2016 (11) TMI 1544 - AT - Income Tax

Disallowance of loss claimed at assessee s behest on account of change in the method of valuation of closing stock of SIM cards -issue arises between the parties qua closing stock valuation of assessee s SIM cards as on 31.03.2009 - Held that - It successfully proved before the DRP to have changed its practice from that of separately charging for SIM cards in earlier assessment years to not asking the customers in question for making separate payment thereof in the impugned assessment year. It has sold the impugned SIM card free of cost in relevant previous year in other words. We find from the case file that there is not even a single agreement executed between assessee and its customers placed on record at Revenue s end to dispute this crucial fact. It is thus clear that the assessee has neither attributed any valuation of its SIM cards nor has it received any separate price thereof. We deem it appropriate to observe that the learned Panel has rightly accepted assessee s contentions in preceding paragraphs. It further holds that the assessee is already eligible for Section 80IA deduction. Meaning thereby that there is no impact on its taxable income. The Revenue s grounds nowhere rebut this factual position. Section 14A r.w. Rule 8D disallowance - seeks to revive addition made in the impugned draft assessment and deleted in DRP s proceedings - Held that - The assessee has not earned any exempt income in the impugned assessment year thus the above statutory provision is not exigible in absence of any exempt income in the relevant previous year. See CIT vs. Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT Section 80IA deduction on account of sharing of passive infrastructure and Cell sites - Held that - PCIT vs. BSNL 2016 (8) TMI 270 - DELHI HIGH COURT upholding this tribunal s Delhi bench s order concluding that the above derived from criteria does not apply in case of an undertaking providing telecommunication services in view of the fact that Section 80IA(2A) starts with a non obstante clause treating the same as a separate species. His further case is that this tribunal s order in assessee s case for A.Y. 2006-07 also adjudicates the very issue in its favour. The Revenue fails to controvert both these legal developments Section 80IA deduction on foreign exchange gain - Held that - We find that hon ble jurisdictional high court in CIT vs. Deversons Industries Ltd. (2015 (1) TMI 394 - GUJARAT HIGH COURT) holds that such a net exchange rate is to be treated as to have been derived from the eligible undertaking in question. We respectfully follow the same to reject this Revenue s ground as well. Relief of Section 80IA deduction on bad debts returned back - Held that - There is hardly any quarrel that the assessee claimed these sums as bad debts (revenue receipts) in earlier assessment years. The same stood allowed. It thereafter received back these sums in the impugned assessment year in the nature of business income u/s.41(1) of the Act. A coordinate bench of the tribunal in Radha Madhav case (2010 (10) TMI 772 - ITAT AHMEDABAD) concludes in these facts that such an instance does not amount to double deduction claim. The Revenue fails to indicate any exception in facts of the instant case. We accordingly reject the instant substantive ground as well. Disallowance on account of miscellaneous expenditure written off in the nature of capital expenditure and crystallized in earlier assessment years to be eligible as deduction in the impugned assessment year - Held that - Such an advance write off is very much allowable in the nature of business loss u/s.28 of the Act. We respectfully follow the same to uphold the above DRP s findings in question. This Revenue s ground also fails. See Abdur Razzak case 1981 (2) TMI 27 - GUJARAT High Court Payment of roaming charges does not fall under the ambit of TDS provisions either u/s 194C / 1941 or 194J of the Act and hence we have no hesitation in directing the Learned Assessing Officer to delete the addition made u/s 40(a)(ia) on this account. TDS upon discount coupons offered to prepaid distributors as disallowed u/s.40(a)(ia) - Held that - In a situation in which the assessee has credited the sale proceeds at the transaction value (in contrast with the transaction being shown at face value and the difference between face value and the transaction value credited to the distributor) the tax deduction liability under section 194H does not arise. While learned counsel for the assessee has stated at the bar that the sale proceeds are credited at the transaction value this aspect of the matter is to be verified by the Assessing Officer and in case the sales is accounted for at the face value to that extent the tax withholding liability is to be sustained. Addition on account of receipt of prepaid services crystallized in the impugned assessment year - Held that - ACIT vs. Shyam Telelinks Ltd. 2012 (7) TMI 955 - ITAT DELHI upholds the said assessee s identical contention on the principle of recognition of income of accrual basis pertaining to sale of prepaid SIM cards. Remits the issue back to the Assessing Officer for factual verification to prevent revenue leakage. Direct the Assessing Officer to verify as to whether the assessee has declared the revenue in respect of the expired prepaid cards or not in the succeeding assessment year. This Revenue s ground is thus partly accepted for statistical purposes. Royalty disallowance paid to the wireless planning commission - Held that - The impugned payments are in the nature of revenue expenditure only. Addition made u/s.36(1)(iii) on account of capitalization of expenses relating to capital work in progress - Held that - There is no distinction u/s.36(1)(iii) between interest incurred on capital borrowed for revenue or capital purposes provided the same is used for business purposes irrespective of the result of use of such capital. We afforded ample rebuttal opportunity to Revenue. Ld. Departmental Representative fails to take us to any material in the case file so as to prove that assesee s interest in question is covered u/s.36(1)(iii) proviso as amended by the Finance Act 2015 w.e.f. 01.04.2016 since it is a case wherein the impugned interest is in respect of capital borrowed for the purpose of business already attracting the main limb of statutory provision instead of the above proviso. This Revenue s ground is accordingly declined. Upward transfer pricing adjustment - Held that - Departmental Representative fails to pinpoint any exception in facts of the instant case vis- -vis those extracted hereinabove with regard to the impugned upward transfer pricing adjustment based on related party agreements only. We thus find no reason to interfere with the DRP s direction under challenge on this count alone. This substantive ground is also rejected.

