Income Tax Appellate Tribunal - Ahmedabad
Dcit(Osd), Circle-8,, Ahmedabad vs Vodafone West Ltd., Ahmedabad on 17 November, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "I" BENCH AHMEDABAD
BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER,
AND SHRI S. S. GODARA, JUDICIAL MEMBER.
ITA No.909 /Ahd/2014
(Assessment Year: 2009-10)
D.C.I.T. (OSD),
Circle-8, Ahmedabad Appellant
Vs.
M/s. Vodafone West Ltd.,
6th Floor, Sakar-II, Ellis Bridge,
Ahmedabad Respondent
&
ITA No.944 /Ahd/2014
(Assessment Year: 2009-10)
Vodafone West Ltd.,
(formerly known as Vodafone
Essar Gujarat Limited), Vodafone
House, B Wing, 4th Floor, Corporate
Road, Prahladnagar, Ahmedabad
- 380051 Appellant
Vs.
D.C.I.T. (OSD),
Circle-8, Ahmedabad Respondent
PAN: AAACF1190P
ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.)
A.Y. 2009-10 -2-
राज व क ओर से /By Revenue : Shri Ram Mohan Tiwari, CIT.DR
आवेदक क ओर से/By Assessee : Shri S. N. Soparkar with
Shri Rohit Pansari, A.R.
सन
ु वाई क तार ख/Date of Hearing : 18.08.2016
घोषणा क तार ख/Date of
Pronouncement : 17.11.2016
ORDER
PER S. S. GODARA, JUDICIAL MEMBER
The Revenue and assessee initiate instant cross appeals for assessment year 2009-10 against the DCIT (OSD), Circle-8, Ahmedabad's assessment order dated 30.01.2014 passed in furtherance to the Dispute Resolution Panel, Ahmedabad's directions issued on 20.12.2013, in proceedings u/s.143(3) r.w.s. 144C of the Income Tax Act,1961; in short 'the Act'.
We have heard both the parties reiterating their respective stands.
2. We come to Revenue's appeal ITA No.909/Ahd/2014. Its first substantive ground challenges the Dispute Resolution Panel's directions "DRP hereafter" issued to the Assessing Officer for deleting disallowance of loss of Rs.4,02,03,570/- claimed at assessee's behest on account of change in the method of valuation of closing stock of SIM cards as on 31.03.2009.
3. This assessee is a company providing cellular mobile telephonic services in Gujarat state. It declared SIM cards stock as on 31.03.2009 at nil value. The Assessing Officer sought to know reasons thereof. The assessee filed reply dated 05.02.2013 stating to have held its SIM cards for sale in ordinary course of business. It had issued significant quantities of SIM cards to customers for providing connection without charging any separate sale price ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -3- during the year. It claimed the said SIM cards' value at Rs. nil till the same were activated at customers' end. The assessee stressed the point that its SIM cards in question were not in the nature of an independent product to be sold in open market. It followed cost or market price; whichever is lower formula to justify nil price in question in tune with not only Section 211(3A) r.w.s. 211(3C) of the Companies Act but also asserted to have prepared its books as per AS-2.
4. The case file indicates that the Assessing Officer rejected all these pleas. He observed in draft assessment that the assessee has itself valued 15,68,545 SIM cards carrying opening stock of Rs.29million as against closing stock of 21,74,521 SIM cards at Rs.nil. He alleged the assessee to have adopted deviation in valuation of its SIM cards in this manner not sustainable under the provisions of the Act. All this led to the impugned addition of Rs.4,02,03,570/- proposed in the above draft assessment order.
5. The assessee preferred objections before the DRP. This panel reverses Assessing Officer's findings hereinabove as follows:
"5.3 We have carefully considered the facts of the case and contentions of the AO as incorporated in the draft assessment order. We have also gone through the various oral and written submission made by the assessee's representative. In the earlier years, the assessee used to charge cost of SIM card separately from its customers but from this previous year in line with change in market conditions, the assessee started distributing its SIM cards at free of cost and no amount was separately charged from the customers for the same. Also, the assessee had not increased its price of services for issuing SIM cards to compensate for free SIM cards issued to customers. This substantiates that in line with the market conditions, market value of SIM cards was NIL. Thus, the assessee had not changed his method of valuing closing stock and continued to follow the same accounting treatment of valuing its closing stock at lower of market value or cost. However, in the current year, as market value of SIM cards became NIL, it being Sower than its cost, they were valued at NIL. Further, in .subsequent years also, the same accounting treatment of valuing closing stock at lower of market value or cost has also been consistently followed by the assesse. Further, we have also gone through judgment of Hon'ble jurisdictional Gujarat High Court in the case of Voltamp Transformers Ltd (327 ITR 360) wherein it was held that AC) cannot dispute the valuation method adopted by the assessee without bringing ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -4-
any cogent or reliable evidence on record. In the instant case, the AO has not been able to provide any evidences as to if there was any market value of SIM cards. AO has proceeded to make addition only on the basis that as opening stock of SIM cards had a value, it was essential that closing stock of SIM cards should also be valued. The said view ignores the fact that it is not necessary that market value of both opening as well as closing stock should be same. It may be possible that market value of a product may be there in beginning of the year but may reduce to NIL by the year end. Thus, in absence of any reliable evidence by the AO, as per the decision of Hon'ble Gujarat High Court in the case of Voltamp Transformers, we accept assessee's contention that it .had rightly valued its SIM cards at Nil value, being their market value. Further, auditors have also not disputed valuation of SIM cards in the financial statements. Even otherwise, assessee is entitled to deduction under section 80IA of the Act in past and current years and hence, there is no impact on taxable income. In the light of above, objections of the assessee against the proposed upward adjustment are allowed. Therefore, we hereby direct the AO to delete the proposed addition of Rs.4,02,03,570. As this ground is allowed on merits, we have not adjudicated alternative ground raised by the assessee."
6. We have heard rival contentions. It is clear by now that the instant issue arises between the parties qua closing stock valuation of assessee's SIM cards as on 31.03.2009. Its case as narrated in preceding paragraphs is that these SIM cards nowhere carried an independent value not being in the nature of an independent saleable product. It successfully proved before the DRP to have changed its practice from that of separately charging for SIM cards in earlier assessment years to not asking the customers in question for making separate payment thereof in the impugned assessment year. It has sold the impugned SIM card free of cost in relevant previous year in other words. We find from the case file that there is not even a single agreement executed between assessee and its customers placed on record at Revenue's end to dispute this crucial fact. It is thus clear that the assessee has neither attributed any valuation of its SIM cards nor has it received any separate price thereof. That being the case, we deem it appropriate to observe that the learned Panel has rightly accepted assessee's contentions in preceding paragraphs. It further holds that the assessee is already eligible for Section 80IA deduction. Meaning thereby that there is no impact on its taxable income. The Revenue's grounds nowhere rebut this factual position. We accordingly find ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -5- no reason to interfere in the DRP's action forming subject matter of the instant ground. This substantive ground is rejected.
7. The Revenue's second substantive ground seeks to revive Section 14A r.w. Rule 8D disallowance of Rs.92.75lacs made in the impugned draft assessment and deleted in DRP's proceedings. Suffice to say, the assessee has not earned any exempt income in the impugned assessment year. Hon'ble jurisdictional high court in CIT vs. Corrtech Energy Pvt. Ltd. 45 Taxmann.com 116 (Gujarat) holds in identical circumstances that the above statutory provision is not exigible in absence of any exempt income in the relevant previous year. Ld. Departmental Representative fails to controvert this legal position. The Revenue's second substantive ground fails accordingly.
8. The Revenue's next substantive ground no.(3a) pleads that the Panel has erred in law and on facts in directing the Assessing Officer to consider assessment year 1997-98 instead of 1996-97 as the initial assessment year in which the assessee started providing its cellular services. Shri Soparkar takes us to page 87 of the paper book comprising of this tribunal's order in assessee's own case for assessment years 2006-07 and 2007-08 deciding the very issue against the Revenue. Ld. Departmental Representative does not point out any exception thereto in the impugned assessment year. This substantive ground accordingly fails.
9. The Revenue's next substantive ground (3b) avers that the Panel has erred in directing the Assessing Officer to apply Section 80IA's amended provision from A.Y.2000-01 thereby allowing the impugned deduction @ 100% of the profits of the relevant previous year. Shri Soparkar states herein as well that this tribunal's order in A.Y. 2006-07 (supra) adjudicates the very ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -6- issue in assessee's favour. The same goes unrebutted at the Revenue's end. We accordingly decline this ground as well.
10. The Revenue's next substantive ground (3C) assails correctness of the DRP's directions to the assessing authority to allow Section 80IA deduction amounting to Rs.94.7 million and Rs.138.90 millions on account of sharing of passive infrastructure and Cell sites; respectively. The Assessing Officer's main reason for disallowing the corresponding claim was that neither the assessee is engaged in the business of leasing of assets nor sharing of cell sites. He held that the above incomes could not be treated to have been derived from an eligible undertaking u/s.80IA in other words. Shri Soparkar places on record hon'ble Delhi high court's decision in a batch of cases ITA Nos.476-490/2016 PCIT vs. BSNL decided on 01.08.2016 upholding this tribunal's Delhi bench's order concluding that the above 'derived from' criteria does not apply in case of an undertaking providing telecommunication services in view of the fact that Section 80IA(2A) starts with a non obstante clause treating the same as a separate species. His further case is that this tribunal's order in assessee's case for A.Y. 2006-07 (supra) also adjudicates the very issue in its favour. The Revenue fails to controvert both these legal developments. We thus find no merit in this substantive ground. It is accordingly rejected.
11. The Revenue's next substantive ground no.3 pleads that the DRP has erred in directing the Assessing Officer to allow Section 80IA deduction on foreign exchange gain in violation of the above derived from criteria. We have already concluded in preceding paragraphs that this derived from condition does not apply in a telecommunication undertaking case. The assessee submits that these gains have arisen on account of settlement/restatement of transactions in revenue account. It strongly ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -7- contends that there exists very much a direct/proximate nexus dating its sources to its telecommunication business. The Revenue is fair enough in not disputing this factual position. We find that hon'ble jurisdictional high court in CIT vs. Deversons Industries Ltd. (2015) 55 taxman.com 189 (Gujarat) holds that such a net exchange rate is to be treated as to have been derived from the eligible undertaking in question. We respectfully follow the same to reject this Revenue's ground as well.
12. The Revenue's next substantive ground (3e) posses challenge to DRP's directions issued to the Assessing Officer for allowing the assessee the relief of Section 80IA deduction on bad debts returned back. Its argument is that the same amounts to double deduction. We find from the case file that assessee's stand before the Assessing Officer was that these bad debts written back are in respect of cellular services only as allowed in earlier years thereby reducing the corresponding Section 80IA deduction claim. It emphasize that these sums are now taxable in the impugned assessment year u/s.41(1) of the Act are to be characterized as business income only. It quoted this tribunal's order in Radha Madhav Industries case ITA No.1935/Ahd/2007 holding identical profits u/s.41(1) as to has been derived from the eligible undertaking. The Assessing Officer opined that such a course of action would amount to double deduction as the very sum stood accepted as bad debts in earlier years and now these figures are sought to be included in Section 80IA deduction claim.
