M/s Bharti Hexacom Ltd., New Delhi V. ACIT, New Delhi

ITA 3394/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8176 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 04-02-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 29-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SAROHA
• Keywords: Capital asset; Recovery proceedings; Business income; Depreciation; Salary income; Opportunity of being heard; Question of law; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 234B; 115JB; 37(1); 201(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI S.V. MEHROTRA: ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER ITA NOS. 3394/DEL/2012 & 2899/DEL/2013 ASSTT. YRS: 2008-09 & 2006-07 M/S BHARTI HEXACOM LIMITED, VS. ACIT CIRCLE 2(1) , BHARTI CRESCENT 1, NEW DELHI. NELSON MANDELA ROAD, VASANT KUNJ PHASE II, NEW DELHI-110070. PAN: AABCB 5576 G AND ITA NO. 2795/DEL/2012 ASSTT. YRS: 2008-09 ACIT CIRCLE 2(1), VS. M/S BHARTI HEXACOM LIMITED, NEW DELHI. BHARTI CRESCENT 1, NELSON MANDELA ROAD, VASANT KUNJ PHASE II, NEW DELHI-110070. ( APPELLANT ) (RESPONDENT) ASSESSEE BY : SHRI ANIL BHALLA CA & SHRI V.K. MEENA CA& SHRI GAURAV WADHWA CA DEPARTMENT BY : SHRI A.K. SAROHA CIT (DR) DATE OF HEARING : 04/02/2016. DATE OF ORDER : 21/04/2016. O R D E R PER S.V. MEHROTRA, A.M: THE ASSESSEE AS WELL AS THE REVENUE ARE IN CROSS AP PEAL AGAINST CIT(A)S ORDER DATED 28.3.2012 FOR AY 2008-09. THE ASSESSEE HAS ALSO 2 PREFERRED APPEAL AGAINST CIT(A)S ORDER DATED 13.02 .2013 RELATING TO AY 2006-07. SINCE, COMMON ISSUES ARE INVOLVED FOR ADJU DICATION, ALL THESE MATTERS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMPOSITE ORDER FOR THE SAKE OF CONVENIENCE. 2. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT SINCE LD. CIT(A) HAS FIRST DECIDED THE APPEAL FOR AY 2008-09, THEREFORE, IT WOULD BE PROPER TO TAKE UP THE CROSS APPEALS FOR AY 2008-09 FIRST. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF CEL LULAR PHONE, LANDLINE SERVICES AND ITS ASSOCIATED VALUE ADDED SERVICE. T HE ASSESSEE HAD FILED RETURN OF INCOME DECLARING INCOME AT RS. 47,33,71,5 27/-. HOWEVER, TAX WAS PAID UNDER THE PROVISIONS OF MAT AT BOOK PROFIT AT RS. 3,80,93,09,820/- COMPUTED U/S 115JB OF THE INCOME-TAX ACT. THE ASSES SMENT WAS COMPLETED AT A GROSS TOTAL BUSINESS INCOME OF RS. 5,11,30, 00,146/- AND AT NET BUSINESS INCOME OF RS. 1,96,14,39,488/-, AFTER MAKING FOLLOW ING ADDITIONS/ DISALLOWANCE I) AMORTIZATION OF LICENSE FEE AND SPECTRUM CHARGES B U/S 35ABB OF THE ACT RS. 75,82,37,380/- II) DISALLOWANCE OF FREE AIRTIME TO DISTRIBUTORS U/S 40(A)(IA) OF THE ACT. 54,29,30,111 III) DISALLOWANCE OF ROAMING CHARGES PAID U/S 40(A)(IA) 13,74,72,942 IV) LEASE RENTAL PAID TO IBM 4,94,27,528 4. LD. CIT(A) PARTLY ALLOWED THE ASSESSEES APPEAL. 5. BEING AGGRIEVED, BOTH ASSESSEE AND THE DEPARTMEN T ARE IN CROSS APPEAL BEFORE US. FIRST WE FIRST TAKE UP THE ASSESSEES AP PEAL VIDE ITA NO. 3394/DEL/2012. THE ASSESSEE HAS RAISED FOLLOWING GR OUNDS OF APPEAL: 3 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS) ['CIT (A)'] HAS ERRED BOTH ON FACTS AND IN LAW IN C ONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER UNDER SECTIO N 40(A)(IA) OF THE INCOME TAX ACT, 1961 (THE 'ACT') OF RS. 54,2 9,30,111/- FOR NON DEDUCTION OF TAX AT SOURCE UNDER SECTION 19 4H OF THE ACT ON ACCOUNT OF TRANSACTION WITH THE DISTRIBUTORS OF PREPAID VOUCHERS TREATING THE DISCOUNT OFFERED ON SALE OF P REPAID VOUCHERS AS COMMISSION. 1.1. THAT THE LEARNED CIT (A) HAS ERRED BOTH ON FAC TS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFIC ER IN TREATING THE BUSINESS RELATIONSHIP BETWEEN THE APPELLANT AND THE DISTRIBUTOR AS PRINCIPAL AND AGENT WITHOUT GOING IN TO THE MERITS OF THE TRANSACTIONS. 2. THAT THE LEARNED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE ASSESSIN G OFFICER UNDER SECTION 40(A)(IA) OF THE ACT OF RS. 11,84,32, 385/- FOR NON DEDUCTION OF TAX AT SOURCE UNDER SECTION 194J OF TH E ACT ON ACCOUNT OF ROAMING CHARGES PAID TO OTHER SERVICE PR OVIDERS. 2.1. THAT THE LEARNED CIT (A) HAS ERRED BOTH ON FAC TS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFIC ER IN TREATING THE PAYMENT MADE BY THE APPELLANT TO THE OTHER SERV ICE PROVIDERS FOR ROAMING AS FEE FOR TECHNICAL SERVICES WITHOUT DECIDING ON THE MERITS AS TO WHETHER THE PROVISIONS OF SECTION 194J OF THE ACT IS APPLICABLE TO THE PAYMENTS FOR R OAMING. 3. THAT THE LEARNED CIT (A) HAS ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE ASSESSIN G OFFICER UNDER SECTION 40(A)(IA) OF THE ACT OF RS. 1,90,40,5 57/- FOR NON DEDUCTION OF TAX AT SOURCE UNDER SECTION 194J OF TH E ACT ON ACCOUNT OF CHARGES PAID TO INTERNATIONAL TELECOM OP ERATORS FOR CARNAGE AND TERMINATION OF CALLS AT THE FOREIGN DES TINATION. 4 3.1 THAT THE LEARNED CIT (A) HAS ERRED BOTH ON FAC TS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFIC ER IN TREATING THE PAYMENT MADE BY THE APPELLANT TO THE INTERNATIO NAL TELECOM OPERATORS AS FEE FOR TECHNICAL SERVICES UNDER SECTI ON 194J OF THE ACT WITHOUT GOING INTO THE MERITS OF THE TRANSACTIO NS THAT SUCH AMOUNT IS NOT CHARGEABLE TO TAX IN INDIA. 4. THAT THE LEARNED ASSESSING OFFICER HAS ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B OF TH E ACT. 5. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AME ND, OR VARY THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 6. GROUNDS NO. 1 TO 3.1, RAISED BY ASSESSEE ARE ON ACCOUNT OF DISALLOWANCE MADE U/S 40(A)(IA) FOR NON-DEDUCTION O F TDS UNDER VARIOUS PROVISIONS OF THE ACT. 7. BRIEF FACTS APROPOS GROUND NOS. 1 & 1.1 ARE THAT THE ASSESSEE HAD PROVIDED FREE AIRTIME TO DISTRIBUTORS AMOUNTING TO RS. 44,38,34,767/- FOR RAJASTHAN CIRCLE AND RS. 9,90,95,344/- FOR NORT H-EAST CIRCLE, AMOUNTING IN TOTAL TO RS. 54,29,30,111/-. THE AO NO TICED THAT THIS FREE TALK-TIME WAS BEING GIVEN AS A DISCOUNT OR MARGIN T O THE DISTRIBUTORS ON THE RETAIL PRICE OF PREPAID PRODUCTS. THUS, HE CONC LUDED THAT THIS AMOUNT WAS IN THE NATURE OF COMMISSION EXPENSES ON WHICH TDS WAS LIABLE TO BE DEDUCTED U/S 194H OF THE ACT. HOWEVER, SINCE THE ASSESSEE HAD NOT DEDUCTED TDS ON THIS AMOUNT ON THE GROUND THAT THE TRANSACTION BETWEEN THE ASSESSEE AND ITS DISTRIBUTORS WERE CARR IED OUT ON PRINCIPAL 5 TO PRINCIPAL BASIS AND, THUS, WERE OUTSIDE THE PURV IEW OF PROVISIONS OF SECTION 194H AND THEREBY SEC. 40(A)(IA) OF THE ACT WAS NOT APPLICABLE. 8. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEES C ONTENTION IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. IDEA CELLULAR LTD. (2010) TIOL 139, WHEREIN THE RELATIONSHIP BETWEEN THE ASSESSEE, WHO WAS ALSO A TELECOM SERVIC E PROVIDER LIKE THE ASSESSEE AND THE DISTRIBUTORS WAS HELD TO BE ONE OF PRINCIPAL TO AGENT. HE POINTED OUT THAT IT WAS FURTHER HELD THAT THE DI SCOUNTS OFFERED TO DISTRIBUTORS WERE IN THE NATURE OF COMMISSION AND T HEREBY LIABLE TO TDS U/S 194H OF THE ACT. HE, ACCORDINGLY, MADE DISALLOW ANCE OF RS. 44,29,30,111/- U/S 40(A)(IA). 9. BRIEF FACTS APROPOS GROUND NOS. 2 & 3 ARE THAT A O NOTICED THAT ASSESSEE HAD MADE PAYMENTS OF RS. 13,74,72,942/- ON ACCOUNT OF ROAMING CHARGES TO VARIOUS OPERATORS. AO WAS OF THE OPINION THAT THESE PAYMENTS WERE IN THE NATURE OF FEE FOR TECHNICAL SERVICES AND, THEREFORE, TDS SHOULD HAVE BEEN DEDUCTED U/S 194J BEFORE MAKING THESE PA YMENTS. THE ASSESSEES EXPLANATION WAS THAT IT WAS COLLECTING ROAMING CHAR GES FROM THE SUBSCRIBERS AND WAS PAYING TO THE OTHER OPERATORS ON BEHALF OF THE SUBSCRIBERS AND, THEREFORE, THE PROVISIONS OF SECTION 194J WERE NOT APPLICABLE TO ROAMING AS WELL AS INTERCONNECTION CHARGES. THE AO OBSERVED TH AT IN ITS SUBMISSIONS DATED 16.12.2010 AS WELL AS 21.12.2010 ASSESSEE HAD SUBMITTED THAT TDS WAS DEDUCTED ON INTERCONNECT CHARGES, BOTH FOR NORT H-EAST AND RAJASTHAN CIRCLES. HE POINTED OUT THAT SINCE THE TWO CHARGES BEING ROAMING CHARGES AS WELL AS INTERCONNECTION CHARGES WERE SIMILAR IN NAT URE, THEREFORE, TDS WAS REQUIRED TO BE MADE FROM ROAMING CHARGES ALSO. HE, ACCORDINGLY, MADE A DISALLOWANCE OF RS. 13,74,72,942/- U/S 40(A)(IA) IN RESPECT OF THESE CHARGES. 