Idea Cellular Ltd, Mumbai vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI VIJAY PAL RAO, JUDICIAL MEMBER

आयकर अपील सं./I.T.A. No.3261 /Mum/2008 ( नधा रण वष / Assessment Year : 2003-2004

M/s Idea Cellular Ltd., बनाम/ Asstt. Commissioner of Windsor, 5 t h floor, Income Tax, Vs. Off CST Road, Range 3(2), Near Vidya Nagari, Mumbai. Kalina, Santacruz (E), Mumbai - 400 098. थायी ले खा सं . /PAN : AAACB2100P (अपीलाथ /Appellant) .. ( यथ / Respondent)

आयकर अपील सं./I.T.A. No.3568 /Mum/2008 ( नधा रण वष / Assessment Year : 2003-2004

Income Tax Officer - बनाम/ M/s Idea Cellular Ltd., 3(2)(1), Windsor, 5 t h floor, Vs. Room No. 673, 6 t h floor, Off CST Road, Aayakar Bhavan, Near Vidya Nagari, Mumbai - 20. Kalina, Santacruz (E), Mumbai - 400 098. थायी ले खा सं . /PAN : AAACB2100P (अपीलाथ /Appellant) .. ( यथ / Respondent)

Assessee by Shri J.D. Mistry & Shri Krupa R. Gandhi Department by: Shri Kishan Vyas

ु वाई क तार ख / Date of Hearing सन : 29-12-2014 घोषणा क तार ख /Date of Pronouncement :11-03-2015 [ 2 ITA 3261//M/08 & ITA 3568/M/08

आदे श / O R D E R PER R.C. SHARMA, A.M. :

These are the cross appeals filed by the assessee and Revenue are directed against the order of ld. CIT(A) -III, Mumbai dated 26-03-2008 for A.Y. 2003-04 in the matter of order u/s 143(3) of the Income Tax Act, 1961.

2. Rival contentions have been heard and record perused. Facts in brief are that the assessee company is in the business or providing cellular services in telecom circles of Maharashtra, Gujarat, Andhra Pradesh and Delhi. The company initially started its operation in Maharashtra and Gujarat and thereafter expanded its scope of operation in 2000-01 in Andhra Pradesh by acquiring Tata Cellular Ltd. Further, in the year 2002-03, the company acquired a licence from DoT through bidding to operate in Delhi. Thus, currently the company operates in four telecom circles. The company also trades in handsets and accessories which are integral part of the nature of business in which the assessee is operating. During the course of scrutiny assessment, the A.O. observed that the assessee has shown capital work-in- progress at Rs. 398.15 million. In this context, the A.O. referred para 11(a) of Part-B, being Notes to Accounts of Schedule - 19 forming part of the accounts and observed that the auditors in this para have provided certain details of work-in-progress which reveal that the work-in-progress has been reduced by the income during pre-operative period of Rs. 3.80. million. A.O. further found that upto 31.3 .2002 there was no pre-operative income. Therefore he inferred on the basis of this Schedule that the entire pre-operative income has been accrued to the assessee during the previous year relevant to the assessment year under consideration. As per the A.O. in view of Supreme Court decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (227 ITR 172) it was obligatory on the part of the assessee to offer this income for taxation. Since the assessee has failed to do so, the same was 3 ITA 3261//M/08 & ITA 3568/M/08

brought to tax in this assessment year. An addition on this account of Rs. 38,00,000/- was made by A.O. By the impugned order, the ld. CIT(A) confirmed the action of A.O. against which assessee is in further appeal before us.

3. We have considered the rival contentions, carefully gone through the orders of authorities below and found that assessee was in receipt of Rs. 38 lacs prior to commencement of operation which was adjusted against the capital expenditure. By applying the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the A.O. has taxed the same as 'income from other sources'. The ld. A.R. has relied on the decision of Hon'ble Delhi High Court in the case of Triveni Engineering Works Ltd. vs. CIT, 232 ITR 639 (Del), Hon'ble Supreme Court decision in the case of CIT vs. Bokaro Steel Ltd. , 236 ITR 315 (SC) and the decision of Hon'ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. vs. TO (2009) 315 ITR 255 (Del) and contended that such pre-operative receipt was liable to be adjusted against capital receipt. However, the nature of such receipt whether intrinsically connected with the assets acquired for implementation of project has not been explained. In the interest of justice, we restore this issue back to the file of A.O. for deciding the same afresh after considering the nature of receipt vis-à-vis intrinsic connection with the capital expenditure incurred by the assessee in the light of the principles laid down in the case of Bokaro Steel Ltd. (supra). We direct accordingly.

