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Breather for Vodafone Idea: Supreme Court admits telco’s appeal in tax dispute

Indu Bhan

The Supreme Court has sought the income tax department s response on whether installation of cell site towers by telecom companies in existing telecom circles amounted to extension of existing business or providing better connectivity to customers for taxation purposes.
A bench led by Justice U U Lalit issued notice to the revenue authorities on the Vodafone Idea s appeal against the Delhi high court s order in June last year that said the installation of cell site towers in existing telecom circles amounted to extension of existing business of providing telecom service as stipulated in proviso to section 36(1)(iii) of the Income Tax Act, 1961, thus warranting proportionate disallowance of interest.

Vodafone had merged with Idea Cellular in August last year and the resultant company was subsequently re-named as Vodafone Idea.
According to the new entity, the installation of cell-site towers in existing telecom circles did not tantamount to extension of existing business but, in fact, amounted to only carrying on the existing business more efficiently and for providing better connectivity to its customers.

Accordingly, the interest expense incurred by the company on loans raised for installation of cell-site towers in existing telecom circles did not come within the ambit of extension of business, warranting disallowance u/s 36(1)(iii) of the Act, senior counsel Arvind Datar and counsel Sachit Jolly, appearing for the company, stated.

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The company said that the HC wrongly concurred with the findings of the ITAT that the cell site towers were installed to reach greater number of customers and thus for increasing subscriber base. Instead, the purpose of the installation of cell-site towers was to provide better connectivity and the increase in new customers was merely incidental, it stated.

The impugned order has a cascading effect on numerous other cases for different AYs and would drastically effect its financial position, it added.

The counsel submitted that for the relevant Assessment Year 2009-10, Vodafone Idea declared capital work in progress (CWIP) of Rs 278.96 crore in its balance sheet.