13. We come to DRP's findings now. Ld. Panel negates this double deduction reason after holding that assessee's bad debts claim in earlier assessment years would have reduced its eligible deduction therein. It further places reliance on the above Radha Madhav's case law (supra) to accept assessee's contentions leaving behind the Revenue aggrieved. ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -8-
14. Heard both sides. There is hardly any quarrel that the assessee claimed these sums as bad debts (revenue receipts) in earlier assessment years. The same stood allowed. It thereafter received back these sums in the impugned assessment year in the nature of business income u/s.41(1) of the Act. A co- ordinate bench of the tribunal (supra) concludes in these facts that such an instance does not amount to double deduction claim. The Revenue fails to indicate any exception in facts of the instant case. We accordingly reject the instant substantive ground as well.
15. The Revenue's next substantive ground no.4 pleads that the DRP has erred in deleting disallowance of Rs.66lacs made on account of miscellaneous expenditure written off in the nature of capital expenditure and crystallized in earlier assessment years to be eligible as deduction in the impugned assessment year.
16. We come to the relevant facts pertinent to this issue. The assessee had paid the above amount to BSNL in preceding assessment years in the nature of advance for use of forecasted E1s (PSTN) traffic. It could not consume the said window. The assessee would thus request the above payee to adjust these advances against other payables or refunds. This payee forfeited the entire sum. The assessee stated to have made all efforts to recover the above figure. It finally wrote off the same in the impugned assessment year. This followed assessee's claim of business loss u/s.28 of the Act. The Assessing Officer's draft assessment order inter alia observed that the assessee was itself not sure in raising Section 36(1)(vii) or Section 37 or Section 28 claim, it did not file any evidence of any negotiations with M/s. BSNL in order to make the recovery in question. He finally treated the above sum in the nature of prior period expenses as incurred in earlier assessment years which could ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 -9- not be claimed in the impugned assessment year. All this resulted in the impugned disallowance.
17. We advert to DRP's findings now deciding the issue in assessee's favour as follows:
"9.3 We have carefully considered the facts of the case and contentions of the AO as incorporated in the draft assessment order. We have also gone through the various oral and written submission made by the assessee's representative. Advance paid by the assessee was forfeited by BSNL in July 2007. Subsequently, assessee followed up with BSNL from time to time for obtaining refund or adjusting the said amount against other liabilities. Assessee also made provision for this probable loss in March 2008 and did not claim as deduction. However, as there was no success for refund, based on management representation, the asssessee finally wrote off the amount as irrecoverable in AY 2009-10. Thus, based on the sequence of events, it is evident that amount forfeited by BSNL and written off by the assessee is a business loss and is not an expenditure. Hence, as the said amount is not an expenditure, it cannot qualify as a prior period expenditure as contended by the AO. Further, as far as claiming deduction of business loss is concerned, the same is covered under provisions of section 28 of the Act. Hence, amount irrecoverable from BSNL being written off by the assessee in AY 2009-10 will constitute a business loss and as it has occurred in AY 2009-10, it is allowable as a deduction under provisions of section 28 of the Act in AY 2009-10. Even otherwise, assessee is entitled to deduction under section 80IA of the Act in past and current years and hence, there is no impact on taxable income. In light of the above, the objection raised by assessee is allowed and the AO is directed to delete the proposed addition of Rs 66,00,000. As this ground is allowed in favour of the assessee, without prejudice ground has not been adjudicated."
18. Heard both sides. We have narrated in preceding paragraphs about assessee's payment made to BSNL for very much a business purpose which was forfeited thereby resulted in the impugned write off as business loss u/s.28 of the Act in the impugned assessment year. Even the Assessing Officer is fair enough in not disputing the above facts. Page 200 of the paper book reveals that the assessee wrote off the same in the impugned assessment year only. The only substantive objection raised in course of the impugned draft assessment is that the above advance sum is in the nature of prior period expenses. We find that hon'ble jurisdictional high court in CIT vs. Abdur ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 10 -
Razzak & Co. (1981) 6 Taxman 346 (Gujarat) holds that such an advance write off is very much allowable in the nature of business loss u/s.28 of the Act. We respectfully follow the same to uphold the above DRP's findings in question. This Revenue's ground also fails.
19. The Revenue's next two substantive ground nos. 5-6 aver that the DRP has erred in allowing Section 80IA deduction on roaming charges as well as on discounts offered to prepaid distributors disallowed u/s.40(a)(ia) of the Act. Shri Soparkar submits at this stage that assessee's corresponding two substantive grounds raised in its Cross Appeal No. ITA No.944/Ahd/2014 also assail correctness of the DRP's findings affirming Assessing Officer's action in draft assessment invoking the above disallowance on the said two payments. The Revenue does not dispute this factual position. We thus proceed to adjudicate the assessee's corresponding substantive grounds as well raised in its cross appeal together for disposal.
20. We come to the former issue of roaming charges. The assessee had paid international and national roaming charges of Rs.10,63,42,991/- and Rs.47,77,93,577/-; respectively without deducting any TDS. It pleaded that there existed no human intervention in the said services so as to be treated as fee for technical services. The Assessing Officer sought assistance from technical experts. They stated that the impugned roaming facility in cellular services cannot be 100% automated wherein human intervention is present inter alia in case of physical hardware, software bug and snapping off fiber cables. Ld. Departmental Representative takes us to page 71 of the assessment order in this regard. The Assessing Officer accordingly appears to have held that the impugned roaming charges are not in the nature of standardized fully automated facility. All this led to the impugned ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 11 -
disallowance u/s.40(a)(ia) of the Act qua the above two roaming expenses. Ld. Panel approved the same.
21. We have heard rival submissions. We put up a specific query to Revenue as to whether there is any direct evidence pinpointing human intervention element in assessee's roaming facilities availed from its payees. No material is quoted in response to our query except page 71 of the assessment order. Meaning thereby that there is only an inference that the assessee must have paid for the impugned roaming charges involving human intervention component. This case file reveals that this tribunal's Kolkata bench in ITA No.1864/Kol/2012 Vodafone East Ltd. (assessee's sister concern) vs. ACIT decided on 15.09.2015 examines all fine points in case of identical roaming charges in cellular telephony parlance to conclude that the same are not liable for TDS deduction as follows:
"4.10. We have heard the rival submissions and perused the materials available on record. It would be pertinent to note here that roaming services are provided by other telecom operators by using their existing telecom network/ infrastructure and no incremental investment is required to put up any additional network /infrastructure for provision of such roaming services. The aforesaid fact lends further support to the contention that roaming services are standard automated services, which are provided by other telecom operators to subscribers of VEL using the same network/infrastructure as is used by such operators for provision of telecommunication services to its own subscribers. Therefore, in essence, roaming services are similar in nature to the telecom services provided by a telecom operator to its own subscribers and hence roaming charges would partake the same character as the normal telecommunication charges paid by a subscriber to its service provider.
4.11. We are not in agreement with the arguments of the Learned DR that the word 'technical' used in Explanation 2 to Section 9(1)(vii) of the Act should take the same character of 'managerial' or 'consultancy' provided in the said section wherein human intervention is required and accordingly even for technical services, human intervention is definitely required. In this regard, the Hon'ble Delhi High Court in the case of CIT vs Bharti Cellular Ltd in 319 ITR 139 (Del) had held that since the entire process of making a call and switching the call from one network to the other is done automatically on the basis of machines and does not involve any human interface, the interconnect charges cannot be regarded as Fee for Technical Services (FTS) and hence would not fall in the ambit of section 194J of the Act. We find that on further appeal by the revenue to the Hon'ble ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 12 -
Supreme Court in CIT vs Bharti Cellular Ltd in 330 ITR 239 (SC), the Hon'ble Apex Court had stated that "right from 1979 various judgements of the High Courts and Tribunal have taken the view that the words "technical services" have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words "technical services" in section 9(l)(vii) r.w. Explanation 2 comes in between the words "managerial and consultancy services".
We find that the principles laid down by the Delhi High Court have been accepted by the apex court as such and the Apex Court has merely directed the TDS officer to carry out factual verification to determine the extent of human involvement. Based on this direction, the CBDT had also issued Instruction No. 5 of 2011 dated 30.3.2011 instructing the revenue authorities to seek opinion of technical experts in case of complex technical matters.
4.12. As per the directions of the Supreme Court in the case of CIT vs Bharti Cellular Ltd in 330 ITR 239 (SC), the TDS officer has been directed to obtain technical evidence from the experts in the telecom field with regard to the fact of existence of human intervention for the roaming services and accordingly the ACIT, Circle 51(1), New Delhi had recorded statement from Shri Tanay Krishna on 29.9.2010. The Learned AR has also filed prayer for receipt of additional evidence in terms of Rule 29 of ITAT Rules on 20.7.2015 containing the statements recorded from Shri Tanay Krishna on 29.9.2010 in the case of Vodafone Essar Mobile Services Ltd & cross examination by Vodafone Essar Mobile Services Ltd on 29.9.2010. This application under Rule 29 contains a prayer with reasons that these documents could not be filed before the lower authorities and that these documents are very crucial for the disposal of the case under appeal as the examination of the technical experts had taken place post the proceedings before the Assessing Officer and as per the directions of the Hon'ble Supreme Court, these statements were recorded in the case of the group company of the assessee. However, it is seen that the statement of Shri Tanay Krishna on 29.9.2010 have been relied upon by the Learned CIT(Appeals) vide page 29 of his order but the cross examination of Shri Tanay Krishna is not in records of the lower authorities. We find that the statement is very much relevant for the disposal of these appeals and are hereby admitted as additional evidence (in respect of cross examination statement of Shri Tanay Krishna on 29.9.2010) in terms of Rule 29 of ITAT Rules as they go into the root of the issue.
4.13. We find that this issue need not be set aside to the file of the Learned Assessing Officer for seeking fresh technical evidences from experts as the same had already been obtained in the case of the group company of the assessee and CBDT had also issued Instructions in this regard to seek evidences. Any technical evidence obtained in a case can be used in the case of another assessee as long as the facts and circumstances involved are identical. In the instant case, the facts in the case of Vodafone Essar Mobile Services Ltd are identical with the facts of the assessee herein and also it happens to be the group company of the assessee.
4.14. Shri Tanay Krishna's statement-questions and answers - 4, 5, 6 & 16 are reproduced below :-
Question 4: Can you enlighten us about the functioning of the network system of the cellular operators at the time of receiving or providing inter- ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 13 -
connect services to each other including installation, interconnectivity etc from the very beginning?
Ans. 4: As regards to interconnect to Gateway switches/MSC of two different operators are interconnected using any transport technology which involves wires as well as human interface for setting up.
