The Mumbai Bench of the Income Tax Appellate Tribunal has dismissed two Revenue appeals concerning Reliance Jio Infocomm Limited for Assessment Year 2019-20. The Tribunal dealt with two substantial issues: whether recurring operational expenditure capitalised as Capital Work-in-Progress (“CWIP”) in the books could nevertheless be claimed as revenue expenditure for income-tax purposes, and whether payments made to overseas telecom operators for voice termination, bandwidth and operation and maintenance services were taxable in India as royalty or fees for technical services (“FTS/FIS”).
Operational Expenditure Capitalised as CWIP
In ITA No. 3540/Mum/2026, the Revenue challenged deletion of a disallowance of ₹1,10,03,17,60,701. Reliance Jio had capitalised the amount in its financial statements as CWIP but claimed it as revenue expenditure while computing its taxable income.
The expenditure comprised recurring business costs such as interconnect charges, employee costs, professional fees, call-centre expenses, power and fuel, repairs and maintenance, network operating costs, interest, selling and distribution expenses, exchange loss, customer-service expenses, bank charges, rates and taxes, ILL expenses and travelling expenditure. At the same time, expenditure actually incurred on acquisition and construction of telecom assets such as antennas, fibre, routers, batteries, generators and electronic equipment had separately been capitalised for tax purposes as well.
The Assessing Officer treated the disputed operational expenditure as capital primarily because Reliance Jio itself had classified it as CWIP in its books. According to the Assessing Officer, the expenditure was connected with improvement and upgradation of the telecom network and could not be treated differently for accounting and tax purposes.
Accounting Treatment Is Not Conclusive for Tax Purposes
The Tribunal rejected the proposition that accounting treatment necessarily determines the tax character of an expenditure. It distinguished between the point at which an asset may be capitalised under accounting standards and the independent question whether an expenditure is capital or revenue under the Income-tax Act.
Reliance Jio’s commercial operations had already commenced in Financial Year 2016-17. During the relevant year, it had approximately 306.7 million subscribers and operational revenue of approximately ₹38,838 crore. The Tribunal therefore found that the company’s profit-earning apparatus was already operational and generating substantial revenue.
The Tribunal observed that telecom infrastructure requires continuing optimisation, strengthening, maintenance and enhancement. Merely because expenditure is incurred in connection with improving or optimising an existing network does not automatically make it capital expenditure. The relevant enquiry is whether the expenditure creates a new asset or enlarges the fixed profit-making apparatus, or instead represents the cost of operating the business already in existence.
The Tribunal relied on the principle that entries in books of account are relevant but are not conclusive for determining deductions under the Income-tax Act. It referred, among others, to Kedarnath Jute Mfg. Co. Ltd. v. CIT, Taparia Tools Ltd. v. JCIT and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.
It also followed the Tribunal’s decision in Reliance Jio’s own case for AY 2018-19, where substantially identical operational expenditure had been allowed under Section 37(1), notwithstanding its capitalisation in the financial statements.
Accordingly, the Tribunal upheld the CIT(A)’s deletion of the disallowance of ₹1,10,03,17,60,701 and dismissed the Revenue’s grounds in ITA No. 3540/Mum/2026.
Payments to Foreign Telecom Operators: Royalty and FTS Issue
ITA No. 3541/Mum/2026 concerned a separate disallowance of ₹66,65,41,174 under Section 40(a)(i) arising from alleged failure to deduct tax under Section 195 on payments to non-resident telecom operators.
The payments related to three categories of services:
Voice termination services: approximately ₹42.10 crore
Bandwidth services: approximately ₹15.48 crore
Operation and maintenance services: approximately ₹9.07 crore.
The Assessing Officer considered these payments taxable as royalty and/or FTS and consequently held that tax was required to be deducted under Section 195.
Use of Technology-Enabled Service Is Not Use of Equipment
The Tribunal emphasised the distinction between receiving a service rendered through sophisticated equipment and having the “use or right to use” that equipment.
