TMI Blog2011 (6) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of and in pursuance to the service arrangement. The SIM cards and other service products are not 'physical' products or 'goods' in that sense, but only 'service products', toward services for an access to the telephony services provided by the service-provider, who only activates the same. The payments made by the franchisee-distributor to the principal are only on his (the latter's behalf); it being only entitled to a commission for the services rendered. The question of no separate payment being made by the payee-principal to the payer-agent, i.e., toward the remuneration or commission. Thus the provision of s. 40A(3) was found as not applicable in the facts and circumstances of the case - Decided in favor of the assessee - IT Appeal No. 153 (Coch.) of 2011 and S.P. no. 27 (Coch.) of 2011 - - - Dated:- 30-6-2011 - N. VIJAYAKUMARAN, SANJAY ARORA, JJ. ORDER Sanjay Arora, Accountant Member. This is an Appeal by the Assessee arising out of the Order by the Commissioner of Income-tax (Appeals)-I, Trivandrum ('CIT(A)' for short) dated 22.12.2010 for the assessment year (AY) 2007-08. The only issue arising in the present appeal is the validity of the disallowance in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus been rightly made and sustained, i.e., as per law, and merits being upheld. 3. We have heard the parties, and perused the material on record, as well as the case law cited. 3.1 The assessee's principal case is that the genuineness of the payments is not in doubt and, therefore, section 40A(3) is not attracted. This is as the provision is cast only as a measure to counter tax evasion by enabling its verification by the assessing authority. Even as found by the apex court in the case of Attar Singh Gurmukh Singh v. ITO (supra), on a challenge to the vires of the section before it; the provision ostensibly casting a restriction on the trade, that the genuine and bona fide transactions are not taken out of the sweep of the section. We are, however, unable to agree. 3.2 We may, firstly, clarify that in our view there is indeed a violation of the provision, i.e., in substance, in the present case, so that the provision is attracted. A payment through the banking channel, as the impugned payments are sought to be projected by the assessee, would, by definition, entail movement of funds from one bank account to another, either with the same bank or another, i.e., an intra or inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, in the case of S. Rahumathulla v. CIT(Asst.) 127 ITD 440 (Cochin), discussing all such arguments as being now advanced before us, including those with reference to other clauses of r. 6DD, decided this issue in favour of the Revenue. It stands explained therein that there has been in fact a change in the character of the provision, which has witnessed several amendments over time, further observing that it stood as far back as per Finance Act, 1995 noticed that the banking services had taken root even in the rural areas. The extant provision mandates a partial disallowance, and prescribes a stricter mode of payment, i.e., per account payee cheque (drawn on a bank) or account payee bank draft. A reference to the said decision, since reported, would be in order. 3.3 The assessee has raised an alternative argument, i.e., that the impugned payments as having been made by way of book adjustment, so as to be covered by Rule 6DD(d)(iii), which reads as under: "Rule 6DD: No disallowance under sub-section (3) to 40A shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by account payee cheque or an account payee bank draft drawn in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure, himself agreed that the assessee's case fell under the extant r. 6DD(j), though disallowed it all the same on the basis that the same did not satisfy the test of r. 6DD(f); the assessee being a processor of goat skins, purchasing them in a semi-processed form. The first appellate authority allowed the assessee's claim only on the basis of the impugned transactions satisfying the requirement of r. 6DD. The tribunal affirmed his order on that basis. A mere browse of the 'held' portion of the cited decision would clarify this. The said decision; the hon'ble court upholding the deletion of the disallowance on the basis of a concurrent finding of fact by both the appellate authorities, would be of no assistance in the present case. True, the apex court upheld the vires of the section only on the basis of the extant r. 6DD(j), which is open-ended, so as to encompass a variety of real life situations, even as found by the hon'ble Madras High Court in the said case, and which rule stands since omitted. So, however, the constitutionality of the provision is to be taken as a given for the purposes of its interpretation. In fact, much less than deliberating on the constitutionality o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Communications Infrastructure Ltd. in the instant case), both de facto and de jure, as one of 'principal' and 'agent'. The franchisee-distributor was, thus, at all times acting only for and on behalf of the service-provider, as a link in the service chain and, thus, the payments by it to the principal-service provider are only in terms of and in pursuance to the service arrangement. The SIM cards and other service products are not 'physical' products or 'goods' in that sense, but only 'service products', toward services for an access to the telephony services provided by the service-provider, who only activates the same (on a satisfactory compliance of the terms of the service relationship), leading to an access to its network, without or apart from which these are of no use or value. The payments made by the franchisee-distributor to the principal are only on his (the latter's behalf); it being only entitled to a commission for the services rendered. The question of no separate payment being made by the payee-principal to the payer-agent, i.e., toward the remuneration or commission, stands also discussed therein. Reference thereto, being reported, and particularly to para 4.4 the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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