It involves different phases -
i) Planning phase- where how much capacity required and how much traffic handling capacity is required on these basis hardware and software is determined.
ii) Selection of vendor - is done to determine who will provide these services along with his consultancy.
iii) Hardware and software is supplied by the vendor and it is customized to the need of the network as per the TEC specifications.
iv) Installation as per vendor guidelines - it involves installation of both hardware and software.
v) Call configuration/provisioning of system - in this the operator has to configure and make provision in data base as to how the calls will flow.
This has to be done by a technically competent person.
vi) Testing - it is exhaustive testing. The calls are tested on various modes (terminating, loading etc) on network portion.
(a) Software by hardware testing - Stand alone testing
(b) Interconnect testing - it is done to test if it is compatible with other hardware/software. This testing employs technically qualified professionals and tested as per the agreed plan between services provider and vendor.
Question 5: In your expert opinion, does the system work automatically when network system of one cellular operator gets connected with the network system of other cellular operator?
Ans. 5: When a calls get connected by one operator to other, per se it is an automatic connection, but there can be instances when there is a problem in the call connect which may require resolution through human intervention.
Question 6: Hence there is no 100% automatic operation of this network. Can you explain what kind of human intervention is required?
Ans. 6: Yes as I said earlier it can't be 100% fully automated. There are several circumstances under which human intervention would be required. I would briefly tell you about each of such circumstances - ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 14 -
(a) There could be a case where there is failure in physical hardware.
(b) There could be a problem due to software bug.
(c) There could be snapping of fibre optic cables.
In (a), (b), (c) above you are required intervention of teams of technical experts to remedy the situation.
Question 16: Please tell us the places or points or areas where human intervention with each other?
Ans. 16: As has been detailed in several answers that I have given earlier, one can broadly say that when there is an interconnection between two service providers, human intervention is constantly required for management of network/System, capacity enhancement and monitoring of system/network.
4.15. Cross examination proceedings of Shri Tanay Krishna - questions and answers - 3,4,5,7,11 & 12 are reproduced below:-
Q.3. What is the process of carriage of calls originating on network of one operator and terminating on the network of the other operator?
The call from one network to the other network flows automatically, i.e. without any human intervention. Once a call originates, the call travels automatically. In establishment of a call, therein no human intervention i.e., once a subscriber dials and the call gets connected without any fault, then there is no human intervention. Intervention is required only ~hen the call is not successful, i.e., the call fails due to any reason.
Q. 4. Is any human intervention involved in the entire process of carriage of call from one operator to another?
No, as stated above, no human intervention is required in the process of carriage of calls. However, human intervention is required at the inter- connect set-up stage (including configuration, installation, testing, etc.) and capacity enhancement, monitoring (including network monitoring), maintenance, fault identification, repair and ensuring quality of service as per interconnect.
Q.5. From the perusal of your answer to Question 4 of your Statement, it appears that the phases described thereon are restricted to merely setting- up of the inter-connect between the networks of the two operators and not during actual carriage of the call by one operator for the other. Please confirm.
Yes.
Q.7. From perusal of your answers to various questions posed to you by the Tax Department, you have mentioned that services of a technical expert are required for inter-connect arrangements. Please confirm whether such ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 15 -
services are required for provision of inter-connect services, i.e., carriage of calls from one network to another, or are primarily for fault detection and removal.
Please refer to answer to Question 4 of this cross examination.
Q.11. What is the extent of human involvement in provision of interconnect services. i.e., carriage of calls originating on network of one operator and termination the network of the other operator?
We have answered in question no 5.
Q.12. In answer to Question 21 of your Statement, you have stated that in cellular networks the level of human intervention is much higher and of sophisticated technical level. In this regard, do you agree that cellular networks are based on sophisticated technology and work on an automated mode? The human intervention as referred by you for network operations is limited to network monitoring and maintenance and fault repair, rectification, enhancement, configuration, and set-up?
We agree that the telecom networks are automated networks and do not require human intervention for carriage of calls. However, as stated in Question 4 of this cross examination, human intervention is required at the inter-connect set-up stage [including configuration, installation, testing, etc) and capacity enhancement, monitoring (including network monitoring), maintenance, fault identification, repair and ensuring quality of service as per interconnect.
4.16. The next argument of Learned DR that roaming charges are paid for both interconnectivity and also for usage of transmission lines and human intervention is very much involved with regard to usage of transmission lines. We find that the human involvement is involved only when something goes wrong in the maintenance of transmission lines and for connectivity per se, human intervention is not involved. This issue could also be looked into from the angle of applicability of TDS provisions on Transmission Charges / wheeling charges paid by power generating companies. This issue had reached the corridors of various judicial forums and now has been put to rest by the following decisions:-
CIT(TDS)- vs Maharashtra State Electricity Distribution Co. Ltd reported in 375 ITR 23 (Bom) -
"By this appeal, the Revenue has proposed the following questions to be substantial questions of law:-
"(a) Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in holding that the payments of the wheeling and transmission charges made by the assesses to the entities like Maharashtra State Electricity Transmission Co. Ltd.
(MSETCL) and Power Grid Corporation of India Ltd. (PGCIL) for the use of transmission lines or other infrastructure, i.e., plant, machinery and ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 16 -
equipment could not be termed as rent under the provisions of section 1941 of the Act and, consequently, the provisions of section 201 and section 201(1A) could not be applied?
(b) Without prejudice to the above, whether, on the facts and in the circumstances of the case and in law, payment of wheeling and transmission charges to the entitles like MSETCL and PGCIL, should have been treated as fees for technical services and tax should have been deducted at source under section 194] of the Act from the payments?"
He submitted that in the case of Chhattisgarh State Electricity Board no appeal had been filed by the Revenue and the Revenue accepted the decision of the Tribunal which was followed by the Tribunal in the case of the present assessee as well. Merely drawing power and carrying power through transmission lines and transmission system would not amount to renting up equipment or its charge or rent".
The Hon'ble Supreme Court has also shown us some direction in this behalf. While interpreting the expression "rent", the applicability of section 194-1 must be gathered from whether the wheeling and transmission charges draw its colour from the basic meaning of the expression "rent". It is seen from the decision of the Supreme Court in Singapore Airlines (supra) that the meaning of "rent" must be understood in the context in which they are used. In the present set of facts, it is not possible to equate the wheeling and transmission charges payable MSETCL with rent. On facts it is seen that the MERC order dated June 27, 2006, deals with MSEDCL's contentions, apropos the methodology proposed by MERC. The transmission charges contemplated by MERC includes the cross-subsidisation of transmission charges across licensees when found to be uneconomical and uncompetitive. It is further observed that MERC has considered pooling of transmission charges during bulk power transmission from one licensee to another licensee. It is after considering all these aspects that a composite charge method for any such transmission was adopted. Thus, it is seen that the methodology for determining of the transmission tariff could not be determined in a mechanical manner as if the charge was only for use of the State transmission utility. The MERC while passing this order on transmission charges had received various objections some, inter alia, supporting the composite tariff, some against. However, we need not divert our attention to the details of pricing formula finally adopted.
There is nothing on record to support the Revenue's contention that the wheeling and transmission charges assumes the character of rent. We are in agreement with Mr. Mistri that the expression "rent" must be conceptually understood. The concept of rent under the Income-tax Act does not encompass, in our view, the wheeling and transmission charges payable by the assessee especially when the assessee is discharging a public function. The expression of "transmission charges and/or "wheeling charges" entails distribution of electricity in the area of the corporation and they cannot be subjected to provisions of section 194-1 of the Act. We, however, clarify that this is restricted to the case of the assessee in view of the public function to be undertaken by it, as a result of the restructuring of the Maharashtra State Electricity Board. ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 17 -
It is pertinent to mention here that section 62 of the Act provides that the Commission may, in the case of supply of electricity fix a maximum ceiling of the tariff, in an attempt to promote competition amongst the distribution licensees. Thus, the very concept of the charge for transmission electricity and wheeling of electricity, as the case may be, is subject to the tariff that will be determined by the MERC in public interest. Hence, it is incomprehensible that the tariff passes the test as fees for technical services. Once again applying the principles of conceptual interpretation to the tariff to be fixed for the wheeling and transmission charges of electricity, it cannot be interpreted to mean fees for the providing technical services. Under the open access system, it is the MSEDCL which will be availing of the said transmission facility. No "service" is being provided by the MSETCL or the State transmission utility. No doubt, MSEDCL, as transmission licensee is required to provide superintendence, maintenance and repairs to the system. However, no such service is rendered by the MSETCL to MSEDCL. MSETCL is obliged to maintain the system by value of operation of law under the Electricity Act. The MSEDCL accesses the State transmission utility and distributes electricity passing through the State transmission utility. Our views stand fortified by the very fact that the Revenue itself is confused and unsure as to the nature of the charge. The focus of the Revenue is only the requirement of deduction of tax whether under section 194-1 or section 194]. This approach is erroneous. The Revenue contends that the wheeling and transmission charges could be rent or fees for technical services but, in our view it is neither. Wheeling charges represent the charge for permitting use of the State transmission utility by persons other than the distribution licence. The transmission charges simply constitute fees for availing of the said transmission utility to be used by open access concept for distribution of electricity to the licensees and consumers. In view of the above discussion, we are of the view that the wheeling and transmission charges are neither rent nor fees for technical services. Keeping the said interpretation into effect, we find that while interpreting the expression "rent" in the present scenario, we must bear in mind that taking into account the functioning of MSEDCL which is a public utility, it will not be appropriate to equate the transmission charges or wheeling charges to rent or fees for technical service.
