The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed two appeals filed by the Income Tax Department against Reliance Jio Infocomm Limited for Assessment Year 2019-20 and held that the foreign telecom payments by Jio not royalty or Fee For Technical Service (FTS).
The Bench comprising Judicial Member Amit Shukla and Accountant Member Arun Khodpia upheld relief granted by the Commissioner of Income Tax (Appeals) on two substantial issues.
The first involved operational expenditure of ₹1,10,03,17,60,701, or over ₹1,100 crore, which was capitalised as Capital Work-in-Progress (CWIP) in the company’s books but claimed as revenue expenditure for income-tax purposes.
The second involved a ₹66,65,41,174 disallowance under Section 40(a)(i) relating to payments to non-resident telecom operators for voice termination, bandwidth and operation and maintenance services. The consolidated order was pronounced on August 21, 2026.
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₹1,100 Crore CWIP Dispute: Accounting Treatment Not Conclusive for Income Tax
The first dispute arose from the Revenue’s challenge to the CIT(A)’s deletion of a disallowance exceeding ₹1,100 crore. Reliance Jio had capitalised the expenditure in its financial statements under CWIP but claimed it as revenue expenditure while computing its taxable income.
The Tribunal identified the central question as whether an expenditure’s treatment as CWIP in the books automatically determines its character under the Income-tax Act, or whether its deductibility must independently be decided by examining its actual nature, purpose and the business circumstances in which it was incurred.
Reliance Jio’s commercial operations had already commenced in FY 2016-17. By March 31, 2019, it had around 306.7 million subscribers and had earned operational revenue of approximately ₹38,838 crore. The Tribunal considered these facts important because the expenditure was incurred when the telecom business was already operational and generating substantial revenue, rather than during the initial setting-up of the business.
The disputed expenditure covered recurring operational heads including interconnect charges, employee costs, professional fees, call-centre expenses, power and fuel, repairs and maintenance, other network costs, interest, selling and distribution expenses, exchange losses, customer-service expenditure, bank charges, rates and taxes, ILL expenses and travelling expenditure.
Importantly, the company had separately capitalised expenditure incurred on the actual acquisition and construction of telecom assets. The controversy was therefore confined to indirect and operational expenditure that had been allocated to CWIP under the accounting policy followed by the company.
ITAT: Tax Character Must Depend on Real Nature of Expenditure
The Tribunal drew a clear distinction between the accounting point of capitalisation and the character of expenditure under income-tax law.
It observed that accounting treatment is certainly a relevant circumstance but cannot substitute an examination of the true nature of the expenditure. Whether an outgoing is capital or revenue must ultimately depend upon what the money was spent on and what the expenditure brought about in the commercial framework of the taxpayer’s business.
The ITAT noted that telecom infrastructure cannot remain static after commercial operations begin. A nationwide telecom network requires continuous optimisation, strengthening, maintenance and enhancement to cope with increasing voice and data traffic and to maintain service quality.
Consequently, the mere fact that expenditure is connected with improvement or optimisation of a network does not automatically make it capital expenditure. The relevant question is whether the expenditure creates a new asset or enlarges the fixed profit-making apparatus, or merely represents the cost of efficiently operating the apparatus already in existence.
The Tribunal further found that the Assessing Officer had not carried out a head-wise exercise to establish a demonstrable nexus between the constituent expenses and the acquisition or creation of a capital asset. Instead, the entire amount had essentially been treated as capital because it appeared as CWIP and was associated broadly with network improvement or upgradation.
Large Amount Alone Cannot Turn Revenue Expense Into Capital Expense
The ITAT also made an important observation regarding the sheer size of the claim.
It held that the magnitude of expenditure cannot determine its legal character. Although the amount involved exceeded ₹1,100 crore, whether an expenditure is capital or revenue is a qualitative rather than quantitative test.
The Tribunal observed that the amount had to be viewed in the context of a nationwide telecom enterprise earning approximately ₹38,838 crore in operational revenue and serving more than 300 million subscribers. A recurring operational expense does not become capital expenditure simply because the enormous scale of the business results in a large aggregate amount.
Conversely, even relatively small expenditure could be capital if incurred for acquiring or creating an asset or an advantage in the capital field.
₹1,100 Crore Disallowance Deleted
The ITAT ultimately upheld the CIT(A)’s conclusion that expenditure incurred for meeting Quality of Service parameters in relation to assets already installed and put to use did not create a new asset of an enduring nature. Rather, it facilitated efficient operation of Reliance Jio’s existing telecom network.
