ITA nos. 3394/Del/2012 & 2899/Del/2013, ITA no. 2795/Del/2012

SHRI S.V. MEHROTRA: ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER

Shri Anil Bhalla CA and Shri V.K. Meena CA and Shri Gaurav Wadhwa CA For The Assessee :
Shri A.K. Saroha CIT (DR) For the Department :

ORDER

S.V. MEHROTRA, A.M:-The assessee as well as the revenue are in cross appeal against CIT(A)’s order dated 28.3.2012 for AY 2008-09. The assessee has also preferred appeal against CIT(A)’s order dated 13.02.2013 relating to AY 2006-07. Since, common issues are involved for adjudication, all these matters were heard together and are being disposed of by this composite order for the sake of convenience.

2. At the outset ld. counsel for the assessee submitted that since ld. CIT(A) has first decided the appeal for AY 2008-09, therefore, it would be proper to take up the cross appeals for AY 2008-09 first.

3. Brief facts of the case are that the assessee company, in the relevant assessment 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

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 both on facts and in law in confirming the addition made by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 (the "Act") of Rs. 54,29,30,111/- for non deduction of tax at source under section 194H of the Act on account of transaction with the distributors of prepaid vouchers treating the discount offered on sale of prepaid vouchers as commission.

1.1. That the learned CIT (A) has erred both on facts and in law in confirming the action of the Assessing Officer in treating the business relationship between the appellant and the distributor as principal and agent without going into the merits of the transactions.

2. That the learned CIT (A) has erred both on facts and in law in confirming the addition made by the Assessing Officer under section 40(a)(ia) of the Act of Rs. 11,84,32,385/- for non deduction of tax at source under section 194J of the Act on account of roaming charges paid to other service providers.

2.1. That the learned CIT (A) has erred both on facts and in law in confirming the action of the Assessing Officer in treating the payment made by the appellant to the other service providers for roaming as fee for technical services without deciding on the merits as to whether the provisions of section 194J of the Act is applicable to the payments for roaming.

3. That the learned CIT (A) has erred both on facts and in law in confirming the addition made by the Assessing Officer under section 40(a)(ia) of the Act of Rs. 1,90,40,557/- for non deduction of tax at source under section 194J of the Act on account of charges paid to International telecom operators for carnage and termination of calls at the foreign destination.

3.1 That the learned CIT (A) has erred both on facts and in law in confirming the action of the Assessing Officer in treating the payment made by the appellant to the international telecom operators as fee for technical services under section 194J of the Act without going into the merits of the transactions that such amount is not chargeable to tax in India.

4. That the learned Assessing Officer has erred on facts and in law in levying interest under section 234B of the Act.

5. The appellant craves leave to add to, alter, amend, or vary the above grounds of appeal at or before the time of hearing.

6. Grounds no. 1 to 3.1, raised by assessee are on account of disallowance made u/s 40(a)(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 distributors was held to be one of principal to agent. He pointed out that it was further held that the discounts offered to distributors were in the nature of commission and thereby liable to TDS u/s 194H of the Act. He, accordingly, made disallowance of Rs. 44,29,30,111/- u/s 40(a)(ia).

9. Brief facts apropos ground nos. 2 & 3 are that AO noticed that assessee had made payments of Rs. 13,74,72,942/- on account of roaming charges to various operators. AO was of the opinion that these payments were in the nature of fee for technical services and, therefore, TDS should have been deducted u/s 194J before making these payments. The assessee’s explanation was that it was collecting roaming charges from the subscribers and was paying to the other operators on behalf of the subscribers and, therefore, the provisions of section 194J were not applicable to roaming as well as interconnection charges. The AO observed that in its submissions dated 16.12.2010 as well as 21.12.2010 assessee had submitted that TDS was deducted on interconnect charges, both for North-East and Rajasthan Circles. He pointed out that since the two charges being roaming charges as well as interconnection charges were similar in nature, therefore, TDS was required to be made from roaming charges also. He, accordingly, made a disallowance of Rs. 13,74,72,942/- u/s 40(a)(ia) in respect of these charges.

