Income Tax Appellate Tribunal on Allowability of Customer Acquisition Cost as Revenue Expenditure.

Headnote:

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that Customer Acquisition Cost incurred by Tata Teleservices Ltd. was revenue expenditure, not capital. The Tribunal observed that such costs — including porting charges, data entry expenses, and handset subsidies — were incurred in the regular course of business without creating any enduring asset or benefit. The disallowance made by the Assessing Officer and confirmed by the CIT(A) was deleted.

Background:

• The assessee filed a return declaring a loss of ₹324.29 crore, which was assessed at a reduced loss of ₹90.20 crore after disallowing ₹169.08 crore towards Customer Acquisition Cost (CAC).

• The Assessing Officer treated the CAC as capital expenditure, holding that it resulted in the acquisition of business rights and future economic benefits.

• The CIT(A) upheld the disallowance, relying on India Capital Markets (P) Ltd. and SKS Micro Finance Ltd., treating customer base as an intangible asset eligible for depreciation under Section 32(1)(ii).

• The assessee argued that the CAC was incurred for normal business operations, provided no enduring benefit, and had been consistently allowed as revenue expenditure in earlier and subsequent assessment years. Reliance was placed on SBI Cards & Payments (P) Ltd. (229 Taxman 356, Del HC) and Empire Jute Co. Ltd. (124 ITR 1, SC).

Tribunal’s Observations:

• The genuineness of the expenditure was not in dispute; the only issue was its classification as revenue or capital.

• The Tribunal distinguished earlier cases cited by the Revenue, noting that India Capital Markets (P) Ltd. and SKS Micro Finance Ltd. involved acquisition of customer bases through slump sale, unlike the present case where customers were acquired in the ordinary course of business.

• The AO’s approach was inconsistent — while treating handset subsidies as capital expenditure, he accepted the corresponding handset sale receipts as revenue.

• The expenditure on porting and data entry charges was of recurring nature and did not confer any enduring benefit.

• Relying on the coordinate bench’s earlier decisions in assessee’s own cases (AYs 2009–10 to 2016–17), the Tribunal held that the CAC was allowable as revenue expenditure.

Legal Provisions Discussed:

• Section 37(1), Income Tax Act, 1961 – Allowability of business expenditure.

• Section 32(1)(ii), Income Tax Act, 1961 – Depreciation on intangible assets.

• Relevant Case Laws:

– SBI Cards & Payments (P) Ltd. v. CIT (229 Taxman 356, Del HC)

– Empire Jute Co. Ltd. v. CIT (124 ITR 1, SC)

– Excel Industries Ltd. v. CIT (38 taxmann.com 100, SC)

– India Capital Markets (P) Ltd. (Mumbai ITAT)

– SKS Micro Finance Ltd. (Hyderabad ITAT)

Decision:

The ITAT allowed the appeal, holding that the Customer Acquisition Cost of ₹169.08 crore was revenue in nature and fully deductible under Section 37(1).

Citation: ITA No. 2549/Del/2024

Case: Tata Teleservices Limited v. Assistant Commissioner of Income Tax, Circle-25(1), New Delhi

Court: Income Tax Appellate Tribunal, Delhi Bench ‘C’

Coram: Shri Satbeer Singh Godara (Judicial Member) & Shri Avdhesh Kumar Mishra (Accountant Member)

Assessment Year: 2017–18