The Tribunal also relied upon its decision in the company’s own case for AY 2018-19 and decisions of the Bombay High Court involving group concerns.
Accordingly, it upheld the deletion of the ₹1,10,03,17,60,701 disallowance and dismissed the Revenue’s grounds in ITA No. 3540/Mum/2026.
Second Dispute: ₹66.65 Crore Payments to Foreign Telecom Operators
The second Revenue appeal concerned reassessment proceedings and a disallowance of ₹66.65 crore under Section 40(a)(i).
The Assessing Officer had taken the view that payments made to non-resident telecom operators for voice termination, bandwidth and operation and maintenance services constituted “royalty” and/or “fees for technical services” (FTS). On that basis, the payments were considered taxable in India, triggering an obligation on Reliance Jio to deduct tax at source under Section 195. Since tax had not been deducted, the expenditure was disallowed.
The reassessment was substantially founded on an earlier Section 201 proceeding in which the international taxation authorities had treated the company as an assessee-in-default for failure to deduct tax on the same overseas remittances.
The payments covered voice termination services, bandwidth services and annual operation and maintenance services involving overseas telecom entities.
Use of Sophisticated Telecom Technology Does Not By Itself Create Royalty or FTS
A crucial issue before the Tribunal was whether the use of sophisticated equipment, telecom networks and technical processes by the foreign service providers meant that Reliance Jio itself had acquired a right to use equipment or received technical services.
The company’s case was that it merely delivered traffic at agreed interconnection points and received the contracted connectivity or termination service. The foreign telecom operator independently controlled how its network, equipment and technical resources were deployed.
No identified equipment was placed in Reliance Jio’s possession or control, it did not operate the overseas network, and no technical resource was earmarked for its exclusive use.
The company also contended that voice traffic was carried and terminated automatically after the interconnection arrangement became operational. Any technical intervention, servicing or repairs were undertaken by the foreign operator’s personnel for operating their own network rather than by personnel whose technical services had specifically been contracted by Reliance Jio.
The CIT(A) had accepted that the foreign operators’ deployment of sophisticated technology did not amount to granting Reliance Jio possession, control or dominion over their network, equipment or processes.
Similarly, no technical knowledge, experience, skill, know-how or process was “made available” to Reliance Jio so that it could independently apply such technology thereafter.
Foreign Operators’ Receipts Were Business Profits, Not Taxable in India Without PE
The CIT(A) had further held that once the receipts did not qualify as royalty or FTS/FIS under the applicable Double Taxation Avoidance Agreements, they constituted business profits of the foreign telecom operators.
There was no finding that the relevant non-resident operators had a Permanent Establishment (PE) in India to which those receipts could be attributed. Accordingly, the receipts were not taxable in India under Article 7 of the relevant tax treaties.
The consequence was that the payments were not chargeable to tax in India, no obligation arose under Section 195, and therefore Section 40(a)(i) could not be invoked for non-deduction of tax.
The Tribunal also noted earlier decisions involving the same or substantially similar telecom services, including proceedings concerning the recipients themselves, where voice termination, bandwidth and O&M receipts had been held not taxable as royalty or FTS under the applicable India-Singapore and India-USA tax treaties.
Section 40(a)(i) Cannot Survive Without Underlying TDS Obligation: ITAT
The Tribunal stressed that a disallowance under Section 40(a)(i) cannot operate independently of the underlying withholding-tax obligation.
Where tax was not deductible under Section 195 because the payment itself was not chargeable to tax in India, failure to deduct tax could not result in disallowance of the expenditure.
It accordingly held that payments for voice termination, bandwidth and O&M services to the concerned non-resident telecom operators were not chargeable to tax in India as royalty or FTS/FIS under the applicable DTAAs. In the absence of a PE in India, the receipts constituted business profits that were also not taxable in India under Article 7.
The Tribunal therefore upheld deletion of the ₹66,65,41,174 disallowance and rejected the Revenue’s appeal on this issue.
Reliance Jio had also sought to support the CIT(A)’s ultimate order by challenging the validity of reassessment under Rule 27 of the ITAT Rules. However, since the Revenue’s appeal had already failed on merits, the company submitted that adjudication of those grounds was unnecessary and that the legal contentions concerning reopening could remain open.
Both Revenue Appeals Dismissed
Concluding the consolidated proceedings, the Mumbai ITAT found no material distinction in facts or law that warranted departure from the judicial view already taken in Reliance Jio’s own cases and in proceedings concerning the recipient telecom entities.
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