4. The second grievance of the assessee relates to two additional grounds raised before the ld. CIT(A) for allowing Revenue Share Licencee Fees u/s 37(1) of the Act.

5. At the outset, the ld. A.R. invited our attention to the order of the Tribunal in assessee's own case in ITA No. 3260/Mum/2008 dated 29-04- 4 ITA 3261//M/08 & ITA 3568/M/08

2014 for A.Y. 2001-02 wherein both the issues regarding accepting the additional ground as well as licence fees paid under revenue sharing was examined by the Tribunal in great detail and allowed the same in favour of assessee.

6. We have considered the rival contentions and found that exactly similar issue with regard to accepting fresh claim first time before appellate authority and claim of deduction of licence fees paid under Revenue's sharing was held to be allowable as revenue expenditure. Precise observation of the Tribunal was as under:-

"4.5 We have considered the rival submissions as well as relevant material on record. So far as the admissibility of the fresh claim first time before the appelate authority is concerned, we find that an identical issue was before the Hon'ble Supreme Court in the case of National Thermal Power Corporation Ltd. Vs. CIT (supra). The issue in the said case emerged from the fact that the assessee offered an amount to tax in the return of income which was not taxable as income. The inclusion of the said amount was not objected by the assessee even before the CIT(A) and only after filing appeal before the Tribunal the assessee raised a ground by way of forwarding a letter. In those facts, Hon'ble Supreme Court has held that when it is found that non taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal first time so long as relevant facts are on record in respect of that item. We have already reproduced the relevant finding of the Hon'ble Supreme Court in the foregoing paras while discussing the ground no. 2. It is clear from the decision of Hon'ble Supreme Court that when a claim which is otherwise allowable /permissible but was not allowed as the assessee did not claim the same in the return of income, there is nothing under law to prevent the assessee to raise such claim before the appellate authorities if the facts relating to such new claim are already on record and do not require any investigation. Accordingly in the facts and circumstances of the case when the denial of claim by CIT(A) is not on the ground that it is not allowable but for want of such claim before the AO and further on merits this issue is covered by the series of decisions as relied upon by the assessee then we are of the view that the CIT(A) has committed an error in not admitting the additional ground raised by the assessee. Hence this ground stands admitted. On merits there are various decisions where this issue has been decided by holding that the license fee paid under revenue sharing is an allowable revenue expenditure. In the latest decision of Hon'ble High Court of Delhi dated 5 ITA 3261//M/08 & ITA 3568/M/08

9th December 2013 in the case of CIT Vs. Bharati Hexacom ltd. & Others, one of the issues before the Hon'ble High Court was regarding the allowability of variable license fee on revenue sharing basis paid under the new telecom policy of 1999. The Hon'ble High Court has discussed the issue and held in para 42 and 47 as under:-

"42 The next obvious question is, on what basis apportionment should be done and what could be the proportion of apportionment between capital and revenue expenditure. In this regard it would be appropriate and proper to divide the licence fee into two periods i.e. before and after 31-7-1999. The licence fee paid or payable for the period upto 31-7-1999 i.e. the date set out in the 1999 policy should be treated as capital and the balance amount payable on or after the said date should be treated as revenue

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47. In view of the aforesaid findings, the substantial question mentioned above in item Nos.1 to 9 is answered in the following manner:

(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31st July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 1st August, 1999 should be treated as revenue expenditure.

(ii) Capital expenditure will qualify for deduction as per Section 35ABB of the Act."

4.6 We further note that this Tribunal in the cae of Mahanagar Telephone Nigam Ltd. Vs. ACIT(supra) as well as in the cae of ACIT Vs. Vodafone Essar Gujarat Ltd. (supra) along with other no. of decision has taken a similar view. Following the decisions of Hon'ble Delhi High Court in the case of CIT Vs. Bharati Hexacom ltd. & Others as well as other decisions relied upon by the assessee, we allow the claim of the assessee."

7. As the facts and circumstances of the case during the year under consideration are para materia, respectfully following the decision of the Tribunal, we direct the A.O. to allow the assessee's claim of licence fees paid under revenue sharing scheme to telephone department. We direct accordingly.

6 ITA 3261//M/08 & ITA 3568/M/08

8. The first grievance of Revenue relates to allowing provident fund dues amounting to Rs. 1,70,388/-. We found that the ld. CIT(A) has allowed the claim by applying the provisions of section 43B of the Act wherein deduction n respect of provident fund was allowed on payment basis. The ld. CIT(A) held that the amount has been paid during the year under consideration and therefore deduction has to be allowed during the year itself. We do not find any infirmity in the order of ld. CIT(A) deleting the addition made by the A.O.