10. Ld. CIT(A) upheld the AO’s action.
11. Aggrieved, the assessee is in appeal before the Tribunal.

12. At the outset, ld. counsel for the assessee submitted that the ITAT Jaipur Bench in the case of assessee in ITA no. 656/JP/2010 for AY 2009- 10, a copy of which has been filed in the PB at page nos. 601 to 637, has held that the provisions of section 194H are not applicable because the selling of prepaid products from the company to the distributor was actually a sale of right to service and, therefore, the provisions of section 194H were not applicable. It was held that the relationship was principal to principal basis because right to service had been sold. Thus, no income accrued to the distributor at the time of purchase of prepaid card.

13. He, further pointed out that as regards applicability of provision of sec. 194J in regard to roaming charges and interconnection charges it has been held by Jaipur Bench of the Tribunal for assessment year under consideration that provisions 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 Court, relied by AO cannot be made applicable in assessee’s case, more particularly because in assessee’s own case the provisions of section 194H has been held to be inapplicable. Ld. counsel submitted that for triggering the applicability of section 40(a)(ia), it is necessary that first there should be default of non-deduction of TDS which in assessee’s case has been held to be not there.

17. As regards the applicability of provisions of section 194J, in regard to roaming charges and interconnect charges, ld. counsel submitted that ITAT Jaipur Bench in assessee’s own case has held that the said provisions are not applicable. He pointed out that no decision of Hon’ble Jurisdictional High Court is available on this aspect and there is no High Court decision taking a contrary view. Ld. counsel referred to the decision of Hon’ble Delhi High Court in the case of CIT Vs. JDS Apparels (P) Ltd. (2015) 53 taxmann.com 139 (Del), wherein it has been held that the doubtful penalization should be avoided. He referred to para 17 of the said decision, which is reproduced hereunder:

17. Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal provisions. The said principle applies not only to criminal statutes but also to provisions, which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalising the assessee, who has failed to deduct tax at source and acts to the detriment of the assessee's property and other economic interests. It operates and inflicts ~ hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include initiation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell'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 has been held that under the Income tax Act, 1961, the machinery provisions formed an integrated code for the charging and the computation provisions, which determine the taxable income. Ld. counsel submitted that since for the instant assessment year assessee has been held to be not an assessee in default u/s 201, therefore, the said decisions will operate as res judicata.

19. Ld. counsel further submitted that any other interpretation will lead to absurd result inasmuch as penalty by way of section 40(a)(ia) would be imposed in an assessment year for a fault, which has been held not being committed in the same very year. He relied on the decision of Hon’ble Supreme Court in the case of A-One Cycles Ltd. Vs. ACIT 156 ITR 323 (SC), wherein it has been held that interpretation leading to absurd result should be avoided.

20. In the alternative, ld. counsel further submitted that where an assessee was under bona fide belief that tax was not deductible at source on payments made, no fault can be found with the assessee in not deducting the tax at source and, consequently, disallowance u/s 40(a)(ia) is not warranted. He submitted that for the period 1995 to December 2010 (assessment made in AY 2006-07), both revenue and assessee proceeded on the footing that section 194 H was not applicable. He relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Kotak Securities Ltd. 340 ITR 333.

21. The third limb of argument was that the provisions of section 40(a)(ia) will apply only to the amount payable at the end of the year. In support of this contention he relied on the decision of ITAT Special Bench in the case of Merilyn Shipping & Transports, Visakhapatnam 16 ITR (Trib.) 1 (Vizag) (SB). He further referred to the decision of Hon’ble Allahabad High Court in the case of Victor Shipping Services Pvt. Ltd. (ITA 122/2013) wherein it has been held that for disallowing expenditure from business and profession on the ground that tax has not been deducted, the amount should be payable and not which has been paid by the end of the year. SLP has been dismissed by the Hon’ble Supreme Court.

22. He, inter alia, relied on the decision of the ITAT in the case of Mr. Kanak Singh in ITA no. 5530/Del/2012 for the same proposition.

23. The next limb of argument was that provision of section 40(a)(ia) could not have been applied without determining as 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 as is evident from para 19 of the said order. He submitted that the provisions of section 40(a)(ia) are not penal in nature.

26. As regards roaming charges, ld. DR pointed out that there is no decision of Hon’ble Jurisdictional High Court on the said issue. However, the agreement is between two cellular services provider to provide complete net work, which definitely comes within the purview of rendering technical services.

27. Ld. DR submitted that ld. counsel is trying to travel beyond the provisions of section 40(a)(ia) inspite of the fact that there is no ambiguity in construction of the said provision. He submitted that the words employed in section 40(a)(ia) do not give any scope of travelling to provisions of section 201 or any other section for that matter.