6 10. LD. CIT(A) UPHELD THE AOS ACTION. 11. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 12. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ITAT JAIPUR BENCH IN THE CASE OF ASSESSEE IN ITA NO. 656 /JP/2010 FOR AY 2009- 10, A COPY OF WHICH HAS BEEN FILED IN THE PB AT P AGE NOS. 601 TO 637, HAS HELD THAT THE PROVISIONS OF SECTION 194H ARE NOT AP PLICABLE BECAUSE THE SELLING OF PREPAID PRODUCTS FROM THE COMPANY TO THE DISTRIBUTOR WAS ACTUALLY A SALE OF RIGHT TO SERVICE AND, THEREFORE, THE PROV ISIONS OF SECTION 194H WERE NOT APPLICABLE. IT WAS HELD THAT THE RELATIONSHIP W AS PRINCIPAL TO PRINCIPAL BASIS BECAUSE RIGHT TO SERVICE HAD BEEN SOLD. THUS, NO INCOME ACCRUED TO THE DISTRIBUTOR AT THE TIME OF PURCHASE OF PREPAID CARD . 13. HE, FURTHER POINTED OUT THAT AS REGARDS APPLICA BILITY OF PROVISION OF SEC. 194J IN REGARD TO ROAMING CHARGES AND INTERCON NECTION CHARGES IT HAS BEEN HELD BY JAIPUR BENCH OF THE TRIBUNAL FOR ASSES SMENT YEAR UNDER CONSIDERATION THAT PROVISIONS OF SECTION 194J ARE N OT ATTRACTED, BECAUSE THE CHARGES WERE NOT TOWARDS FEES FOR RENDERING ANY TEC HNICAL SERVICES AS IS ENVISAGED IN SECTION 194J. 14. LD. COUNSEL FURTHER POINTED OUT THAT ITAT JAIPU R BENCH IN THE CASE OF ASSESSEE IN ITA NOS. 251 TO 256/JP/2013 FOR AY 2004 -05 TO 2008-09, A COPY OF WHICH IS CONTAINED AT PAGES 710 TO 725 OF PB, HA S FOLLOWED THE DECISION FOR AY HAS 2009-10 IN REGARD TO BOTH THE ISSUES. 15. LD. COUNSEL FURTHER SUBMITTED THAT THE ITAT GAU HATI BENCH IN THE CASE OF ASSESSEE IN ITA NOS. 258 TO 262/GAU/2013 FOR AY 2006-07 TO 2010-11, A COPY OF WHICH IS CONTAINED AT PAGES 638 TO 644 OF P B, HAS ALSO HELD THAT THE PROVISIONS OF SECTION 194H ARE NOT APPLICABLE IN RE GARD TO DISCOUNT ALLOWED TO DISTRIBUTORS. 7 16. WITH REFERENCE TO AFOREMENTIONED DECISIONS OF T HE ITAT IN ASSESSEES OWN CASE FOR VARIOUS ASSESSMENT YEARS INCLUDING AY 2008-09, LD. COUNSEL SUBMITTED THAT SINCE IN ASSESSEES OWN CASE THE APP LICABILITY OF THE PROVISIONS OF SECTION 194H IN REGARD TO DISCOUNT AL LOWED TO DISTRIBUTORS HAS BEEN HELD TO BE NOT APPLICABLE, THEREFORE, THERE IS NO QUESTION OF ANY DISALLOWANCE U/S 40(A)(IA). HE POINTED OUT THAT THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, RELIED BY AO CANNOT BE M ADE APPLICABLE IN ASSESSEES CASE, MORE PARTICULARLY BECAUSE IN ASSES SEES OWN CASE THE PROVISIONS OF SECTION 194H HAS BEEN HELD TO BE INAP PLICABLE. LD. COUNSEL SUBMITTED THAT FOR TRIGGERING THE APPLICABILITY OF SECTION 40(A)(IA), IT IS NECESSARY THAT FIRST THERE SHOULD BE DEFAULT OF NON -DEDUCTION OF TDS WHICH IN ASSESSEES CASE HAS BEEN HELD TO BE NOT THERE. 17. AS REGARDS THE APPLICABILITY OF PROVISIONS OF S ECTION 194J, IN REGARD TO ROAMING CHARGES AND INTERCONNECT CHARGES, LD. COUNS EL SUBMITTED THAT ITAT JAIPUR BENCH IN ASSESSEES OWN CASE HAS HELD THAT THE SAID PROVISIONS ARE NOT APPLICABLE. HE POINTED OUT THAT NO DECISION OF HON BLE JURISDICTIONAL HIGH COURT IS AVAILABLE ON THIS ASPECT AND THERE IS NO H IGH COURT DECISION TAKING A CONTRARY VIEW. LD. COUNSEL REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JDS APPARELS (P) LTD. (2015) 53 TAXMANN.COM 139 (DEL), WHEREIN IT HAS BEEN HELD THAT THE DOUBTF UL PENALIZATION SHOULD BE AVOIDED. HE REFERRED TO PARA 17 OF THE SAID DECISIO N, WHICH IS REPRODUCED HEREUNDER: 17. ANOTHER REASON WHY WE FEEL SECTION 40(A)(IA) O F THE ACT SHOULD NOT HAVE BEEN INVOKED IN THE PRESENT CASE I S THE PRINCIPLE OF DOUBTFUL PENALIZATION WHICH REQUIRES S TRICT CONSTRUCTION OF PENAL PROVISIONS. THE SAID PRINCIPL E APPLIES NOT ONLY TO CRIMINAL STATUTES BUT ALSO TO PROVISIONS, WHICH CREATE A DETERRENCE AND RESULTS IN PUNITIVE PENALTY. SECTION 40(A)(IA) IS A 8 DETERRENT AND A PENAL PROVISION. IT HAS THE EFFECT OF PENALISING THE ASSESSEE, WHO HAS FAILED TO DEDUCT TAX AT SOURC E AND ACTS TO THE DETRIMENT OF THE ASSESSEE'S PROPERTY AND OTHER ECONOMIC INTERESTS. IT OPERATES AND INFLICTS ~ HARDSHIP AND DEPRIVATION, BY DISALLOWING EXPENDITURE ACTUALLY INCURRED AND TREAT ING IT AS DISALLOWED. THE EXPLANATION, THEREFORE, REQUIRES A STRICT CONSTRUCTION AND THE PRINCIPLE AGAINST DOUBTFUL PEN ALIZATION WOULD COME INTO PLAY. THE DETRIMENT IN THE PRESENT CASE, AS IS NOTICEABLE, WOULD INCLUDE INITIATION OF PROCEEDINGS FOR IMPOSITION OF PENALTY FOR CONCEALMENT, AS WAS DIREC TED BY THE ASSESSING OFFICER IN THE PRESENT CASE. THE AFORESAI D PRINCIPLE REQUIRES THAT A PERSON SHOULD NOT BE SUBJECTED TO A NY SORT OF DETRIMENT UNLESS THE OBLIGATION IS CLEARLY IMPOSED. WHEN THE WORDS ARE EQUALLY CAPABLE OF MORE THAN ONE CONSTRUC TION, THE ONE NOT INFLICTING THE PENALTY OR DETERRENT MAY BE PREFERRED. IN MAXWELL'S THE INTERPRETATION OF STATUTES, 12TH EDIT ION (1969) IT HAS BEEN OBSERVED:- 'THE STRICT CONSTRUCTION OF PENAL STATUTES SEEMS TO MANIFEST ITSELF IN FOUR WAYS: IN THE REQUIREMENT OF EXPRESS LANGUAGE FOR THE CREATION OF AN OFFENCE; IN INTERPRETING STRICTLY WORDS SETTING OUT THE ELEMENT S OF AN OFFENCE; IN REQUIRING THE FULFILMENT TO THE LETTER OF STATUTORY CONDITIONS PRECEDENT TO THE INFLICTION OF PUNISHMENT; AND IN INSISTING ON THE STRICT OBSERVANCE OF TECHNICAL PROVISIONS CONCERNING CRIMINAL PROCEDURE AND JURISDICTION.' 18. LD. COUNSEL FURTHER SUBMITTED THAT COMPUTATION AND CHARGING PROVISION CANNOT OPERATE DE HORS THE MACHINERY PRO VISIONS. LD. COUNSEL SUBMITTED THAT IN VIEW OF THE DECISION OF THE GAU HATI BENCH AND JAIPUR BENCH OF THE ITAT, WHEREIN IT HAS BEEN HELD THAT M ACHINERY PROVISIONS DO NOT COME INTO PLAY BECAUSE THERE WAS NO INCOME WHIC H AROSE TO PAYEE FROM TRANSACTION, THE PROVISIONS OF SECTION 40(A)(IA) CO ULD NOT BE RESORTED TO. HE 9 RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF B.C. SRINIVASA SHETTY 128 ITR 294 AND ALSO SON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. ELI LILLY & C O. (INDIA) PVT. LTD. 312 ITR 225 (SC), WHEREIN IT HAS BEEN HELD THAT UNDER THE INCOME TAX ACT, 1961, THE MACHINERY PROVISIONS FORMED AN INTEGRATED CODE FOR THE CHARGING AND THE COMPUTATION PROVISIONS, WHICH DETERMINE THE TAXABLE INCOME. LD. COUNSEL SUBMITTED THAT SINCE FOR THE INSTANT ASSESS MENT YEAR ASSESSEE HAS BEEN HELD TO BE NOT AN ASSESSEE IN DEFAULT U/S 201, THEREFORE, THE SAID DECISIONS WILL OPERATE AS RES JUDICATA. 19. LD. COUNSEL FURTHER SUBMITTED THAT ANY OTHER IN TERPRETATION WILL LEAD TO ABSURD RESULT INASMUCH AS PENALTY BY WAY OF SECTION 40(A)(IA) WOULD BE IMPOSED IN AN ASSESSMENT YEAR FOR A FAULT, WHICH HA S BEEN HELD NOT BEING COMMITTED IN THE SAME VERY YEAR. HE RELIED ON THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF A-ONE CYCLES LTD. VS. ACIT 156 ITR 323 (SC), WHEREIN IT HAS BEEN HELD THAT INTERPRETATION LEADING TO ABSURD RESULT SHOULD BE AVOIDED. 