9. Ground No. 2 is against deletion of disallowance of club entry fee amounting to Rs.10,08,510/-. According to Assessing Officer this expenditure goes to benefit assessee in the long run and is therefore of capital in nature. As per the A.O., the assessee is acquiring a right to enjoy the facilities of the club and that right is enduring in nature. Consequently it cannot be treated as revenue. By the impugned order, the ld. CIT(A) had deleted the disallowance after observing as under:-

"4.1 Learned counsel has drawn my attention to the decision of Hon'ble Mumbai High Court in the case of Otis Elevators & Hon'ble Gujarat High Court in the case of Gujarat Estate Export Corporation Ltd. reported at 209 ITR 649. In these decisions, it is claimed that the expenditure 'Under consideration has been held to be revenue expense since it does not bring into existence any assets or advantage of enduring nature. Respectfully, following these decisions, it is held that club entry fee has to be allowed as revenue expenditure. Assessing Officer is directed accordingly."

10. We have considered the rival contention and we do not find any infirmity in the order of ld. CIT(A) for allowing club fees by following the decision of Hon'ble Bombay High Court in the case of Otis Elevators and the decision of Hon'ble Gujarat High Court in the case of Gujarat Estate Export Corporation Ltd. reported in 209 ITR 649 (supra). As the expenditure was incurred was revenue in nature as held by the Hon'ble High Court, we do not find any infirmity in the order of ld. CIT(A) deleting the disallowance of Club fees paid by the assessee company.

7 ITA 3261//M/08 & ITA 3568/M/08

11. Ground No. 3 is with respect to the depreciation on licence fees amounting to Rs. 39,37,22,853/- disallowed by the A.O. This ground has become infructuous insofar as we have already allowed assessee's claim for licence fees paid while deciding ground No. 2 of assessee's appeal, hence, this ground of Revenue's appeal is dismissed as infructuous.

12. Ground No. 4 of Revenue's appeal pertains to disallowance of brand service fees treated as capital expenditure. The A.O. has disallowed brand servicing fee amounting to Rs. 86,70,OOO/- on the ground that it constitutes capital expenditure. While making the disallowance, Assessing Officer has argued that the nomenclature suggests that expenditure has been incurred for projection and development of the brand and therefore it is of capital nature. He has, accordingly, made the disallowance. By the impugned order, the ld. CIT(A) allowed the claim after having the following observation:-

7.2 I have perused the facts of the case and I find the only basis for making disallowance is nomenclature of expenditure, This is not a rational base for making this disallowance. If Assessing Officer wanted to disallow expenditure, he ought to have gone to the nature of this expenditure and analyzed its allowability. This has not been done at all.

I also notice that the amount has been considered in earlier assessment years and has been allowed revenue expenditure to the appellant. Therefore, it is held that disallowance of an expenditure only on the basis of its nomenclature is not justified at all. Accordingly, addition made is deleted."

13. It was contended by the ld. Senior A.R. Mr. J.D. Mistry that the payment is recurring in nature and does not give any enduring benefit to the assessee. The assessee gets only right to use the brand "AT&T" only till the time it paid such fee. In any case, "Idea" Brand was used by the assssee w.e.f. May 2002 and subsequently, AT&T exited. Hence, the question of any enduring benefit in the captioned year does not arise at all. Reliance was 8 ITA 3261//M/08 & ITA 3568/M/08

placed by the ld. A.R. on the following decisions for the proposition that a payment for brand use is allowable revenue expenditure:-

~ CIT Vs. Hindustan General Electrical Corporation Ltd. (1971) (81 ITR 243) (Cal);

~ Agarwal Hardware works (P.) Ltd. Vs. CIT (1980) (121 ITR 510) (Cal);

~ CIT Vs. Tata Engineering & Locomotive Co. P. Ltd. (1980) (123 ITR 538) (Born.);

~ Tata Robins Frazer Ltd. Vs. CIT (1987) (165 ITR 347) (Patna);

~ CIT Vs. V.R.V. Breweries & Bottling Industries Ltd. [2011] (347 ITR 249) (201 Taxman 196) (Delhi);

14. We have considered the rival contention and found that during the year under appeal, the assessee had paid brand servicing fees amounting to Rs. 86,70,000/- to AT&T Communications Services India Private Limited ("AT&T") for using the brand "AT&T" for the Maharashtra and Gujarat Circles and the same was debited to Profit & Loss Account and claimed as revenue expenditure. AT&T Corporation - USA was one of the promoters of the assessee. The assessee was earlier known by the name "Birla AT&T Communication Limited". AT&T - USA has been in telecom business in USA since 1984. However, the assessee was a new entrant in the industry in 1995. The assessee used to pay a brand service fee annually to AT&T for using the brand "AT&T.