28. He submitted that the provisions of section 201 are related to recovery of the amount which should have been deducted as TDS. It does not have any direct bearing of applicability of section 40(a)(ia).

29. As regards the alternate plea of bona fide belief taken by ld. counsel, he submitted that the assessee is a big company having full fledged legal/ tax department and has access to best professional advice. He submitted that since provisions of section 40(a)(ia) are not penal in nature, this plea cannot be accepted.

30. Ld. DR submitted that it is well settled law that if a person comes within the ambit of law, he must be taxed, however, the great hardship may appear to have been caused.

31. As regards alternate plea that provisions of section 40(a)(ia) are applicable on the amount payable at the end of the year, ld. DR submitted that the operation of order of Special Bench of the ITAT in the case of Merilyn Shipping & Transports, Visakhapatnam (supra), has been stayed by Hon’ble Andhra Pradesh & Telangana High Court. As regards the plea based on the decision in the case of Hindustan Coca Cola Beverage Ld. DR submitted that the said judgment has been delivered in regard to sec. 201, which is basically recovery section and section 40(a)(ia) are independent of section 201.

32. As regards applicability of TDS provisions u/s 194J to roaming charges, ld. DR submitted that the decision of ITAT Jaipur Bench is of no help to assessee because the correct facts had not been placed before the Tribunal. He pointed out that AO has decided the matter on the peculiar fact that the roaming 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 section 194H are not applicable. However, on this issue, admittedly Hon’ble Jurisdictional High Court in the case of Idea Cellular (supra) has held that the said provision is applicable.

36. As far as the issue regarding applicability of provisions of section 194J to roaming charges and interconnect charges, are concerned, Jaipur Bench of the ITAT in AY 2008-09 has held that the said provisions are not applicable.

37. Now we are pitted against the situation where Hon’ble Jurisdictional High Court is against the assessee on the issue regarding applicability of the provisions of section 194H, but in assessee’s own case for AY 2008-09 the Jaipur Bench of the ITAT as well as Gauhati Bench of the ITAT has held that the assessee is not in default on account of non-deduction of TDS u/s 194H in regard to discount allowed to distributors on prepaid cards.

38. The assessee’s contention is that these directions operate as res judicata and, therefore, no contrary view can be taken. In support of its contention, ld. counsel’s reliance is on the decision of Hon’ble Supreme Court in the caseof B.C. Srinivasa Setty (supra) and the decision of Eli Lilly (supra), wherein it has been held that the charging and computation provisions cannot operate de hors the machinery provisions. Therefore, we have to first examine whether the assessee’s case falls within the law laid down by Hon’ble supreme Court or not.

39. It is well settled law that the liability to tax arises by virtue of the charging section alone and it arises no later than the close of the previous year, though quantification of the amount payable is postponed.

40. The assessment order only quantifies liability which is already definitely and finally created by the charging sections. However, if qualification of tax liability is not possible the charge must fail. The Hon’ble Supreme Court in the case of Eli Lilly & Co. (India) 312 ITR 225 has held that the purpose of the provisions for deduction of tax at source in Chapter XVIIB of the I.T. Act is to see that from the sum which is chargeable u/s 4 for levy and calculation of income-tax, the payer should deduct tax thereon at the rate in force. They are meant for tantamount deduction of income-tax subject to regular assessment. In this case one of the argument advanced by Shri Ajay Vohra, counsel appearing on behalf of respondent assessee, inter alia, was 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 payment of salary by the foreign company in the Netherlands was not on behalf of or on account of the tax-deductor-assessee herein and, consequently, it was not under statutory obligation to deduct tax from the entire salary including the home salary, particularly when the expatriate(s) did not exercise the option under section 192(2) requiring the tax deductor-assessee herein to deduct tax from their aggregate salary income. Lastly, learned counsel submitted that each of the expatriate cemployee(s) had paid directly the taxes due on the home salary by way of advance tax self assessment tax from time to time. They had filed also the return of income, In such circumstances, according to the learned counsel, there was no loss to the Revenue occasioned on account of the alleged default by the assessee herein in not deducting tax from the entire salary or on account of short deduction of tax at source. According to the learned counsel, even if the assessee herein is to be regarded as an assessee-in-default in terms of section 201 of the Act, the tax alleged to be in default cannot be once again recovered from the assessee herein since the same stood paid by the expatriate(s).