20. IN THE ALTERNATIVE, LD. COUNSEL FURTHER SUBMIT TED THAT WHERE AN ASSESSEE WAS UNDER BONA FIDE BELIEF THAT TAX WAS NOT DEDUCTI BLE AT SOURCE ON PAYMENTS MADE, NO FAULT CAN BE FOUND WITH THE ASSESSEE IN NO T DEDUCTING THE TAX AT SOURCE AND, CONSEQUENTLY, DISALLOWANCE U/S 40(A)(IA ) IS NOT WARRANTED. HE SUBMITTED THAT FOR THE PERIOD 1995 TO DECEMBER 2010 (ASSESSMENT MADE IN AY 2006-07), BOTH REVENUE AND ASSESSEE PROCEEDED O N THE FOOTING THAT SECTION 194 H WAS NOT APPLICABLE. HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. KOTAK SECURITIES LTD. 340 ITR 333. 21. THE THIRD LIMB OF ARGUMENT WAS THAT THE PROVISI ONS OF SECTION 40(A)(IA) WILL APPLY ONLY TO THE AMOUNT PAYABLE AT THE END OF THE YEAR. IN SUPPORT OF THIS CONTENTION HE RELIED ON THE DECISION OF ITAT SPECIAL BENCH IN THE CASE 10 OF MERILYN SHIPPING & TRANSPORTS, VISAKHAPATNAM 16 ITR (TRIB.) 1 (VIZAG) (SB). HE FURTHER REFERRED TO THE DECISION OF HONBL E ALLAHABAD HIGH COURT IN THE CASE OF VICTOR SHIPPING SERVICES PVT. LTD. (ITA 122/2013) WHEREIN IT HAS BEEN HELD THAT FOR DISALLOWING EXPENDITURE FROM BUS INESS AND PROFESSION ON THE GROUND THAT TAX HAS NOT BEEN DEDUCTED, THE AMOU NT SHOULD BE PAYABLE AND NOT WHICH HAS BEEN PAID BY THE END OF THE YEAR. SLP HAS BEEN DISMISSED BY THE HONBLE SUPREME COURT. 22. HE, INTER ALIA, RELIED ON THE DECISION OF THE I TAT IN THE CASE OF MR. KANAK SINGH IN ITA NO. 5530/DEL/2012 FOR THE SAME PROPOSITION. 23. THE NEXT LIMB OF ARGUMENT WAS THAT PROVISION OF SECTION 40(A)(IA) COULD NOT HAVE BEEN APPLIED WITHOUT DETERMINING AS TO WHETHER DISTRIBUTOR HAS ALREADY PAID TAX ON THE INCOME EARNED BY HIM TH ROUGH THE PURCHASE AND SALE OF PREPAID CARDS. HE POINTED OUT THAT IF THE DEDUCTEE HAS ALREADY PAID ALL TAXES NO DISALLOWANCE CAN BE MADE U/S 40(A)(IA) IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES PVT. LTD. 293 ITR 226. 24. LD. DR SUBMITTED THAT HONBLE JURISDICTIONAL HI GH COURT IN THE CASE OF IDIA CELLULAR, RELIED BY AO, HAS HELD THAT DISC OUNT ALLOWED TO DISTRIBUTORS IS COVERED BY THE PROVISIONS OF SECTION 194H. LD. DR SUBMITTED THAT AO WHILE DOING ASSESSMENT HAS TO INDEPENDENTLY DECIDE WHETHER THERE WAS DEFAULT OF NON-DEDUCTION OF TAX OR NOT. HE SUBMITTE D THAT THE ORDER PASSED U/S 201 IS NO PRECEDENCE AND, THEREFORE, THE DECISION R ENDERED BY ITAT JAIPUR AS WELL AS GAUHATI BENCHES CANNOT BE RESORTED TO FOR D ECIDING WHETHER THE PROVISIONS OF SECTION 40(A)(IA) WERE ATTRACTED OR N OT. IN SUM AND SUBSTANCE LD. DR SUBMITTED THAT TDS PROVISIONS CONTAINED IN CHAPTER XVII-BOPERATE INDEPENDENT OF CHARGING AND COMPUTATION PROVISIONS. 11 25. LD. DR SUBMITTED THAT DECISION IN THE CASE OF JDS APPARELS (SUPRA), HONBLE DELHI HIGH COURT HAS NOT DECIDED ANY QUESTI ON OF LAW AS IS EVIDENT FROM PARA 19 OF THE SAID ORDER. HE SUBMITTED THAT T HE PROVISIONS OF SECTION 40(A)(IA) ARE NOT PENAL IN NATURE. 26. AS REGARDS ROAMING CHARGES, LD. DR POINTED OUT THAT THERE IS NO DECISION OF HONBLE JURISDICTIONAL HIGH COURT ON TH E SAID ISSUE. HOWEVER, THE AGREEMENT IS BETWEEN TWO CELLULAR SERVICES PRO VIDER TO PROVIDE COMPLETE NET WORK, WHICH DEFINITELY COMES WITHIN THE PURVIEW OF RENDERING TECHNICAL SERVICES. 27. LD. DR SUBMITTED THAT LD. COUNSEL IS TRYING TO TRAVEL BEYOND THE PROVISIONS OF SECTION 40(A)(IA) INSPITE OF THE FACT THAT THERE IS NO AMBIGUITY IN CONSTRUCTION OF THE SAID PROVISION. HE SUBMITTED TH AT THE WORDS EMPLOYED IN SECTION 40(A)(IA) DO NOT GIVE ANY SCOPE OF TRAVELLI NG TO PROVISIONS OF SECTION 201 OR ANY OTHER SECTION FOR THAT MATTER. 28. HE SUBMITTED THAT THE PROVISIONS OF SECTION 201 ARE RELATED TO RECOVERY OF THE AMOUNT WHICH SHOULD HAVE BEEN DEDUC TED AS TDS. IT DOES NOT HAVE ANY DIRECT BEARING OF APPLICABILITY OF SEC TION 40(A)(IA). 29. AS REGARDS THE ALTERNATE PLEA OF BONA FIDE BELI EF TAKEN BY LD. COUNSEL, HE SUBMITTED THAT THE ASSESSEE IS A BIG COMPANY HAV ING FULL FLEDGED LEGAL/ TAX DEPARTMENT AND HAS ACCESS TO BEST PROFESSIONAL ADVI CE. HE SUBMITTED THAT SINCE PROVISIONS OF SECTION 40(A)(IA) ARE NOT PENAL IN NATURE, THIS PLEA CANNOT BE ACCEPTED. 30. LD. DR SUBMITTED THAT IT IS WELL SETTLED LAW T HAT IF A PERSON COMES WITHIN THE AMBIT OF LAW, HE MUST BE TAXED, HOWEVER, THE GREAT HARDSHIP MAY APPEAR TO HAVE BEEN CAUSED. 31. AS REGARDS ALTERNATE PLEA THAT PROVISIONS OF SE CTION 40(A)(IA) ARE APPLICABLE ON THE AMOUNT PAYABLE AT THE END OF THE YEAR, LD. DR SUBMITTED 12 THAT THE OPERATION OF ORDER OF SPECIAL BENCH OF TH E ITAT IN THE CASE OF MERILYN SHIPPING & TRANSPORTS, VISAKHAPATNAM (SUPRA ), HAS BEEN STAYED BY HONBLE ANDHRA PRADESH & TELANGANA HIGH COURT. AS R EGARDS THE PLEA BASED ON THE DECISION IN THE CASE OF HINDUSTAN COCA COLA BEVERAGE LD. DR SUBMITTED THAT THE SAID JUDGMENT HAS BEEN DELIVERED IN REGARD TO SEC. 201, WHICH IS BASICALLY RECOVERY SECTION AND SECTION 40( A)(IA) ARE INDEPENDENT OF SECTION 201. 32. AS REGARDS APPLICABILITY OF TDS PROVISIONS U/S 194J TO ROAMING CHARGES, LD. DR SUBMITTED THAT THE DECISION OF ITA T JAIPUR BENCH IS OF NO HELP TO ASSESSEE BECAUSE THE CORRECT FACTS HAD NOT BEEN PLACED BEFORE THE TRIBUNAL. HE POINTED OUT THAT AO HAS DECIDED THE MA TTER ON THE PECULIAR FACT THAT THE ROAMING SERVICES DID NOT REQUIRE ANY HUMAN INTERVENTION. HE POINTED OUT THAT THIS FACT IS BASED UPON CONTEXT THAT THE Q UESTION IS REGARDING PROVIDING ROAMING SERVICES TO AN INDEPENDENT CUSTOM ER OF OTHER OPERATOR. HE SUBMITTED THAT THE CORRECT CONTEXT IS THAT THE SERV ICE IS PROVIDED TO THE TELECOM OPERATOR BY VIRTUE OF AGREEMENTS BETWEEN T WO TELECOM OPERATORS. 33. HE POINTED OUT THAT A CUSTOMER IS HAVING CONTR ACT/ AGREEMENT WITH HIS/ HER TELECOM OPERATOR AND DOES NOT HAVE ANY CON TRACT/ AGREEMENT WITH THE TELECOM OPERATOR PROVIDING ROAMING SERVICES. HE POI NTED OUT THAT FACT OF DETERMINING OF CHARGE BASED ON CALLS MADE IS METHOD OF CALCULATION. THERE IS NO BAR TO HAVE CLAUSES IN THE AGREEMENT (BETWEEN TH E TWO TELECOM OPERATOR) TO PROVIDE SOME OTHER METHOD OF CHARGING. 34. LD. DR RELIED ON HIS EARLIER ARGUMENT WITH REFE RENCE TO APPLICABILITY OF TDS PROVISION U/S 194H. 35. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. ADMITTEDLY, AS REGARDS DISCOUNT ALLOWE D TO DISTRIBUTORS IN RESPECT OF PREPAID CARDS, THE GAUHATI BENCH OF THE ITAT AS WELL AS JAIPUR BENCH OF 13 ITAT IN ASSESSEES OWN CASE FOR AY 2008-09 HAVE CLE ARLY HELD THAT THE SAID PROVISIONS OF SECTION 194H ARE NOT APPLICABLE. HOWE VER, ON THIS ISSUE, ADMITTEDLY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF IDEA CELLULAR (SUPRA) HAS HELD THAT THE SAID PROVISION IS APPLIC ABLE. 36. AS FAR AS THE ISSUE REGARDING APPLICABILITY OF PROVISIONS OF SECTION 194J TO ROAMING CHARGES AND INTERCONNECT CHARGES, ARE CONCERNED, JAIPUR BENCH OF THE ITAT IN AY 2008-09 HAS HELD THAT THE S AID PROVISIONS ARE NOT APPLICABLE. 37. NOW WE ARE PITTED AGAINST THE SITUATION WHERE H ONBLE JURISDICTIONAL HIGH COURT IS AGAINST THE ASSESSEE ON THE ISSUE REG ARDING APPLICABILITY OF THE PROVISIONS OF SECTION 194H, BUT IN ASSESSEES OWN C ASE FOR AY 2008-09 THE JAIPUR BENCH OF THE ITAT AS WELL AS GAUHATI BENCH O F THE ITAT HAS HELD THAT THE ASSESSEE IS NOT IN DEFAULT ON ACCOUNT OF N ON-DEDUCTION OF TDS U/S 194H IN REGARD TO DISCOUNT ALLOWED TO DISTRIBUTORS ON PREPAID CARDS. 38. THE ASSESSEES CONTENTION IS THAT THESE DIRECTI ONS OPERATE AS RES JUDICATA AND, THEREFORE, NO CONTRARY VIEW CAN BE TA KEN. IN SUPPORT OF ITS CONTENTION, LD. COUNSELS RELIANCE IS ON THE DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF B.C. SRINIVASA SETTY (SUPRA) A ND THE DECISION OF ELI LILLY (SUPRA), WHEREIN IT HAS BEEN HELD THAT THE CH ARGING AND COMPUTATION PROVISIONS CANNOT OPERATE DE HORS THE MACHINERY PRO VISIONS. THEREFORE, WE HAVE TO FIRST EXAMINE WHETHER THE ASSESSEES CASE F ALLS WITHIN THE LAW LAID DOWN BY HONBLE SUPREME COURT OR NOT. 39. IT IS WELL SETTLED LAW THAT THE LIABILITY TO TA X ARISES BY VIRTUE OF THE CHARGING SECTION ALONE AND IT ARISES NO LATER THAN THE CLOSE OF THE PREVIOUS YEAR, THOUGH QUANTIFICATION OF THE AMOUNT PAYABLE I S POSTPONED. 