Customer acquisition costs including handset subsidies are revenue expenditure; Disallowance by AO contradictory to revenue recognition

Issue

Whether “Customer Acquisition Costs” (CAC) comprising porting charges, data entry charges, and handset subsidies incurred by a telecom service provider are allowable as revenue expenditure under Section 37(1) of the Income-tax Act, 1961, or if they constitute capital expenditure providing an enduring benefit.

Facts

Nature of Business: The assessee is engaged in the business of providing telecommunication services.
The Expense: For the Assessment Year 2017-18, the assessee claimed a deduction for “Customer Acquisition Costs” amounting to approximately ₹169.09 Crores. These costs included:
- Porting Charges: Fees paid for MNP (Mobile Number Portability).
- Data Entry Charges: Costs for digitizing customer details (CAF entry).
- Handset Subsidy: Compensation paid to distributors to cover the loss incurred by selling handsets to customers at a price lower than the cost price (a marketing strategy to acquire subscribers).
AO’s Stand: The Assessing Officer (AO) disallowed the entire amount, treating it as capital expenditure. The AO argued that acquiring customers creates an “enduring benefit” by enlarging the customer base, which is akin to acquiring a capital asset.
Contradictory Approach: While the AO capitalized the subsidy/loss on handsets, he simultaneously accepted the subsidized sale proceeds recovered from customers as revenue receipts in the Profit & Loss account.

Decision

Held in favour of the Assessee.

Nature of Expenses: The Tribunal held that porting charges and data entry charges are routine operating expenses incurred in the normal course of business. They are essential for running the telecom service and do not create any new asset or right of a permanent nature.
No Enduring Benefit: The “enduring benefit” test must be applied pragmatically in the telecom sector. Acquiring a customer does not guarantee a permanent income stream due to high churn rates (customers can switch operators easily). Thus, the expenditure is for facilitating business operations and generating revenue, not for creating a capital asset.
Contradiction by AO: The Tribunal found the AO’s approach legally unsustainable. The AO cannot blow hot and cold by treating the receipts from handset sales as “revenue” while treating the corresponding cost/subsidy required to generate that sale as “capital.” If the receipt is revenue, the direct cost incurred to earn it must also be revenue.
Conclusion: The customer acquisition costs, including the handset subsidy, were held to be revenue expenditure allowable under Section 37(1). The disallowance was deleted.

Key Takeaways

Customer Acquisition is Revenue: Costs incurred to acquire customers (marketing, subsidies, processing fees) are generally revenue in nature as they relate to the day-to-day running of the business and profit generation, not the creation of a fixed capital asset.

Consistency Principle: Tax authorities cannot treat the income from a transaction (e.g., sale of handsets) as revenue while capitalizing the direct expenses (e.g., subsidy/discount) incurred to generate that specific income.

Enduring Benefit Limitation: In dynamic industries like telecom, the “enduring benefit” test fails if the benefit (customer retention) is uncertain and short-lived.

IN THE ITAT DELHI BENCH ‘C’

Tata Teleservices Ltd.

Assistant Commissioner of Income-tax

SATBEER SINGH GODARA, Judicial Member
and Avdhesh Kumar Mishra, Accountant Member

IT Appeal No. 2549 (Delhi) of 2024
[Assessment year 2017-18]

OCTOBER 27, 2025

Ms. Ananya Kapoor, Salil Kapoor and Shivam Yadav, Advs. for the Appellant. Dayainder Singh Sidhu, CIT-DR for the Respondent.

ORDER

Avdesh Kumar Mishra, Accountant Member.- This appeal of the assessee for Assessment Year (‘AY’) 2017-18 is directed against the order dated 29.03.2024 of the Commissioner of Income Tax (Appeals), NFAC, New Delhi [‘CIT(A)’].

2. The relevant facts giving rise to this appeal are that the assessee filed its Income Tax Return (‘ITR’) of the relevant year declaring loss of (-) INR 3,242,981,672. The case was scrutinized and consequential assessment was completed at loss of (-) INR 902,080,867 under section 143(3) of the Income Tax Act, 1961 (‘Act’) on 28.09.2021. Aggrieved, the assessee filed appeal before the Ld. CIT(A) and succeeded partially. Before us, the assessee has challenged only the disallowance of Customer acquisition cost amounting to INR 169,08,54,302. The customer acquisition cost has been incurred with respect to porting charges, data entry charges with respect to customer details, subsidy on handsets i.e. compensation paid to the distributors for the loss on sale of handset to customers at a price lower than the cost price to make the handsets, etc. The assessee claimed the customer acquisition cost as revenue expenditure as the same were incurred in normal course of business, which did not result any enduring benefit. Whereas the Ld. Assessing Officer (‘AO’) held the customer acquisition cost as capital expenditure and disallowed the same as under:

