TaxTMI 
TaxTMI 
2016 (5) TMI 34
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....essment year, was engaged in the business of cellular phone, landline services and its associated value added service. The assessee had filed return of income declaring income at Rs. 47,33,71,527/-. However, tax was paid under the provisions of MAT at book profit at Rs. 3,80,93,09,820/- computed u/s 115JB of the Income-tax Act. The assessment was completed at a gross total business income of Rs. 5,11,30,00,146/- and at net business income of Rs. 1,96,14,39,488/-, after making following additions/ disallowance i) Amortization of license fee and spectrum charges b u/s 35ABB of the Act Rs. 75,82,37,380/- ii) Disallowance of free airtime to distributors u/s 40(a)(ia) of the Act. 54,29,30,111 iii) Disallowance of roaming charges paid u/s 40(a)(ia) 13,74,72,942 iv) Lease Rental paid to IBM 4,94,27,528 4. Ld. CIT(A) partly allowed the assessee's appeal. 5. Being aggrieved, both assessee and the department are in cross appeal before us. First we first take up the assessee's appeal vide ItA no. 3394/Del/2012. The assessee has raised following grounds of appeal: "1. That the learned Commissioner of Income tax (Appeals) ["CIT (A)"] has erred....
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....ia) for non-deduction of TDS under various provisions of the Act. 7. Brief facts apropos ground nos. 1 & 1.1 are that the assessee had provided free airtime to distributors amounting to Rs. 44,38,34,767/- for Rajasthan Circle and Rs. 9,90,95,344/- for North-East Circle, amounting in total to Rs. 54,29,30,111/-. The AO noticed that this free talk-time was being given as a discount or margin to the distributors on the retail price of prepaid products. Thus, he concluded that this amount was in the nature of commission expenses on which TDS was liable to be deducted u/s 194H of the Act. However, since the assessee had not deducted TDS on this amount on the ground that the transaction between the assessee and its distributors were carried out on principal to principal basis and, thus, were outside the purview of provisions of section 194H and thereby sec. 40(a)(ia) of the Act was not applicable. 8. The AO, however, did not accept the assessee's contention in view of the decision of Hon'ble Delhi High Court in the case of CIT Vs. Idea Cellular Ltd. (2010) TIOL 139, wherein the relationship between the assessee, who was also a telecom service provider like the assessee and the dist....
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....of section 194J are not attracted, because the charges were not towards fees for rendering any technical services as is envisaged in section 194J. 14. Ld. counsel further pointed out that ITAT Jaipur Bench in the case of assessee in ITA nos. 251 to 256/JP/2013 for AY 2004-05 to 2008-09, a copy of which is contained at pages 710 to 725 of PB, has followed the decision for AY has 2009-10 in regard to both the issues. 15. Ld. counsel further submitted that the ITAT Gauhati Bench in the case of assessee in ITA nos. 258 to 262/Gau/2013 for AY 2006-07 to 2010-11, a copy of which is contained at pages 638 to 644 of PB, has also held that the provisions of section 194H are not applicable in regard to discount allowed to distributors. 16. With reference to aforementioned decisions of the ITAT in assessee's own case for various assessment years including AY 2008-09, ld. counsel submitted that since in assessee's own case the applicability of the provisions of section 194H in regard to discount allowed to distributors has been held to be not applicable, therefore, there is no question of any disallowance u/s 40(a)(ia). He pointed out that the decision of Hon'ble Jurisdictional High C....
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....l's The Interpretation of Statutes, 12th edition (1969) it has been observed:- "The strict construction of penal statutes seems to manifest itself in four ways: in the requirement of express language for the creation of an offence; in interpreting strictly words setting out the elements of an offence; in requiring the fulfilment to the letter of statutory conditions precedent to the infliction of punishment; and in insisting on the strict observance of technical provisions concerning criminal procedure and jurisdiction." 18. Ld. counsel further submitted that computation and charging provision cannot operate de hors the machinery provisions. Ld. counsel submitted that in view of the decision of the Gauhati Bench and Jaipur Bench of the ITAT, wherein it has been held that machinery provisions do not come into play because there was no income which arose to payee from transaction, the provisions of section 40(a)(ia) could not be resorted to. He relied on the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty 128 ITR 294 and also son the decision of Hon'ble Supreme Court in the case of CIT Vs. Eli Lilly & Co. (India) Pvt. Ltd. 312 ITR 225 (SC), wherein it....