40. THE ASSESSMENT ORDER ONLY QUANTIFIES LIABILITY WHICH IS ALREADY DEFINITELY AND FINALLY CREATED BY THE CHARGING SECT IONS. HOWEVER, IF 14 QUALIFICATION OF TAX LIABILITY IS NOT POSSIBLE THE CHARGE MUST FAIL. THE HONBLE SUPREME COURT IN THE CASE OF ELI LILLY & CO. (INDIA ) 312 ITR 225 HAS HELD THAT THE PURPOSE OF THE PROVISIONS FOR DEDUCTION OF TAX AT SOURCE IN CHAPTER XVIIB OF THE I.T. ACT IS TO SEE THAT FROM THE SUM W HICH IS CHARGEABLE U/S 4 FOR LEVY AND CALCULATION OF INCOME-TAX, THE PAYER SHOULD DEDUCT TAX THEREON AT THE RATE IN FORCE. THEY ARE MEANT FOR TANTAMOUNT DEDUCTION OF INCOME-TAX SUBJECT TO REGULAR ASSESSMENT. IN THIS CASE ONE OF THE ARGUMENT ADVANCED BY SHRI AJAY VOHRA, COUNSEL APPEARING ON BEHALF OF RES PONDENT ASSESSEE, INTER ALIA, WAS AS UNDER: ACCORDING TO THE LEARNED COUNSEL, THE TDS PROVISI ONS ARE IN THE NATURE OF MACHINERY PROVISIONS WHICH ENABLE EAS Y CALCULATION AND RECOVERY OF TAX. THE SAID PROVISION S ARE INDEPENDENT OF THE CHARGING PROVISIONS, WHICH ARE A PPLICABLE TO THE RECIPIENT OF INCOME, WHEREAS TDS PROVISIONS ARE APPLICABLE TO THE PAYER OF INCOME. ACCORDING TO THE LEARNED CO UNSEL, THEREFORE, THE OBLIGATION TO DEDUCT TAX AT SOURCE I S ON THE DEDUCTOR, WHICH IS INDEPENDENT OF THE ASSESSMENT OF INCOME IN THE HANDS OF THE EXPATRIATE EMPLOYEE(S); THE DEDUCT OR IS OBLIGED TO DEDUCT AT SOURCE ONLY FROM THE PAYMENT MADE BY T HE DEDUCTOR OR PAYMENT MADE ON HIS BEHALF OR ON HIS AC COUNT. THEREFORE, ACCORDING TO THE LEARNED COUNSEL, EACH E MPLOYER IS REQUIRED TO COMPLY WITH AND DEDUCT TAX FROM OUT OF THE SALARIES PAID BY SUCH EMPLOYER. THE OBLIGATION DOES NOT EXTE ND TO DEDUCTION OF TAX OUT OF SALARIES PAID BY ANY OTHER PERSON, WHICH IS NOT ON ACCOUNT OF OR ON BEHALF OF SUCH EMPLOYER, NOTWITHSTANDING THAT SUCH SALARIES MAY HAVE NEXUS W ITH THE SERVICE OF THE EMPLOYEE WITH THAT EMPLOYER AND MAY BE ASSESSABLE TO TAX IN INDIA IN THE HANDS OF THE RECI PIENT EMPLOYEE. ACCORDING TO THE LEARNED COUNSEL, ON THE FACTS, THE PAYMENT OF SALARY BY THE FOREIGN COMPANY IN THE NE THERLANDS WAS NOT ON BEHALF OF OR ON ACCOUNT OF THE TAX-DEDUC TOR-ASSESSEE HEREIN AND, CONSEQUENTLY, IT WAS NOT UNDER STATUTOR Y OBLIGATION TO DEDUCT TAX FROM THE ENTIRE SALARY INCLUDING THE HOME SALARY, PARTICULARLY WHEN THE EXPATRIATE(S) DID NOT EXERCIS E THE OPTION UNDER SECTION 192(2) REQUIRING THE TAX DEDUCTOR-ASS ESSEE HEREIN 15 TO DEDUCT TAX FROM THEIR AGGREGATE SALARY INCOME. L ASTLY, LEARNED COUNSEL SUBMITTED THAT EACH OF THE EXPATRIA TE CEMPLOYEE(S) HAD PAID DIRECTLY THE TAXES DUE ON THE HOME SALARY BY WAY OF ADVANCE TAX SELF ASSESSMENT TAX FROM TIME TO TIME. THEY HAD FILED ALSO THE RETURN OF INCOME, IN SUCH C IRCUMSTANCES, ACCORDING TO THE LEARNED COUNSEL, THERE WAS NO LOSS TO THE REVENUE OCCASIONED ON ACCOUNT OF THE ALLEGED DEFAUL T BY THE ASSESSEE HEREIN IN NOT DEDUCTING TAX FROM THE ENTIR E SALARY OR ON ACCOUNT OF SHORT DEDUCTION OF TAX AT SOURCE. ACCORD ING TO THE LEARNED COUNSEL, EVEN IF THE ASSESSEE HEREIN IS TO BE REGARDED AS AN ASSESSEE-IN-DEFAULT IN TERMS OF SECTION 201 OF T HE ACT, THE TAX ALLEGED TO BE IN DEFAULT CANNOT BE ONCE AGAIN RECOV ERED FROM THE ASSESSEE HEREIN SINCE THE SAME STOOD PAID BY THE EX PATRIATE(S). 41. SIMILAR ARGUMENT HAS BEEN ADVANCED BY LD. DR BE FORE US. HOWEVER, HONBLE SUPREME COURT DID NOT ACCEPT THE ASSESSEES CONTENTION ADVANCED BY LD. COUNSEL AND HAS HELD AT PAGE 247-249 AS UNDE R: ON THE QUESTION AS TO WHETHER THERE IS ANY INTER-L INKING OF THE CHARGING PROVISIONS AND THE MACHINERY PROVISIONS U NDER THE 1961 ACT, WE MAY, AT THE VERY OUTSET, POINT OUT THA T IN THE CASE OF CRR V. B. C. SRINIVASA SETTY REPORTED IN [1981] 128 ITR 294 THIS COURT HAS HELD THAT THE CHARGING SECTION AND T HE COMPUTATION PROVISIONS TOGETHER CONSTITUTE AN INTE GRATED CODE. WHEN THERE IS A CASE TO WHICH THE COMPUTATION PROVI SIONS CANNOT APPLY AT ALL, IT IS EVIDENT THAT SUCH A CAS E WAS NOT INTENDED TO FALL WITHIN THE CHARGING SECTION. WE MA Y ADD THAT, THE 1961 ACT IS AN INTEGRATED CODE AND, AS STATED H EREINABOVE, SECTION 9(1) INTEGRATES THE CHARGING SECTION, THE C OMPUTATION PROVISIONS AS WELL AS THE MACHINERY PROVISIONS. (S EE SECTION 9(L)(I) READ WITH SECTIONS 160, 161, 162 AND 163). IN THE PRESENT CASE, IT HAS BEEN VEHEMENTLY URGED T HAT THE IDS PROVISIONS BEING MACHINERY PROVISIONS ARE INDEPEND ENT OF THE CHARGING PROVISIONS WHEREAS AS HELD BY THIS COURT IN THE CASE OF B. C. SRINIVASA SETTY REPORTED IN [1981] 128 IT R 294, THE 1961 ACT IS AN INTEGRATED CODE. TO ANSER THE CONTEN TION HEREIN 16 WE NEED TO EXAMINE BRIEFLY THE SCHEME OF THE 1961 A CT. SECTION 4 IS THE CHARGING SECTION. UNDER SECTION 4(1), TOT AL INCOME EAR IS CHARGEABLE TO TAX. SECTION 4(2), INTER ALIA, PRO VIDES THAT IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTION (I), INCOME-TAX SHALL BE DEDUCTED AT SOURCE WHETHER IT IS SO DEDU CTIBLE UNDER ANY PROVISION OF THE 1961 ACT WHICH, INTER ALIA, BR INGS IN THE IDS PROVISIONS CONTAINED IN CHAPTER XVII-B. IN FACT , IF A PARTICULAR INCOME FALLS OUTSIDE SECTION 4(1) THEN T HE TDS PROVISIONS CANNOT COME IN: UNDER SECTION 5, ALL RE SIDENTS AND NON- RESIDENTS ARE CHARGEABLE IN RESPECT OF INCOME WHICH ACCRUES OR IS DEEMED TO ACCRUE IN INDIA OR IS RECEI VED IN INDIA. NON-RESIDENTS WHO ARE NOT ASSESSABLE IN RESPECT OF INCOME ACCRUING AND RECEIVED ABROAD ARE RENDERED CHARGEABL E UNDER SECTION 5 (2) (B) IN RESPECT OF INCOME DEEMED BY S ECTION 9 TO ACCRUE IN INDIA. SECTION 9 WHICH DEEMS CERTAIN CATEGORIES/HEADS OF INCOME TO ACCRUE IN INDIA HAS NO APPLICATION IN CASES WHERE INCOME ACTUALLY ACCRUES IN INDIA. LIKEWISE, SECTION 9 DOES NOT APPLY IN CASES WHERE I NCOME IS RECEIVED IN INDIA. THEREFORE, IF THE INCOME IS NOT RECEIVED IN INDIA, A NON-RESIDENT WOULD NOT BE CHARGEABLE TO T AX UPON IT UNLESS IT ACCRUES OR IS DEEMED TO ACCRUE IN INDIA. THUS, A GENERAL CHARGE OF INCOME- TAX IS IMPOSED BY SECTION S 4 AND 5, AND THAT GENERAL CHARGE IS GIVEN A PARTICULAR APPLICATION IN RESPECT OF NON-RESIDENTS BY SECTION 9 WHICH ENLARGES THE AMBIT OF TAXATION BY DEEMING INC OME TO ARISE IN INDIA IN CERTAIN CIRCUMSTANCES. UNDER SECT ION 9(1), INCOME IS DEEMED TO ACCRUE IN INDIA IF IT ACCRUES D IRECTLY OR INDIRECTLY UNDER THE FIVE CIRCUMSTANCES MENTIONED T HEREIN. TO GIVE AN EXAMPLE OF AS TO HOW THE 1961 ACT IS AN IN TEGRATED CODE WE MAY STATE THAT SECTION 9(1) EXPLAINS THE ME ANING OF THE WORDS 'DEEMED TO ACCRUE OR ARISE IN INDIA' IN SECTI ON 5(2)(B). SECTION 9(1)(I) PERFORMS TWO FUNCTIONS: I. IT DEEMS THE ABOVE FIVE CATEGORIES OF INCOME TO ACCRUE: IN INDIA. THE DEEMING PROVISIONS OF THIS CLAUSE (A) APPLY TO RESIDENTS AND NON-RESIDENTS ALIKE; 17 (B) HAVE NO APPLICATION WHERE INCOME ACTUALLY ACCRU ES IN INDIA OR IS RECEIVED IN INDIA. BOTH THESE POINTS HAVE BEEN NOTED ABOVE IN DEALING WITH THIS SECTION GENERALLY. II. IT SPECIFIES THE CATEGORIES OF INCOME IN RESPEC T OF WHICH A VICARIOUS LIABILITY IS IMPOSED BY SECTIONS 160 AND 161 ON AN AGENT TO BE ASSESSED IN RESPECT OF A NON-RESIDENT'S INCOME. IN PERFORMING HIS FUNCTION, THE CLAUSE (A) APPLIES TO THE INCOME OF NON-RESIDENTS ALONE; (B) SPECIFIES THE CATEGORIES OF INCOME IN RESPECT O F WHICH THE AGENT IS VICARIOUSLY LIABLE EVEN IF THE INCOME ACTU ALLY ACCRUES IN INDIA OR IS RECEIVED IN INDIA. EXAMPLES SHOWING INTER-LINKING OF