“6. Customer Acquisition cost: Vide notice u/s 142(1) dated 26/03/2021 the assessee was inter alia, asked to Provide the amount and details of customer acquisition cost for the year and explain the allowability of the same as deduction. In reply dated 03.04.2021 the assessee stated that:

“The expense of INR 169,08,54,302 has been recognized as Customer Acquisition costs during the subject year.” The assessee has claimed that customer acquisition cost is a revenue expenditure. The assessee has placed reliance on the following: Empire Jute Co. India Ltd. v. CIT [124 ITR 1] (SC) SBI Cards & Payment Services (P.) Ltd. Versus Commissioner of Income-tax-III (ITA No. 603/2014) (Delhi High Court) Indian Visit.com (P.) Ltd. v. Commissioner of Income-tax, Delhi-IV (ITA No. 1011/2008) (Delhi HC) CIT v. Gujarat Mineral Development Corporation (1980) (132 ITR 377) (Guj) Eastern Investments Ltd. v. CIT 1951 (20 ITR 1) (SC) S. A. Builders Ltd. v. CIT (A) 2007 (288) ITR 1 (SC) Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT. [1997] 223 ITR 101 (SC) CIT v.Dhanrajgirji Raja Narasingirji[1973] 91 ITR 544 (SC).

Further the assessee has submitted that, “The assessee further submits that wherever the legislature intends to allow expenditure on deferred basis, it clearly provides so in the statue. Intention of the statue is to allow deductibility of expenditure on revenue/capital basis. That, however, wherever expenditure is to be allowed to the assessee Company on deferral basis, specific exceptions have been specifically provided in the statue. For example: Section 35D, Section 35DDA etc. which deals with amortization certain of expenditure. TTSL humbly submits, that, had the intention of the statue been to allow prorata deduction of aforesaid expenditure incurred, the same would have been expressly included under the provisions of any specific section under the Act.”

The assessee has placed reliance on the following: Taparia Tools Limited versus Joint Commissioner of Income Tax Commissioner of Income Tax v. Citi Financial Consumer Finance Ltd (335 ITR 29) (Del HC) C.I.T. V/s. ACC Ltd. [172 ITR 257] (SC) Hindustan Commercial Bank Ltd. [21 ITR 353] (HC) R.K. Swamy Advertising Associates (P) Ltd. [44.ITD 99] [Mad ITAT] The assessee has made the following conclusion; “Therefore, expense incurred by TTSL with respect to customer acquisition cost cannot be deferred as there is no concept of deferred expenditure in Income Tax Law and further, the assessee has not incurred these expenses to acquire any fixed assets and hence such expenses have been correctly claimed as revenue expenditure. Considering the above, we submit that the aforesaid customer acquisition cost are incurred wholly and exclusively for the purpose of business and the benefit from which is not expected to be spread over number of years, are claimed as an allowable revenue expenditure under Section 37(1) of the Act.”

The assessee has also made the following request, “Without prejudice to the above, where your office still considers such amount to be capitalized, then we request you to kindly provide appropriate allowance/deduction for the amount similarly treated as capital expenditure to be amortized in the preceding years.”

The reply has been examined. From the explanation offered, it is clearly seen that the expenditure is towards subsidization of mobile handsets which is clearly of capital nature. Also the said amount is expended towards the cost of prospective customers with a view to retain them in future. This itself shows that there is no certainty involved in the expenditure and the assessee is in no position to know in present the future events of continuation of those customers in the subsequent years. The expenditure is not only of capital and prepaid nature but is also incurred in relation to an income which may be earned by the assessee in subsequent years. The claim for allowance of the same in this year is neither as per accounting norms nor in line with the provisions of Income Tax Act. It is also an admitted fact that such expense is to widen the customer base of the assessee which shall provide an impetus to the business of the assessee, as the customers acquired would be the source of assured economic benefit to the assessee in the time to come. Therefore, by acquiring an enlarged customer base, the assessee is acquiring business and commercial rights of enduring nature. Therefore, the acquisition cost paid by the assessee is towards acquiring an asset of enduring benefit. In case of Hindustan Coca Cola Beverages (P.) Ltd., the Hon’ble Delhi High Court, while upholding the view of the Income-tax Appellate Tribunal, Delhi Bench in treating goodwill as an intangible asset held that the meaning of business or commercial rights of similar nature if understood would mean commercial rights or such rights which are obtained for effectively carrying on business and commerce as is understood in a wider sense which encompasses in its fold many facets. The Hon’ble High Court held that any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset and therefore of capital nature rather than revenue. The Income-tax Appellate Tribunal Mumbai Bench in case of India Capital Markets (P.) Ltd. (supra), while considering a similar nature of acquisition of clientele held that acquisition of such clientele would come within the expression “any other business or commercial rights of similar nature” as the rights over the clients is used as a tool to carry on the business by the assessee and as such is capital in nature. Therefore, the assessee cannot claim the entire expenditure in the current assessment year but ought to have apportioned the same across the years. Further, the assessee could not substantiate why the said expenditure should be allowed during the assessment year under consideration. Hence the entire amount of Rs.169,08.54,302/- towards Customer Acquisition Cost is disallowed and added back to loss returned.”