41. Similar argument has been advanced by ld. DR before us. However, Hon’ble Supreme Court did not accept the assessee’s contention advanced by ld. counsel and has held at page 247-249 as under:

“On the question as to whether there is any inter-linking of the charging provisions and the machinery provisions under the 1961 Act, we may, at the very outset, point out that in the case of crr v. B. C. Srinivasa Setty reported in [1981] 128 ITR 294 this court has held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. We may add that, the 1961 Act is an integrated code and, as stated hereinabove, section 9(1) integrates the charging section, the computation provisions as well as the machinery provisions. (see section 9(l)(i) read with sections 160, 161, 162 and 163).
In the present case, it has been vehemently urged that the IDS provisions being machinery provisions are independent of the charging provisions whereas as held by this court in the case of B. C. Srinivasa Setty 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. Therefore, if the income is not received in India, a non-resident would not be chargeable to tax upon it unless it accrues or is deemed to accrue in India. Thus, a general charge of income- tax is imposed by sections 4 and 5, and that general charge is given a particular application in respect of non-residents by section 9 which enlarges the ambit of taxation by deeming income to arise in India in certain circumstances. Under section 9(1), income is deemed to accrue in India if it accrues directly or indirectly under the five circumstances mentioned therein. To give an example of as to how the 1961 Act is an integrated code we may state that section 9(1) explains the meaning of the words "deemed to accrue or arise in India" in section 5(2)(b). Section 9(1)(i) performs two functions:

I. It deems the above five categories of income to accrue: in India. The deeming provisions of this clause

(a) apply to residents and non-residents alike;
(b) have no application where income actually accrues in India or is received in India.
Both these points have been noted above in dealing with this section generally.

II. It specifies the categories of income in respect of which a vicarious liability is imposed by sections 160 and 161 on an agent to be assessed in respect of a non-resident's income. In performing his function, the clause

(a) applies to the income of non-residents alone;
(b) specifies the categories of income in respect of which the agent is vicariously liable even if the income actually accrues in India or is received in India.
Examples showing inter-linking of various provisions of the 1961 Act:

(a) It may be noted that sections 160(1)(i), 161, 162 and 163 are machinery sections. They do not affect the incidence of taxation under sections 4 and 5 which are the charging sections. Sections 160 and 161 provide a machinery for collection of a charge which is imposed in general terms elsewhere and yet sections 160 and 161 are sections which like section 201(1) impose a vicarious liability on an agent to be assessed in respect of the income of the principal. The liability is imposed under sections 160 and 161 in respect of the income of a non-resident principal and it is only in respect of the income falling within section 9(1) and not any other income. Therefore, one has to read 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 to a resident, on which tax was deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139 then such payments will not be allowed as deduction.

43. Therefore, it follows that there should be sum paid by assessee on which tax was deductible at source under Chapter XVIIB before 40(a)(ia) could come into play. Admittedly in the case of assessee, it has been held that the provisions of section 194H as well as provisions of section 194J are not attracted and therefore, there was no amount on which tax was deductible. Therefore, section 40(a)(ia) cannot come into play. The machinery provisions cannot operate independently and before the computation provisions contained in section 40(a)(ia) can come into the play, the effect of applicability of machinery provision has to be considered.

44. Now, if we accept the submissions advanced by ld. CIT(DR) that the provisions of section 40(a)(ia) and provisions of section 201operate in two independent fields then it would lead to contradictory findings by Tribunal for the same assessment year in respect of the same subject matter and issue. Had there been no decision of Tribunal in assessee’s own case for the same assessment year, then in view of the decision of Hon’ble Jurisdictional High Court in the case of Idea Cellular, deduction could not be allowed to assessee. However, in view of the decision of Hon’ble Supreme Court, keeping in view the integrated scheme of the Act, we are of the opinion that Non-deduction of tax under Chapter XVIIB leads to consequences contemplated u/s 201 and, therefore, Section 40(a)(ia) and provisions contained in chapter XVII-B constitute an integrated code and, accordingly, effect has to be given to the decisions of Tribunal’s Guwhati and Jaipur Benches, which will operate as res-judicata.In any view of the matter, the view beneficial to the assessee is to be taken. We, accordingly, allow the assessee’s appeal in respect of ground nos. 1 and 1.1.

