Transfer of PI to Vodafone Infrastructure is a 'Gift' Eligible for Sec 47(iii) Exemption: ITAT rules in favour of Vodafone Idea [Read Order]
SUMMARY: It is well-settled that a transfer without consideration, forming part of a court-approved scheme of demerger specifically contemplating transfer by way of gift, cannot be disregarded as a colourable device.
In a major relief to Vodafone Idea Limited (formerly Vodafone West Limited), the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, while deciding cross-appeals for AY 2011-12, ruled that the transfer of passive infrastructure (PI) assets under a court-approved scheme of demerger without consideration qualifies as a 'gift' under Section 47(iii) of the Income Tax Act, thereby legitimizing the claim of depreciation on such assets.
The Revenue had challenged the DRP's directions on several fronts, primarily arguing that the transfer of PI assets was a tax evasion scheme and not a gift, which led to the disallowance of depreciation to the tune of Rs. 26.85 crores. The Revenue also contested the allowability of Section 80IA deductions on various incidental incomes such as cell site sharing, IRU revenue, scrap sales, late payment charges, and SFIS income, arguing they were not "derived from" the eligible telecommunication business.
The Assessee, on the other hand, challenged multiple additions sustained by the DRP. These included the disallowance of Rs. 225.83 crores paid as network site rentals to Indus Towers under Sections 37(1) and 40A(2)(b), a Rs. 92.75 lakh disallowance under Section 14A read with Rule 8D despite no exempt income being earned, and a disallowance of Rs. 74.21 crores on roaming charges paid to domestic and overseas operators under Section 40(a)(ia) on the ground that human intervention was involved.
The assessee also challenged the denial of depreciation on 3G spectrum fees and a Transfer Pricing (TP) adjustment of Rs. 16.15 crores on interest paid on External Commercial Borrowings (ECB) from its AE, Vodafone Overseas Finance Limited (VOFL).
Upholding the assessee's claims on most counts, the two member bench of Shri Amit Shukla, Judicial Member & Shri Makarand Vasant Mahadeokar, Accountant Member relied on precedents set by coordinate benches in the assessee’s own case for earlier assessment years. It was concluded that the transfer of PI assets constituted a genuine gift falling within the ambit of section 47(iii) of the Act, and therefore the same could not be treated as a transfer for the purposes of section 2(47).
Consequently, it was held that the Assessing Officer was not justified in imputing any notional consideration or reducing the written down value of the block of assets, and the disallowance of depreciation was held to be unsustainable in law. Accordingly, the Revenue’s ground on this issue was dismissed.
On the depreciation issue, the ITAT held that since the demerger was sanctioned by the High Court and no loss was claimed or unintended tax advantage derived, the AO was not justified in imputing a notional sale consideration. Considering this, the depreciation disallowance was deleted by the tribunal.
It is well-settled that a transfer without consideration, forming part of a court-approved scheme of demerger specifically contemplating transfer by way of gift, cannot be disregarded as a colourable device. Since the assessee had voluntarily reduced the written down value of the block and not claimed any capital loss, the character of the transaction as a gift under section 47(iii) is intact. Therefore, imputing notional consideration to disallow depreciation is unsustainable in law.
On the issue of the TP adjustment on ECB interest, the Tribunal made seminal observations regarding the use of RBI approvals in transfer pricing benchmarks. The TPO had rejected the assessee's benchmarking, re-characterized the unsecured loan as a secured loan, and made an ad-hoc 50 bps adjustment for country and currency risks.
The Tribunal noted that while RBI approval may not be wholly determinative of the Arm's Length Price (ALP) in the abstract, it is certainly a highly relevant and contemporaneous benchmark. The TPO’s benchmarking was found to suffer from material infirmities, including a lack of reliable comparability on the nature of the loan , purpose, tenor, and subordination.
Rejecting the TPO's approach, the Tribunal held that where the TPO’s comparables are deficient on critical parameters, the RBI-approved all-in-cost ceiling represents a safer and more reliable external guide than the TPO's flawed analysis.
Furthermore, the ITAT held that roaming services between telecom operators are provided through an automated process without human intervention, thus ruling out the applicability of TDS on fees for technical services. Following the Supreme Court's decision in CIT vs. Bharti Hexacom Ltd., the Tribunal also restored the issue of the disallowance of license fees to the AO's file, directing it to be treated as capital expenditure amortizable under Section 35ABB, rather than revenue expenditure.
The ITAT deleted the depreciation disallowance on PI assets, the Section 14A disallowance, the roaming charges disallowance, the TP adjustment on ECB interest, and allowed the Section 80IA deductions on incidental incomes, while restoring the network site rental and license fee issues to the AO's file for de novo adjudication.
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