2018 (6) TMI 1583 - HC - Income Tax

The following two questions of law are framed for consideration - 1. Did the Income Tax Appellate Tribunal (ITAT) fall into error in upholding the disallowance of the depreciation claimed to the extent of Rs. 5, 10, 79, 752/- on account of asset reconstruction cost in holding that it was a contingent liability? 2. Did the ITAT fall into error in upholding the disallowance u/s 49(a)(ia) of the Income Tax Act 1961 with respect to the discount offered by the assessee to the prepaid SIM Card distributor as commission? Proportionate interest claimed on account of Section 36(1)(iii) - HELD THAT - The Court is of the opinion that the assessee s argument that the improved efficiency within the circle if it was allowed for operation of its licences did not amount to extension of business is unpersuasive. The facts are that the assessee is a license holder in respect of three telecom circles. At the relevant time it sought to install cell-site towers claiming that they would merely improve its efficiency. The lower authorities discerned that materials on record clearly show that the object of such exercise was to reach the greater number of customers and thus increase subscriber base. In these circumstances the finding of the lower authorities cannot be faulted. No substantial question of law arises. Addition of advertising marketing and promotion (AMP) expenses - HELD THAT - Having regard to the fact that all materials were available with it the ITAT is directed to consider the transactions involving AMP expenditure as well as the issue of royalty. In this regard its observations with respect to the comparables used by the assessee vis-a-vis the two foreign parties shall not be treated conclusive. The ITAT shall carry out necessary inquiry if need be by resorting to a limited remand to the TPO or DRP as the case may be having regard to the overall facts and circumstances and decide whether AMP expenses required in the present case involve international transaction if so to what extent.

Summary

Issues:
1. Depreciation claimed as contingent liability.
2. Disallowance under Section 49(a)(ia) for discount offered as commission.
3. Extension of business due to installation of cell-site towers.
4. Reconsideration of AMP expenses and royalty transactions.

Depreciation claimed as contingent liability:
The High Court examined whether the Income Tax Appellate Tribunal (ITAT) erred in disallowing depreciation claimed for asset reconstruction cost. The Court found that the installation of cell-site towers by the assessee aimed at increasing the subscriber base, indicating an extension of business rather than just improving efficiency. The Court upheld the ITAT's decision, stating that no substantial question of law arose in this regard. However, the lower authorities were directed to decide the remitted issues in accordance with the law.

Disallowance under Section 49(a)(ia) for discount offered as commission:
The Court considered whether the ITAT erred in upholding the disallowance under Section 49(a)(ia) for the discount offered by the assessee as commission to a prepaid SIM card distributor. The Court did not find any fault with the ITAT's decision on this matter.

Extension of business due to installation of cell-site towers:
The Court analyzed the argument raised by the assessee that the installation of cell-site towers did not amount to an extension of existing business. However, the Court disagreed, noting that the objective was to reach more customers and increase the subscriber base. The Court upheld the lower authorities' findings in this regard.

Reconsideration of AMP expenses and royalty transactions:
The ITAT was directed to reconsider the issue of advertising, marketing, and promotion (AMP) expenses, as well as the bench marking of international transactions related to royalty payments. The Court emphasized that the ITAT should not consider its previous observations as conclusive and should conduct a necessary inquiry, possibly through a limited remand to the Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP), to determine the extent of international transactions involving AMP expenses and royalty payments.

In conclusion, the High Court admitted the case for consideration and framed specific questions of law for each issue, providing detailed analysis and directions for further proceedings in the matter.