45. It is pertinent to note that by the Finance Act 2012 w.e.f. 1.4.2013, a proviso has been inserted to section 40(a)(ia), which reads as under:

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter DXVII-B on any such sum but is 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. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 4,94,27,528/- made by the AO on account of lease rent paid to IBM.

3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

50. Brief facts apropos ground no. 1 are that from the P&L A/c the AO noticed that an amount of Rs. 105,86,79,000/- had been debited as payment towards license fee and spectrum charges. The AO show caused the assessee as to why this amount should not be amortized over the remaining period of validity of license in case of each circle u/s 35ABB of the I.T. Act, while disallowing the same as a revenue expenditure, as had been done in the assessment year 2007-08. The assessee vide its written submissions dated 16.12.2010 gave the following explanation:

3.2 The assessee vide written submission dated 16.12.2010, gave the following explanation:

"The license fee is paid on the basis of certain percentage of annual gross revenue (AGR).

The license fee paid under section 35ABB conferred a light on the telecom operators to operate telephony services for a number of years. U/s 35ABB the fee was held to be capital and allowable in an appropriate proportion over the number of years. From 1.7.1999 the whole scheme of payment was changed and license fee was directly linked with the annual revenue generated by the telecom operators. The payment also was annual. The licence will get revoked if the in case of nonpayment of licence fee. As per settled law, any expenditure which does not create an asset and which is paid for the specific year and not for years is not a capital expenditure but a revenue expenditure.

The issue of variable licence fees in earlier years has been decided in favour of the assessee company by the Hon'ble ITAT, New Delhi. Accordingly, the variable licence fees not to be amortized as per section 35ABB and to be allowed as revenue expenditure in the year in which it is incurred. "

51. The assessee had also relied on the decision of Tribunal in its favour on this issue for AY 2003-04 and 2004-05. The AO, however, did not accept the assessee’s claim, inter alia, observing that the decision of Tribunal had not been accepted by the department and appeal was pending against the same before Hon’ble 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 give rise to any capital asset. Further the Bombay Bench of this Tribunal has held as follows:

8. Revocation of licences- The Central Government may, at any time, revoke any licence granted u/s 4, on the breach of any of the conditions therein contained, or in default of payment of any consideration payable there under."

From perusal of S. 8 of that Act, it is now evident that under the circumstances the licence is revoked, the appellant shall not be able to carry on its business of telephone services, unless it had paid such a licence fee to the Government. The irresistible conclusion, therefore, would be that payment of licence fee is wholly and exclusively incurred for the purpose of the business' carried on by it. The same is, therefore, an allowable deduction u/s 37 of the Act. Since the liability stands paid during the year under consideration, we direct the AO to allow the deduction to the appellant.

10. Respectfully following the decision of the coordinate Bench of this Tribunal in the case of MTNL, referred to supra, we assessee of the view that the variable revenue share licence fee paid pursuant to the migration of the assessee to the New Telecom Policy of 1999 is liable to be allowed as revenue expenditure and we do so. In the circumstances, AD is directed to delete the addition made by holding the variable revenue share fee paid to be capital expenditure. In the circumstances, ground no. 3 in assessee's appeal stands allowed."-

54. In view of the findings recorded by the Tribunal, ld. CIT(A) following the same allowed the assessee’s appeal.

55. Being aggrieved, the department is in appeal before the Tribunal.

56. At the time of hearing ld. counsel for the assessee referred to of the decision of the Hon’ble Delhi High Court in assessee’s own case vide ITA no. 1336/2010, available at page 797 of the PBpage 754. Para 47 & 48 of the said decision read as under:

47. In view of the aforesaid findings, the substantial question mentioned above in item Nos. l to 9 is answered in the following manner:

(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31 5t July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 15t August, 1999 should be treated as revenue expenditure.

(ii) Capital expenditure 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 expenditure?

59. Hon’ble Delhi High Court in para 4 of its decision observed as under:

4. As is apparent from the substantial question of law quoted above, the issue raised is whether the variable licence fee paid by the respondents under Indian Telegraph Act, 1885, and Indian Wireless Fee Act 1933, payable under the New Telecom Policy 1999 or 1994 agreement,. is revenue expenditure or capital expenditure which is required to be amortized under Section 35ABB of the Income Tax Act, 1961 (Act, for short).

60. The Hon’ble Delhi High Court, after considering the statutory provisions, National Telecom Policy 1999 in detail and various decisions, finally concluded in paras 47 & 48 as under:

47. In view of the aforesaid findings, the substantial question mentioned above in item Nos. l to 9 is answered in the following manner:

(i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31 5t July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 15t August, 1999 should be treated as revenue expenditure.