Summary

Issues Involved:
1. Deletion of disallowance of loss on change in valuation method of closing stock of SIM cards.
2. Section 14A disallowance in absence of exempt income.
3. Determination of initial assessment year for Section 80IA deduction.
4. Applicability of Section 80IA to sharing of passive infrastructure and cell sites.
5. Section 80IA deduction on foreign exchange gain.
6. Section 80IA deduction on bad debts written back.
7. Disallowance of miscellaneous expenditure written off.
8. Disallowance under Section 40(a)(ia) on roaming charges and discounts to prepaid distributors.
9. Treatment of prepaid services income.
10. License fee paid to the Department of Telecommunication.
11. Royalty disallowance paid to the Wireless Planning Commission.
12. Disallowance under Section 36(1)(iii) on capital work in progress.
13. Upward transfer pricing adjustment.

Detailed Analysis:

1. Deletion of Disallowance of Loss on Change in Valuation Method of Closing Stock of SIM Cards:
The Revenue challenged the DRP’s direction to delete the disallowance of Rs. 4,02,03,570/- on account of change in valuation method of closing stock of SIM cards. The assessee, a cellular service provider, declared SIM cards at nil value, stating they were not independent products and followed the cost or market price, whichever is lower. The DRP found the change in market conditions justified the nil value and noted the consistent accounting treatment in subsequent years. The Tribunal upheld the DRP’s decision, noting the absence of any agreement to dispute the assessee’s valuation and the eligibility for Section 80IA deduction, which negated any impact on taxable income.

2. Section 14A Disallowance in Absence of Exempt Income:
The Revenue’s appeal to revive Section 14A disallowance of Rs. 92.75 lacs was rejected. The Tribunal noted the assessee had not earned any exempt income in the relevant year, citing the jurisdictional High Court’s decision in CIT vs. Corrtech Energy Pvt. Ltd. that Section 14A is not applicable in the absence of exempt income.

3. Determination of Initial Assessment Year for Section 80IA Deduction:
The Revenue’s appeal against the DRP’s direction to consider AY 1997-98 instead of 1996-97 as the initial year for Section 80IA deduction was dismissed. The Tribunal referred to its earlier decision in the assessee’s case for AYs 2006-07 and 2007-08, which was against the Revenue.

4. Applicability of Section 80IA to Sharing of Passive Infrastructure and Cell Sites:
The Tribunal upheld the DRP’s direction to allow Section 80IA deduction on income from sharing passive infrastructure and cell sites. It relied on the Delhi High Court’s decision in PCIT vs. BSNL, which held that the ‘derived from’ criteria does not apply to telecommunication services under Section 80IA(2A).

5. Section 80IA Deduction on Foreign Exchange Gain:
The Tribunal rejected the Revenue’s appeal against the DRP’s direction to allow Section 80IA deduction on foreign exchange gains. It noted the gains arose from transactions in the revenue account and were directly linked to the telecommunication business, supported by the jurisdictional High Court’s decision in CIT vs. Deversons Industries Ltd.

6. Section 80IA Deduction on Bad Debts Written Back:
The Tribunal upheld the DRP’s decision to allow Section 80IA deduction on bad debts written back, rejecting the Revenue’s argument of double deduction. It noted the bad debts were previously allowed and now taxable under Section 41(1), following the Tribunal’s decision in Radha Madhav Industries.

7. Disallowance of Miscellaneous Expenditure Written Off:
The Tribunal upheld the DRP’s direction to allow the write-off of Rs. 66 lacs paid to BSNL as a business loss under Section 28. It noted the amount was forfeited by BSNL and written off in the relevant year, with no dispute on the facts by the Assessing Officer.

8. Disallowance Under Section 40(a)(ia) on Roaming Charges and Discounts to Prepaid Distributors:
The Tribunal rejected the Revenue’s appeal to disallow roaming charges and discounts to prepaid distributors under Section 40(a)(ia). It followed the Kolkata Tribunal’s decision in Vodafone East Ltd. vs. ACIT, which held roaming charges do not require TDS as they are automated services without human intervention. Similarly, it followed the decision in Vodafone Essar Gujarat Ltd. vs. ACIT, which held discounts to prepaid distributors are not commission subject to TDS under Section 194H.

9. Treatment of Prepaid Services Income:
The Tribunal remitted the issue of prepaid services income back to the Assessing Officer for verification, directing to check if the revenue from expired prepaid cards was declared in the succeeding year, following the decision in ACIT vs. Shyam Telelinks Ltd.

10. License Fee Paid to the Department of Telecommunication:
The Tribunal upheld the DRP’s direction to treat the license fee paid to the Department of Telecommunication as revenue expenditure under Section 37(1), following its earlier decision in the assessee’s case for AY 2006-07.

11. Royalty Disallowance Paid to the Wireless Planning Commission:
The Tribunal upheld the DRP’s direction to delete the royalty disallowance of Rs. 1,67,24,62,560/- paid to the Wireless Planning Commission, following the Delhi High Court’s decision in the assessee’s own case for AY 1999-2000.

12. Disallowance Under Section 36(1)(iii) on Capital Work in Progress:
The Tribunal upheld the DRP’s direction to delete the disallowance of Rs. 18,22,71,089/- under Section 36(1)(iii). It noted the interest was incurred on borrowings for existing business operations and not for business extension, following the Supreme Court’s decision in Core Healthcare Ltd.

13. Upward Transfer Pricing Adjustment:
The Tribunal rejected the Revenue’s appeal against the DRP’s directions on upward transfer pricing adjustment. It noted the TPO’s reliance on related party transactions and the adoption of CUP method without rejecting the TNMM method was incorrect, following the Tribunal’s decision in ACIT vs. Bilag Industries Pvt. Ltd.