,571 on right to use 3G spectrum (Ground 5); disallowance of INR 27,75,78,909 paid to the Department of Telecommunication (DoT) as penalty (Ground 6); disallowance of INR 16,68,00,000 relating to Asset Restoration Cost (ARC) depreciation, with an alternate claim under section 37(1) (Ground 7); addition of INR 1,48,70,950 for liabilities written back under sections 41(1)/28(iv) (Ground 8); disallowance of INR 3,06,84,13,975 under section 40(a)(ia) for discount to prepaid distributors (Ground 9); capitalisation of licence fee under section 35ABB versus section 37(1) (Ground 10); disallowance relating to IBM payments treated as capital expenditure (Ground 11); and disallowance of INR 12,78,68,29,868 in respect of royalty/WPC expense (Ground 12). Further grounds concerned TDS credit, interest under sections 234B and 234C, and initiation of penalty proceedings under section 271(1)(c).
Court findings
On the royalty transfer pricing adjustment, the Tribunal held that the agreement between Virgin Enterprises Ltd. and Virgin Mobile USA LLC, being a controlled transaction, could not be a valid CUP comparable, following coordinate bench decisions in the assessee's own case and group companies' cases, and directed deletion of the adjustment (paras 3.6, 3.7).
On the ECB interest adjustment, the Tribunal followed the decision in Vodafone West Ltd. (ITA No. 571/Ahd/2016), holding that RBI approval, while not conclusive, is a highly relevant contemporaneous benchmark, and that the TPO's benchmarking suffered from infirmities regarding country risk, currency risk, tenure and subordination adjustments. The adjustment was directed to be deleted (paras 5.8 to 5.10).
On AMP expenditure, the Tribunal relied on Maruti Suzuki India Ltd. v. CIT and CIT v. Whirlpool of India Ltd. of the Delhi High Court, and its own earlier decision for AY 2011-12, holding that the Revenue had not established, by tangible material, any international transaction or arrangement for AMP expenditure. The adjustment was deleted (paras 6.6 to 6.8).
On depreciation on 3G spectrum, the Tribunal followed its own consistent prior decisions and directed the AO to allow depreciation under section 32 (paras 7.3, 7.4).
On the DoT penalty, the Tribunal held the payment compensatory in nature and allowable under section 37(1), following prior decisions in the assessee's own and group cases (paras 8.4 to 8.6).
On ARC, the Tribunal upheld disallowance of depreciation but, following the Delhi High Court judgment dated 11.03.2025 reported at (2025) 172 taxmann.com 192 (Delhi), allowed the alternate claim for deduction of ARC as revenue expenditure under section 37(1) (paras 9.3 to 9.5).
On liabilities written back, the Tribunal upheld the addition, following its own earlier decisions for AY 2012-13 and 2013-14, finding no material to show those decisions had been reversed (paras 10.3 to 10.5).
On the section 40(a)(ia) disallowance for discount to prepaid distributors, the Tribunal followed the Supreme Court judgment in Bharti Cellular Ltd. v. ACIT, holding that such discount is not commission under section 194H, and directed deletion of the disallowance (paras 11.3 to 11.5).
On licence fee capitalisation, the Tribunal, following the Supreme Court judgment in CIT v. Bharti Hexacom Ltd., upheld disallowance of the section 37(1) claim but remanded the matter to the AO to verify the assessee's workings, including Appendix-C, and compute the consequential deduction under section 35ABB (paras 12.4 to 12.7).
On IBM payments, the Tribunal held that capitalisation in the books under Accounting Standard-19 did not determine tax treatment, and since IBM retained ownership of the hardware, the payments were allowable as revenue expenditure, following its own earlier decisions and the Delhi High Court judgment in CIT v. Bharti Hexacom Ltd. (paras 13.4 to 13.6).
On WPC royalty, the Tribunal followed its own prior decisions and the Delhi High Court judgment in CIT v. Fascel Ltd., holding the expense to be revenue expenditure allowable under section 37(1), and directed deletion of the disallowance (paras 14.3, 15).
The grounds relating to TDS credit and interest under sections 234B and 234C were treated as consequential, and the ground on initiation of penalty proceedings under section 271(1)(c) was dismissed as premature (paras 16 to 18).
Outcome
The appeal of the assessee, ITA No. 8971/Del/2019, was partly allowed. The transfer pricing adjustments on royalty, ECB interest and AMP expenditure were deleted. Depreciation on 3G spectrum, the DoT penalty disallowance, the section 40(a)(ia) disallowance, the IBM payment disallowance and the WPC royalty disallowance were all deleted or allowed.
The ARC ground was partly allowed, with depreciation disallowed but revenue deduction under section 37(1) permitted. The licence fee ground was partly allowed for statistical purposes and remanded for recomputation under section 35ABB. The ground on liabilities written back was dismissed. TDS credit was allowed for statistical purposes, interest under sections 234B and 234C was treated as consequential, and the penalty ground was dismissed as infructuous (para 19).
Tp method highlighted
For the royalty transaction, the assessee applied the Comparable Uncontrolled Price (CUP) Method, benchmarking a 1.75% royalty rate against comparable uncontrolled agreements averaging 2.67%, with TNMM used as a corroborative check. The TPO rejected the assessee's comparables and instead applied the Virgin Enterprises Ltd./Virgin Mobile USA LLC agreement at 0.25% of gross sales, which the Tribunal held was a controlled transaction and therefore not a valid CUP comparable.
For ECB interest, the assessee relied on RBI-approved all-in-cost ceilings as a CUP benchmark, supported by a Reuters Loan Connector (DealScan) database analysis. The TPO rejected this and selected its own comparable loan agreements. The Tribunal found the TPO's approach deficient for not incorporating country risk, currency risk, tenure and subordination adjustments, and treated the RBI-approved all-in-cost as the more reliable benchmark.
For AMP expenditure, the TPO applied the Bright Line Test under the guise of the Residual Profit Split Method (RPSM), allocating profits on an 80%-20% FAR-based split. The Tribunal held that the Bright Line Test approach could not establish the existence of an international transaction absent tangible evidence of an arrangement with the AE, following Maruti Suzuki India Ltd. and Whirlpool of India Ltd.
Major issues / areas of contention
- Whether a controlled agreement (Virgin Enterprises Ltd./Virgin Mobile USA LLC) can be used as a CUP comparable for benchmarking brand royalty payments.
- Whether RBI approval of ECB terms constitutes a reliable benchmark for arm's length interest, and whether the TPO's comparability adjustments were adequate.
- Whether AMP expenditure can be treated as a separate international transaction requiring compensation from the AE, absent evidence of an arrangement, and whether the Bright Line Test can be used to infer such a transaction.
- Whether depreciation under section 32 is allowable on the right to use 3G spectrum, as against amortisation under section 35ABB.
- Whether the penalty paid to the DoT for subscriber verification failures is compensatory (deductible under section 37(1)) or penal in nature.
- Whether Asset Restoration Cost is depreciable as part of asset cost, or alternatively deductible as revenue expenditure under section 37(1).
- Whether liabilities written back, including customer security deposits, are taxable under sections 41(1) or 28(iv).
- Whether discount extended to prepaid distributors amounts to commission attracting TDS under section 194H, triggering disallowance under section 40(a)(ia).
- Whether annual licence fee paid to DoT is capital expenditure amortisable under section 35ABB, and how consequential deduction should be recomputed following amalgamations and licence transfers.
- Whether payments to IBM for use of hardware under a finance lease arrangement are capital or revenue expenditure for tax purposes.
- Whether WPC royalty paid for use of spectrum and microwave frequency is capital or revenue expenditure under section 37(1).