15. There is no dispute to the fact that amount so paid helped the assessee to promote its business due to the name of its Joint Venture Partner viz:

AT&T Corporation - USA. Hence, the expenditure so incurred was wholly and exclusively for the purpose of the assessee's business.

16. We find that in all earlier years as mentioned above, the assessee paid brand service fees to AT&T and debited the same to Profit & Loss Account and 9 ITA 3261//M/08 & ITA 3568/M/08

claimed as revenue expenditure in the return of income. The claim was never disputed by the revenue in any earlier Assessment Years and the same was allowed. During the year under appeal, the assessee paid brand service fees to AT&T only for the month of April 2002 and after that the assessee is using its own brand "Idea".

17. From the record we find that the brand servicing fee was paid by the assessee since last several years and in the earlier assessment orders, this expenditure has been held to be revenue in nature by the A.O. himself. No distinguishing feature was brought on record by the A.O. during the year under consideration to justify the disallowance of assessee's claim. Accordingly, we do not find any infirmity in the order of ld. CIT(A) deleting the disallowance of brand servicing fee paid by the assessee insofar as findings recorded by the ld. CIT(A) had not been controverted by the ld. CIT - DR by bringing any positive materials on record.

18. The next grievance of the Revenue i.e. ground No. 5 relates to disallowance of interest for interest free loans advanced to subsidiaries. By the impugned order, the ld. CIT(A) deleted the disallowance of interest after having following observation:-

"9. Ground No.9 is against disallowance of interest amounting to Rs.32,34,00,000/- on the ground that interest free loans have been advanced to subsidiaries. According to Assessing Officer, during the year under consideration, appellant has paid interest of Rs.1983.27 Million. In contrast appellant has advanced funds to subsidiaries amounting to Rs.3090.S7 Million, on which no interest has been charged. He has consequently held that interest bearing funds by appellant have been diverted for purpose other than business. Assessing Officer has disallowed interest paid by appellant attributable to interest free advances made to Subsidiaries Company by appellant. On this issue detailed submission have been filed which are on record. My attention has been drawn to Schedule 19 Note No.B para No.2(a), where facts have been detailed.

I have perused the facts of the case and I am satisfied that in th facts detailed above, there was direct commercial consideration in 10 ITA 3261//M/08 & ITA 3568/M/08

advancing funds to subsidiaries. Therefore, decision of Hon'ble Supreme Court is directly applicable to the facts of the case. Consequently disallowance of interest is not justified. This ground of appeal is allowed."

19. We have considered the rival contentions and found that Tata Group were promoters of idea Cellular Ltd. and they were in land line telephone service in area of Madhya Pradesh. Because of this operation of Tata's in Madhya Pradesh and because of connection between Tata's and assessee company, assessee could not have entered into Mobile telephone services in the area of Madhya Pradesh. However, assessee wanted to enter into Madhya Pradesh for providing Cellular facilities. They have therefore given funds to its own subsidiary. Thus the advances to subsidiaries were out of this commercial consideration. The decision of Hon'ble Supreme Court in the case of S.A. Builders is applicable to the facts of the case. The findings recorded by the ld. CIT(A) at para 9.2 with regard to the fact that there was direct commercial expediency in advancing funds to subsidiaries have not been controverted by the Revenue by bringing any positive material on record. We therefore do not find any reason to interfere with the order of ld. CIT(A) deleting the disallowance of interest attributable to funds advanced to subsidiaries

20. In the result, assessee's appeal as well as Revenue's appeal are allowed in part in terms indicated hereinabove.

Order pronounced in the open court on 11-03-2015.

आदे श क घोषणा खल ु े #यायालय म% &दनांकः 11-03-2015 को क गई ।

Sd/- sd/- (VIJAY PAL RAO) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; &दनांक Dated 11-03-2015 [ 11 ITA 3261//M/08 & ITA 3568/M/08

व.6न.स./ RK , Sr. PS

आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आय7 ु त(अपील) / The CIT(A) -8,, Mumbai

4. आयकर आयु7त / CIT --4, Mumbai

5. :वभागीय 6त6न<ध, आयकर अपील य अ<धकरण, मंब ु ई / DR, ITAT, Mumbai H Bench

6. गाड@ फाईल / Guard file.

ु ार/ BY ORDER, आदे शानस

स या:पत 6त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai