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TMI Blog2016 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in assessee’s own case for AY 2008-09 have clearly held that the said provisions of section 194H are not applicable Therefore, it follows that there should be sum paid by assessee on which tax was deductible at source under Chapter XVIIB before 40(a)(ia) could come into play. Admittedly in the case of assessee, it has been held that the provisions of section 194H as well as provisions of section 194J are not attracted and therefore, there was no amount on which tax was deductible. Therefore, section 40(a)(ia) cannot come into play. The machinery provisions cannot operate independently and before the computation provisions contained in section 40(a)(ia) can come into the play, the effect of applicability of machinery provision has to be considered. Keeping in view the integrated scheme of the Act, we are of the opinion that Non-deduction of tax under Chapter XVIIB leads to consequences contemplated u/s 201 and, therefore, Section 40(a)(ia) and provisions contained in chapter XVII-B constitute an integrated code and, accordingly, effect has to be given to the decisions of Tribunal’s Guwhati and Jaipur Benches, which will operate as res-judicata. In any view of the matter, the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance of the transaction clearly suggests that the beneficial ownership remained with IBM and not with assessee and, therefore, the assessee had rightly claimed the entire lease rent paid by it to IBM. X X X X Extracts X X X X X X X X Extracts X X X X ..... is applicable to the payments for roaming. 3. That the learned CIT (A) has erred both on facts and in law in confirming the addition made by the Assessing Officer under section 40(a)(ia) of the Act of ₹ 1,90,40,557/- for non deduction of tax at source under section 194J of the Act on account of charges paid to International telecom operators for carnage and termination of calls at the foreign destination. 3.1 That the learned CIT (A) has erred both on facts and in law in confirming the action of the Assessing Officer in treating the payment made by the appellant to the international telecom operators as fee for technical services under section 194J of the Act without going into the merits of the transactions that such amount is not chargeable to tax in India. 4. That the learned Assessing Officer has erred on facts and in law in levying interest under section 234B of the Act. 5. The appellant craves leave to add to, alter, amend, or vary the above grounds of appeal 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 of TDS under various provisions of the Act. 7. Brief facts ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges also. He, accordingly, made a disallowance of ₹ 13,74,72,942/- u/s 40(a)(ia) in respect of these charges. 10. Ld. CIT(A) upheld the AO's action. 11. Aggrieved, the assessee is in appeal before the Tribunal. 12. At the outset, ld. counsel for the assessee submitted that the ITAT Jaipur Bench in the case of assessee in ITA no. 656/JP/2010 for AY 2009- 10, a copy of which has been filed in the PB at page nos. 601 to 637, has held that the provisions of section 194H are not applicable because the selling of prepaid products from the company to the distributor was actually a sale of right to service and, therefore, the provisions of section 194H were not applicable. It was held that the relationship was principal to principal basis because right to service had been sold. Thus, no income accrued to the distributor at the time of purchase of prepaid card. 13. He, further pointed out that as regards applicability of provision of sec. 194J in regard to roaming charges and interconnection charges it has been held by Jaipur Bench of the Tribunal for assessment year under consideration that provisions of section 194J are not attracted, because the charges were not towards fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions. The said principle applies not only to criminal statutes but also to provisions, which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalising the assessee, who has failed to deduct tax at source and acts to the detriment of the assessee's property and other economic interests. It operates and inflicts ~ hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include initiation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell's The Interpretation of Statutes, 12th edition (1969) it has been observed:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 194 H was not applicable. He relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Kotak Securities Ltd. 340 ITR 333. 21. The third limb of argument was that the provisions of section 40(a)(ia) will apply only to the amount payable at the end of the year. In support of this contention he relied on the decision of ITAT Special Bench in the case of Merilyn Shipping & Transports, Visakhapatnam 16 ITR (Trib.) 1 (Vizag) (SB). He further referred to the decision of Hon'ble Allahabad High Court in the case of Victor Shipping Services Pvt. Ltd. (ITA 122/2013) wherein it has been held that for disallowing expenditure from business and profession on the ground that tax has not been deducted, the amount should be payable and not which has been paid by the end of the year. SLP has been dismissed by the Hon'ble Supreme Court. 22. He, inter alia, relied on the decision of the ITAT in the case of Mr. Kanak Singh in ITA no. 5530/Del/2012 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 through the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be accepted. 30. Ld. DR submitted that it is well settled law that if a person comes within the ambit of law, he must be taxed, however, the great hardship may appear to have been caused. 31. As regards alternate plea that provisions of section 40(a)(ia) are applicable on the amount payable at the end of the year, ld. DR submitted that the operation of order of Special Bench of the ITAT in the case of Merilyn Shipping & Transports, Visakhapatnam (supra), has been stayed by Hon'ble Andhra Pradesh & Telangana High Court. As regards the plea based on the decision in the case of Hindustan Coca Cola Beverage Ld. DR submitted that the said judgment has been delivered in regard to sec. 201, which is basically recovery section and section 40(a)(ia) are independent of section 201. 