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.... to whether distributor has already paid tax on the income earned by him through the purchase and sale of prepaid cards. He pointed out that if the deductee has already paid all taxes no disallowance can be made u/s 40(a)(ia) in view of the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. 293 ITR 226. 24. Ld. DR submitted that Hon'ble Jurisdictional High Court in the case of Idia Cellular, relied by AO, has held that discount allowed to distributors is covered by the provisions of section 194H. Ld. DR submitted that AO while doing assessment has to independently decide whether there was default of non-deduction of tax or not. He submitted that the order passed u/s 201 is no precedence and, therefore, the decision rendered by ITAT Jaipur as well as Gauhati Benches cannot be resorted to for deciding whether the provisions of section 40(a)(ia) were attracted or not. In sum and substance ld. DR submitted that TDS provisions contained in chapter XVII-Boperate independent of charging and computation provisions. 25. Ld. DR submitted that decision in the case of JDS Apparels (supra), Hon'ble Delhi High Court has not decided any question of law ....
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....g services did not require any human intervention. He pointed out that this fact is based upon context that the question is regarding providing roaming services to an independent customer of other operator. He submitted that the correct context is that the service is provided to the telecom operator by virtue of agreements between two telecom operators. 33. He pointed out that a customer is having contract/ agreement with his/ her telecom operator and does not have any contract/ agreement with the telecom operator providing roaming services. He pointed out that fact of determining of charge based on calls made is method of calculation. There is no bar to have clauses in the agreement (between the two telecom operator) to provide some other method of charging. 34. Ld. DR relied on his earlier argument with reference to applicability of TDS provision u/s 194H. 35. We have considered the rival submissions and have perused the record of the case. Admittedly, as regards discount allowed to distributors in respect of prepaid cards, the Gauhati Bench of the ITAT as well as Jaipur Bench of ITAT in assessee's own case for AY 2008-09 have clearly held that the said provisions of sec....
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....as under: "According to the learned counsel, the TDS provisions are in the nature of machinery provisions which enable easy calculation and recovery of tax. The said provisions are independent of the charging provisions, which are applicable to the recipient of income, whereas TDS provisions are applicable to the payer of income. According to the learned counsel, therefore, the obligation to deduct tax at source is on the deductor, which is independent of the assessment of income in the hands of the expatriate employee(s); the deductor is obliged to deduct at source only from the payment made by the deductor or payment made on his behalf or on his account. Therefore, according to the learned counsel, each employer is required to comply with and deduct tax from out of the salaries paid by such employer. The obligation does not extend to deduction of tax out of salaries paid by any other person, which is not on account of or on behalf of such employer, notwithstanding that such salaries may have nexus with the service of the employee with that employer and may be assessable to tax in India in the hands of the recipient employee. According to the learned counsel, on the facts, the ....
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....tty reported in [1981] 128 ITR 294, the 1961 Act is an integrated code. To anser the contention herein we need to examine briefly the scheme of the 1961 Act. Section 4 is the charging section. Under section 4(1), total income ear is chargeable to tax. Section 4(2), inter alia, provides that in respect of income chargeable under sub-section (I), income-tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which, inter alia, brings in the IDS provisions contained in Chapter XVII-B. In fact, if a particular income falls outside section 4(1) then the TDS provisions cannot come in: Under section 5, all residents and non- residents are chargeable in respect of income which accrues or is deemed to accrue in India or is received in India. Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable under section 5 (2) (b) in respect of income deemed by section 9 to accrue in India. Section 9 which deems certain categories/heads of income to accrue in India has no application in cases where income actually accrues in India. Likewise, section 9 does not apply in cases where income is received in India....