(ii) Capital expenditure 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.

61. Respectfully following the decision of Hon’ble Delhi High court, the revenue’s ground is dismissed.

62. Brief facts apropos ground no. 2 are that the AO noticed from notes to return of income, note no. 1, which reads as under:

"The company has entered into a composite agreement for services and equipment with IBM India for provision of Information Technology (IT). The company has ace unfed for IBM composite outsourcing agreement as Finance Lease following AS-19. Accordingly, in the books 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 allowing the depreciation on equipment and legal and professional charges paid as debited by the assessee in its books of accounts holding that the financial lease transaction carried out by the assessee was actually a disguised purchase of assets. He further observed that the case was agitated u/s 144C by the assessee before ld. DRP, New Delhi. However, ld. DRP upheld the treatment given by AO. The assessee in its written submissions submitted before AO as under:

'The Assessee Company has taken the assets on lease from IBM and has accordingly done the treatment in the books of accounts.

There are following expenditure charged to profit and loss account in respect of the aforesaid leasing arrangement;
a) Depreciation as per the Schedule XIV of the Companies Act, 1956 @ 33.33% in respect of the assets taken on lease, the lease being the finance lease (amounting to Rs. 5,026,726/-)

b) Service charges paid to the IBM as per the agreement (amounting to Rs. 209,838,684/-)
The Assessee Company has disallowed the following items while computing its income for tax purposes:

and has finally claimed Rs. 26,42,92,938 as a deductible expenditure which is lease rental paid by the Assessee Company to IBM

In view of above the payment made towards lease rentals must be allowed
Without prejudice to the above submission we further submit that in any case the depreciation on these assets should be allowed at the rate of 60% to the Assessee Company.

Should your goodself is not in agreement with our submissions filed during the whole assessment proceeding, we would strongly urge for an opportunity of being heard in person before any order is passed to the contrary.

64. AO, however, after considering the above submissions did not accept the same and treating the whole transaction as financial lease allowed only depreciation on leased assets as per books amounting to Rs. 50,26,726/- and legal and professional charges amounting to Rs. 20,98,38,684/- were also allowed. The AO made addition of Rs. 4,94,27,528/- on this count.

65. Before ld. CIT(A) the assessee had pointed 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 fixed asset account. However, while computing the income, the assessee added back depreciation and amount paid towards legal and professional charges to their total income and thereafter claimed the entire sum of Rs. 26,42,92,938/- as the amount paid to IBM as lease charges.

66. As regards the contract with Nortel Networks India Pvt. Ltd. the assessee explained that since the entire amount payable to the vendor towards supply on fixed assets during the year had accrued, there was no minimum lease payments outstanding as at the yearend in relation to these assets. The assessee referred to the CBDT Circular no. 2 dated 9.2.2001 which explains the action to be taken by the AO. After explaining the above methodology the assessee pointed out that the action of the company to prepare the balance-sheet, P&L a/c, in accordance with the accounting standard 19, was only for the purpose of preparation of account under the Companies Act. Therefore, the depreciation will continue to be allowed only in the hands of lessor. In alternate, the assessee submitted that if AO’s stand is to be accepted then 60% depreciation is to be allowed as the assets were computers only.

67. Ld. CIT(A) after considering the assessee’s submissions with reference to preparation of accounts as per AS-19 and the effect of Circular no. 2 dated 2001 dated 9.2.2001, deleted the disallowance, inter alia, holding that the entire amount was lease rent paid by the assessee, impliedly holding that it was not a case of finance lease.

68. Ld. DR submitted that it is assessee’s own admission that it is a case of finance lease. He referred to page 242 of PB, wherein the agreement between Bharti Tele-Ventures Ltd. and IBM Global Services India Pvt. Ltd. is contained, wherein it had been agreed between IBM and Bharti that Bharti will outsource to IBM and IBM will provide to Bharti information technology services, processes, applications, software, hardware, packages and products, as specified in the agreement (“S1 ITO”). He referred to page 315, wherein clause 6.9 Asset Management, outsource agreement reads as under:

“6.9 Asset Management
Asset Register

IBM will maintain lists of hardware. Software, Licenses. Manuals, Type 1 Materials, Type II Materials and other resources (collectively the "Asset Register”) during the Term and Transition for the purpose of physical verification, 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 and has obtained benefit under Companies Act. Therefore assessee is stopped from taking a contrary view.

