2022 (12) TMI 692 - AT - Income Tax

Tribunal allows appeal, deletes disallowances under Sections 40(a)(ia) & 40(a)(i) on distributor discounts & IUC payments.

Bharat Sanchar Nigam Limited Versus ACIT Range-4 New Delhi

Bharat Sanchar Nigam Limited Versus ACIT Range-4 New Delhi - TMI Issues Involved:1. Validity of reopening of assessment proceedings.2. Addition on account of discount extended to prepaid distributors.3. Addition on account of IUC charges paid to foreign/non-resident telecom operators.Detailed Analysis:1. Validity of Reopening of Assessment Proceedings:The assessee challenged the validity of reopening the assessment proceedings. However, the Counsel for the assessee stated that this issue was not being pressed. Consequently, this issue was dismissed as not pressed.2. Addition on Account of Discount Extended to Prepaid Distributors:The primary contention was whether the discount extended to prepaid distributors should be treated as commission, thereby attracting the provisions of Section 194H of the Income Tax Act, 1961, and consequently disallowed under Section 40(a)(ia) for non-deduction of TDS.- The Assessing Officer (AO) observed that the assessee had shown service revenue from prepaid products after netting off the discounted amount given to distributors/franchisees. The AO estimated the discount at 5% and considered it as commission liable to TDS under Section 194H, relying on the Delhi High Court's decision in the case of Idea Cellular Limited, which held that the relationship between the telecom service provider and the distributors was one of principal to agent.- The CIT(A) upheld the AO's view, leading to the disallowance of Rs. 5095228342/-.- The Tribunal noted that a similar issue had been decided in favor of the assessee in its own case for A.Y. 2009-10, where it was held that the distributor margin was in the nature of a discount and not commission, and hence, TDS under Section 194H was not applicable.- The Tribunal also considered the conflicting views of the Delhi High Court in Idea Cellular (principal-agent relationship) and the Karnataka High Court in Bharti Airtel (principal-to-principal relationship). However, since the jurisdictional High Court (Delhi) had a binding precedent, the Tribunal was compelled to follow it.- Despite this, the Tribunal acknowledged the assessee's bonafide belief due to the conflicting High Court decisions and the third proviso to Section 194H, which exempts BSNL and MTNL from deducting TDS on commission payable to their public call office franchisees.- Consequently, the Tribunal directed the AO to delete the disallowance made under Section 40(a)(ia), as the assessee's belief was considered bonafide and the issue was debatable.3. Addition on Account of IUC Charges Paid to Foreign/Non-Resident Telecom Operators:The issue was whether the payments made for Interconnection Usage Charges (IUC) to foreign operators were subject to TDS under Section 195, and if the disallowance under Section 40(a)(i) was justified.- The AO disallowed Rs. 57,78,92,080/- under Section 40(a)(i) for non-deduction of TDS on IUC payments to foreign operators, treating them as fees for technical services or royalty.- The Tribunal referred to its decision in the assessee's case for A.Y. 2009-10, where it was held that IUC payments were neither fees for technical services nor royalty under Section 9(1)(vi) and 9(1)(vii) of the Act. This decision was based on the technical nature of the services, which did not involve human intervention, and the retrospective amendments to Section 9 by the Finance Act, 2012.- The Tribunal also noted that the payments did not accrue or arise to the foreign telecom operators in India, and they did not have a Permanent Establishment in India. Therefore, the payments could not be taxed in India under Article 7 of the Model OECD Convention.- Following these precedents, the Tribunal directed the AO to delete the disallowance under Section 40(a)(i), as the payments were not chargeable to tax in India, and TDS was not deductible.Conclusion:The appeal was partly allowed, with the Tribunal directing the deletion of disallowances made under Sections 40(a)(ia) and 40(a)(i) concerning discounts to prepaid distributors and IUC payments to foreign operators, respectively. The issue of reopening the assessment proceedings was dismissed as not pressed.