VARIOUS PROVISION S OF THE 1961 ACT: (A) IT MAY BE NOTED THAT SECTIONS 160(1)(I), 161, 1 62 AND 163 ARE MACHINERY SECTIONS. THEY DO NOT AFFECT THE INCI DENCE OF TAXATION UNDER SECTIONS 4 AND 5 WHICH ARE THE CHARG ING SECTIONS. SECTIONS 160 AND 161 PROVIDE A MACHINERY FOR COLLECTION OF A CHARGE WHICH IS IMPOSED IN GENERAL TERMS ELSEWHERE AND YET SECTIONS 160 AND 161 ARE SECTIONS WHICH LIKE SECTION 201(1) IMPOSE A VICARIOUS LIABILITY ON AN A GENT TO BE ASSESSED IN RESPECT OF THE INCOME OF THE PRINCIPAL. THE LIABILITY IS IMPOSED UNDER SECTIONS 160 AND 161 IN RESPECT OF THE INCOME OF A NON-RESIDENT PRINCIPAL AND IT IS ONLY IN RESPE CT OF THE INCOME FALLING WITHIN SECTION 9(1) AND NOT ANY OTHE R INCOME. THEREFORE, ONE HAS TO READ SECTION 9(1) WITH SECTIO N 160 AND SECTION 161 WHICH ARE MACHINERY SECTIONS (SEE THE L AW AND PRACTICE OF INCOME TAX BY KANGA AND PALKHIVALA, EI GHTH EDITION, AT PAGES 1268 AND 1269). (B) SIMILARLY, SECTION 40(A)(III), QUOTED ABOVE, WH ICH FINDS PLACE IN CHAPTER N (COMPUTATION OF BUSINESS INCOME), INTE R ALIA, STATES THAT ANY PAYMENT WHICH IS CHARGEABLE UNDER T HE HEAD 'SALARIES, IF IT IS PAYABLE OUTSIDE INDIA OR TO A NON-RESIDENT AND IF THE TAX THEREON IS NOT DEDUCTED FROM SUCH PA YMENT UNDER CHAPTER XVII-B THEN NOTWITHSTANDING THE ENTITLEMENT OF THE 18 ASSESSEE TO CLAIM DEDUCTION, THE SAME WILL BE DISAL LOWED FOR SUCH NON-DEDUCTION OF TAX AT SOURCE . THE ABOVE EXAMPLES SHOW THAT THE 1961 ACT IS AN INT EGRATED CODE IN WHICH ONE CANNOT SEGREGATE THE COMPUTATION MACHINERY FROM THE COLLECTION AND RECOVERY MACHINE RY. 42. THEREFORE, THE PROVISIONS CONTAINED IN CHAPTER XVIIB HAVE TO BE GIVEN EFFECT TO WHILE QUANTIFYING THE LIABILITY OF AN ASSESSEE. THE COMPUTATION OF INCOME CANNOT BE EFFECTED WITHOUT HA VING RECOURSE TO SECTION 40(A)(IA) AND CONSEQUENTLY TO PROVISIONS OF CHAPTER XVII-B. SECTION 40(A)(IA) COMES INTO PLAY WHEN ANY INTEREST, COMMIS SIONS OR BROKERAGE ETC. PAYABLE TO A RESIDENT, ON WHICH TAX WAS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVIIB AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-S ECTION (1) OF SECTION 139 THEN SUCH PAYMENTS WILL NOT BE ALLOWED AS DEDUCTION . 43. THEREFORE, IT FOLLOWS THAT THERE SHOULD BE SUM PAID BY ASSESSEE ON WHICH TAX WAS DEDUCTIBLE AT SOURCE UNDER CHAPTER XV IIB BEFORE 40(A)(IA) COULD COME INTO PLAY. ADMITTEDLY IN THE CASE OF ASS ESSEE, IT HAS BEEN HELD THAT THE PROVISIONS OF SECTION 194H AS WELL AS PROV ISIONS OF SECTION 194J ARE NOT ATTRACTED AND THEREFORE, THERE WAS NO AMOUNT ON WHICH TAX WAS DEDUCTIBLE. THEREFORE, SECTION 40(A)(IA) CANNOT COM E INTO PLAY. THE MACHINERY PROVISIONS CANNOT OPERATE INDEPENDENTLY A ND BEFORE THE COMPUTATION PROVISIONS CONTAINED IN SECTION 40(A)(I A) CAN COME INTO THE PLAY, THE EFFECT OF APPLICABILITY OF MACHINERY PROV ISION HAS TO BE CONSIDERED. 44. NOW, IF WE ACCEPT THE SUBMISSIONS ADVANCED BY L D. CIT(DR) THAT THE PROVISIONS OF SECTION 40(A)(IA) AND PROVISIONS OF S ECTION 201OPERATE IN TWO INDEPENDENT FIELDS THEN IT WOULD LEAD TO CONTRADICT ORY FINDINGS BY TRIBUNAL FOR THE SAME ASSESSMENT YEAR IN RESPECT OF THE SAME SUBJECT MATTER AND ISSUE. 19 HAD THERE BEEN NO DECISION OF TRIBUNAL IN ASSESSEE S OWN CASE FOR THE SAME ASSESSMENT YEAR, THEN IN VIEW OF THE DECISION OF HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF IDEA CELLULAR, DEDUCTION COULD NOT BE ALLOWED TO ASSESSEE. HOWEVER, IN VIEW OF THE DECISION OF HONB LE SUPREME COURT, KEEPING IN VIEW THE INTEGRATED SCHEME OF THE ACT, WE ARE OF THE OPINION THAT NON-DEDUCTION OF TAX UNDER CHAPTER XVIIB LEADS TO C ONSEQUENCES CONTEMPLATED U/S 201 AND, THEREFORE, SECTION 40(A)( IA) AND PROVISIONS CONTAINED IN CHAPTER XVII-B CONSTITUTE AN INTEGRATE D CODE AND, ACCORDINGLY, EFFECT HAS TO BE GIVEN TO THE DECISIONS OF TRIBUN ALS GUWHATI AND JAIPUR BENCHES, WHICH WILL OPERATE AS RES-JUDICATA.IN ANY VIEW OF THE MATTER, THE VIEW BENEFICIAL TO THE ASSESSEE IS TO BE TAKEN. WE, ACCORDINGLY, ALLOW THE ASSESSEES APPEAL IN RESPECT OF GROUND NOS. 1 AND 1 .1. 45. IT IS PERTINENT TO NOTE THAT BY THE FINANCE ACT 2012 W.E.F. 1.4.2013, A PROVISO HAS BEEN INSERTED TO SECTION 40(A)(IA), WHI CH READS AS UNDER: PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER DXVII-B ON ANY SUCH SUM BUT IS NOT DEEME D TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO S UB-SECTION (1) OF SECTION 201, THEN, FOR THE PURPOSE OF THIS SUB-C LAUSE, IT SHALL BE DEEMED THAT THE ASSESSEE AHS DEDUCTED AND PAID T HE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INC OME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO. 46. THIS PROVISO, THOUGH APPLICABLE FROM 1.4.2013 B UT PRIMARILY DEALS WITH PROCEDURAL ASPECTS AND, THEREFORE, WILL BE APP LICABLE TO ALL PENDING PROCEEDINGS ALSO. 47. FACTS IN A.Y. 2006-07 BEING IDENTICAL FOLLOWING THE DECISION FOR AY 2008-09, THE ASSESSEES APPEAL IS ALLOWED. 20 48. AS FAR AS GROUND NOS. 2 AND 3 ARE CONCERNED, SI NCE JAIPUR BENCH OF TRIBUNAL HAS HELD FOR ASSESSMENT YEAR 2008-09 THAT PROVISIONS OF SECTION 194J ARE NOT APPLICABLE, THEREFORE, FOR THE REASONI NG GIVEN FOR GROUND NOS. 1 & 1.1, THE ASSESSEES BOTH GROUNDS ARE ALLOWED. ITA NO. 2795/DEL/2012 (REVENUES APPEAL): 49. THE DEPARTMENT HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.75,82,37,380/- MADE BY THE AO ON ACC OUNT OF AMORTIZATION OF LICENSE FEE AND SPECTRUM CHARGES U/ S 35ABB OF THE IT ACT. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 4,94,27,528/- MADE BY THE AO ON ACC OUNT OF LEASE RENT PAID TO IBM. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIG HT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) O F APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEA L. 50. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT FROM THE P&L A/C THE AO NOTICED THAT AN AMOUNT OF RS. 105,86,79,000/- HAD B EEN DEBITED AS PAYMENT TOWARDS LICENSE FEE AND SPECTRUM CHARGES. THE AO SH OW CAUSED THE ASSESSEE AS TO WHY THIS AMOUNT SHOULD NOT BE AMORTIZED OVER THE REMAINING PERIOD OF VALIDITY OF LICENSE IN CASE OF EACH CIRCLE U/S 35AB B OF THE I.T. ACT, WHILE DISALLOWING THE SAME AS A REVENUE EXPENDITURE, AS HAD BEEN DONE IN THE ASSESSMENT YEAR 2007-08. THE ASSESSEE VIDE ITS WRIT TEN SUBMISSIONS DATED 16.12.2010 GAVE THE FOLLOWING EXPLANATION: 3.2 THE ASSESSEE VIDE WRITTEN SUBMISSION DATED 16. 12.2010, GAVE THE FOLLOWING EXPLANATION: 'THE LICENSE FEE IS PAID ON THE BASIS OF CERTAIN PE RCENTAGE OF ANNUAL GROSS REVENUE (AGR). 21 THE LICENSE FEE PAID UNDER SECTION 35ABB CONFERRED A LIGHT ON THE TELECOM OPERATORS TO OPERATE TELEPHONY SERVICES FOR A NUMBER OF YEARS. U/S 35ABB THE FEE WAS HELD TO BE C APITAL AND ALLOWABLE IN AN APPROPRIATE PROPORTION OVER THE NUM BER OF YEARS. FROM 1.7.1999 THE WHOLE SCHEME OF PAYMENT WA S CHANGED AND LICENSE FEE WAS DIRECTLY LINKED WITH TH E ANNUAL REVENUE GENERATED BY THE TELECOM OPERATORS. THE PAY MENT ALSO WAS ANNUAL. THE LICENCE WILL GET REVOKED IF THE IN CASE OF NONPAYMENT OF LICENCE FEE. AS PER SETTLED LAW, ANY EXPENDITURE WHICH DOES NOT CREATE AN ASSET AND WHICH IS PAID FO R THE SPECIFIC YEAR AND NOT FOR YEARS IS NOT A CAPITAL EXPENDITURE BUT A REVENUE EXPENDITURE. THE ISSUE OF VARIABLE LICENCE FEES IN EARLIER YEARS HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE COMPANY BY THE HO N'BLE ITAT, NEW DELHI. ACCORDINGLY, THE VARIABLE LICENCE FEES NOT TO BE AMORTIZED AS PER SECTION 35ABB AND TO BE ALLOWED AS REVENUE EXPENDITURE IN THE YEAR IN WHICH IT IS INCU RRED. ' 51. THE ASSESSEE HAD ALSO RELIED ON THE DECISION O F TRIBUNAL IN ITS FAVOUR ON THIS ISSUE FOR AY 2003-04 AND 2004-05. THE AO, H OWEVER, DID NOT ACCEPT THE ASSESSEES CLAIM, INTER ALIA, OBSERVING THAT TH E DECISION OF TRIBUNAL HAD NOT BEEN ACCEPTED BY THE DEPARTMENT AND APPEAL WAS PENDING AGAINST THE SAME BEFORE HONBLE DELHI HIGH COURT. HE, ACCORDING LY, MADE ADDITION OF RS. 75,82,37,380/-. 