In our view, the transmission charges and/or wheeling charges are not amounts paid under any arrangement for use of land, building, plant machinery, equipment, furniture, fitting, etc. and, therefore, not rent. Equally, the amounts are not fees for technical services. In the facts and circumstances of this case, we answer the question in favour of the assessee and against the Revenue. The appeal is disposed of accordingly. There will be no order as to costs.
b) Auro Mira Biopower India P Ltd vs ITO TDS reported in (2015) 55 taxmann.com 452 (Chennai-Tribunal) -
"Section 194 read with section 9 of the Income Tax Act, 1961-Deduction of tax at source- Fees for professional or technical services (Transmission charges)- Assessment Year 2012-13-Whether, where assessee paid wheeling, scheduling and transmission charges to State power utility for using its distribution network to sell energy generated by assessee to end consumers and same did not involve any human element, assessee was not ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 18 -
required to deduct TDS under section 194)-Held, yes [Para 6] in favour of assessee".
c) DCIT vs Delhi Transco Ltd reported in (2014) 52 taxmann.com 261 (Delhi -
"This finding has been followed by the ITAT in ITA No. 3965/Del/2011 in the case of assessee for Assessment Year 2006-07. Apart from the finding of tribunal recorded in the assessee's own cases, we deem it pertinent to take note of the finding recorded by the tribunal in the case of Chhattisgarh State Electricity Board
-vs. - ITO (supra) (2012) 50 SOT 33 (Mum.)- No further appeal to High Court by Department The relevant finding read as under:
" 11. We find that the Power Purchase Agreement entered into by the assessee with NTPC, [copy placed before us at pages 15-27 of the paper- book), specifically provides that "power shall be made available by the NTPC at the busbars of the Station and it shall be obligation and responsibility of the CSEB to make the required arrangement for evacuation of power from such delivery points of NTPC". It is pursuant to these obligations that the assessee, along with other bulk power beneficiaries - namely M P State Electricity Board, Gujarat Electricity Board, Maharashtra State Electricity Board, Electricity Department -
Government of Goa, Administration of Daman & Diu, and Electricity Department - Administration ofDadra and Nagar Haveli, has entered into a 'Bulk Power Transmission Agreement' with PGCIL. The preamble of this agreement, inter alia, notes that the PGCIL "is desirous to transmit energy from the Central Sector Power Station(s) to the Bulk Power Beneficiaries and that the said Bulk Power Beneficiaries are desirous of receiving the same through POWERGRID transmission system on mutually agreed terms and conditions". This agreement provides that "POWERGRID shall operate and maintain the transmission system belonging to it in the Western Region as per agreed guidelines and the directives of the Western Regional Electricity Board and the Regional Load Dispatch Centers, and cooperate with the Bulk Power Beneficiaries of the Region, so as to maintain the system parameters within acceptable/reasonable limits except where it is necessary to take measures to prevent imminent damage to any equipment". In respect of these services, the bulk power beneficiaries are to pay to PGCIL a monthly charges computed in the manner set out in clause 9 of the said agreement This clause, in turn, refers to formula set out in A.4 of Annexure 1 which refers to the same ratio of agreed annual charges divided by 12 as is between power transmitted to each beneficiary to total sales from that particular point of delivery. In other words, while the annual charges are fixed, these are divided between the beneficiaries in the same ratio as is ratio of power evacuated by a beneficiary to the total sale of power from that delivery point It is, however, not in dispute that the transmission lines are in the physical control of PGCIL, these are maintained and operated by the PGCIL and, so far as the assessee is concerned, its interest in the transmission lines is restricted to the fact that electrical power purchased by the assessee, simultaneously alongwith electrical power purchased by other bulk power beneficiaries, is transmitted through these transmission lines. The way it works is like this. ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 19 -
The power available at the delivery points, collectively for all the bulk power beneficiaries, is loaded for transmission on these transmission lines or powergrid and each of the beneficiaries is allowed to utilize the power to the extent allocated to him. It is not the case that purchases by each of the bulk beneficiary can be physically identified and that particular beneficiary is only allowed to use that physically identified portion of power. Strictly speaking, therefore, it is not the transmission of power from one point to another but availability of power on the entire power grid or transmission lines enabling the beneficiary to utilize the power to the extent of his allocation. On these facts, the question that requires our adjudication is whether or not the payment for transmission charges can be termed as 'rent' for the purposes of Section 194-1 of the Act.
12. Let us now take a look at the statutory provision with regard to tax withholding from rent payments, which is set out in Section 194-I of the Act, and analyze the same. Section 194-I provides as follows:
Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of- (a) two per cent for the use of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:
Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed [one hundred eighty thousand rupees]: Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section. Explanation : For the purposes of this section, [(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any, -,
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings, whether or not any or all of the above are owned by the payee;] ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 20 -
(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
13. The case of the Assessing Officer, which has been sustained in the first appeal, is that since expression "rent", for the purpose of Section 1941, includes "any payment, by whatever name called, under any lease, sub- lease, tenancy or any other agreement or arrangement" for the use of machinery, plant or equipment, and since the assessee has made the payments towards transmission charges for use of the machinery, plant and equipment collectively constituting mode of transmission of power, the provisions of Section 194-1 come into play on the facts of this case.
14. The core issue that we must deal with is whether the present arrangement under the Bulk Power Transmission Agreement can be termed can be covered by the scope of expression any other agreement or arrangement 'for the use of appearing in Explanation (i) to Section 194-I.
15. Explanation (i) to Section 194-I, as we have noted above, defines rent as any payment, by whatever name called, under any lease, sublease, or tenancy or any other agreement or arrangement "for the use of land, building, plant, machinery or equipment etc. As evident from a plain reading of the agreements under which impugned payments have been made, the payments have been made for the services of transmission of electricity and not the use of transmission wires per se. It is a significant fact that these transmission lines are not only being used for transmission of electricity to the assessee but also for transmission to electricity to various other entities. The transmission lines continue to be not only under control and possession of the PGCIL in legal terms, but, what is more important, these transmission lines are effectively in the control of PGCIL, without any involvement of the assessee in actual operations of the same. On these facts, in our humble understanding, the assessee has made the payments for transmission of electricity in which transmission lines have been used rather than for the use of transmission lines per se. The payments could be said to have been made for "the use of transmission lines" in a case in which the object of consideration for which payments are made was the use of transmission lines simplictor. and such a use by the assessee does not extend beyond the transmission of electricity through such lines in the sense that the same transmission lines continue to be in the control of PGCIL for transmission of electricity for other entities and for all practical purposes. Even as electricity purchased bv the assessee is transmitted to the assessee from the NTPC busbar to its landing points, the same transmission lines continue to be engaged in similar transmission of electricity for other entities and the assessee has no say in the manner in which such transmission lines can be controlled and used bv the PGCIL. Undoubtedly, for the purpose of an arrangement being termed as in the nature of rent for the purpose of Section 194-1, the 'control' and 'possession', in legal terms, of an asset may not not needed to be with the ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 21 -
person benefiting from the asset in question, it is a condition precedent for invoking Section 194 I that the asset for the use of which the payment in question is made, should have some element of its control by the assessee. Here is a case in which the assessee has no control over the operations of the transmission lines, and all that he gets from the arrangements is that he can draw the electrical power purchased from PGCIL's transmission lines in an agreed manner.
16. While on the issue of distinction between use of an asset and benefit from an asset, we may usefully refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asstt, Commr. of Commercial Taxes [2001] 124 STC 426 (Kar.), which has been followed by Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332ITR 340/197 Taxman 263/9 taxmann.com 168, in the following terms:
"9. Thus if the transaction is one of leasing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the framework of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of "sale". On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of "sale". Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO.[1990] 77 STC 182 (AP).
Illustration
(i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire.
The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the "use of the lorry" for the following reasons:
(i) The lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (Hi) the carrier can at any point (of time or place) transfer the consignment in ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 22 -
the lorry to another lorry; or the carrier may unload the consignment en route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination.
(ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8 a.m. to 8 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km. subject to an assured minimum, for a period of one month or one week or even one day; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit; and during the period when the lorry is with the customer, the transport operator has no control over it The transport operator renders no other service to the customer........"
17. It is thus clear that in a situation in which the payment in made for the use of an asset simpliciter, whether with control and possession in its legal sense or not, the payment could be said to be for the use of an asset However, in a situation in which the payment is made only for the purpose a specific act, i.e. power transmission in this case, and even if an asset is used in the said process, the payment cannot be said to be for the use of an asset When control of the asset (transmission lines in the present case) always remains with the PGCIL, any payment made to the PGCIL for transmission of power on the transmission lines and infrastructure owned controlled and in physical possession of PGCIL can be said to have been made for 'the use of ' these transmission lines or other related infrastructure. Viewed in this perspective. Section 1941 has no application so far as the impugned payments for transmission of electricity is concerned. For this short reason alone the impugned demands must be held to unsustainable in law."
9. On due consideration the order of the coordinate bench in the assessee's own case in assessment year 2005-06, and 2006-07 as well as in the case Chhattisgarh State Electricity Board, we are of the view that ld. Commissioner of Income Tax (appeals) has appreciated the controversy in right prospective and no interference is called for.
Therefore, ITA No. 3526,3528,3629,3530 are dismissed.
The various decisions cited supra have held that there will be no TDS on transmission charges and the same analogy would apply with equal force in the case of transmission charges in telecom industry.
4.17. From the aforesaid statement recorded from technical experts pursuant to the directions of the Supreme Court in CIT vs Bharti Cellular Ltd ( 330 ITR 239) which has been heavily relied upon by the Learned CITA, we find that human ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 23 -
intervention is required only for installation / setting up / repairing / servicing / maintenance / capacity augmentation of the network. But after completing this process, mere interconnection between the operators while roaming, is done automatically and does not require any human intervention and accordingly cannot be construed as technical services. It is common knowledge that when one of the subscribers in the assessee's circle travels to the jurisdiction of another circle, the call gets connected automatically without any human intervention and it is for this, the roaming charges is paid by the assessee to the Visiting Operator for providing this service. Hence we have no hesitation to hold that the provision of roaming services do not require any human intervention and accordingly we hold that the payment of roaming charges does not fall under the ambit of TDS provisions u/s 194J of the Act.
4.18. As far as the applicability of provisions of section 194C are concerned, we hold that the provisions of section 194C of the Act would become applicable only where some work (works contract) is being carried out and there is some human intervention involved in the carriage of such work. The term 'work' is defined in section 194C as follows:-
"Work shall include:
a) Advertising;
b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
c) carriage of goods or passengers by any mode of transport other than by railways;
d) catering;
e) manufacturing or supplying a product according to the requirement or specification of the customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer."
We hold that 194C is applicable only where any sum is paid for carrying out any work including supply of labour for carrying out any work. Thus, 'carrying out any work' is the substance for making the payment relating to such work, liable for deduction of tax at source u/s 194Cof the Act. For carrying out any work, manpower is sine qua non and without manpower, it cannot be said that work has been carried out. Under section 194C each and every work/service is not covered, hence the nature of work done or service performed is required to be seen. Moreover, the term 'work' is defined in section 194C of the Act. The word 'work' in section 194C referred to and comprehends only the activities of workman. It is the physical force which has comprehended in the word 'work'. We have already held that the payment of roaming charges does not require any human intervention. Hence in the absence of human intervention, the services rendered in the context of the impugned issue does not fall under the definition of 'work' as defined in section ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 24 -
194C and hence the provisions of section 194C are not applicable to the impugned issue.
4.19. Let us now get into the applicability of provisions of section 1941 of the Act to the facts of the impugned issue. The term 'rent' is defined in section 1941 as below:-
"For the purposes of this section, "rent" means any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,-
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings whether or not any or all of the above are owned by the payee."