71. Ld. DR further referred to page 208 of the PB wherein effect of publication of accounting standard on allowability of depreciation in case of finance lease agreement has been clarified. He submitted that substance of the transaction has to be taken into consideration.

72. Ld. counsel for the assessee submitted that payments have been made to IBM from 2005-06 onwards and no disallowance has been made., In the books of a/c the assessee had charged the depreciation because as per AS 19 it had to capitalize the asset but the amount was added back and the whole amount was claimed as lease rental.

73. Ld. counsel further submitted that in the computation of income assessee did not claim depreciation. The disclosure was made in notes to account only because of AS 19. Ld. counsel referred to AS 19 contained at page 220 onwards of the PBG to demonstrate under what circumstances a lease can be said to be a finance lease. He referred to the SI ITO agreement contained at pages 252 to 260 of the PB to demonstrate that the equipment remained effectively with IBM only.

74. Ld. counsel referred to para 6.9 of SI ITO out source agreement, reproduced earlier, and pointed out that the main issue is regarding clause (c) of the said clause, which reads as under:
c. IBM owned Assets used to provide SI ITO to Bharti under the Agreement and which shall be transferred to Bharti upon exit.

75. In this regard ld. counsel referred to page 304 of PB, wherein clause relating to warranty are contained and pointed out that clause “e.” reads as under:

“IBM represents and warrants that during the Term IBM has the right to access and use Service Machines in order for IBM to provide SI ITO and will thereafter transfer the applicable service Machines in accordance with Section 6 11 (Machines).

76. Thus, he submitted that in effect control remained with the IBM.

77. Ld. counsel further referred to page 260 of the PB wherein clause 2.2 of agreement is contained, wherein the list of software has been given in detail and it has been observed that for all the assets initial and on-going charges like license fees, AMC, upgrades, updates, subscription will be to IBM account.

78. Ld. counsel further referred to page 344 of PB, wherein the covenant relating 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 & machinery to its customers for the use by the customer for its business. It was held that such company was for the purpose of section 32, the owner and was an owner who was using the assets for its business and, therefore, entitled to depreciation.

82. We have considered the submissions of both the parties. The assessee has clearly explained that in order to comply with the mandate of AS 19 it had capitalized the assets taken on lease from IBM but while computing the income, the amounts were adder back and the whole amount paid as lease rent to IBM was claimed.

83. Now the main issue which arises for consideration is, whether merely because assessee in its books of a/c had given some treatment to the transaction, has to be taken as sacrosanct or the substance of the transaction is to be considered. In our opinion, there cannot be any quarrel with the proposition that the substance of the transaction has to be taken into consideration and merely because in books of a/c, the assessee had complied with the requirement of AS 19 and, accordingly, charged depreciation on the asset treating the whole transaction as capital in nature, could not disentitle the assessee to claim the expenditure in computation of income on the basis of true nature of the transaction. It is well settled law that a particular mode of recording a transaction in books of a/c is of little consequence and the substance of the transaction has to be considered to arrive at proper conclusion.

84. Ld. CIT(DR) has very rightly submitted that substance of the transaction has to be considered. His main plank of argument is that the assets are identified in terms of identity as well as sequence. Certain clause of the agreement also states that these assets could be handed over to the assessee upon exit of IBM. With reference to these two aspects, ld. CIT(DR) submits that the assessee was the beneficial owner of these assets and the IBM was only titular owner. His contention is that these being movable properties, such titular ownership does not entitle the owner to any benefit or right except, principal security against finance lease charges.

85. However, ld. AR has referred to various clauses, which we have noted in the argument advanced by him, to demonstrate that for all practical purposes IBM was exercising all the ownership rights on the assets such as their maintenance, insurance etc. Had the ownership rights been effectively transferred to assessee it would have taken all necessary steps to protect the assets from all risks. However, the agreement clearly lays liability on IBM on this count. Therefore, the substance of the transaction clearly suggests that the beneficial ownership remained with IBM and not with assessee and, therefore, the assessee had rightly claimed the entire lease rent paid by it to IBM.

86. In view of above discussion, we dismiss the ground raised by the department.

87. Revenue’s appeal is dismissed.

88. In the result, assessee’s appeals are allowed and department’s appeal dismissed.