The Delhi High Court has held that the expansion of Telecommunication service with internet service does not change infrastructure and upheld the deletion of disallowance of deduction under section 80IA of the Income Tax Act, 1961.
The appellant/revenue challenged the order passed by the Income Tax Appellate Tribunal [“Tribunal”] in favour of Verizone Communications India Pvt Ltd, the respondent-assessee.
The question was whether the Tribunal erred in deleting the addition amounting to Rs.5,89,34,508/- on account of disallowance made under Section 80IA of the Income Tax Act, 1961 [“Act”].
The respondent/assessee was incorporated on 11.01.2002 with the main object of rendering telecommunication services. To progress its main object, the respondent/assessee, in and about May 2002, obtained an Internet Service Provider (ISP) License from the Department of Telecommunication (DOT).
Consequently, the respondent/assessee claimed a tax holiday under Section 80IA of the Act at the rate of 100% of the profits earned up until AY 2011-12 and, thereafter, at the rate of 30% between AY 2012-13 and AY 2016-17.
The respondent/assessee acquired two licenses, namely, the International Long Distance (ILD) License and the National Long Distance (NLD) License. The AO disallowed the tax holiday claimed for the AY in issue, albeit, on a proportionate basis (i.e., in proportion to the contribution of each segment) pivoted on the rationale that a new and separate undertaking had come into existence with respondent/assessee having acquired, in 2008, NLD and ILD Licenses.
The respondent/assessee, the Commissioner of Income Tax (Appeals) [in short, “CIT(A)”] confirmed the view taken by the AO. The CIT(A)’s order, impelled the respondent/assessee to prefer an appeal with the Tribunal to seek redressal.
It was found that the main provision, i.e., Section 80IA, inter alia, applies to any undertaking which started or started providing telecommunication services which includes internet services on or after 01.04.1995 but on or before 31.03.2005.
The denial of deduction to respondent/assessee under Section 80IA in the AY in issue, i.e., AY 2011-12 by the AO was founded on the reason that the acquisition of two new licenses, whereby NLD and ILD services were provided to a certain group of private users, amounted to expansion of the existing undertaking and, therefore, fell beyond the cut-off date, i.e., 31.03.2005.
It was contended, that the expression which finds mention in Sub-Section (4) Clause (ii) of Section 80IA of the Act is “undertaking” and since the undertaking remained the same, merely because certain services were enhanced, the respondent/assessee could not be denied full play of the deductions which were being provided before the impugned assessment order was passed by the AO.
In other words, if the services were added or expanded with the same infrastructure and largely the same manpower content, albeit, after 31.03.2005, would the undertaking be deprived of the deduction which it previously claimed and was allowed under Section 80IA of the Act?
A division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that there was no material brought on record by the appellant/revenue to back its claim that a separate undertaking had been established to provide the NLD and ILD services offered by the respondent/assessee.
The respondent/assessee was and continued to provide internet services. The only difference was that it expanded its business footprint by adding to it a niche consumer base. The legislative policy of providing deduction under Section 80IA is to give leg-up to certain undertakings, which are capital intensive. The attempt of the AO to excise a portion of the benefit, in our opinion, cannot pass muster upon perusal of the plain language of Section 80IA(4)(ii) of the Act.
The Court upheld the impugned order passed by the Tribunal.
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