The real test to be considered is whether it is possible to say that it is the assessee who has used the equipment and has paid the roaming charges to the other service provider with whom it has entered into a national roaming agreement. We hold that it is not possible to say so because if at all anyone can be said to have used the equipment it can only be the subscriber of the assessee but not the assessee. If anything the assessee is placed in a position of a mere facilitator between its subscriber and the other service provider, facilitating a roaming call to be made by the subscriber. The assessee cannot be said to have used the equipment which is involved in providing the roaming facility. The assessee collects the roaming charges from its subscriber and passes it on to the other service provider. It is relevant at this juncture to get into the judgement of the apex court in the case of BSNL and Another vs Union of India and Others (2006) 282 ITR 273 (SC). One of the questions which arose for consideration was whether there was any transfer of a right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber. Referring to section 4 of the Telegraph Act, 1885, which gives exclusive privilege in respect of telecommunication and the power to grant licences to the Central Government, it was contended by the service providers that they provided only a service by the utilization of telegraph licensed to them for the benefit of the subscribers.
The Supreme Court proceeded on the assumption that incorporeal rights may be goods for the purpose of levying sales tax and posed to itself the question whether the electromagnetic waves through which the signals are transmitted can fulfil the criteria for being described as "goods". The court held that the electromagnetic waves cannot be called goods. They were held to be merely the medium of communication; the waves are neither abstracted nor consumed, they are not delivered, stored or possessed, nor are they marketable. What was transmitted is not an electromagnetic wave but the signal through such means. The Supreme Court thereafter gave a more basic reason to hold that the electromagnetic waves cannot be considered as goods and it is this reason which ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 25 -
is relevant for our purpose. It was held that a subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection.
In view of the above, we hold that the payment of roaming charges by the asesssee to other service provider cannot be considered as rent within the meaning of section 1941 of the Act.
4.20. Accordingly, we hold that the payment of roaming charges of Rs.55,41,01,320/- does not fall under the ambit of TDS provisions either u/s 194C / 1941 or 194J of the Act and hence we have no hesitation in directing the Learned Assessing Officer to delete the addition made u/s 40(a)(ia) on this account."
22. We follow the above precedent in absence of any distinction on facts being pointed out at Revenue's behest. The assessee's corresponding ground in its appeal succeeds whereas Revenue's ground no.5 fails.
23. This leaves us with the latter issue as to whether the assessee is liable to deduct TDS upon discount coupons offered to prepaid distributors as disallowed u/s.40(a)(ia) of the Act. Case record reveals that a co-ordinate bench in M/s. Vodafone Essar Gujarat Ltd. (assessee's sister concern) vs. ACIT ITA No.386/Ahd/2011 decided on 07.07.2015 adjudicates the very issue against the Revenue as under:
"7. We find that what is sold by the assessee is airtime, whether through the physical vouchers or through the electronic transfer of refill/ recharge value, to its distributors. It is this transaction which is subject matter of different perceptions, so far as tax withholding obligations of the seller are concerned, of the parties before us. As a matter of fact, the assessment order itself states that the assessee has sold the "pre-paid vouchers, of various face value, to its distributors, at a rate lower than its face value", and that "the difference (between the face value and the price at which is sold) is nothing but commission on which no tax has been deducted". The short issue that we are required to adjudicate in this appeal is whether the provisions of section 194H will come into play in respect of the difference between the price at which the airtime is thus sold to the distributors and its recommended retail price to the end consumers. ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 26 -
8. This issue is no longer res Integra. As the same business model, with no or peripheral variations, has been followed by almost all the operators in the mobile telecommunication industry, this issue has been subject matter before various forums, and more importantly, before various Hon'ble High Courts. Learned Representatives fairly agree that the above issue in appeal is subject matter of difference of opinion by various Hon'ble non-jurisdictional High Courts and that we do not have the benefit of guidance by Hon'ble jurisdictional High Court.
9. This issue is covered, in favour of the assessee, by Hon'ble Karnataka High Court's common judgement in the cases of Bharti Airtel Limited, Tata Teleservices Limited and Voadfone South Limited, reported as Bharti Airtel Limited vs. DCIT [(2015) 372 ITR 33 (Kar)] wherein their Lordships have, inter alia, observed as follows:
"62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Only after the resale of those prepaid cards, distributors would derive income. At the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor. In this context it is pertinent to mention that the assessee sells SIM cards to the distributor and allows a discount of Rs.20/-, that Rs.20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer. The profit 86 earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share Rs.20/- which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 27 -
service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal.
63. It was contended by the revenue that, in the event of the assessee deducting the amount and paying into the department, ultimately if the dealer is not liable to tax it is always open to him to seek for refund of the tax and, therefore, it cannot be said that Section 194H is not attracted to the case on hand. As stated earlier, on a proper construction of Section 194H and keeping in mind the object with which Chapter XVII is introduced, the person paying should be in possession of an income which is chargeable to tax under the Act and which belongs to the payee. A statutory obligation is cast on the payer to deduct the tax at source and remit the same to the Department. If the payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. As held by the Apex Court in Bhavani Cotton Mills Limited's case, if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage will not make the original levy valid.
64. In the case of Vodafone, it is necessary to look into the accounts before granting any relief to them as set out above. They have accounted the entire price of the prepaid card at Rs.100/- in their books of accounts and showing the discount of Rs.20/- to the dealer. Only if they are showing Rs.80/- as the sale price and not reflecting in their accounts a credit of Rs.20/- to the distributor, then there is no liability to deduct tax under Section 194H of the Act. This exercise has to be done by the assessing authority before granting any relief. The same exercise can be done even in respect of other assessees also.
65. In the light of the aforesaid discussions, we are of the view that the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable."
10. As we take note of the views so expressed by Hon'ble Karnataka High Court, we may also note that this issue has been decided against the assessee by, amongst others, Hon'ble Kerala High Court, in the case of Vodafone Essar Cellular Ltd vs. ACIT [(2010) 332 ITR 255 (Ker)]. The same approach has been adopted by some various other Hon'ble non jurisdictional High Courts as well, such as in the cases of Bharti Cellular Limited Vs ACIT [(2013) 354 ITR 507 (Cal)] and CIT Vs Idea Cellular Limited [(2010) 325 ITR 148 (Del)]. In the case of Vodafone Essar Cellular Ltd (supra) Their Lordships have, inter alia, observed as follows :-
4. The main question to be considered is whether Section 194H is applicable for the "discount" given by the assessee to the distributors in the course of selling Sim Cards and Recharge coupons under prepaid scheme against advance payment received from the distributors. We have to ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 28 -
necessarily examine this contention with reference to the statutory provisions namely, Section 194H ....
What is clear from Explanation (i) of the definition clause is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case (supra) above referred that a customer can have access to mobile phone service only by inserting Sim Card in his hand set (mobile phone) and on assessee activating it. Besides getting connection to the mobile network, the Sim Card has no value or use for the subscriber. In other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far as Recharge coupons or E Topups are concerned which are only air time charges collected from the subscribers in advance. We have to necessarily hold that our findings based on the observations of the Supreme Court in BSNL's case (supra) in the context of sales tax in the case of BPL Cellular Ltd. (supra) squarely apply to the assessee which is nothing but the successor company which has taken over the business of BPL Cellular Ltd. in Kerala. So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rendering services to ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee. The terms of distribution agreement clearly indicate that it is for the distributor to enroll the subscribers with proper identification and documentation which responsibility is entrusted by the assessee on the distributors under the agreement. It is pertinent to note that besides the discount given at the time of supply of Sim Cards and Recharge coupons, the assessee is not paying any amount to the distributors for the services rendered by them like getting the subscribers identified, doing the documentation work and enrolling them as mobile subscribers to the service provider namely, the assessee. Even though the assessee has contended that the relationship between the assessee and the distributors is principal to principal basis, we are unable to accept this contention because the role of the distributors as explained above is that of a middleman between the service provider namely, the assessee, and the consumers. The essence of a contract of agency is the agent's authority to commit the principal. In this case the distributors actually canvass business for the assesssee and only through distributors and retailers appointed by them assessee gets subscribers for the mobile service. Assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed that the distributor is only rendering services to the assessee and the distributor commits the assessee to the subscribers to whom assessee is accountable under the service contract which is the subscriber connection arranged by the ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 29 -
distributor for the assessee. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation
(i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute that discount is nothing but a margin given by the assessee to the distributor at the time of delivery of Sim Cards or Recharge coupons against advance payment made by the distributor. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot charge anything more than the MRP shown in the product namely, Sim Card or Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but commission within the meaning of Explanation (i) on which tax is deductible under Section 194H of the Act. The contention of the assessee that discount is not paid by the assessee to the distributor but is reduced from the price and so much so, deduction under Section 194H is not possible also does not apply because it was the duty of the assessee to deduct tax at source at the time of passing on the discount benefit to the distributors and the assessee could have given discount net of the tax amount or given full discount and recovered tax amount thereon from the distributors to remit the same in terms of Section 194H of the Act."
11. There is no, and there cannot be any, dispute about the fundamental legal position that in the hierarchical judicial system, that we have in our country, lower tiers of judicial hierarchy has to respectfully follow the views expressed by the higher tiers of judicial hierarchy. In the case of ACIT Vs Dunlop India Limited [(1985) 154 ITR 172 (SC)], Hon'ble Supreme Court has observed, quoting the House of Lords, as follows:
We desire to add and as was said in Cassell & Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that "in the hierarchical system of Courts" which exists in our country, "it is necessary for lower tier", including the High Court, "to accept loyally the decisions of the higher tiers". "It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary.... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted" (See observations of Lord Hailsham and Lord Diplock in Bropme vs. Cassell). ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 30 -
The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system
12. The question whether the non- jurisdictional High Court binds the Tribunal benches or not came up for consideration before Hon'ble Bombay High Court in the case of CIT Vs Godavaridevi Saraf [(1978) 113 ITR 589 (Bom)]. That was a case in which Their Lordships were in seisin of the question as to "whether, on the facts and circumstances of the case, and in view of decision in the case of A.M. Sali Maricar & Anr. vs. ITO & Anr. [(1973) 90 ITR 116 (Mad)] the penalty imposed on the assessee under s. 140A(3) was legal ? The specific question before Their Lordships thus was whether the Tribunal, while sitting in Bombay, was justified in following the Madras High Court decision. It was in this context that Hon'ble Bombay High Court concluded as follows:
"It should not be overlooked that IT Act is an all India statute, and if a Tribunal in Madras has to proceed on the footing that s. 140A(3) was non- existent, the order of penalty under that section cannot be imposed by any authority under the Act. Until a contrary decision is given by any other competent High Court, which is binding on the Tribunal in the State of Bombay (as it then was), it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land..............an authority like Tribunal has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision on that issue by any other High Court........."
13. In the case of CIT Vs Shah Electrical Corporation [(1994) 207 ITR 350 (Guj)], vide judgment dated 23rd June 1993, Their Lordships had an occasion to consider the aforesaid views. It was in this context that Their Lordships have observed as follows:
3. What is contended by the learned advocate for the Revenue is that the Tribunal decided the appeal on 26th Oct., 1976. By that time, the Andhra Pradesh High Court had upheld the validity of s. 140A(3). He drew our attention to the judgment of the Andhra Pradesh High Court in Kashiram vs. ITO (1977) 107 ITR 825 (AP).
