ACIT vs. Bharti Hexacom Ltd.: Tribunal Ruling on Amortization of License Fee and Penalty Deductions for AY 2014-15

ACIT vs. Bharti Hexacom Ltd.: Tribunal Ruling on Amortization of License Fee and Penalty Deductions for AY 2014-15

Case Number: ITA 6548/DEL/2019
Assessment Year: 2014-15
Filed Date: 2019-08-06
Order Date: 2023-07-19
Pronounced On: 2023-07-19

Background:

The case revolves around an appeal by the Additional Commissioner of Income Tax (ACIT), Circle-4(2), New Delhi, against Bharti Hexacom Ltd., New Delhi, for the assessment year 2014-15. The appeal, filed on 6th August 2019, questioned various financial treatments by Bharti Hexacom Ltd. These issues included the amortization of variable license fees, deductions related to penalties for subscriber verification, and disallowances under Section 40(a)(ia) of the Income Tax Act, 1961. The Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘A’, passed the final order on 19th July 2023.

Key Issues:

• Amortization of Variable License Fee: The ACIT contended that the variable license fee paid by Bharti Hexacom Ltd. should not be treated as a revenue expenditure under Section 37(1) of the Income Tax Act but should be amortized over the license period under Section 35ABB.
• Subscriber Verification Penalty: The ACIT argued that the penalty paid by Bharti Hexacom Ltd. for subscriber verification failures should be disallowed under the Explanation to Section 37(1) as it was penal in nature.
• Disallowance under Section 40(a)(ia): The ACIT also raised an issue regarding the discount provided to distributors on prepaid SIM cards, arguing that it should be considered as commission, thus requiring tax deduction at source under Section 194H.

Tribunal’s Findings:

1. Amortization of Variable License Fee:

The tribunal evaluated whether the variable license fee should be treated as a revenue expenditure or amortized under Section 35ABB. It was noted that this matter had been previously adjudicated in favor of Bharti Hexacom Ltd. by the Delhi High Court, which had allowed the fee to be treated as a revenue expenditure. The ITAT found no reason to deviate from this precedent and upheld the CIT(A)’s decision to treat the fee as a revenue expenditure, dismissing the revenue’s appeal on this ground.

2. Subscriber Verification Penalty:

The ACIT’s argument that the penalty paid for subscriber verification issues should be disallowed under the Explanation to Section 37(1) was dismissed by the tribunal. The ITAT found that the penalty was compensatory rather than penal, arising from contractual obligations under the license agreement with the Department of Telecommunications (DOT). The tribunal referenced earlier rulings, including the case of Mangal Keshav Securities Ltd. vs. ACIT, to support its conclusion that such penalties do not fall under the purview of the Explanation to Section 37(1). Therefore, the tribunal upheld the CIT(A)’s decision to allow the deduction.

3. Disallowance under Section 40(a)(ia):

The final issue involved the relationship between Bharti Hexacom Ltd. and its distributors concerning the sale of prepaid SIM cards. The ACIT argued that the discount provided to distributors should be classified as a commission, thereby requiring tax deduction under Section 194H. The tribunal, however, ruled that the relationship between the company and its distributors was on a principal-to-principal basis. Therefore, the discount did not qualify as a commission, and no tax deduction at source was required. The tribunal upheld the CIT(A)’s decision to delete the disallowance, referencing consistent rulings in previous years favoring Bharti Hexacom Ltd.

Conclusion:

The ITAT’s order provided significant relief to Bharti Hexacom Ltd., dismissing all grounds raised by the revenue. The tribunal’s ruling upheld the treatment of the variable license fee as a revenue expenditure, confirmed the allowance of the subscriber verification penalty as compensatory, and validated the classification of distributor discounts as non-commission, thus not subject to disallowance under Section 40(a)(ia). This decision further solidifies the importance of adhering to judicial precedents and properly classifying expenses in corporate tax assessments.

Order Pronounced in Open Court: 19th July 2023

Bench: SHRI M. BALAGANESH, ACCOUNTANT MEMBER, and SHRI ANUBHAV SHARMA, JUDICIAL MEMBER

ACIT vs. Bharti Hexacom Ltd.: Tribunal Ruling on Amortization of License Fee and Penalty Deductions for AY 2014-15