ITAT Deletes TP Adjustments on Brand Royalty, ECB Interest & AMP Expenses in Vodafone Idea Case:

Mumbai ITAT grants major relief by deleting key transfer pricing additions, allows depreciation on 3G spectrum and several business expenditure claims, while remanding licence fee amortisation for limited verification.

Vodafone Idea Limited, successor to Vodafone Mobile Services Limited, filed its revised return for Assessment Year 2015-16 declaring nil taxable income under the normal provisions and book profits under Section 115JB. Since the company had entered into various international transactions with its Associated Enterprises (AEs), the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) under Section 92CA(1).

The TPO proposed transfer pricing adjustments in respect of brand royalty, interest on External Commercial Borrowings (ECBs), and Advertisement, Marketing and Promotion (AMP) expenditure. Apart from these, the Assessing Officer made several corporate tax disallowances relating to depreciation on 3G spectrum rights, subscriber verification penalties paid to the Department of Telecommunications (DoT), Asset Restoration Cost (ARC), discounts to prepaid distributors, annual licence fees, IBM IT infrastructure charges, and Wireless Planning Commission (WPC) royalty expenses.

Although the Dispute Resolution Panel (DRP) granted partial relief, substantial additions survived, resulting in an assessed income exceeding Rs.66,000 crore, prompting the assessee to approach the ITAT.

The Mumbai ITAT partly allowed the appeal and granted significant relief to the assessee. On transfer pricing, it deleted the adjustment on brand royalty, holding that the TPO had incorrectly relied upon a controlled transaction between Virgin Enterprises and Virgin Mobile USA while applying the Comparable Uncontrolled Price (CUP) method. Reiterating its earlier decisions in the assessee's own cases, the Tribunal held that controlled transactions cannot serve as valid comparables for determining the arm's length price.

It also deleted the adjustment on interest paid on ECBs, observing that RBI-approved borrowing terms provided a reliable benchmark and that the TPO had ignored relevant factors such as country risk, currency risk, loan tenure and debt subordination. The AMP adjustment was likewise deleted, with the Tribunal holding that, in the absence of evidence of an arrangement with the Associated Enterprises, the existence of an international transaction could not be inferred merely by applying the Bright Line Test.

On the corporate tax issues, the Tribunal allowed depreciation on the right to use 3G spectrum by following its earlier orders. It also held that subscriber verification penalties paid to the DoT were compensatory in nature and therefore allowable under Section 37(1). While depreciation on the Asset Restoration Cost was disallowed, the Tribunal accepted the alternate claim and directed the Assessing Officer to allow the expenditure as a revenue deduction under Section 37(1) in line with the Delhi High Court's binding decision.

The Tribunal further deleted the disallowance under Section 40(a)(ia) on discounts given to prepaid distributors by following the Supreme Court's ruling that such discounts do not constitute commission liable for TDS under Section 194H. Payments made to IBM for IT infrastructure were held to be deductible lease rentals since ownership of the equipment remained with IBM, and WPC royalty charges were also allowed as revenue expenditure.

However, the Tribunal upheld the capitalization of annual revenue-sharing licence fees in view of the Supreme Court's decision in Bharti Hexacom, while remanding the matter to the Assessing Officer for limited verification and recomputation of amortisation arising from corporate restructuring and licence transfers. It also sustained the addition relating to customer security deposits written back under Sections 41(1) and 28(iv), following the earlier decisions in the assessee's own case.