[Emphasis supplied]

3. The Ld. CIT(A)’s upheld the disallowance of the customer acquisition cost as under:

“6.1 The assessee claimed that it has incurred certain cost with respect to cost of startup kits, printing of startup kits. SIM cards/prepaid vouchers, porting charges. data entry expense with respect to customer details, subsidy on handsets i.e. compensation paid to the distributors towards loss on sale of handsets to customers etc. amounting to INR 169,08,54,302. The same is reported as ‘customer acquisition cost’ under the group head of ‘Other expenses’ and reported in Note 31 of the Profit and Loss A/c for the subject AY.

6.2 The Appellant claimed the aforesaid expense as a revenue expenditure, as the same were incurred in normal course of business and benefit of the same does not bring any enduring benefit to the Appellant.

6.3 The Assessing Officer on consideration of the claim and submissions made during the assessment proceeding came to the conclusion that any expenditure made to increase the customer base of the assessee cannot be claimed to be revenue in nature and by the strength of the order of ITAT Mumbai, in the case of India Capital Markets Pvt. Ltd., held that the nature of expense made for acquisition of client would come within the expression of “any other business or commercial right of a similar nature” as mentioned in section 32 of the Income Tax Act. Therefore, the Assessing Officer disallowed the claim of the assessee of the entire amount of Rs.169,08,54,002/- and treated the same as capital in nature.

6.4 I have perused the issue and have also gone through the various judicial pronouncements, where similar issue has been dealt with. The Hon’ble ITAT Hyderabad, in the case of SKS Micro Finance Ltd. in ITA No. 1222/Hyd/2011 in an order dated 21.06.2013, held that customer base is an intangible asset against the entire world and therefore it is eligible for depreciation u/s.32(1)(ii) of the Act.

6.5 Respectfully following such judicial pronouncement, I hold that treatment made by the Assessing Officer in treating the said expenditure as capital to be correct. However, the assessee is eligible for getting depreciation on the said disallowed amount treating the same as an intangible asset as per section 32(1)(ii). The Assessing Officer is, therefore, directed to allow depreciation as per rate prescribed in Income Tax Rules, for intangible assets on the entire sum which he disallowed treating it as capital expenditure.”

4. Shri Salil Kapoor, Ld. Counsel of the assessee submitted that the customer acquisition cost was in the nature of revenue expenditure as the same were incurred in normal course of business and the benefit derived therefrom was not long lasting. It was submitted that the customer acquisition cost had been incurred with respect to porting charges, data entry charges with respect to customer details, subsidy on handsets i.e. compensation paid to the distributors for the loss on sale of handset to customers at a price lower than the cost price to make the handsets, etc. Such expenditure grouped under the customer acquisition cost did not bring any enduring benefit to the assessee. Hence, it was not a capital expenditure. Reliance was placed on the decision of the Hon’ble Delhi High Court in the case of CIT v. SBI Cards & Payment Services (P.) Ltd. (Delhi), wherein it had been categorically held that customer acquisition cost/expenditure was not a capital expenditure. Further, reliance was placed on decisions of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT ITR 1 (SC) and the Hon’ble Delhi High Court in the case of CIT v. Indian Visit.com (P.) Ltd (Delhi).