From the report, it appears that the said judgment was delivered on 10th Dec., 1975. Therefore, the Tribunal was not right in proceeding on the basis that only the Madras High Court judgment was in the field and, therefore, it was open to it to proceed on the basis that s. 140A(3) was non-existent. He also submitted that for that reason, the Tribunal was not right in following the judgment of the Bombay High Court in Godavaridevi's case (supra).
4. In our opinion, the legal position is correctly stated by the Punjab & Haryana High Court in CIT vs. Ved Prakash (1989) 77 CTR (P&H) 116 : (1989) 178 ITR 332 (P&H) when it observed that "unless and until the Supreme Court or the High Court of the State in question, under Art. 226 of the Constitution, declares a provision of the Act to be ultra vires, it must be taken to be constitutionally valid and treated as such".
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5. In our opinion, the Tribunal of another State would be justified in proceeding on the basis that the provision has ceased to exist because it has been declared as ultra vires by the High Court only when there is some material to show that the said decision has been accepted by the Department. .............
(Emphasis by underlining supplied by us)
14. A little later, however, while dealing with a materially similar situation, in the case of CIT Vs Maganlal Mohanlal Panchal (HUF) [(1994) 210 ITR 580 (Guj)], vide judgment dated 1st September 1994, Their Lordships have held as follows:
........ At the time when the Tribunal decided the appeal, that was the only decision in the field and, therefore, in view of what the Bombay High Court has held in CIT vs. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom) and CIT vs. Smt. Nirmalabai K. Darekar (1990) 186 ITR 242 (Bom), the Tribunal was bound to follow the said judgment of the Madras High Court. It, therefore, cannot be said that the Tribunal committed an error in following the said judgment of the Madras High Court. In view of the said decision of the Madras High Court, the only course which the Tribunal could have followed was to direct the ITO to consider the partial partition on the merits and pass an order under s. 171 first and then under s. 143(3) of the Act
15. It is clear that, except on the issue of legality of the statutory provision itself, the decisions of even the non-jurisdictional High Courts are binding on the lower tiers of judicial hierarchy such as this Tribunal. As we hold so, we are alive to the school of thought that non jurisdictional High Courts are not binding on the subordinate courts and Tribunals, as articulated by Hon'ble Punjab & Haryana High Court in the case of CIT vs. Ved Prakash [(1989) 178 ITR 332 (P&H)] but then that was a case in the context of validity of a statutory provision, i.e. 140A(3), covered by the rider to the general proposition. This exception does not come into play in the present case as we are not, and we cannot be, dealing with the constitutional validity of a provision. Clearly, therefore, the views expressed by Hon'ble non jurisdictional High Court, in the absence of a direct decision on that issue by the Hon'ble jurisdictional High Court, deserve utmost respect and deference.
16. The difficulty, however, arises in the case in which Hon'ble non jurisdictional High Courts have expressed conflicting views and the subordinate courts and Tribunals do not have the benefit of guidance from Hon'ble jurisdictional High Court.
17. In our humble understanding of the legal position and of the propriety, it will be wholly inappropriate for us to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon'ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. Of course, when the matter travels to Hon'ble jurisdictional High Court, Their Lordships, being unfettered by the views of a non- ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 32 -
jurisdictional High Court, can take such a call on merits. That exercise, as we understand, should not be carried out by us.
18. The choice of which of Hon'ble High Court to follow must, therefore, be made on some objective criterion. We have to, with our highest respect of all the Hon'ble High Courts, adopt an objective criterion for deciding as to which of the Hon'ble High Court should be followed by us. We find guidance from the judgment of Hon'ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd. [(1972) 88 ITR 192 (SC)]. Hon'ble Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted" Although this principle so laid down was in the context of penalty, and Their Lordships specifically stated so in so many words, it has been consistently followed for the interpretation about the statutory provisions as well. In another Supreme Court judgment, Petron Engg. Construction (P) Ltd. & Anr. vs. CBDT & Ors. [(1989) 175 ITR 523 (SC)] the above principle of law has been reiterated by observing as follows:
"......Counsel submits that when two interpretations are possible to be made, the interpretation which is favourable to the assessee should be adopted. In support of that contention, learned counsel has placed reliance upon a few decisions of this Court in CIT vs. Madho Prasad Jatia (1976) 105 ITR 179 (SC); CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) and CIT vs. Kulu Valley Transport Co. P. Ltd. (1970) 77 ITR 518 (SC) : .........The above principle of law is well-established and there is no doubt about that......."
19. Having noted the legal position as above, it is appropriate, for the sake of completeness, to note the exception to this general rule as well. Hon'ble Supreme Court had, however, some occasions to deviate from this general principle of interpretation of taxing statute which can be construed as exceptions to this general rule. It has been held that the rule of resolving ambiguities in favour of tax-payer does not apply to deductions, exemptions and exceptions which are allowable only when plainly authorised. This exception, laid down in Littman vs. Barron 1952(2) AIR 393 and followed by apex Court in Mangalore Chemicals & Fertilizers Ltd. vs. Dy. Commr. of CT (1992) Suppl. (1) SCC 21 and Novopan India Ltd. vs. CCE & C 1994 (73) ELT 769 (SC), has been summed up in the words of Lord Lohen, "in case of ambiguity, a taxing statute should be construed in favour of a taxpayer does not apply to a provision giving tax-payer relief in certain cases from a section clearly imposing liability". This exception has been also reiterated by Hon'ble Supreme Court in the case of Oil & Natural Gas Commission Vs CIT (Civil Appeal no. 730 of 2007, judgment dated 1st July 2015; reported in www.itatonline.org). However, in the present case, this exception has no application. The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretation in favour of assessee will have to treat the provisions unconstitutional, as held in the matter of State of M.P. vs. Dadabhoy's New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 (SC) 614. That is what Hon'ble jurisdictional High Court has also held in the case of Shah Electrical Corporation (supra). None of these exceptions, however, admittedly apply to the situation that we are dealing with at present.
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20. There can be no dispute on the proposition that irrespective of whether or not the judgments of Hon'ble non jurisdictional High Courts are binding on us, these judgments deserve utmost respect which implies that, at the minimum, these judgments are to be considered reasonable interpretations of the related legal and factual situation. Viewed thus, when there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted by us. In other words, Hon'ble non jurisdictional High Court's judgment in favour of the assessee, in the light of this legal principle laid down by Hon'ble Supreme Court, is to be preferred over the Hon'ble non jurisdictional High Court not favourable to the assessee. In our humble understanding, it is only on this basis, without sitting in value judgment on the views expressed by a higher tier of judicial hierarchy, that the conflicting views of Hon'ble non jurisdictional High Courts can be resolved by us in a transparent, objective and predictable manner.
21. It is very tempting to believe, or pretend to believe, that, in the absence of direct decision on the issue by the Hon'ble jurisdictional High Court, we have unfettered discretions in exercise of our judicial powers but then such an approach will not only be contrary to settled legal position, as set out above, but also, in a way, an exercise in impropriety.
22. We may also mention that a single member bench of this Tribunal, in the case of ITO Vs Bharat Sanchar Nigam Limited and vice versa (ITA No 170/Hyd/2010 and CO No 10/Hyd/10; order dated 5th June 2015) has reached the same conclusion but the reasoning adopted, for following Hon'ble Karnataka High Court's judgment in the case of Bharti Airtel Limited (supra), was stated to be that "Since no jurisdictionaf High Court decision is available as on date, the latest decision of Karnataka High Court, which has considered and distinguished earlier rulings of other High Courts, deserves to be followed". Our conclusion is the same but our decision to follow Hon'ble Karnataka High Court's judgment is simply this judgment is to be preferred over, in the light of settled legal principles set out above, other Hon'ble High Court judgments, because it is favourable to the assessee. With utmost respect and reverence to all the Hon'ble Courts, it is not for us to choose which decision is to be followed because of its merits because of what it has discussed or because of how it has distinguished other Hon'ble High Courts or because of its timing i.e. of its being latest. Even when a non-jurisdictional High Court distinguishes all other decisions of Hon'ble High Courts but holds a view unfavourable to the assessee, that decision cannot normally be preferred over a decision from another Hon'ble non jurisdictional High Court decision, of equal stature, in favour of the assessee. That is, as we understand, correct approach to the matter and that is the reason why we come to the same conclusion as the SMC did but for altogether different reasons.
23. We have also noted that material facts of the case and the terms of agreements with the distributors are the same as were before Hon'ble Karnataka High Court in the above case. A comparative chart of these clauses is as follows:
Sl. Discosure in the Agreement as Corresponding clause in the No. highlighted in the Hon'ble agreement of the assessee with Karnataka High Court's judgment - its pre-paid distributors ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 34 -
relevant extracts 1 The agreement stipulates that the Clause 17.2 specifically provides distributors have to represent to the that the relationship created by customers that the distributor's the agreement is that of a buyer agreement with the customers/its and seller and that the agreement dealers is on Principal-to-Principal is on a 'principal to principal' basis and assesses is no way basis and neither party is, nor concerned or liable to the shall be deemed to be, an customers/dealers of the Distributor' agent/partner of the other. It Is
-Page 68. also provided that nothing in the Agreement shall be construed to render the distributor a partner or agent of the assessee 2 "Distributor shall not make any Clause 1e ofAnnexure III to the promise, representatbn or to give agreement provides that the any warranty or guarantee with distributor shall not make any respect to services and products, promises or representatbn or who are not authorized by the give any warranties or assessee'- Page 69. guarantees in respect of the service tickets except such as are consistent with those which accompany the Service Ticket or as expressly authorized by the assessee in writing.
3 That the insurance liability for the As per clause (iv) of Annexure II entire stock in trade in the premises to the agreement, the assessee is at the address under reference will not liable for any loss, pilferage be of the Distributor and the liability or damage to the recharge for any loss or damage due to any vouchers/service tickets post-
fire, burglary, theft etc., will be of the delivery of the same to the Distributor.'- Page 69. distributors. The assessee does not compensate the distributors for any unsold stock 4 'The Distributor has no express or Distributor does not have an implied right or authority to assume authority to assume or create any or undertake any obligation in obligations VWL's behalf or respect of or on in the name of the incur any liability on behalf of assessee.' Page 70. VWL or accept any contract binding upon VWL (clause 17.1 of the Agreement).
5 'Channel Partner be liable to pay all The distributor shall pay all the taxes such as sales tax, service licenses, fee, taxes, duties, sales tax applicable and payable in respect tax, service tax and any other of the subject matter of this charges, assessments penalties agreement and statutory increase in whether statutory or otherwise respect therof -Page 72. levied by any authority in connection with the operation of distributor's office (Clause III(b) of Annexure III to agreement).
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6 'After sale of products The assessee shall not be distributor/channel partner cannot responsible for any post delivery return goods to the assessee for defect in the service tickets. No whatever reason'-Page 74. request of refund of any money shall be entertained by the assessee in any circumstances (Clause e-Annexure I).
