TMI Blog2010 (4) TMI 905X X X X Extracts X X X X X X X X Extracts X X X X ..... de only to a Government organisation, and which we have explained as of no moment. Rather, we are inclined to take the view that the fact that a good percentage of the purchase payments stand effected other than in cash defeats the assessee's case inasmuch as it clearly shows that its business could be conducted through the banking channel. None of the payments have been shown before any authority to have been made on a banking holiday or on account of dislocation of work in the said industry, for clause (k) of rule 6DD to be applicable, with reference to which the assessee seeks to advance its case. As regards the payments toward open market purchases, if and to the extent these are in cash, the same could hardly be considered as falling within the ambit of the clause. It is, thus, abundantly clear from the foregoing, that the assessee's case does not fall within the specific clause of rule 6DD. The provision of section 40A(3), which is a non obstante provision, would thus hold, and operate to deem twenty per cent., of the impugned expenditure as the assessee's profit from its business and liable to be disallowed thereunder. Again, the pleading or the argument that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provider, providing cellular mobile telephony services across the country. The business model involves appointment of franchisees for distribution of the various service products, viz., SIM cards, recharge coupons, service tickets, etc. which are channelled to the retail customers opting for the telephony services of the service provider. The assessee, as such, deals in BSNL, ITC and Excel cards. During the period under reference, being the previous year relevant to the assessment year 2006-07, the assessee made total purchases of India Telephone Cards at Rs. 270.64 lakhs, of which Rs. 187.73 lakhs were by way of cash payments, as reported per its tax audit certificate, forming part of his return of income. The assessee having made these payments in cash and, thus, having apparently contravened the provisions of section 40A(3) of the Act, disallowance at the rate of twenty per cent. of the impugned expenditure of Rs. 1,87,73,475, i.e., Rs. 37,54,695, stood proposed during the assessment proceedings under section 143(3) of the Act and effected vide assessment order dated December 31, 2008. In appeal, it was explained that the purchases had to be made, on account of paucity of card ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its trade could be carried out by discharging the purchase obligation other than in legal tender. In rejoinder, it was submitted by learned counsel for the assessee that the very fact that a part of the payments in respect of purchases stood made through the banking channel would rather support the assessee's case inasmuch as it exhibits that wherever possible the assessee discharged the trading liability against purchases through the banking channel, i.e., as provided for. So, however, it was conceded by her, on an enquiry by the Bench, that the argument that the payments stood made to a public sector undertaking (PSU) would be of no consequence in so far as the genuineness of the payments is not in dispute and the law does not draw any exception for payments to the Government or Government undertaking (except those specified), treating business payments, irrespective of the identity of the payee, at par. We have heard the parties, and perused the material on record, including the case law cited. We would firstly deal with the case law cited by the assessee, as if its case is covered by the principles laid down thereunder, it would stand to succeed. In the case of Eastern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed utilitarian or necessary. Besides, the provision read with rule 6DD(j) had given rise to substantial litigation arising out of the interpretation and scope of these provisions. Perhaps, the Legislature was of the view that it was difficult to establish the mitigating circumstances of the payments, so that where the genuineness is not in doubt, it would suffice if a fraction thereof is deemed as an inflation in the claimed expenditure with reference to the mode of its payment, and disallowance effected on that basis. The same thus impacts the character of the disallowance or of the proscription mandated thereby inasmuch as the genuineness of the payment was no longer in issue or relevant for the purpose of the disallowance, which, as against the entire payment earlier, stood restricted to a fraction thereof. The amended extant law, thus, is cast more as an absolute rule ; the exceptional circumstances having been enlisted under rule 6DD, and is in the nature of a deeming section, with the law prescribing disallowance with reference to the mode of payment of the concerned expenditure rather than with reference to the expenditure itself, deeming an inflation therein where the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of no moment. Rather, we are inclined to take the view that the fact that a good percentage of the purchase payments stand effected other than in cash defeats the assessee's case inasmuch as it clearly shows that its business could be conducted through the banking channel. Even as no extenuating circumstances necessitating the payments in cash have been stated, much less proven, the omission of the erstwhile clause (j) of rule 6DD excludes the ground of hardship to the payee from the mitigating circumstances, and the assessee's case, as held by the Special Bench (supra) could succeed only on it establishing the same to fall within the specified clauses of rule 6DD. None of the payments have been shown before any authority to have been made on a banking holiday or on account of dislocation of work in the said industry, for clause (k) of rule 6DD to be applicable, with reference to which the assessee seeks to advance its case. As it appears, the relevant clause having not been read out during hearing, the assessee is adverting to a subsequently substituted clause (k), which reads as: (k) where the payment is made by any person to his agent who is required to make payment in cash fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he satisfactory compliance with the terms of the service relationship), leading to an access to the network, without or apart from which these are of no use or value. As such, there is no de facto purchase or sale of any product, and the relationship between the two, i.e., the franchisee-distributor and the service provider, both de facto and de jure, is one of the principal and agent. In arriving at its decision, the Tribunal relied on the decision by the hon'ble jurisdictional High Court in the case of BPL Mobile Cellular Ltd. v. Union of India (in W. P. (C) 29202 of 2005 (B)), wherein the hon'ble court, following the decision by the hon'ble apex court in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 145 STC 91 held that the value of the SIM cards, recharge coupons, etc., do not represent sale of goods, exigible to sales (goods) tax, but is only a service rendered by the service provider, liable to service tax. In view thereof, the Tribunal held that the distributor or the franchisee is at all times acting only for and on behalf of the service provider, as a link in the service chain, and thus, the "payments" made by the principal-service provider to the agent-di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-distributor, thus, does not in fact make any "purchases" either of goods or services on the acceptance of the delivery of the SIM cards or other service products and resultantly, does not incur any expenditure in its respect, even as the transaction may be classified as such in its accounts, which, as is trite, cannot be conclusive as to the nature of the transaction. Consequently, there is no scope for the application of the provision of section 40A(3) in the facts and circumstances of the case. In view of the decision by the Tribunal in the case of Vodafone Essar Cellular Ltd. [2009] 317 ITR (AT) 234 (Cochin), which we have sought to explain vide paragraph 13 of this order, we are of the clear view that the provision of section 40A(3) would not be applicable in the facts and circumstances of the case. The earlier part of the order, which suggests otherwise, is on the premise that the transfer of the cards by the service-provider to the assessee-distributor represents the latter's purchase thereof, and thus, as being only an expenditure incurred by it in the normal course of its business, meeting the arguments of the opposing parties and their respective cases as made bef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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