ACIT vs. Bharti Hexacom Ltd.: Tribunal Ruling on Amortization of License Fee and Penalty Deductions for AY 2013-14

ACIT vs. Bharti Hexacom Ltd.: Tribunal Ruling on Amortization of License Fee and Penalty Deductions for AY 2013-14

Case Number: ITA 6547/DEL/2019
Assessment Year: 2013-14
Filed Date: 2019-08-06
Order Date: 2023-07-19
Pronounced On: 2023-07-19

Background:

The case involves the Additional Commissioner of Income Tax (ACIT), Circle-4(2), New Delhi, appealing against Bharti Hexacom Ltd., New Delhi, concerning the assessment year 2013-14. The appeal was filed on 6th August 2019, and the final order was pronounced by the Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘A’, on 19th July 2023. The central issues in this appeal were the amortization of variable license fees, the deduction of penalties related to subscriber verification, and disallowances under Section 40(a)(ia) of the Income Tax Act, 1961.

Key Issues:

• Amortization of Variable License Fee: The ACIT challenged the treatment of the variable license fee as a revenue expenditure under Section 37(1) of the Income Tax Act. The ACIT argued that the fee should be amortized over the remaining period of the license under Section 35ABB of the Act.
• Subscriber Verification Penalty: The ACIT also contested the allowance of Rs. 13,54,65,160/- paid as a penalty for subscriber verification violations. The ACIT asserted that this payment should be treated as a penal expenditure, disallowable under the Explanation to Section 37(1) of the Act.
• Disallowance under Section 40(a)(ia): The ACIT further raised concerns over the disallowance of expenditure related to the sale of prepaid SIM cards to distributors, where the revenue claimed that the discount allowed should be treated as commission, necessitating tax deduction at source under Section 194H.

Tribunal’s Findings:

1. Amortization of Variable License Fee:

The tribunal examined whether the variable license fee paid by Bharti Hexacom Ltd. should be treated as a revenue expenditure or amortized under Section 35ABB. The tribunal noted that this issue had been previously addressed by the Delhi High Court in favor of the assessee. The High Court had ruled that such fees could be treated as revenue expenditure. As a result, the tribunal upheld the CIT(A)’s decision to allow the fee as a revenue expenditure, dismissing the revenue’s appeal on this ground.

2. Subscriber Verification Penalty:

The ACIT argued that the penalty imposed for subscriber verification failures was a penal expenditure and should be disallowed under the Explanation to Section 37(1). The tribunal, however, found that the penalty was compensatory in nature, arising from a breach of contractual obligations under the license agreement with the Department of Telecommunications (DOT). The tribunal referenced previous rulings, including the decision in Mangal Keshav Securities Ltd. vs. ACIT, which held that such penalties are not disallowable under Section 37(1) as they are not paid for the infraction of any law. Consequently, the tribunal upheld the CIT(A)’s deletion of the disallowance.

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

The tribunal also addressed the disallowance related to the discount on prepaid SIM cards provided to distributors. The ACIT argued that this discount should be treated as a commission, necessitating tax deduction under Section 194H. The tribunal, however, observed that the relationship between Bharti Hexacom Ltd. and its distributors was that of a principal-to-principal basis. Thus, the discount given did not qualify as commission. The tribunal noted that this issue had been consistently ruled in favor of the assessee in prior years, including decisions by the Hon’ble Gauhati High Court and the ITAT. Therefore, the tribunal upheld the CIT(A)’s decision to delete the disallowance under Section 40(a)(ia).

Conclusion:

The tribunal’s order provided significant relief to Bharti Hexacom Ltd. by dismissing the revenue’s appeal on all grounds. The tribunal upheld the treatment of the variable license fee as a revenue expenditure, the allowance of the subscriber verification penalty as compensatory, and the classification of discounts to distributors as non-commission, thereby not attracting disallowance under Section 40(a)(ia). This ruling underscores the importance of adhering to judicial precedents and the proper classification of 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 2013-14