52. BEFORE LD. CIT(A) THE ASSESSEE SUBMITTED THAT I N THE CASE OF ASSESSEE COMPANY FOR AY 2003-04, 2004-05, 2006-07 AND 2007-0 8 THE CIT(A)-V, NEW DELHI CONSIDERED THE SAID ISSUE AND ALLOWED THE CLAIM OF THE COMPANY AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT. IT WAS FURTHER POINTED OUT THAT ALL THE APPEALS HAVE BEEN DECIDED BY THE ITAT DELHI IN FAVOUR OF THE COMPANY. 22 53. LD. CIT(A) HAS NOTED THE FINDINGS OF THE ITAT A T PAGE 4 OF HIS ORDER WHICH ARE REPRODUCED HEREUNDER: 'WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. THE OPERATIVE PORTION OF THE ORDER OF THE TRIBUNAL IS CONTAINED IN PARAGRAPHS 9 AND 10, WHICH ARE REPR ODUCED BELOW FOR READY REFERENCE:- QUOTE 9. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE HAVE PER USED THE ORDER OF THIS TRIBUNAL IN THE CASE OF TO SUPRA. IT IS NOTICED THAT THE BOMBAY BENCH OF THIS TRIBUNAL IN THE CASE OF MT NL HAS AFTER CONSIDERING THE VARIOUS DETAILS AND SUBMISSIO NS OF THE ASSESSEE AND THE REVENUE THEREIN, HAS HELD THAT THE LICENCE FEE WAS PAID ONLY FOR THE USE OF THE RIGHT TO DO THE BU SINESS OF TELECOM PROVIDER. THE SAID RIGHT DID NOT GIVE RISE TO ANY CAPITAL ASSET. FURTHER THE BOMBAY BENCH OF THIS TRIBUNAL HA S HELD AS FOLLOWS: 8. REVOCATION OF LICENCES- THE CENTRAL GOVERNMENT M AY, AT ANY TIME, REVOKE ANY LICENCE GRANTED U/S 4, ON THE BREA CH OF ANY OF THE CONDITIONS THEREIN CONTAINED, OR IN DEFAULT OF PAYMENT OF ANY CONSIDERATION PAYABLE THERE UNDER.' FROM PERUSAL OF S. 8 OF THAT ACT, IT IS NOW EVIDENT THAT UNDER THE CIRCUMSTANCES THE LICENCE IS REVOKED, THE APPELLANT SHALL NOT BE ABLE TO CARRY ON ITS BUSINESS OF TELEPHONE SERVICES , UNLESS IT HAD PAID SUCH A LICENCE FEE TO THE GOVERNMENT. THE IRRE SISTIBLE CONCLUSION, THEREFORE, WOULD BE THAT PAYMENT OF LIC ENCE FEE IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE BUSINESS' CARRIED ON BY IT. THE SAME IS, THEREFORE, AN ALLOWA BLE DEDUCTION U/S 37 OF THE ACT. SINCE THE LIABILITY STANDS PAID DURING THE YEAR UNDER CONSIDERATION, WE DIRECT THE AO TO ALLOW THE DEDUCTION TO THE APPELLANT. 10. RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MTNL, REFERRED TO S UPRA, WE ASSESSEE OF THE VIEW THAT THE VARIABLE REVENUE SHAR E LICENCE FEE PAID PURSUANT TO THE MIGRATION OF THE ASSESSEE TO T HE NEW 23 TELECOM POLICY OF 1999 IS LIABLE TO BE ALLOWED AS R EVENUE EXPENDITURE AND WE DO SO. IN THE CIRCUMSTANCES, AD IS DIRECTED TO DELETE THE ADDITION MADE BY HOLDING THE VARIABLE REVENUE SHARE FEE PAID TO BE CAPITAL EXPENDITURE. IN THE CI RCUMSTANCES, GROUND NO. 3 IN ASSESSEE'S APPEAL STANDS ALLOWED.' ~ 54. IN VIEW OF THE FINDINGS RECORDED BY THE TRIBUNA L, LD. CIT(A) FOLLOWING THE SAME ALLOWED THE ASSESSEES APPEAL. 55. BEING AGGRIEVED, THE DEPARTMENT IS IN APPEAL BE FORE THE TRIBUNAL. 56. AT THE TIME OF HEARING LD. COUNSEL FOR THE ASSE SSEE REFERRED TO OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN ASSESS EES OWN CASE VIDE ITA NO. 1336/2010, AVAILABLE AT PAGE 797 OF THE PBPAGE 754. PARA 47 & 48 OF THE SAID DECISION READ AS UNDER: 47. IN VIEW OF THE AFORESAID FINDINGS, THE SUBSTANT IAL QUESTION MENTIONED ABOVE IN ITEM NOS. L TO 9 IS ANSWERED IN THE FOLLOWING MANNER: (I) THE EXPENDITURE INCURRED TOWARDS LICENCE FEE IS PARTLY REVENUE AND PARTLY CAPITAL. LICENCE FEE PAYABLE UPT O 31 5T JULY, 1999 SHOULD BE TREATED AS CAPITAL EXPENDITURE AND L ICENCE FEE ON REVENUE SHARING BASIS AFTER 15T AUGUST, 1999 SHOULD BE TREATED AS REVENUE EXPENDITURE. (II) CAPITAL EXPENDITURE WILL QUALIFY FOR DEDUCTION AS PER SECTION 35ABB OF THE ACT. 48. THE APPEAL ITA NO. 417/2013 BY THE REVENUE IN T HE CASE OF HUTCHISON ESSAR PVT. LTD., PERTAINS TO THE ASSESSME NT YEAR 1999- 2000 I.E. YEAR ENDING 315T MARCH, 1999. IT IS FOR T HE PERIOD PRIOR TO THE PERIOD 315T JULY, 1999. AS PER THE DIS CUSSION ABOVE, THE LICENCE FEE PAYABLE ON OR BEFORE 31ST JULY, 199 9 SHOULD BE TREATED AS CAPITAL EXPENDITURE AND THE LICENCE FEE PAYABLE THEREAFTER SHOULD BE TREATED AS REVENUE EXPENDITURE . IN VIEW OF THE AFORESAID POSITION, THE QUESTION OF LAW ADMITTE D FOR HEARING 24 IN THIS APPEAL AS RECORDED IN THE ORDER DATED 21ST AUGUST, 2013, HAS TO BE ANSWERED IN FAVOUR OF THE REVENUE AND AGA INST THE RESPONDENT ASSESSEE. 57. HE, THEREFORE, SUBMITTED THAT THIS ISSUE IS NOW COVERED BY THE DECISION OF THE HONBLE DELHI HIGH COURT. 58. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE FIND THAT THE QU ESTION OF LAW ON THIS ISSUE, FRAMED BY THE HONBLE DELHI HIGH COURT READS AS UND ER:- '1. DID THE TRIBUNAL FALL INTO ERROR IN HOLDING THA T THE VARIABLE LICENCE FEE PAID BY THE ASSESSEES WAS PROPERLY DEDU CTIBLE AS REVENUE EXPENDITURE? 59. HONBLE DELHI HIGH COURT IN PARA 4 OF ITS DECIS ION OBSERVED AS UNDER: 4. AS IS APPARENT FROM THE SUBSTANTIAL QUESTION O F LAW QUOTED ABOVE, THE ISSUE RAISED IS WHETHER THE VARIA BLE LICENCE FEE PAID BY THE RESPONDENTS UNDER INDIAN TELEGRAPH ACT, 1885, AND INDIAN WIRELESS FEE ACT 1933, PAYABLE UNDER THE NEW TELECOM POLICY 1999 OR 1994 AGREEMENT,. IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE WHICH IS REQUIRE D TO BE AMORTIZED UNDER SECTION 35ABB OF THE INCOME TAX ACT , 1961 (ACT, FOR SHORT). 60. THE HONBLE DELHI HIGH COURT, AFTER CONSIDERING THE STATUTORY PROVISIONS, NATIONAL TELECOM POLICY 1999 IN DETAIL AND VARIOUS DECISIONS, FINALLY CONCLUDED IN PARAS 47 & 48 AS UNDER: 47. IN VIEW OF THE AFORESAID FINDINGS, THE SUBSTANT IAL QUESTION MENTIONED ABOVE IN ITEM NOS. L TO 9 IS ANSWERED IN THE FOLLOWING MANNER: (I) THE EXPENDITURE INCURRED TOWARDS LICENCE FEE IS PARTLY REVENUE AND PARTLY CAPITAL. LICENCE FEE PAYABLE UPT O 31 5T JULY, 1999 SHOULD BE TREATED AS CAPITAL EXPENDITURE AND L ICENCE FEE ON 25 REVENUE SHARING BASIS AFTER 15T AUGUST, 1999 SHOULD BE TREATED AS REVENUE EXPENDITURE. (II) CAPITAL EXPENDITURE WILL QUALIFY FOR DEDUCTION AS PER SECTION 35ABB OF THE ACT. 48. THE APPEAL ITA NO. 417/2013 BY THE REVENUE IN T HE CASE OF HUTCHISON ESSAR PVT. LTD., PERTAINS TO THE ASSESSME NT YEAR 1999- 2000 I.E. YEAR ENDING 315T MARCH, 1999. IT IS FOR T HE PERIOD PRIOR TO THE PERIOD 315T JULY, 1999. AS PER THE DIS CUSSION ABOVE, THE LICENCE FEE PAYABLE ON OR BEFORE 31ST JULY, 199 9 SHOULD BE TREATED AS CAPITAL EXPENDITURE AND THE LICENCE FEE PAYABLE THEREAFTER SHOULD BE TREATED AS REVENUE EXPENDITURE . IN VIEW OF THE AFORESAID POSITION, THE QUESTION OF LAW ADMITTE D FOR HEARING IN THIS APPEAL AS RECORDED IN THE ORDER DATED 21ST AUGUST, 2013, HAS TO BE ANSWERED IN FAVOUR OF THE REVENUE AND AGA INST THE RESPONDENT ASSESSEE. 61. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT, THE REVENUES GROUND IS DISMISSED. 62. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT THE A O NOTICED FROM NOTES TO RETURN OF INCOME, NOTE NO. 1, WHICH READS AS UNDER: 'THE COMPANY HAS ENTERED INTO A COMPOSITE AGREEMENT FOR SERVICES AND EQUIPMENT WITH IBM INDIA FOR PROVISION OF INFORMATION TECHNOLOGY (IT). THE COMPANY HAS ACE UN FED FOR IBM COMPOSITE OUTSOURCING AGREEMENT AS FINANCE LEAS E FOLLOWING AS-19. ACCORDINGLY, IN THE BOOKS OF ACCOU NT THE COMPANY HAS MADE ADDITIONS TO FIXED ASSETS AMOUNTIN G TO RS.4,47,18,653/- AND DEPRECIATION THEREON AMOUNTING TO RS.50,26,726/- HAS BEEN CHARGED ADDITIONALLY, RS. 20, 98, 38, 684/- ON ACCOUNT OF S ERVICES RECEIVED (AS PART OF THE COMPOSITE IT CONTRACT) HAS BEEN DEBITED TO LEGAL AND PROFESSIONAL CHARGES. THE ABOVE CHARGE TO THE PROFIT AND LOSS ACCOUNT NAM ELY: I. DEPRECIATION ON LEASED ASSETS AS PER BOOKS OF ACCOUNTS RS.50,26, 726/- AND 26 II. RS.20,98,38,684/- DEBITED TO LEGAL AND PROFESSIONAL CHARGES HAS BEEN ADDED BACK WHILE COMPUTING THE INCOME UNDER NORMAL PROVISIONS OF THE INCOME. TAX ACT 1961 (THE ACT) CONSEQUENTLY, THE AMOUNT PAID DURING THE PREVIOUS YEAR TO THE VENDOR AS LEASE RENTAL AMOUNTING TO RS.26,42,92,938/- HAS BEEN CLAIMED AS AN ADMISSIBLE DEDUCTION. FURTHER NO DEPRECIATION HAS BEEN CLAIMED UNDER THE ACT ON AFORESAID ASSETS.' 63. THE AO OBSERVED THAT SIMILAR TREATMENT WAS BEI NG GIVEN IN THE CASE OF M/S BHARTI AIRTEL LTD., AN ASSOCIATE CONCERN OF THE ASSESSEE COMPANY, IN RESPECT OF LEASE RENTALS BEING PAID IN A SIMILAR MA NNER TO IBM. HOWEVER, FOR AY 2006-07 THE AO HAD DISALLOWED THE LEASE RENTAL B EING PAID TO IBM WHILE ALLOWING THE DEPRECIATION ON EQUIPMENT AND LEGAL AN D PROFESSIONAL CHARGES PAID AS DEBITED BY THE ASSESSEE IN ITS BOOKS OF ACC OUNTS HOLDING THAT THE FINANCIAL LEASE TRANSACTION CARRIED OUT BY THE ASSE SSEE WAS ACTUALLY A DISGUISED PURCHASE OF ASSETS. HE FURTHER OBSERVED T HAT THE CASE WAS AGITATED U/S 144C BY THE ASSESSEE BEFORE LD. DRP, NEW DELHI. HOWEVER, LD. DRP UPHELD THE TREATMENT GIVEN BY AO. THE ASSESSEE IN I TS WRITTEN SUBMISSIONS SUBMITTED BEFORE AO AS UNDER: 'THE ASSESSEE COMPANY HAS TAKEN THE ASSETS ON LEASE FROM IBM AND HAS ACCORDINGLY DONE THE TREATMENT IN THE BOOKS OF ACCOUNTS. THERE ARE FOLLOWING EXPENDITURE CHARGED TO PROFIT A ND LOSS ACCOUNT IN RESPECT OF THE AFORESAID LEASING ARRANGE MENT; A) DEPRECIATION AS PER THE SCHEDULE XIV OF THE COMP ANIES ACT, 1956 @ 33.33% IN RESPECT OF THE ASSETS TAKEN ON LEA SE, THE LEASE BEING THE FINANCE LEASE (AMOUNTING TO RS. 5,026,72 6/-) 27 B) SERVICE CHARGES PAID TO THE IBM AS PER THE AGR EEMENT (AMOUNTING TO RS. 209,838,684/-) THE ASSESSEE COMPANY HAS DISALLOWED THE FOLLOWING I TEMS WHILE COMPUTING ITS INCOME FOR TAX PURPOSES: DEPRECIATION ON IBM ASSETS AS PER THE COMPANIES ACT, 1956 RS. 5,026,726/- PAYMENT TO IBM (SERVICE CHARGES) RS. 2,09,38,864/ - TOTAL AMOUNT ADDED BACK IN COMPUTATION OF TAXABLE INCOME RS. 21,48,65,410/- AND HAS FINALLY CLAIMED RS. 26,42,92,938 AS A DEDUC TIBLE EXPENDITURE WHICH IS LEASE RENTAL PAID BY THE ASSES SEE COMPANY TO IBM IN VIEW OF ABOVE THE PAYMENT MADE TOWARDS LEASE REN TALS MUST BE ALLOWED WITHOUT PREJUDICE TO THE ABOVE SUBMISSION WE FURTHE R SUBMIT THAT IN ANY CASE THE DEPRECIATION ON THESE ASSETS S HOULD BE ALLOWED AT THE RATE OF 60% TO THE ASSESSEE COMPANY. SHOULD YOUR GOODSELF IS NOT IN AGREEMENT WITH OUR S UBMISSIONS FILED DURING THE WHOLE ASSESSMENT PROCEEDING, WE WO ULD STRONGLY URGE FOR AN OPPORTUNITY OF BEING HEARD IN PERSON BEFORE ANY ORDER IS PASSED TO THE CONTRARY. 64. AO, HOWEVER, AFTER CONSIDERING THE ABOVE SUBMIS SIONS DID NOT ACCEPT THE SAME AND TREATING THE WHOLE TRANSACTION AS FIN ANCIAL LEASE ALLOWED ONLY DEPRECIATION ON LEASED ASSETS AS PER BOOKS AMOUNTIN G TO RS. 50,26,726/- AND LEGAL AND PROFESSIONAL CHARGES AMOUNTING TO RS. 20, 98,38,684/- WERE ALSO ALLOWED. THE AO MADE ADDITION OF RS. 4,94,27,528/- ON THIS COUNT. 65. BEFORE LD. CIT(A) THE ASSESSEE HAD POINTED OUT THAT ASSESSEE HAD ACCOUNTED FOR IBM COMPOSITE OUTSOURCING AGREEMENT A S FINANCE LEASE FOLLOWING AS-19. SIMILARLY, THE ASSESSEE HAD ENTER ED INTO A CONTRACT WITH NORTEL NETWORKS INDIA PVT. LTD. TO OUTSOURCE ITS CA LL CENTER SERVICE. THE 28 ACCOUNTING OF THIS OUTSOURCE AGREEMENT WAS DONE AS FINANCE LEASE FOLLOWING AS-19. THE ASSESSEE SUBMITTED THAT THE AO DISREGARDED SERVICE CUM LEASE AGREEMENT, ENTERED INTO BY THE ASSESSEE W ITH IBM AND NORTEL. THE ASSESSEE POINTED OUT THAT THE AGREEMENT WAS A COMPO SITE AGREEMENT FOR LEASING OF EQUIPMENT AND SERVICE TO BE RENDERED BY IBM. SIMILARLY, THE ASSESSEE COMPANY HOLDING COMPANY M/S BHARTI AIRTEL LTD. ENTERED INTO AN AGREEMENT WITH NORTEL ON 13.3.2006, WHICH WAS ALSO A COMPOSITE AGREEMENT FOR LEASING OF EQUIPMENT AND SERVICES TO BE RENDERE D BY NORTEL. THE ASSESSEE EXPLAINED THAT IT PREPARED ITS ACCOUNT AS PER AS-19 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHICH REQUIRED THAT LEASE CONTRACTS HAD TO BE BROKEN UP TO BE DISCLOSED IN A MANNER WHICH REFLECTS INTEREST, DEPRECIATION ON THE FIXED ASSETS AND OTHE R SERVICE CHARGES SEPARATELY. THUS, AS REQUIRED BY THE ACCOUNTING STA NDARD, THE COST OF THE FIXED ASSETS WAS DEBITED TO THE FIXED ASSET ACCOUNT . HOWEVER, WHILE COMPUTING THE INCOME, THE ASSESSEE ADDED BACK DEPRE CIATION AND AMOUNT PAID TOWARDS LEGAL AND PROFESSIONAL CHARGES TO THE IR TOTAL INCOME AND THEREAFTER CLAIMED THE ENTIRE SUM OF RS. 26,42,92,9 38/- AS THE AMOUNT PAID TO IBM AS LEASE CHARGES. 66. AS REGARDS THE CONTRACT WITH NORTEL NETWORKS I NDIA PVT. LTD. THE ASSESSEE EXPLAINED THAT SINCE THE ENTIRE AMOUNT PA YABLE TO THE VENDOR TOWARDS SUPPLY ON FIXED ASSETS DURING THE YEAR HAD ACCRUED, THERE WAS NO MINIMUM LEASE PAYMENTS OUTSTANDING AS AT THE YEAREN D IN RELATION TO THESE ASSETS. THE ASSESSEE REFERRED TO THE CBDT CIRCULAR NO. 2 DATED 9.2.2001 WHICH EXPLAINS THE ACTION TO BE TAKEN BY THE AO. A FTER EXPLAINING THE ABOVE METHODOLOGY THE ASSESSEE POINTED OUT THAT THE ACTIO N OF THE COMPANY TO PREPARE THE BALANCE-SHEET, P&L A/C, IN ACCORDANCE W ITH THE ACCOUNTING STANDARD 19, WAS ONLY FOR THE PURPOSE OF PREPARATIO N OF ACCOUNT UNDER THE 29 COMPANIES ACT. THEREFORE, THE DEPRECIATION WILL CON TINUE TO BE ALLOWED ONLY IN THE HANDS OF LESSOR. IN ALTERNATE, THE ASSESSEE SUBMITTED THAT IF AOS STAND IS TO BE ACCEPTED THEN 60% DEPRECIATION IS TO BE AL LOWED AS THE ASSETS WERE COMPUTERS ONLY. 67. LD. CIT(A) AFTER CONSIDERING THE ASSESSEES SUB MISSIONS WITH REFERENCE TO PREPARATION OF ACCOUNTS AS PER AS-19 A ND THE EFFECT OF CIRCULAR NO. 2 DATED 2001 DATED 9.2.2001, DELETED THE DISALL OWANCE, INTER ALIA, HOLDING THAT THE ENTIRE AMOUNT WAS LEASE RENT PAID BY THE A SSESSEE, IMPLIEDLY HOLDING THAT IT WAS NOT A CASE OF FINANCE LEASE. 68. LD. DR SUBMITTED THAT IT IS ASSESSEES OWN ADMI SSION THAT IT IS A CASE OF FINANCE LEASE. HE REFERRED TO PAGE 242 OF PB, WH EREIN THE AGREEMENT BETWEEN BHARTI TELE-VENTURES LTD. AND IBM GLOBAL SE RVICES INDIA PVT. LTD. IS CONTAINED, WHEREIN IT HAD BEEN AGREED BETWEEN IB M AND BHARTI THAT BHARTI WILL OUTSOURCE TO IBM AND IBM WILL PROVIDE T O BHARTI INFORMATION TECHNOLOGY SERVICES, PROCESSES, APPLICATIONS, SOFTW ARE, HARDWARE, PACKAGES AND PRODUCTS, AS SPECIFIED IN THE AGREEMENT (S1 IT O). HE REFERRED TO PAGE 315, WHEREIN CLAUSE 6.9 ASSET MANAGEMENT, OUTSOURCE AGREEMENT READS AS UNDER: 6.9 ASSET MANAGEMENT ASSET REGISTER IBM WILL MAINTAIN LISTS OF HARDWARE. SOFTWARE, LICE NSES. MANUALS, TYPE 1 MATERIALS, TYPE II MATERIALS AND OT HER RESOURCES (COLLECTIVELY THE 'ASSET REGISTER) DURIN G THE TERM AND TRANSITION FOR THE PURPOSE OF PHYSICAL VERIFIC ATION, WHICH ARE USED/PROVIDED IN THE PROVISION OF THE SI ITO. THE ASSET REGISTER SHALL BE ACCESSIBLE TO SHARTI AT ALL TI MES. IBM WILL PERFORM PHYSICAL ASSET TRACKING USING BAR CODES OR EQUIVALENT TECHNOLOGY. THE ASSET REGISTER WILL CONTAIN THREE CLASSIFICATI ONS OF ASSETS: 30 A. BHARTI OWNED, RENTED OR LEASED ASSETS WHICH IBM WIL L MANAGE AND MAINTAIN DURING THE TERM. B. IBM OWNED ASSETS FOR THE INTERNAL USE OF IBM THAT W ILL NOT BE TRANSFERRED TO BHARTI UPON EXIT. THESE ASSETS AR E EXPECTED TO CONSIST OF PCS, PC SOFTWARE, PERIPHERALS, SERVE RS REQUIRED FOR IBM EMPLOYEES TO PERFORM THEIR RESPONSIBILITIES. C. IBM OWNED ASSETS USED TO PROVIDE SI ITO TO BHARTI UNDER THE AGREEMENT AND WHICH SHALL BE TRANSFERRED TO BHA RTI UPON EXIT. D. ASSETS LISTED AS SET FORTH IN A) AND C) ABOVE WILL BE USED SOLELY FOR THE PURPOSES OF PROVIDING SI ITO FOR BHA RTI, UNLESS OTHERWISE AGREED BY THE PARTIES. 