ITAT Mumbai on Reliance Jio: Capitalisation in Books Not Conclusive & Telecom Payments Not Royalty

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT Mumbai) has delivered an important ruling in DCIT Vs Reliance Jio Infocomm Limited for Assessment Year 2019-20, addressing two independent but critical income-tax issues:

  1. Whether large-scale operational expenses, capitalised as Capital Work-in-Progress (CWIP) in the financial statements, can still be claimed as revenue deductible under Section 37(1).
  2. Whether payments to foreign telecom operators for voice termination, bandwidth and operation and maintenance (O&M) services constitute “royalty” or “fees for technical services” (FTS), triggering withholding under Section 195 and disallowance under Section 40(a)(i).

The Tribunal dismissed both Revenue appeals, thereby upholding substantial relief granted to Reliance Jio Infocomm Limited (RJIL).

Background of the Appeals

Two appeals by the Revenue were heard together as they related to the same assessee and year (AY 2019-20):

  • ITA No. 3540/Mum/2026 – Regular assessment under Section 143(3) read with Section 144B (dispute on deductibility of operational expenses classified as CWIP).
  • ITA No. 3541/Mum/2026 – Reassessment under Section 147 read with Section 144B (dispute on TDS and disallowance under Section 40(a)(i) on payments to non-residents).

RJIL is a public limited company engaged in providing digital and telecommunication services over a pan-India 4G LTE network under a Unified Licence. Commercial operations commenced in Financial Year 2016-17. By 31.03.2019, RJIL:

  • Served about 306.7 million subscribers, and
  • Reported operational revenue of approximately ₹38,838 crore, duly offered to tax.

The Tribunal emphasised that RJIL was a fully operational, revenue-generating enterprise during the relevant previous year; this was not a “pre‑commencement” fact pattern.

Issue 1: Revenue Deduction for Expenses Shown as CWIP

Nature of the Disputed Expenditure

During assessment, the Assessing Officer (AO) noticed that RJIL had claimed a deduction of ₹1,10,03,17,60,701 under the head:

“expenses capitalised in books – allowable as revenue for tax purposes”

In the audited financials, these expenses had been grouped under CWIP. For tax computation, however, the assessee treated them as revenue expenditure. The costs broadly covered routine and recurring heads such as:

  • Interconnect charges
  • Employee costs
  • Professional fees
  • Call-centre expenses
  • Power and fuel
  • Repairs and maintenance
  • Other network operating costs
  • Interest
  • Selling and distribution expenditure
  • Exchange loss
  • Customer-service expenses
  • Bank charges
  • Rates and taxes
  • ILL-related expenses
  • Travelling expenditure

RJIL’s consistent stand was that these were ongoing operational and indirect expenses incurred for running an already established network, and did not result in creation of any new capital asset or a fresh profit-making structure.

Distinction Between Capital Assets and Operational Costs

RJIL had also incurred separate expenditure on actual acquisition and construction of network infrastructure such as:

  • Antennas, radio equipment, ducts, fibre
  • Energy meters, diesel generator sets
  • Routers, racks, batteries
  • Various electronic and telecom equipment

These were capitalised both in the books and for income-tax purposes. The present controversy did not involve such capital asset costs. It was confined to operational/indirect costs that were, for accounting reasons, parked in CWIP.

Thus, the assessee was not seeking dual benefit on the same capital spend. The only issue was: does the accounting classification of certain operating costs as CWIP change their nature from revenue to capital for tax purposes?

Accounting Policy and QoS Benchmarks

RJIL followed Ind-AS 16 – “Property, Plant and Equipment”. Under its disclosed accounting policy, network assets were capitalised only when they were:

“available for use and working in the manner intended by the management”

For this purpose, RJIL specified internal Quality of Service (QoS) parameters, including metrics around:

  • Call drops and handovers
  • HD voice quality
  • True HD video performance
  • Ultra high-speed data services
  • Multimedia Broadcast Multicast Services
  • Multi-band network ecosystem
  • Seamless functioning with open market devices on IP Multimedia Subsystem

On this basis:

  • Where network sites/fibre assets had already satisfied the QoS criteria, associated operational expenditure was charged directly to the Profit & Loss Account.
  • Where the infrastructure was installed and in use but had not yet fully achieved the QoS thresholds, related indirect and operating expenditure was temporarily reflected as CWIP.

For tax purposes, RJIL argued that these recurring expenses were still revenue in character, being costs of running an existing telecom business, irrespective of their interim book presentation.

RJIL submitted that:

  1. Accounting and tax operate in different domains – Ind-AS govern financial reporting, whereas the Income Tax Act governs computation of taxable income.
  2. Entries in the books are at best corroborative, but not decisive, of the nature of a payment for tax purposes.
  3. The disputed expenditure:
    • Was incurred after commencement of business;
    • Was wholly and exclusively for business;
    • Did not bring any new capital asset into existence;
    • Did not enlarge the fixed profit-making apparatus;
    • Did not confer an enduring advantage in the capital field.

Therefore, the mere inclusion of such expenses within CWIP could not transform them into capital outgoings under Section 37(1).

AO’s Reasoning and Disallowance

The AO disagreed and disallowed the entire amount of ₹1,10,03,17,60,701, on the following broad reasoning:

  • Similar expense heads had been partly charged to Profit & Loss and partly capitalised as CWIP, indicating a conscious internal bifurcation by RJIL.
  • In his view, an expense cannot be capital in books and revenue for tax simultaneously.
  • Referring to Ind-AS 16 and RJIL’s own policy, the AO concluded that these expenses were linked to ongoing asset additions, network upgradation and improvement.
  • Once capitalised as CWIP, such amounts, according to the AO, could only be allowed via depreciation under Section 32, not as an outright deduction under Section 37(1).

Accordingly, the AO recomputed the loss at ₹83,97,58,53,793 instead of the returned loss of ₹1,94,00,76,14,494.

CIT(A)’s Findings in Favour of RJIL

On appeal, the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, examined the issue in depth and accepted the assessee’s contentions. Key aspects noted by the CIT(A) included:

1.