7 'Distributors are even prevented The distributor shall not make
from making any representation to any promises or representations
the retailers unless authorized by the or give any warranties or
assessee'. guarantees in respect of the
products (i.e. SIM cars and pre-
paid vouchers) (Clause 1e
Annexure III).
24. In the light of the above discussions, and particularly as there is no dispute that the factual matrix of all the cases before the Hon'ble non jurisdictional High Courts were materially the same as in this case, in conformity with the esteemed views of Hon'ble Karnataka High Court in Bharti Airtel's case (supra), and hold as follows:
(a) On the facts of the case, and as is evident from a reading of the agreements before us, the assessee has sold, by way of prepaid vouchers, e-top ups and prepaid SIM cards, the 'right to service' on principal to principal basis to its distributors. As evident from the terms and conditions for sale, placed at page 136 of the paper-book, not only that the sale was final and the assessee was not responsible for any post-delivery defects in the services, it was specifically agreed that "no request of refund of any money shall be entertained by VEGL (i.e. the assessee) under any circumstances".
(b) The fact that there are certain conditions and stipulations attached to the sale of this right of service by the assessee to his distributors does not affect the character of sale on principal to principal basis.
(c) Section 194 H comes into play only in a situation in which "any person, ........responsible for paying..... to a resident, any income by way of commission"
pays or credits such "income by way of commission" . However, since at the time of the assessee selling these rights for a consideration to the distributor, the distributor does not earn any income, the provisions of Section 194 H do not come into play on the transaction of sale of the right to service by the assessee to his distributors. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor
(d) So far as the transaction of sale of 'right to service' by the assessee to his distributor is concerned, while it has income potential at a future points of time (i.e. when this right to service is sold at a profit by the distributor), rather than ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 36 -
earning income, distributors incur expenditure for the purchase of prepaid cards. Therefore, at the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Accordingly, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise.
(e) In a situation in which the assessee has credited the sale proceeds at the transaction value (in contrast with the transaction being shown at face value and the difference between face value and the transaction value credited to the distributor), the tax deduction liability under section 194H does not arise. While learned counsel for the assessee has stated at the bar that the sale proceeds are credited at the transaction value, this aspect of the matter is to be verified by the Assessing Officer, and in case the sales is accounted for at the face value, to that extent, the tax withholding liability is to be sustained,"
Both the learned representatives are ad idem that neither the hon'ble apex court nor jurisdictional high court have decided the issue till date. We thus draw support from above extracted tribunal's decision and direct the Assessing Officer to finalize similar factual verification in the very terms reproduced hereinabove. This issue succeeds in assessee's favour as indicated hereinabove. The Revenue's corresponding ground no.6 is thus declined. Shri Soparkar informs us at this stage that the assessee raises only the above two grounds in its appeal. We accordingly accept assessee's appeal ITA No.944/Ahd/2014 raising these two substantive ground only in the terms indicated hereinabove.
24. The Revenue's next substantive ground no.7 pleads that the DRP has erred in law and on facts in deleting addition of Rs.1,21,82,00,000/- made in the course of the impugned draft assessment on account of receipt of prepaid services crystallized in the impugned assessment year. The sole issue between the parties is about income arises from sale of prepaid cards. The Revenue treats the same to be a mere recharge taxable in the year of purchase. The assessee's stand as against this is that AS-9 mandates revenue recognition only when the corresponding services are actually rendered. We notice from the case file that a co-ordinate bench of this tribunal in (2013) 31 taxmann.com 239 (Delhi-trib.) ACIT vs. Shyam Telelinks Ltd. upholds the ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 37 -
said assessee's identical contention on the principle of recognition of income of accrual basis pertaining to sale of prepaid SIM cards. We further notice that the said co-ordinate bench in para 16 remits the issue back to the Assessing Officer for factual verification to prevent revenue leakage. We also follow suit in this legal and factual backdrop and direct the Assessing Officer to verify as to whether the assessee has declared the revenue in respect of the expired prepaid cards or not in the succeeding assessment year. This Revenue's ground is thus partly accepted for statistical purposes.
25. The Revenue's next substantive ground no.8 pleads that the DRP has erred in treating assessee's license fee paid to department of telecommunication as revenue expenditure u/s.37(1) of the Act. Shri Soparkar submits at this stage that tribunal's order in assessee's case for A.Y. 2006-07 (supra) squarely covers the issue in its favour. The same goes unrebutted from other side. We thus decline this substantive ground as well.
26. The Revenue's next substantive ground no.8 avers that that the DRP has erred in directing the Assessing Officer to delete royalty disallowance of Rs.1,67,24,62,560/- paid to the wireless planning commission. The assessee informs that herein as well that the DRP's findings under challenge rely on hon'ble Delhi high court's judgment 221 CTR 305 upholding tribunal' s order 120 TTJ 289 in its own case for A.Y. 1999-2000 concluding the impugned payments are in the nature of revenue expenditure only. We thus find no reason to adopt a different approach in the impugned assessment year. This substantive ground is also rejected.
27. The Revenue's next substantive ground pleads that the DRP has erred in law and on facts in deleting disallowance of Rs.18,22,71,089/- made u/s.36(1)(iii) of the Act on account of capitalization of expenses relating to capital work in progress. We find that the DRP's directions under challenge ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 38 -
elaborately discuss facts of the case along with Assessing Officer's findings and assessee's submissions as follows:
"15. The eleventh ground of objection raised by the asseesee is that the AO has erred in making proportionate disallowance of interest expenses amounting to Rs 18,22,71,089 claimed under section 36(1)(iii) of the Act, by placing reliance on Explanation 8 to section 43(1) of the Act. :
15.1 On this issue, in brief, the Assessing Officer has based his conclusion in the draft assessment order on the following contentions:
* As per section 36(1)(iii) of the Act, interest paid on capital borrowed for acquisition of assets for extension of business is not allowed as a deduction. .Reliance was placed on Explanation 8 to Section 43(1) of the Act;
* The onus of the assesse who claimed any expenditure to prove that the said expenditure, including the expenditure claimed under section 36(1)(iii) of the Act was for business purposes. Reliance in this regard was placed on the following .judicial precedents:
Malwa Cotton Spinning Mills vs ACIT (89 ITD 65) (ITAT - Chandigarh);
Tirupati Trading Co. v. CIT [2000] (242 ITR 132) (Hon'ble Calcutta High Court);
Iriveni Engineering Works Ltd. vs CIT (167 ITR 742) (Hon'ble Allahabad High Court);
Sanghvi Swiss Refills P Ltd vs, ITO (85 ITD 59) (Mumbai ITAT);
CIT vs. Orissa Cement Ltd. (258 ITR 365) (Delhi ITAT);
CIT v. Motor General Finance Ltd [2002] (254 ITR 449) (Delhi ITAT) * The assesse could not prove by way of submitting fund flow statement that there was no diversion of interest bearing fund.
15.2 With regard to this ground of objection, the submissions of the assesse, in brief, are as under:
* Assessee had incurred interest expenditure in respect of various ECB loans obtained for acquisition of capital assets for continuation of the existing telecom connectivity business; * The interest paid on borrowed funds for acquisition of a capital asset, even for a period prior to the date of put to use, qualifies as a deduction under section 36(1)(iii) of the Act. Reliance in this regard is placed on the following judicial precedents:
Core Healthcare Ltd (298 ITR 194)'(Hon'ble Supreme Court);
United Phosphorous Ltd (299 ITR 9) (Hon'ble Supreme Court);
ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 39 -
Varclhman Polytex Ltd v CIT (349 ITR 090) (Hon'ble Supreme Court) * Explanation 8 to section 43(1) of the Act states that any interest expenditure incurred on acquisition of capital asset after it is put to use cannot be capitalized in the actual cost. In the instant case, the Assessee has incurred interest expenditure even after various assets have been put to use. Hence, as per provisions of Explanation 8 to section 43(1) of the Act, these interest expenses cannot form part of actual cost of the asset as per section 43(1) of the Act and hence, cannot be capitalized.
* The case laws relied upon by the AO deals with cases whereby interest free loans / advances were provided by the assessee to its group companies / sister concerns / subsidiaries and the assessee was unable to substantiate that the said loans / advances were provided out of own funds and not out of borrowed funds. However, in the instant case, as no interest free loans / advances were given to group companies, the decisions relied by AO are not applicable.
Decision 15.3 We have carefully considered the facts of the case and contentions of the AO as incorporated, in the draft assessment order. We have also gone through the various oral and written submission made by the assessee's representative. The assessee has incurred interest expenditure during the year in respect of various ECB loans obtained for acquisition of capital assets. The assesse has acquired capital assets for its existing business and not for the purpose of extension of the business. Hence, proviso to section 36(1)(iii) of the Act cannot be invoked and deducibility of interest expenditure would be determined by section 36(1)(iii) of the Act.
Further, as mentioned by the assessee, it has incurred interest, expenditure on ECBs used for acquisition of capital assets and hence, interest expenditure has also been incurred even after capital assets have been put to use. Thus, provisions of Explanation 8 to section 43(1) are also not applicable to the assesssee as per decisions of Hon'ble Supreme Court in the case of Core Health Care .is relied on by the assessee. In the said decision, Hon'ble Supreme Court held that interest expenditure incurred on borrowings used for acquisition of capital assets for the purposes of existing business and not for the purpose of expansion, would be allowable as a deduction under section 36(1)(iii) of the Act. Hence, interest expenditure incurred by the assessee which is not for the extension of existing business but for the purpose of normal business operations would be allowable under section 36(1)(iii) of the Act. Further, Hon'ble Supreme Court has after considering provisions of Explanation 8 to section 43(1) held that the said explanation is not relevant while determining deduction of interest expenditure under section 36(1)(iii) of the Act. The relevant observations of Hon'ble Supreme Court in case of Core Health Care Ltd. are as under:
ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 40 -
"The determination of actual cost in Section 43(1) has relevancy in relation to Section 32(depreciation allowance), Section 32A(investment allowance), Section 33(development rebate allowance), and Section 41 (balancing charge). "Actual cost" of an asset has no relevancy in relation Section 36(1)(iii) of the 1961 Act. , This reasoning flows from a bare reading of Section 43(1). Section 43 defines certain terms relevant to income from profits and gains of business and, therefore, the said section commences with the words "In Sections 28 to 41 and unless the context otherwise requires" "actual cost" shall mean the actual cost of the assets to the assessee, reducing by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In other words, Explanation 8 applies only to those Sections like Sections 32, 32A, 33 and 41 which deal with concepts like Depreciation. The concept of Depreciation is not there in Section 36(1)(iii), That is why the legislature has used the words "unless the context otherwise requires". Hence, Explanation 8 has no relevancy to Sect/on 36(1)(iii). It has relevancy to the aforementioned enumerated sections. Therefore, in our view Explanation 8 has no application to the facts of the present case.... Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because of that the section requires is that the assessee must borrow the capital for the purpose of his business. ...."
