Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2026 Supreme(Online)(ITAT) 7179

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant Member
Vodafone Idea Limited – Appellant
Versus
Asst. CIT – Respondent
ITA No.8362/Del/2019

Advocates:
For the Appellants/Petitioners: Salil Kapoor, Soumya Singh
For the Respondents: S.K. Jadhav

An expenditure's classification in books of account is not determinative for tax purposes. Payments for asset usage without transfer of legal titles, such as finance leases, qualify as revenue expenditure. Additionally, specified domestic transaction adjustments lack statutory validity following legislative omissions, and contractual penalties remain deductible expenses.

Headnote:(A) Income Tax Act, 1961 - Sections 32, 35ABB, 37(1), 40(a)(ia), 40A(2)(b), 41(1), 92CA, 115JB, 143(3), 144C, 244A, 271(1)(c) - Transfer Pricing - Specified Domestic Transactions - Depreciation on intangible assets - Telecommunication license fees - Penalty payments - Revenue versus capital expenditure - Liability write-backs. The provisions regarding specified domestic transactions were omitted by the Finance Act, 2017, rendering references invalid. Payments for spectrum and license fees, while capital in nature, are subject to amortization under specific statutory provisions. Payments to third-party service providers categorized as finance leases in books of account are to be treated as revenue expenditure for tax purposes as the legal ownership remains with the lessor. Penalties for non-compliance with contractual guidelines are distinct from statutory infractions and are allowable expenses under the act. (Paras 7-38)

(B) Transfer Pricing - Arm’s Length Price - The determination of arm’s length price cannot be based on transactions between two associate enterprises where the fundamental condition requires a comparable uncontrolled transaction. Internal comparable transactions between controlled parties are inadmissible for benchmarking. (Paras 9, 13, 14)

Facts of the case:
The assessee, a telecommunications provider, challenged adjustments made by the revenue authorities regarding transfer pricing for brand royalty and infrastructure charges, the disallowance of depreciation on spectrum usage, penalties paid to regulatory authorities, provisions for asset restoration, and the nature of expenditure regarding payment for support services and license fees.

Findings of Court:
The court held that transfer pricing adjustments for domestic transactions were invalid due to the legislative omission of the relevant provisions. Brand royalty and infrastructure transactions must be benchmarked using appropriate uncontrolled comparables. Expenditure on finance-lease assets is allowable as revenue, and penalties for contractual breaches are deductible.

Issues: The main issues were the validity of transfer pricing adjustments for domestic transactions, the classification of spectrum and license fees as capital or revenue expenditure, the tax treatment of finance lease payments, and the deductibility of regulatory penalties.

Ratio Decidendi: The legal character of expenditure for tax purposes is not solely determined by the classification in the books of account. Payments for the use of assets without transfer of legal ownership qualify as revenue expenditure. Regulatory penalties for contractual breaches do not constitute tax-disallowed penal payments under current provisions.

Result: Appeal of the assessee partly allowed.

Table of Content
1. overview of assessment history and tp adjustments. (Para 1 , 2)
2. brand royalty payment benchmarking via cup method. (Para 6 , 7 , 8 , 9)
3. specified domestic transaction adjustments and statutory omission. (Para 10 , 11 , 12 , 13 , 14)
4. depreciation on intangible assets (3g spectrum). (Para 15 , 16)
5. deductibility of regulatory penalties vs contractual payments. (Para 17 , 18 , 19 , 20 , 21)
6. asset restoration cost allowable as revenue expenditure. (Para 22 , 23)
7. writing back of capital liabilities as business income. (Para 24 , 25)
8. tds applicability on prepaid distributor discounts. (Para 26 , 27)
9. capitalization versus revenue nature of license fees. (Para 28 , 29)
10. lease rentals on hardware as revenue expenditure. (Para 30 , 31)
11. treatment of wpc spectrum royalty as revenue expenditure. (Para 32 , 33)
12. procedural directions regarding tds credit and interest. (Para 34 , 35 , 36 , 37 , 38)

O R D E R

PER MANISH AGARWAL, AM:

The present appeal is filed by the Assessee against the order passed u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 dated 30.08.2019 for Assessment Year 2013-14.

2. Brief facts of the case are that assessee company is a telecom service provider. The return of income was filed on 29.11.2013 declaring total loss of Rs.189,55,09,843/- and book profit u/s 115JB of the Act was declared at Rs. 225,57,18,422/-. Thereafter, as a consequence to amalgamation/merger, the assessee filed return electronically on 26.08.2017 declaring total loss of Rs. 6337,04,80,564/- under normal provisions of Income Tax and book profit of Rs.510,16,64,251/- u/s 115JB of the Act. The case of the assessee was selected under CASS and notice u/s 143(2) was issued on 03.09.2014. Since, the assessee has carried out international transactions and specified domestic transactions with its Associate Enterprises (AEs), therefore, a reference was made u/s 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) of international and specified domestic transactions carried by the assessee. The TPO vide its order dated 26.10.2016 u/s 92CA(3) of the Act has made onward adjustments which are (i) payment of royalty of Rs.221,27,39,573/- and (ii) Passive Infrastructure charges-rent Rs.29,57,02,005/- Thereafter, the AO passed the draft assessment order u/s 144C(3) dated 20.09.2018 wherein, besides addition for the TP adjustment made by the TPO, certain other additions/disallowance were also made and the total assessed income was proposed to be assessed at a loss of Rs.30,79,32,76,535/-. Against the said order, assessee filed objections before the Ld. Dispute Resolution Panel (DRP) who vide order dated 27.06.2019 disposed of the objections either rejected the objections of the assessee or give certain directions to the AO/TPO. Consequently, AO passed the order u/s 143(3) r.w.s 144(13) of the Act dated 30.08.2019 wherein the TP adjustments were reduced to Rs. 237,40,85,723/- as against total adjustment of Rs. 250,84,41,578/- proposed in the draft assessment order and further additions/disallowance were made and, accordingly the total income was assessed at Rs. Nil after set-off of brought forward losses of Rs. 37,51,99,79,196/-.

3. Aggrieved by the said order, the assessee is in appeal before the Tribunal by taking following grounds of appeal:

“1 That on the facts and circumstances of the case and in law, the AO has erred in assessing the net income of the Appellant at INR Nil, in pursuance to DRP directions, as against returned loss of INR 1,11,63,50,926

Transfer Pricing Grounds:

2. Transfer pricing ("TP") adjustment amounting to INR 2,21,27,39,573 in respect of international transaction of payment of royalty:

2.1 That on the facts and circumstances of the case and in law, the AO/ DRP/ Transfer Pricing Officer ('TPO") have erred in making an upward TP adjustment of INR 2,21,27,39,573 in respect of the international transaction pertaining to payment of royalty (for use of Voda

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2026 Supreme(Online)(ITAT) 7179

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant MemberVodafone Idea Limited – AppellantVersusAsst. CIT – RespondentITA No.8362/Del/2019

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant Member
Vodafone Idea Limited – Appellant
Versus
Asst. CIT – Respondent
ITA No.8362/Del/2019