In the arrangements before it, the foreign telecom operators continued to possess and control their networks, equipment, processes and technological resources. Reliance Jio did not operate the overseas networks, control their configuration or acquire any proprietary or possessory right over the equipment.
The Tribunal held that Reliance Jio purchased the output of the network — connectivity, carriage or termination of telecom traffic — and not the network or technology through which that output was produced.
Accordingly, the fact that sophisticated telecom infrastructure was necessarily used by the foreign operator did not convert consideration for telecom services into equipment royalty.
No Right to Use a Process
The Tribunal applied similar reasoning to the Revenue’s contention regarding “process royalty”. Although voice and data transmission undoubtedly involve complex technological processes, the processes remained embedded within the foreign operator’s own network.
Reliance Jio merely delivered traffic at the agreed interconnection point and received the contracted result. It neither acquired the underlying technological process nor obtained the ability to independently employ that process.
The Tribunal therefore distinguished between availing the result of a technological process and acquiring a right to use the process itself.
It further noted that a unilateral retrospective expansion of the domestic definition of royalty cannot automatically enlarge the treaty definition where the relevant Double Taxation Avoidance Agreement has not correspondingly been amended.
Standard Automated Telecom Services Not FTS Merely Because Technology Is Involved
The Tribunal also rejected the Revenue’s attempt to characterise the payments as fees for technical services merely because sophisticated technical expertise was involved in providing the telecom service.
Once the interconnection arrangements were operational, the carriage and termination of traffic occurred automatically through the telecom networks. Technical personnel employed by the foreign service providers maintained and operated their own networks; their expertise was not placed at Reliance Jio’s disposal.
The Tribunal observed that a technologically complex service from the provider’s perspective may nevertheless remain a standard commercial facility from the customer’s perspective.
Where the relevant treaty contained a “make available” requirement, the Tribunal held that this test was also not satisfied. Reliance Jio acquired no technical knowledge, skill, know-how or capability enabling it to reproduce the overseas operator’s telecom service independently after receiving the service.
O&M Charges Also Not FTS
The Tribunal applied the same principle to operation and maintenance charges paid to the foreign operator. The maintenance activity related to infrastructure used by the overseas service provider for rendering bandwidth services.
Although technical personnel might necessarily have been deployed by the foreign operator for maintaining its infrastructure, no technical capability or know-how was transferred to Reliance Jio.
The Tribunal therefore held that O&M charges could not be characterised as FTS merely because technical expertise was employed by the service provider in maintaining its own service-delivery infrastructure.
No Taxability in India Without Permanent Establishment
Having concluded that the payments did not constitute royalty or FTS/FIS under the applicable DTAAs, the Tribunal treated the corresponding receipts as business profits of the overseas telecom operators.
There was no finding that the relevant non-resident recipients had a permanent establishment in India to which those receipts could be attributed. Consequently, the business profits were not taxable in India under Article 7 of the applicable treaties.
Since the payments were not chargeable to tax in India, Reliance Jio had no obligation to deduct tax under Section 195. In the absence of a withholding obligation, the consequential disallowance under Section 40(a)(i) could not survive.
Accordingly, the Tribunal upheld deletion of the ₹66,65,41,174 disallowance and dismissed the Revenue’s appeal in ITA No. 3541/Mum/2026.
The assessee had also filed an application under Rule 27 challenging the validity of the reassessment proceedings. Since the Revenue’s appeal failed on merits, the Tribunal did not consider it necessary to adjudicate those contentions. Ultimately, both Revenue appeals were dismissed.
Key Takeaway
The ruling reiterates two important principles of income-tax law. First, capitalisation of expenditure in financial statements does not, by itself, determine whether the expenditure is capital or revenue for tax purposes; its true nature, purpose and effect must be examined independently under the Income-tax Act.
Second, obtaining technologically sophisticated telecom connectivity does not amount to using the service provider’s equipment, process or technical know-how. Where the overseas operator retains control over its infrastructure and merely provides the resulting telecom service without transferring technology or making technical knowledge available, the payment cannot automatically be characterised as royalty or FTS under the applicable DTAA.