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.... section 9(1) with section 160 and section 161 which are machinery sections (See The Law and Practice of Income Tax by Kanga and Palkhivala, eighth edition, at pages 1268 and 1269). (b) Similarly, section 40(a)(iii), quoted above, which finds place in Chapter N (computation of business income), inter alia, states that any payment which is chargeable under the head "Salaries", if it is payable outside India or to a non-resident and if the tax thereon is not deducted from such payment under Chapter XVII-B then notwithstanding the entitlement of the assessee to claim deduction, the same will be disallowed for such non-deduction of tax at source . The above examples show that the 1961 Act is an integrated code in which one cannot segregate the computation machinery from the collection and recovery machinery." 42. Therefore, the provisions contained in Chapter XVIIB have to be given effect to while quantifying the liability of an assessee. The computation of income cannot be effected without having recourse to section 40(a)(ia) and consequently to provisions of chapter XVII-B. Section 40(a)(ia) comes into play when any interest, commissions or brokerage etc. payable....
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....s not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee ahs deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso." 46. This proviso, though applicable from 1.4.2013 but primarily deals with procedural aspects and, therefore, will be applicable to all pending proceedings also. 47. Facts in A.Y. 2006-07 being identical following the decision for AY 2008-09, the assessee's appeal is allowed. 48. As far as ground nos. 2 and 3 are concerned, since Jaipur Bench of Tribunal has held for assessment year 2008-09 that provisions of section 194J are not applicable, therefore, for the reasoning given for ground nos. 1 & 1.1, the assessee's both grounds are allowed. ITA no. 2795/Del/2012 (Revenue's appeal): 49. The department has raised following grounds of appeal: "1. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 75,82,37,380/- made by the AO on account of amortization of license fee and spectrum charges U/S 35ABB of the IT Act. 2. ....
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....e Delhi High Court. He, accordingly, made addition of Rs. 75,82,37,380/-. 52. Before ld. CIT(A) the assessee submitted that in the case of assessee company for AY 2003-04, 2004-05, 2006-07 and 2007-08 the CIT(A)-V, New Delhi considered the said issue and allowed the claim of the company as revenue expenditure u/s 37(1) of the Act. It was further pointed out that all the appeals have been decided by the ITAT Delhi in favour of the company. 53. Ld. CIT(A) has noted the findings of the ITAT at page 4 of his order which are reproduced hereunder: "We have considered the facts of the case and rival submissions. The operative portion of the order of the Tribunal is contained in paragraphs 9 and 10, which are reproduced below for ready reference:- Quote 9. We have heard the rival submissions. We have perused the order of this Tribunal in the case of to supra. It is noticed that the Bombay Bench of this Tribunal in the case of MTNL has after considering the various details and submissions of the assessee and the revenue therein, has held that the licence fee was paid only for the use of the right to do the business of telecom provider. The said right did not gi....
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....xpenditure will qualify for deduction as per Section 35ABB of the Act. 48. The appeal ITA No. 417/2013 by the Revenue in the case of Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999- 2000 i.e. year ending 315t March, 1999. It is for the period prior to the period 315t July, 1999. As per the discussion above, the licence fee payable on or before 31st July, 1999 should be treated as capital expenditure and the licence fee payable thereafter should be treated as revenue expenditure. In view of the aforesaid position, the question of law admitted for hearing in this appeal as recorded in the order dated 21st August, 2013, has to be answered in favour of the revenue and against the respondent assessee. 57. He, therefore, submitted that this issue is now covered by the decision of the Hon'ble Delhi High Court. 58. We have considered the submissions of both the parties and have perused the record of the case. We find that the question of law on this issue, framed by the Hon'ble Delhi High Court reads as under:- "1. Did the Tribunal fall into error in holding that the variable licence fee paid by the assessees was properly deductible as revenue expend....
