ITAT: Telecom Expenses Decided in Cross-Appeals; Tribunal Favors Depreciation on Spectrum

The assessee challenged multiple additions sustained by the Assessing Officer, including pre-operating expenses, customer acquisition costs, distributor discounts, and depreciation on spectrum fees. The Revenue, in its cross-appeals, questioned the allowance of depreciation on 3G spectrum by contending that only amortisation under section 35ABB was permissible.

The Commissioner (Appeals) partly allowed the disallowances, and hence both parties went to the Tribunal. The appeals, therefore involved recurrent issues spread over six assessment years, with major bearing on the telecommunication business model adopted by the assessee.

Issue Before ITAT: The Tribunal considered whether the amount spent on pre-operating activities and on acquiring customers was revenue or capital in nature, whether the discounts to distributors constituted commission inviting disallowance under section 40(a)(ia) read with section 194H, and whether spectrum charges for 3G licences would be treated as depreciable intangible assets under section 32 or amortised under section 35ABB.

ITAT’s Decision: The Hon’ble ITAT, by this order and judgment, settled key issues on telecom-related expenses. It allowed pre-operating expenses as revenue in nature and partly upheld disallowances on customer acquisition costs where details were lacking. Applying the Supreme Court ruling in Bharti Cellular Ltd., the Tribunal held that distributor discounts on prepaid SIMs were not “commission” under section 194H, deleting related disallowances under section 40(a)(ia).

While deciding on the spectrum fees, the ITAT rejected the Revenue’s stand that only amortisation under section 35ABB was permissible. It followed coordinate bench rulings to hold that 3G spectrum constituted an intangible asset entitled to depreciation under section 32, at least until section 35ABA came into effect from 01.04.2017. Thus, the assessee secured partial relief, while the Revenue’s appeals were dismissed, bringing clarity on recurring tax issues in the telecom sector.

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