69. WITH REFERENCE TO ABOVE CLAUSE, LD. DR POINTED OUT THAT IT IS PRIMARILY THE AGREEMENT FOR FINANCING THE ASSET IN EFFECT PUR CHASED BY ASSESSEE. 70. LD. DR FURTHER SUBMITTED THAT ASSESSEE IN ITS N OTES TO ACCOUNT HAS CLEARLY STATED THAT IT WAS A FINANCE LEASE AND HAS OBTAINED BENEFIT UNDER COMPANIES ACT. THEREFORE ASSESSEE IS STOPPED FROM TAKING A CONTRARY VIEW. 71. LD. DR FURTHER REFERRED TO PAGE 208 OF THE PB W HEREIN EFFECT OF PUBLICATION OF ACCOUNTING STANDARD ON ALLOWABILITY OF DEPRECIATION IN CASE OF FINANCE LEASE AGREEMENT HAS BEEN CLARIFIED. HE SUBM ITTED THAT SUBSTANCE OF THE TRANSACTION HAS TO BE TAKEN INTO CONSIDERATION. 72. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT PAY MENTS HAVE BEEN MADE TO IBM FROM 2005-06 ONWARDS AND NO DISALLOWANCE HAS BEEN MADE., IN THE BOOKS OF A/C THE ASSESSEE HAD CHARGED THE DEPRECIAT ION BECAUSE AS PER AS 19 IT HAD TO CAPITALIZE THE ASSET BUT THE AMOUNT WAS A DDED BACK AND THE WHOLE AMOUNT WAS CLAIMED AS LEASE RENTAL. 31 73. LD. COUNSEL FURTHER SUBMITTED THAT IN THE COMPU TATION OF INCOME ASSESSEE DID NOT CLAIM DEPRECIATION. THE DISCLOSURE WAS MADE IN NOTES TO ACCOUNT ONLY BECAUSE OF AS 19. LD. COUNSEL REFERRED TO AS 19 CONTAINED AT PAGE 220 ONWARDS OF THE PBG TO DEMONSTRATE UNDER WH AT CIRCUMSTANCES A LEASE CAN BE SAID TO BE A FINANCE LEASE. HE REFERRE D TO THE SI ITO AGREEMENT CONTAINED AT PAGES 252 TO 260 OF THE PB TO DEMONSTR ATE THAT THE EQUIPMENT REMAINED EFFECTIVELY WITH IBM ONLY. 74. LD. COUNSEL REFERRED TO PARA 6.9 OF SI ITO OUT SOURCE AGREEMENT, REPRODUCED EARLIER, AND POINTED OUT THAT THE MAIN I SSUE IS REGARDING CLAUSE (C) OF THE SAID CLAUSE, WHICH READS AS UNDER: C. IBM OWNED ASSETS USED TO PROVIDE SI ITO TO BHARTI UNDER THE AGREEMENT AND WHICH SHALL BE TRANSFERRED TO BHARTI UPON EXIT. 75. IN THIS REGARD LD. COUNSEL REFERRED TO PAGE 304 OF PB, WHEREIN CLAUSE RELATING TO WARRANTY ARE CONTAINED AND POINTED OUT THAT CLAUSE E. READS AS UNDER: IBM REPRESENTS AND WARRANTS THAT DURING THE TERM I BM HAS THE RIGHT TO ACCESS AND USE SERVICE MACHINES IN ORD ER FOR IBM TO PROVIDE SI ITO AND WILL THEREAFTER TRANSFER THE APPLICABLE SERVICE MACHINES IN ACCORDANCE WITH SECTION 6 11 (M ACHINES). 76. THUS, HE SUBMITTED THAT IN EFFECT CONTROL REMAI NED WITH THE IBM. 77. LD. COUNSEL FURTHER REFERRED TO PAGE 260 OF THE PB WHEREIN CLAUSE 2.2 OF AGREEMENT IS CONTAINED, WHEREIN THE LIST OF SOFT WARE HAS BEEN GIVEN IN DETAIL AND IT HAS BEEN OBSERVED THAT FOR ALL THE AS SETS INITIAL AND ON-GOING CHARGES LIKE LICENSE FEES, AMC, UPGRADES, UPDATES, SUBSCRIPTION WILL BE TO IBM ACCOUNT. 32 78. LD. COUNSEL FURTHER REFERRED TO PAGE 344 OF PB, WHEREIN THE COVENANT RELATING TO INSURANCE AND RISK OF LOANS IS CONTAINE D, WHICH READS AS UNDER: IBM WILL COMPREHENSIVELY INSURE ALL INSURABLE ASSE TS CONTAINED IN THE ASSET REGISTER, EXCEPT BHARTI MACH INES. AGAINST LOSS OR DAMAGE, INCLUDING LOSS OR DAMAGE BY FIRE, FLOODS, RIOTS AND OTHER NATURAL CALAMITIES BHARTI W ILL INSURE ALL BHARTI MACHINES. IBM WILL PROCURE TRANSPORTATION IN SURANCE, WHERE APPLICABLE IBM WILL PROCURE INSURANCE FOR ITS EMPLOYEES IN ACCORDANCE WITH ITS HUMAN RESOURCES POLICIES AND AS REQUIRED UNDER RELEVANT LAWS AND REGULATIONS APPLICABLE TO I BM. EACH PARTY WILL PROVIDE CERTIFICATES OF INSURANCE EVIDEN CING COMPLIANCE WITH THIS SECTION TO THE OTHER. 79. WITH REFERENCE TO ALL ABOVE CLAUSES OF SI ITO O UT SOURCING AGREEMENT, LD. COUNSEL SUBMITTED THAT ASSESSEE WAS PAYING ONLY SERVICE CHARGES AND NO PAYMENTS WERE MADE WITH RESPECT TO ASSETS. 80. LD. COUNSEL RELIED ON FOLLOWING DECISIONS: - ICDS LTD. VS. CIT 350 ITR 527; - CIT VS. SHAAN FINANCE (I) LTD. 231 ITR 308 (SC) - CIT VS. REETU FINLEASE P. LTD. 286 ITR 652 (DEL.). 81. LD. COUNSEL SUBMITTED THAT IN THE CASE OF ICDS LTD. (SUPRA), THE COMPANY IN COURSE OF ITS BUSINESS HAD GIVEN ON LEAS E PLANT & MACHINERY TO ITS CUSTOMERS FOR THE USE BY THE CUSTOMER FOR ITS B USINESS. IT WAS HELD THAT SUCH COMPANY WAS FOR THE PURPOSE OF SECTION 32, THE OWNER AND WAS AN OWNER WHO WAS USING THE ASSETS FOR ITS BUSINESS AND , THEREFORE, ENTITLED TO DEPRECIATION. 82. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. THE ASSESSEE HAS CLEARLY EXPLAINED THAT IN ORDER TO COMPLY WITH THE MANDATE OF AS 19 IT HAD CAPITALIZED THE ASSETS TAKEN ON LEASE FROM IBM BUT WHILE COMPUTING THE 33 INCOME, THE AMOUNTS WERE ADDER BACK AND THE WHOLE A MOUNT PAID AS LEASE RENT TO IBM WAS CLAIMED. 83. NOW THE MAIN ISSUE WHICH ARISES FOR CONSIDERATI ON IS, WHETHER MERELY BECAUSE ASSESSEE IN ITS BOOKS OF A/C HAD GIVEN SOME TREATMENT TO THE TRANSACTION, HAS TO BE TAKEN AS SACROSANCT OR THE S UBSTANCE OF THE TRANSACTION IS TO BE CONSIDERED. IN OUR OPINION, THERE CANNOT B E ANY QUARREL WITH THE PROPOSITION THAT THE SUBSTANCE OF THE TRANSACTION H AS TO BE TAKEN INTO CONSIDERATION AND MERELY BECAUSE IN BOOKS OF A/C, T HE ASSESSEE HAD COMPLIED WITH THE REQUIREMENT OF AS 19 AND, ACCORDINGLY, CHA RGED DEPRECIATION ON THE ASSET TREATING THE WHOLE TRANSACTION AS CAPITAL IN NATURE, COULD NOT DISENTITLE THE ASSESSEE TO CLAIM THE EXPENDITURE IN COMPUTATIO N OF INCOME ON THE BASIS OF TRUE NATURE OF THE TRANSACTION. IT IS WELL SETTL ED LAW THAT A PARTICULAR MODE OF RECORDING A TRANSACTION IN BOOKS OF A/C IS OF LI TTLE CONSEQUENCE AND THE SUBSTANCE OF THE TRANSACTION HAS TO BE CONSIDERED T O ARRIVE AT PROPER CONCLUSION. 84. LD. CIT(DR) HAS VERY RIGHTLY SUBMITTED THAT SUB STANCE OF THE TRANSACTION HAS TO BE CONSIDERED. HIS MAIN PLANK OF ARGUMENT IS THAT THE ASSETS ARE IDENTIFIED IN TERMS OF IDENTITY AS WELL AS SEQUENCE. CERTAIN CLAUSE OF THE AGREEMENT ALSO STATES THAT THESE ASSETS COUL D BE HANDED OVER TO THE ASSESSEE UPON EXIT OF IBM. WITH REFERENCE TO THESE TWO ASPECTS, LD. CIT(DR) SUBMITS THAT THE ASSESSEE WAS THE BENEFICIAL OWNER OF THESE ASSETS AND THE IBM WAS ONLY TITULAR OWNER. HIS CONTENTION IS THAT THESE BEING MOVABLE PROPERTIES, SUCH TITULAR OWNERSHIP DOES NOT ENTITL E THE OWNER TO ANY BENEFIT OR RIGHT EXCEPT, PRINCIPAL SECURITY AGAINST FINANCE LEASE CHARGES. 85. HOWEVER, LD. AR HAS REFERRED TO VARIOUS CLAUSES , WHICH WE HAVE NOTED IN THE ARGUMENT ADVANCED BY HIM, TO DEMONSTRATE THA T FOR ALL PRACTICAL 34 PURPOSES IBM WAS EXERCISING ALL THE OWNERSHIP RIGHT S ON THE ASSETS SUCH AS THEIR MAINTENANCE, INSURANCE ETC. HAD THE OWNERSHIP RIGHTS BEEN EFFECTIVELY TRANSFERRED TO ASSESSEE IT WOULD HAVE TAKEN ALL NEC ESSARY STEPS TO PROTECT THE ASSETS FROM ALL RISKS. HOWEVER, THE AGREEMENT CLEAR LY LAYS LIABILITY ON IBM ON THIS COUNT. THEREFORE, THE SUBSTANCE OF THE TRAN SACTION CLEARLY SUGGESTS THAT THE BENEFICIAL OWNERSHIP REMAINED WITH IBM AND NOT WITH ASSESSEE AND, THEREFORE, THE ASSESSEE HAD RIGHTLY CLAIMED THE ENT IRE LEASE RENT PAID BY IT TO IBM. 86. IN VIEW OF ABOVE DISCUSSION, WE DISMISS THE GRO UND RAISED BY THE DEPARTMENT. 87. REVENUES APPEAL IS DISMISSED. 88. IN THE RESULT, ASSESSEES APPEALS ARE ALLOWED A ND DEPARTMENTS APPEAL DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON ______/04/2016. (A.T. VARKEY) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: ______/04/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.