5. The Ld. Counsel submitted that learned CIT(A), relying on decisions of Tribunal in the cases of India Capital Markets (P) Ltd. and SKS Micro Finance Ltd. (AO also relied on these case laws), held that customer base was an intangible asset eligible for depreciation under section 32(1)(ii) of the Act though these decisions were not applicable in the case in hand as the facts of those cases were different; India Capital Markets (P) Ltd. and SKS Micro Finance Ltd. had acquired the customer base from another entities in slump sales, whereas the appellant assessee had acquired the customer base in its regular business and not on account of acquisition of customers from other entity. The Ld. Counsel, drawing our attention to the decision of the Hon’ble Supreme court in the case of CIT v. Excel Industries Ltd (SC), submitted that the deferment of expenditure by capitalization of the same did not serve any purpose in public interest as the dispute was limited to whether such expenditure could be allowed in one year as revenue expenditure or over the years in form of depreciation after capitalization of such expenditure. It was contended that the Revenue was not a gainer in this whole exercise as rate of tax over the years remained same and the case in hand was of returned and assessed Loss. He drew our attention the decision of the Hon’ble Supreme court in the case of Excel Industries Ltd. to submit that the Revenue should not continue with the litigation as it might not add anything to the public coffers. Mr. Kapoor submitted that the decision in the case of Excel Industries Ltd. (supra) was relied on by the coordinate bench in the assessee’s own case for the subject issue in Tata Teleservices Ltd v. ACIT [IT Appeal Nos. 27 and 28 (Delhi) of 2017, dated 18-6-2025] (AYs 2009-10 and 2010-11).

6. Mr. Kapoor submitted that the facts of AY 2011-12 were quite different than the case in hand. In AY 2011-12, the Ld. CIT(A) analyzed the customer acquisition cost and disallowed certain part of this expenditure with specific finding that party-wise details were not provided, etc., etc. Such expenditure was also confirmed by the Hon’ble Tribunal vide in the Tata Teleservices Ltd v. ACIT [IT Appeal No. 4150 (Delhi) of 2017, dated 26-8-2025]. It was submitted that none of the Authorities below had given any such categorical finding as they had not questioned the genuineness of the customer acquisition cost. The issue in dispute here was that whether the customer acquisition cost was revenue expenditure or capital expenditure. It was submitted that the case laws relied upon by the Authorities below were factually different and were not applicable here. Further the nature of expenditure in the present case was quite different and incurred in routine course of business rather that the onetime acquisition from others in slump sale. Our attention was also drawn to the order of coordinate benches of tribunal in earlier AYs other than AY 2011-12 and subsequent AYs 2012-13 to 2016-17 (order dated 26.08.2025 in ITA Nos. 5665 to 5668/Del/2019, ITA Nos. 5924 to 5927/Del/2019, ITA No. 337/Del/2021 and ITA No. 17/Del/2022).

7. On the other hand, the Ld. CIT-DR, placing emphasis on the finding of the Authorities below prayed for dismissal of the appeal.

8. We have heard both parties and have perused the material available on the record. We find force in the arguments/submissions/contentions of the Ld. Counsel. We are of the considered view that the case laws relied upon by the Authorities below are held factually different as the customer acquisition cost in cases relied upon by the Authorities below are onetime; whereas in the present case, it is in routine course of business regularly incurred year after year. Thus, the case laws relied upon by the Authorities below loss relevance here. Further, we have analyzed the customer acquisition cost/ expenditure and find that the genuineness of this expenditure is not in dispute here. The issue in dispute here is the allowability of the customer acquisition cost as revenue/capital expenditure. The revenue expenditure is allowed in the year of accrual/incurrence of the expenditure. Whereas the capital expenditure is allowed as deferred expenditure over the years in form of depreciation. It is a case of assessed loss. The nature of the customer acquisition cost is porting charges, data entry charges with respect to customer details, subsidy/compensation paid to the distributors for the loss on sale of handset to customers at a price lower than the cost price to make the handsets, etc. The porting charges and data entry charges are held in the nature of revenue expenditure as it is of not enduring benefit.

9. For the handset, there are two components; part recovered from customers and part subsidized by the assessee. We have taken note of the fact that the Ld. AO, on one hand, has held the subsidy/compensation on handsets as capital expenditure and on other hand, accepted the subsidized sale price of handsets recovered from customers disclosed as revenue receipts in the Profit & Loss Account. Such contradictory findings weaken the stand of Revenue. We have also considered the decisions of the coordinate bench in ITA Nos. 5665 to 5668/Del/2019, ITA Nos. 5924 to 5927/Del/ 2019, ITA No. 337/Del/2021 and ITA No. 17/Del/2022.

10. In view of the above, we are of the considered view that the disallowance of Customer acquisition cost of INR 169,08,54,302 is not justified as the same is in the nature of revenue expenditure. The appellant assessee gats consequential relief.

11. In the result, the appeal of the assessee is allowed.