The above principles were subsequently followed by Hon'ble Supreme Court in the case of United Phosphorous Ltd. (299;lTR 9) and Vardhman Polytex Ltd v CIT (349 ITR 690).
Hence, respectfully following the above judgments of Hon'ble, Supreme Court, we hold that interest expenditure incurred by the assessee on ECB used for acquisition of capital assets is eligible for deduction under section 36(1)(iii) of the Act. Accordingly, we direct the AO to delete the proposed addition of interest expenditure incurred by assessee. Hence, this ground of assessee is allowed."
28. Heard both sides. The Revenue strongly contends that the Assessing Officer had rightly invoked the impugned disallowance in the above draft assessment by quoting Section 43(1) explanation 8 of the Act. It however fails to dispute that hon'ble apex court decision in Core Healthcare case (supra) categorically holds that the said explanation does not apply in case of 36(1)(iii) deduction. The assessee at this stage states to have incurred the impugned interest expenditure in respect of various external corporate borrowings obtained for acquisition of capital assets for continuing its existing telecom business only and not for extension thereof. Its further case ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 41 -
is that the interest in question paid on borrowed funds for acquisition of a capital asset is allowable even for a period to dated of its being put to use. As per hon'ble apex court's decision hereinabove holding that there is no distinction u/s.36(1)(iii) between interest incurred on capital borrowed for revenue or capital purposes provided the same is used for business purposes irrespective of the result of use of such capital. We afforded ample rebuttal opportunity to Revenue. Ld. Departmental Representative fails to take us to any material in the case file so as to prove that assesee's interest in question is covered u/s.36(1)(iii) proviso as amended by the Finance Act, 2015 w.e.f. 01.04.2016 since it is a case wherein the impugned interest is in respect of capital borrowed for the purpose of business already attracting the main limb of statutory provision instead of the above proviso. This Revenue's ground is accordingly declined.
29. This leaves us with the Revenue's last substantive ground assailing correctness of the DRP's directions deleting upward transfer pricing adjustment on various facets in ground nos. 11 to 11(j) in its pleadings.
30. A perusal of the case record indicates that the assessee had paid brand royalty fee amounting to Rs.5,37,37,397/- and Rs.2,68,68,699/- to its overseas associate enterprises, namely, M/s. Vodafone Ireland Marketing Ltd. and M/s. Rising Groups Ltd.; respectively. It adopted the transaction net margin method (TNMM) to benchmark the same. We find from Transfer Pricing Officer's order dated 28.01.2013 that he rejected assessee's method after holding that the same was an indirect one liable to give way to the other direct methods in the Income Tax Rules. He relied on this tribunal's decision in M/s. Serdia Pharmaceuticals India Pvt. Ltd. case 44 SOT 391 (Mumbai) to adopt CUP method (comparable uncontrolled price) in facts of the instant case. He thereafter was of the view that arms' length price for royalty ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 42 -
payment for "Essar" brand as Rs. Nil and corresponding payment had to be restricted to 0.25% on gross sales as against 0.275% declared by the assessee. He adopted similar course of action for the later payee regarding "Vodafone" brand. The same resulted in the impugned upward adjustment of Rs.3,17,53,917/-. We notice from the above TPO's order that he went by assessee's related parties royalty agreement transactions in proposing the impugned adjustment. The Dispute Resolution Panel reverses the same leaving the Revenue aggrieved.
31. We have heard rival contentions. Suffice to say, since the transfer pricing officer in the instant case has proceeded to propose the impugned upward adjustment on the basis of related party transactions after adopting CUP method instead of TNMM hereinabove, we find that a co-ordinate bench of this tribunal in ACIT vs. Bilag Industries Pvt. Ltd. ITA No. 1441 & 1670/Ahd/2006 and 343/Ahd/2012 quotes a catena of case law to disagree with such an approach as follows:
"28. We have heard both the sides. Learned representatives reiterate their respective pleadings in support of and against the impugned transfer pricing adjustment. There is hardly and dispute that the assessee agreed to supply Deltametrin and its intermediate chemical solutions to the above stated associate enterprise or its designee. This lis however is confined to arms length price determination of 18 tones supplied to the foreign entity. The assessee charges @ US $ 126.2 per kg by following cost + 55% markup. Its agreement quoted Deltametrin price to be @ 161.20 US $ per kg. The assessee also admitted the latter rate to be at arms length price as already indicated in page 292 of the paper book. This made the TPO to inter alia to reject assessee's other contentions for making impugned upward transfer pricing adjustment of Rs. 2,96,10,000/- subject matter of the instant litigation.
29. We deem it appropriate at this stage to deal with chapter X of the act containing transfer pricing provisions relating to avoidance of tax introduced by the Finance Act, 2001 w.e.f. 01-04-2002. The impugned assessment year before us is the first full fledged year of business thereafter. Section 92(1) mandates any income arising from an international transaction to be computed having regard to arms length price. The same admittedly applies in case of international transactions; as it then was, between two associate enterprises illustrated in section 92A of the Act. We repeat that this assessee and its overseas associate enterprise admittedly fall in this category. There is further no quarrel about its Deltamethrin sale to be in the nature of international transactions u/s. 92B of the ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 43 -
Act. We notice that section 92C(1) of the Act postulates arms length price computation by applying six methods namely; comparable un-controlled price method (CUP), re-sale price method (RPM), cost +method (CPM), profit split method (PSM), transactional net margin method (TNMM) and the residuary one such other methods as may be prescribed by the Central Board of Direct Taxes. An Assessing Officer's jurisdictional flows thereafter u/s. 92CA of the Act to make reference to the TPO for ascertaining arms length price of the relevant international transactions.
30. We now come to the corresponding income tax rules. Rule 10A defines various expressions used in all contemporary provisions. Sub-rule (a); as it was in the impugned assessment year defines an un-controlled transaction to mean a transaction other than that between two associate enterprises; whether resident or non-resident. We keep in mind the same and proceed further to Rule 10B prescribing arms length price for the purpose of section 92C(2) of the Act by using any of the six method as the most appropriate method as enumerated in clause (a) to (f); respectively in the given sequence in chapter 10 of the Act. The last clause
(f) relevant for any other appropriate method hereinabove contains a specific rule 10AB. This is admittedly not germane to the issue before us. We find that only clause (a) to (e) hereinabove pertaining to 'CUP' and 'TNMM' methods are relevant for the instant adjudication. We find it a fit case to repeat that the assessee had employed TNMM method for charging @ cost + 55% markup i.e. an indirect method for declaring its ALP. The TPO adopted its direct sale price @ 161.2 US $ per kg for making the impugned upward adjustment. We do not find a single observation even in his order rejecting assessee's TNMM method before adopting the agreement price in question under the CUP method.
31. We stay back on Rule 10B(1)(a) at this stage. It is evident that this clause prescribes CUP methods application to determine controlled price of an international transaction by the price charged or paid for property transfer or services provided in a comparable uncontrolled transaction; or a number of transaction, as identified. The same forms a price charged or paid in relation to property or services as the basis of ALP transaction. We referred to the above stated rule 10A(a) to observe here that the expression 'comparable un-controlled transaction' signifies a transaction between enterprises other than associate ones; whether resident or non-resident. It has already come on record that the TPO in the instant case relied upon assessee's agreed price rate of US $ 161.20 per kg for Deltamethrin supply in order to make the impugned transfer pricing adjustment. We reply on above stated statutory provision in the act as well as rule to observe that the same is rather in the nature of a comparable controlled transaction between two associate enterprises negating the basic fundamental condition of CUP methods application.
32. We proceed further to observe here that various co-ordinate benches of this tribunal have already adjudicated this issue as to whether an accepted net profit margin from a transaction with an associate enterprise can be taken as comparable or not being an internal comparable for determining arms length price. Two tribunals decisions reported as (2012) 24 taxmann.com 28 (Mum) (TM) Technimont ICB Pvt. Ltd. vs. ACIT as reiterated in ITA 2587/Ahd2012 Pino Bisazza Glass Pvt. Ltd vs. ACIT already decide this issue in assessee's favour to ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 44 -
conclude that such a comparable is not to be adopted as comparable un-controlled transaction price in question.
33. We have already noticed that a comparable un-controlled transaction instead of a controlled forms sine qua non for determining ALP of an international transaction between two associate enterprises leaving behind no scope of application of estoppel principle or acceptance of agreed prices in absence of an comparable un-controlled transaction. The Revenue's vehement contentions advanced in the course of hearing seeking to invoke estoppel principle fails to convince us.
34. We further deem it appropriate to observe at this stage that the impugned assessment year 2002-03 is the first full-fledged business of year after introduction of chapter X transfer pricing provision incorporated in the act. The TPO's order dated 10-03-2005 does not even issue a show cause notice disagreeing with assessee's TNMM method. He has rather proceeded to adopt CUP method(supra) again by ignoring the fundamental condition of applying the same. Same is the case with learned CIT(A) who has proceeded on revenue neutral implication without even taking into section 92(1) r.w.s. 92C and 92C(4) proviso along with rules discussed hereinabove at length. There is hardly any dispute that this chapter and the rules notified thereunder prescribe that an arms length price is not the price an assessee is charging or paying for being a party in the international transaction in question but it is the price i.e. to be paid or charged in such a comparable controlled transaction in comparison to a comparable un-controlled transaction. We repeat that the TPO has not kept in mind this fine distinction. We accordingly reverse his action on this sole legal principle. Needless to say, the CIT(A) has already deleted the impugned adjustment. We find no reason to interfere in the lower appellate order albeit on a different score as enumerated hereinabove. This Revenue's ground is declined accordingly."
We have given out thoughtful consideration to rival contentions. Ld. Departmental Representative fails to pinpoint any exception in facts of the instant case vis-à-vis those extracted hereinabove with regard to the impugned upward transfer pricing adjustment based on related party agreements only. We thus find no reason to interfere with the DRP's direction under challenge on this count alone. This substantive ground is also rejected.
32. We come to assessee's cross appeal ITA No.944/Ahd/2014. Shri Soparkar invites our attention to the preceding paras allowing both of assessee's substantive grounds challenging Section 40(a)(ia) disallowance(s) on roaming charges and prepaid SIM cards (supra). Needless to say, no ITA No.909 & 944/Ahd/2014 (DCIT vs. M/s. Vodafone West Ltd.) A.Y. 2009-10 - 45 -
separate adjudication is required. This appeal ITA No.944/Ahd/2014 is allowed in terms indicated hereinabove.
33. The Revenue's appeal ITA No.909/Ahd/2014 is partly allowed for statistical purposes and assessee's cross appeal ITA No.944/Ahd/2014 is accepted.
[Pronounced in the open Court on this the 17th day of November, 2016.] Sd/- Sd/-
(PRAMOD KUMAR) (S. S. GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 17/11/2016
True copy
S.K.SINHA
आदे श क त ल
प अ े
षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं धत आयकर आय!
ु त / Concerned CIT
4. आयकर आय!
ु त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद /
DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण, अहमदाबाद ।