The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has granted significant relief to Vodafone by deleting multiple additions and disallowances made during assessment, holding that they were not sustainable in law. The Tribunal ruled that the transfer of passive telecom tower infrastructure under a High Court-approved scheme of demerger constituted a valid “gift” within the meaning of Section 47(iii) of the Income Tax Act, 1961. It held that the Assessing Officer was not justified in imputing any notional consideration or denying depreciation on such transfer.
The Bench, comprising Sandeep Singh Karhail (Judicial Member) and Vikram Singh Yadav (Accountant Member), was deciding cross-appeals filed by Vodafone and the Revenue.
The dispute arose after the Assessing Officer treated the transfer of tower assets by Vodafone to Vodafone Infrastructure Ltd. as a colourable device, imputing a deemed sale consideration, reducing the written down value and disallowing depreciation of ₹31.60 crore. Rejecting this approach, the Tribunal held that once a transfer under a court-approved demerger is made without consideration and satisfies the statutory conditions, it squarely falls under Section 47(iii). The Assessing Officer could not disregard the transaction or assign an artificial value to deny depreciation. The transfer was held to be a genuine gift, and the depreciation disallowance was deleted.
On roaming charges, the Tribunal held that roaming services operate through automated systems without human intervention and therefore do not qualify as “technical services”. As a result, tax was not deductible at source under Section 194J, and the related disallowance was deleted.
The Tribunal also dealt with prepaid distribution margins and, relying on the Supreme Court’s decision in Bharti Cellular Ltd. v. ACIT (2024) 462 ITR 247 (SC), held that such margins are in the nature of trade discounts and not commission. Accordingly, Section 194H was held to be inapplicable, and the corresponding disallowance was set aside.
With respect to Section 14A read with Rule 8D, the Tribunal noted that Vodafone had not earned any exempt income during the relevant assessment year. On this factual basis, it held that no disallowance under Section 14A could be made, and consequently, the adjustment under Section 115JB for MAT purposes was also unsustainable.
On the deduction under Section 80-IA(2A), the Tribunal held that telecom undertakings are entitled to deduction on eligible receipts, including income from the Served From India Scheme (SFIS) and foreign exchange gains arising from operational activities. The Revenue’s challenge on this issue was rejected.
However, on the issue of network site rentals paid to Indus Towers, the Tribunal found that further factual verification was required. This limited issue was remanded to the Assessing Officer for fresh examination in accordance with law.
Overall, Vodafone’s appeal was allowed on all major issues, with disallowances relating to depreciation on tower assets, roaming charges, prepaid distribution margins and Section 14A being deleted, and its eligibility for deduction under Section 80-IA(2A) being affirmed. The Revenue’s appeal was dismissed except to the limited extent of the remand on network site rentals.
