Vodafone Idea Gets Partial Relief in Dispute Over Disallowances and Transfer Pricing Adjustments [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai Bench has ruled in favor of Vodafone Idea Limited, granting partial relief by deleting certain disallowances while remanding others for fresh consideration. The tribunal held that adjustments related to Section 14A disallowance, distributor discounts, and 3G spectrum depreciation were not justified, while transfer pricing adjustments and IBM service charges required further examination.

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The case involved Vodafone Idea Limited (formerly Vodafone India Limited, now merged with Idea Cellular Limited), which had filed its income tax return for Assessment Year (AY) 2014-15, reporting a total loss of Rs.474.26 crores. The Assessing Officer (AO) made multiple disallowances and adjustments, including Rs.362.23 crores under Section 14A, Rs.68.19 crores under Section 40(a)(ia) for non-deduction of tax on discounts to prepaid distributors, Rs.261.29 crores for 3G spectrum depreciation, Rs.14.66 crores as IBM service charges, Rs.35.97 crores in royalty payments, and Rs.2.45 crores in transfer pricing adjustments related to reimbursements to associated enterprises (AEs). Vodafone Idea challenged these adjustments before the Dispute Resolution Panel (DRP), which upheld most of the AO’s findings. Aggrieved by this, Vodafone Idea appealed before the ITAT Mumbai.

Vodafone Idea argued that the disallowance under Section 14A was unjustified as the company had sufficient interest-free funds and did not make any fresh investments during the year. It contended that discounts to distributors were not commission payments and, therefore, not subject to Tax Deducted at Source (TDS) under Section 194H. The company further argued that 3G spectrum should be classified as an intangible asset eligible for depreciation under Section 32, rather than being amortized under Section 35ABB. Regarding IBM service charges, Vodafone Idea maintained that the payments were revenue in nature and incurred under a five-year service agreement. The company also challenged the transfer pricing adjustments on royalty payments and reimbursements to AEs, asserting that proper benchmarking analysis justified the transactions.

The Revenue argued that the AO had correctly applied disallowances and transfer pricing adjustments, stating that the expenses and deductions claimed by Vodafone Idea were either inadequately documented or misclassified. The department contended that the disallowance under Section 14A was valid, as the AO had applied Rule 8D. It further maintained that discounts given to distributors should be treated as commission and subjected to TDS.

The ITAT Mumbai Bench, comprising Amarjit Singh (Accountant Member) and Sandeep Singh Karhail (Judicial Member), ruled in favor of Vodafone Idea on several key issues. The tribunal deleted the disallowance of Rs.362.23 crores under Section 14A, holding that no interest expense was attributable to tax-free income. However, it directed the AO to recompute administrative expenses under Rule 8D(2)(iii). The tribunal also deleted the disallowance of Rs.68.19 crores on distributor discounts, ruling that Section 194H does not apply to discounts on prepaid services. Additionally, it allowed depreciation on 3G spectrum under Section 32(1)(ii), rejecting the Revenue’s stance that it should be amortized under Section 35ABB.

However, the ITAT remanded the IBM service charge disallowance, directing Vodafone Idea to submit supporting invoices and agreements. Similarly, it referred the royalty payment and reimbursement issues back to the Transfer Pricing Officer (TPO) for a fresh review, allowing Vodafone Idea to provide additional benchmarking documentation.

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The ITAT Mumbai's decision granted Vodafone Idea substantial relief by deleting significant disallowances while remanding transfer pricing-related matters for further verification.

To Read the full text of the Order CLICK HERE

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