TMI Blog2016 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 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. - Decided in favour of assessee Addition on account of amortization of license fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the assessee had rightly claimed the entire lease rent paid by it to IBM. - ITA nos. 3394/Del/2012 & 2899/Del/2013, ITA no. 2795/Del/2012 - - - Dated:- 21-4-2016 - SHRI S.V. MEHROTRA: ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER For The Assessee : Shri Anil Bhalla CA and Shri V.K. Meena CA and Shri Gaurav Wadhwa CA For the Department : Shri A.K. Saroha CIT (DR) ORDER PER 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eating 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 ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Hon ble Supreme Court in the case of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,726/- Payment to IBM (Service Charges) ₹ 2,09,38,864/- Total amount added back in computation of taxable income ₹ 21,48,65,410/- and has finally claimed ₹ 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 ₹ 50,26,726/- and legal and professional charges amounting to ₹ 20,98,38,684/- were also allowed. The AO made addition of ₹ 4,94,27, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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