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....of account the company has made additions to fixed assets amounting to Rs. 4,47,18,653/- and depreciation thereon amounting to Rs. 50,26,726/- has been charged Additionally, Rs. 20, 98, 38, 684/- on account of services received (as part of the composite IT contract) has been debited to Legal and Professional charges. The above charge to the Profit and Loss Account namely: I. Depreciation on leased assets as per books of accounts Rs. 50,26, 726/- and II. Rs. 20,98,38,684/- debited to Legal and professional charges has been added back while computing the income under normal provisions of the Income. Tax Act 1961 (the Act) Consequently, the amount paid during the previous year to the vendor as lease rental amounting to Rs. 26,42,92,938/- has been claimed as an admissible deduction. Further no depreciation has been claimed under the Act on aforesaid assets." 63. The AO observed that similar treatment was being given in the case of M/s Bharti Airtel Ltd., an associate concern of the assessee company, in respect of lease rentals being paid in a similar manner to IBM. However, for AY 2006-07 the AO had disallowed the lease rental being paid to IBM while al....
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.... out that assessee had accounted for IBM composite outsourcing agreement as finance lease following AS-19. Similarly, the assessee had entered into a contract with Nortel Networks India Pvt. Ltd. to outsource its call center service. The accounting of this outsource agreement was done as Finance Lease following AS-19. The assessee submitted that the AO disregarded service cum lease agreement, entered into by the assessee with IBM and Nortel. The assessee pointed out that the agreement was a composite agreement for leasing of equipment and service to be rendered by IBM. Similarly, the assessee company holding company M/s Bharti Airtel Ltd. entered into an agreement with Nortel on 13.3.2006, which was also a composite agreement for leasing of equipment and services to be rendered by Nortel. The assessee explained that it prepared its account as per AS-19 issued by the Institute of Chartered Accountants of India, which required that lease contracts had to be broken up to be disclosed in a manner which reflects interest, depreciation on the fixed assets and other service charges separately. Thus, as required by the Accounting Standard, the cost of the fixed assets was debited to the fi....
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....ion, which are used/provided in the provision of the SI ITO. The Asset Register shall be accessible to SHARTI at all times. IBM will perform physical asset tracking using bar codes or equivalent technology. The Asset Register will contain three classifications of Assets: a. Bharti owned, rented or leased Assets which IBM will manage and maintain during the Term. b. IBM owned Assets for the internal use of IBM that will not be transferred to Bharti upon exit. These assets are expected to consist of PC's, PC Software, Peripherals, servers required for IBM employees to perform their responsibilities. c. IBM owned Assets used to provide SI ITO to Bharti under the Agreement and which shall be transferred to Bharti upon exit. d. Assets listed as set forth in a) and c) above will be used solely for the purposes of providing SI ITO for Bharti, unless otherwise agreed by the parties. 69. With reference to above clause, ld. DR pointed out that it is primarily the agreement for financing the asset in effect purchased by assessee. 70. Ld. DR further submitted that assessee in its notes to account has clearly stated that it was a finance lease ....
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....ng to Insurance and Risk of loans is contained, which reads as under: "IBM will comprehensively insure all insurable assets contained in the Asset Register, except BHARTI Machines. Against loss or damage, including loss or damage by fire, floods, riots and other natural calamities Bharti will insure all Bharti Machines. IBM will procure transportation insurance, where applicable IBM will procure insurance for its employees in accordance with its human resources policies and as required under relevant laws and regulations applicable to IBM. Each party will provide certificates of insurance evidencing compliance with this Section to the other." 79. With reference to all above clauses of SI ITO out sourcing agreement, ld. counsel submitted that assessee was paying only service charges and no payments were made with respect to assets. 80. Ld. counsel relied on following decisions: - ICDS Ltd. Vs. CIT 350 ITR 527; - CIT Vs. Shaan Finance (I) Ltd. 231 ITR 308 (SC) - CIT Vs. Reetu Finlease P. Ltd. 286 ITR 652 (Del.). 81. Ld. counsel submitted that in the case of ICDS Ltd. (supra), the company in course of its business had given on lease plant &....