Vodafone Idea Limited Vs ACIT: ITAT Mumbai Delivers Comprehensive Ruling on Transfer Pricing and Corporate Tax Issues (AY 2015-16)
The Income Tax Appellate Tribunal, Mumbai, rendered a significant decision in the matter of Vodafone Idea Limited challenging the final assessment order framed under Section 143(3) read with Section 144C of the Income Tax Act, 1961, dated 31/10/2019, for Assessment Year 2015-16. The assessment was completed pursuant to the directions issued by the Dispute Resolution Panel-2, New Delhi, on 20/09/2019. The Tribunal adjudicated upon an array of contested issues spanning transfer pricing adjustments, depreciation claims, disallowances under various provisions, and questions concerning the taxability of unaccounted sales.
Background and Procedural History
The assessee is engaged in the business of rendering telecommunication services. For the year in question, it filed a revised return of income declaring Nil income under the regular provisions of the Act and a book profit of Rs. 514,85,93,299/- under Section 115JB of the Act. The return was picked up for scrutiny proceedings.
Given the assessee's involvement in numerous international transactions with its Associated Enterprises ("AEs"), the Assessing Officer referred the matter to the Transfer Pricing Officer ("TPO") under Section 92CA(1) of the Act for computation of the arm's length price. The TPO issued an order under Section 92CA(3) proposing several transfer pricing adjustments. Thereafter, the Assessing Officer passed a draft assessment order under Section 143(3) read with Section 144C(1). The assessee contested the proposed variations before the Dispute Resolution Panel, which issued directions under Section 144C(5). The final assessment order was passed on 31/10/2019 and has been assailed before the Tribunal on multiple grounds.
Ground No. 2 — Transfer Pricing Adjustment on Payment of Brand Royalty
Facts and Dispute
During the year under consideration, the assessee made payment of brand royalty amounting to Rs. 6,68,30,40,435/- to its Associated Enterprise, Vodafone Sales and Services Ltd. ("VSSL"), for authorised use of the "Vodafone" trademark and trade name. The assessee benchmarked this international transaction under the Comparable Uncontrolled Price ("CUP") method, claiming that royalty was paid at 1.75% of net service revenue, while comparable uncontrolled agreements indicated an average royalty rate of 2.67%. Accordingly, the assessee maintained that the payment satisfied the arm's length standard.
The TPO, however, rejected the comparable uncontrolled agreements relied upon by the assessee and instead adopted the agreement between Virgin Enterprises Ltd. and Virgin Mobile USA LLC as a comparable, applying a royalty rate of 0.25% of gross sales as the arm's length price. This resulted in a proposed transfer pricing adjustment of Rs. 5,72,83,20,370/-. The DRP affirmed this approach, following its directions for earlier assessment years.
Tribunal's Analysis and Decision
The Tribunal noted that the issue was no longer res integra and was squarely covered by a consistent line of decisions rendered by Coordinate Benches. The Coordinate Bench, while adjudicating the case of the assessee's group entity, Vodafone Digilink Ltd. for Assessment Year 2009-10, had categorically held that a controlled transaction cannot serve as a valid comparable under the CUP method. The Tribunal had relied upon CIT v. EKL Appliances Ltd. and Technimont ICB Pvt. Ltd., which established that arm's length price determination must conform strictly to the methods prescribed under Chapter X of the Act and Rule 10B of the Income-tax Rules, 1962.
Identical transfer pricing adjustments on brand royalty payment had already been deleted in the assessee's own case for Assessment Years 2011-12, 2012-13, and 2013-14. Similar outcomes were recorded in the cases of DCIT v. Vodafone West Ltd. (ITA No. 443/Ahd/2016, ITA No. 1634/Ahd/2015, ITA No. 944/Ahd/2015) and Vodafone Digilink Ltd. v. DCIT (ITA No. 1073/Del/2015). The Revenue presented no distinguishing facts or contrary judicial authority.
Held: The Tribunal directed the Assessing Officer/TPO to delete the transfer pricing adjustment of Rs. 5,72,83,20,370/- on account of brand royalty payment. Ground No. 2 and all sub-grounds were allowed.
Ground No. 3 — Transfer Pricing Adjustment on Interest Paid on External Commercial Borrowings
Facts and Dispute
The assessee had entered into two separate External Commercial Borrowing ("ECB") facility agreements with its Associated Enterprises:
Agreement with Vodafone Overseas Finance Ltd. ("VOFL") — for an ECB facility of JPY 120.95 billion, specifically approved by the Reserve Bank of India vide approval dated 31.03.2010. Interest was paid at the all-in-cost ceiling of LIBOR plus 500 basis points sanctioned by the RBI.
Agreement with Vodafone Investments Luxembourg SARL ("VLux") — for an ECB facility of USD 700 million, entered into on 14.11.2011 and approved by the RBI on 24.02.2012. Interest was paid at LIBOR plus 475 basis points as approved.
The assessee benchmarked both transactions using the CUP method, treating the RBI approvals as reliable comparable uncontrolled prices. External benchmarking was also carried out using Reuters' Loan Connector database, confirming that the effective interest paid was below arm's length levels.