2017 (10) TMI 1093 - AT - Income Tax

Tribunal upholds reassessment, confirms disallowance on tax, reverses disallowance on IUC charges.

The tribunal upheld the reassessment under Section 147, confirmed the disallowance under Section 40(a)(ia) for non-deduction of tax on discounts given to ... Validity of assumption of jurisdiction to reassess u/s 147 - Held that:- Assessing Officer has not addressed the relevant issue in the original assessment order nor formed any opinion nor took any express decision thereupon. Moreover, we observe that the reassessment proceedings in the instant case got triggered on the basis of findings recorded by the Ld. AO in the assessment proceedings for the subsequent year i.e., AY 2011-12, vis a vis issue in dispute. This in our opinion would constitute to a material relevant for assumption of jurisdiction u/s 147. Support in this regard can safely be drawn from the decision of Hon’ble Bombay High Court in the case of Multiscreen Media Pvt. Ltd. vs. UOI (2010 (2) TMI 269 - BOMBAY HIGH COURT) wherein it is held that reassessment proceedings on the basis of subsequent assessment is valid.Proviso to section 147 is not applicable in the instant case since action u/s 147 has been initiated by issuance of notice u/s 148 dated 31st March, 2014 i.e., before expiry of 4 years from the end of the relevant assessment year. TDS u/s 194J - Disallowance u/s 40(a)(ia) - relationship between appellant and its distributors - Held that:- Section 194J was inserted with effect from July 1, 1995, till the assessment year in question that is the assessment year 2005-06 both the Revenue and the assessee proceeded on the footing that section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the Revenue has raised any objection or initiated any proceedings for not deducting the tax at source. In these circumstances, if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting the tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) . Appellant had a reasonable / bonafide cause for not deducting TDS on payment of discounts to the distributors / franchises of its repaid products. This is accordingly not a fit case for making disallowance of an expense by invoking penal provisions of section 40(a)(ia). Nature of payment - IUC charges between BSNL and Cable & Wireless UK - Held that:- Payment of IUC Charges is not “Fee for Technical Services” or “Royalty” within the meaning of its definition as per section 9(1)(vi) and 9(1)(vii) of the Act. Moreover, a perusal of sample agreement for payment of IUC charges between BSNL and Cable & Wireless UK in the instant case also clearly shows that a standard facility for availing interconnectivity services while roaming was availed by the appellant in the instant case. This does not require any human intervention. Thus we hold that payment for IUC Charges is not chargeable to tax in India in the hands of the non-resident recipients and hence TDS was not deductible as per provisions of section 195 of the Act. Therefore, we reverse the order of the Ld CIT(A) on this issue and decide the same in favour of the assessee List of Issues:1. Validity of assumption of jurisdiction to reassess under Section 147 of the Income Tax Act.2. Disallowance under Section 40(a)(ia) for non-deduction of tax on discounts given to distributors/franchisees for prepaid SIM cards and talk time.3. Disallowance under Section 40(a)(i) on payment of Interconnect Usage Charges (IUC) to International Telecom Operators.Issue-wise Detailed Analysis:1. Validity of Assumption of Jurisdiction to Reassess under Section 147 of the Income Tax Act:The appellant, a Government of India Undertaking, filed a return of income for the assessment year 2009-10. The assessment was completed under Section 143(3) of the Act. During the assessment proceedings for AY 2011-12, the AO observed that the appellant had offered discounts on its prepaid products to its distributors/franchisees, which were considered as 'commission' liable for tax deduction under Section 194H of the Act. Based on this observation, a notice under Section 148 was issued for AY 2009-10. The appellant objected to the reassessment, arguing that all material facts were disclosed during the original assessment, and the reassessment was merely a change of opinion. However, the tribunal upheld the reassessment, citing that the AO had not examined the issue of whether the discount was in the nature of 'commission' during the original assessment. The tribunal relied on the decisions of the Hon’ble Jurisdictional High Court and the Hon’ble Gujarat High Court to support its conclusion that the reassessment was valid.2. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax on Discounts Given to Distributors/Franchisees for Prepaid SIM Cards and Talk Time:The AO disallowed Rs. 631,71,72,727/- under Section 40(a)(ia) for non-deduction of tax on discounts given to distributors/franchisees, treating the discounts as 'commission' under Section 194H. The appellant argued that the relationship between BSNL and its distributors/franchisees was on a principal-to-principal basis, and the discounts were not 'commission.' The appellant relied on the decision of the Karnataka High Court in the case of Bharti Airtel Ltd. The tribunal, however, upheld the disallowance, relying on the decision of the Hon’ble Delhi High Court in the case of Idea Cellular Ltd., which held that the relationship between the telecom service provider and its distributors was one of principal to agent, and the discounts were in the nature of 'commission' liable for TDS under Section 194H. The tribunal also noted that the appellant had issued circulars in subsequent years directing the deduction of tax under Section 194H on discounts given to distributors/franchisees.3. Disallowance under Section 40(a)(i) on Payment of Interconnect Usage Charges (IUC) to International Telecom Operators:The AO disallowed Rs. 57,78,92,080/- under Section 40(a)(i) for non-deduction of tax on IUC charges paid to foreign telecom operators, treating the payments as 'fees for technical services' or 'royalty' under Section 9(1)(vi) and 9(1)(vii) of the Act and the applicable DTAA. The appellant argued that the payments did not constitute income in the nature of 'fees for technical services' or 'royalty' and were not chargeable to tax in India. The tribunal agreed with the appellant, citing the decision of the ITAT in the case of Bharti Airtel Ltd., which held that payment of IUC charges is not 'fees for technical services' or 'royalty' within the meaning of Section 9(1)(vi) and 9(1)(vii) of the Act. The tribunal also noted that the payment for IUC charges does not require any human intervention and is not chargeable to tax in India in the hands of the non-resident recipients. Therefore, the tribunal reversed the order of the CIT(A) on this issue.Conclusion:The tribunal upheld the reassessment under Section 147, confirmed the disallowance under Section 40(a)(ia) for non-deduction of tax on discounts given to distributors/franchisees, and reversed the disallowance under Section 40(a)(i) on payment of IUC charges to international telecom operators. The appeal of the assessee was partly allowed.