32. As regards applicability of TDS provisions u/s 194J to roaming charges, ld. DR submitted that the decision of ITAT Jaipur Bench is of no help to assessee because the correct facts had not been placed before the Tribunal. He pointed out that AO has decided the matter on the peculiar fact that the roaming services did not require any human intervention. He pointed out that this fact is based upon context tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine whether the assessee's case falls within the law laid down by Hon'ble supreme Court or not. 39. It is well settled law that the liability to tax arises by virtue of the charging section alone and it arises no later than the close of the previous year, though quantification of the amount payable is postponed. 40. The assessment order only quantifies liability which is already definitely and finally created by the charging sections. However, if qualification of tax liability is not possible the charge must fail. The Hon'ble Supreme Court in the case of Eli Lilly & Co. (India) 312 ITR 225 has held that the purpose of the provisions for deduction of tax at source in Chapter XVIIB of the I.T. Act is to see that from the sum which is chargeable u/s 4 for levy and calculation of income-tax, the payer should deduct tax thereon at the rate in force. They are meant for tantamount deduction of income-tax subject to regular assessment. In this case one of the argument advanced by Shri Ajay Vohra, counsel appearing on behalf of respondent assessee, inter alia, was as under: "According to the learned counsel, the TDS provisions are in the nature of machinery provisions which enable ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced by ld. counsel and has held at page 247-249 as under: "On the question as to whether there is any inter-linking of the charging provisions and the machinery provisions under the 1961 Act, we may, at the very outset, point out that in the case of crr v. B. C. Srinivasa Setty reported in [1981] 128 ITR 294 this court has held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. We may add that, the 1961 Act is an integrated code and, as stated hereinabove, section 9(1) integrates the charging section, the computation provisions as well as the machinery provisions. (see section 9(l)(i) read with sections 160, 161, 162 and 163). In the present case, it has been vehemently urged that the IDS provisions being machinery provisions are independent of the charging provisions whereas as held by this court in the case of B. C. Srinivasa Setty reported in [1981] 128 ITR 294, the 1961 Act is an integrated code. To anser the contention herein we need to examine briefly the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forming his function, the clause (a) applies to the income of non-residents alone; (b) specifies the categories of income in respect of which the agent is vicariously liable even if the income actually accrues in India or is received in India. Examples showing inter-linking of various provisions of the 1961 Act: (a) It may be noted that sections 160(1)(i), 161, 162 and 163 are machinery sections. They do not affect the incidence of taxation under sections 4 and 5 which are the charging sections. Sections 160 and 161 provide a machinery for collection of a charge which is imposed in general terms elsewhere and yet sections 160 and 161 are sections which like section 201(1) impose a vicarious liability on an agent to be assessed in respect of the income of the principal. The liability is imposed under sections 160 and 161 in respect of the income of a non-resident principal and it is only in respect of the income falling within section 9(1) and not any other income. Therefore, one has to read section 9(1) with section 160 and section 161 which are machinery sections (See The Law and Practice of Income Tax by Kanga and Palkhivala, eighth edition, at pages 1268 and 1269). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Idea Cellular, deduction could not be allowed to assessee. However, in view of the decision of Hon'ble Supreme Court, keeping in view the integrated scheme of the Act, we are of the opinion that Non-deduction of tax under Chapter XVIIB leads to consequences contemplated u/s 201 and, therefore, Section 40(a)(ia) and provisions contained in chapter XVII-B constitute an integrated code and, accordingly, effect has to be given to the decisions of Tribunal's Guwhati and Jaipur Benches, which will operate as res-judicata.In any view of the matter, the view beneficial to the assessee is to be taken. We, accordingly, allow the assessee's appeal in respect of ground nos. 1 and 1.1. 45. It is pertinent to note that by the Finance Act 2012 w.e.f. 1.4.2013, a proviso has been inserted to section 40(a)(ia), which reads as under: "Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter DXVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee ahs deducted and paid th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual revenue generated by the telecom operators. The payment also was annual. The licence will get revoked if the in case of nonpayment of licence fee. As per settled law, any expenditure which does not create an asset and which is paid for the specific year and not for years is not a capital expenditure but a revenue expenditure. The issue of variable licence fees in earlier years has been decided in favour of the assessee company by the Hon'ble ITAT, New Delhi. Accordingly, the variable licence fees not to be amortized as per section 35ABB and to be allowed as revenue expenditure in the year in which it is incurred. " 51. The assessee had also relied on the decision of Tribunal in its favour on this issue for AY 2003-04 and 2004-05. The AO, however, did not accept the assessee's claim, inter alia, observing that the decision of Tribunal had not been accepted by the department and appeal was pending against the same before Hon'ble Delhi High Court. He, accordingly, made addition of ₹ 75,82,37,380/-. 52. Before ld. CIT(A) the assessee submitted that in the case of assessee company for AY 2003-04, 2004-05, 2006-07 and 2007-08 the CIT(A)-V, New Delhi considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal stands allowed." ~ 54. In view of the findings recorded by the Tribunal, ld. CIT(A) following the same allowed the assessee's appeal. 55. Being aggrieved, the department is in appeal before the Tribunal. 56. At the time of hearing ld. counsel for the assessee referred to of the decision of the Hon'ble Delhi High Court in assessee's own case vide ITA no. 1336/2010, available at page 797 of the PBpage 754. Para 47 & 48 of the said decision read as under: 47. In view of the aforesaid findings, the substantial question mentioned above in item Nos. l to 9 is answered in the following manner: (i) The expenditure incurred towards licence fee is partly revenue and partly capital. Licence fee payable upto 31 5t July, 1999 should be treated as capital expenditure and licence fee on revenue sharing basis after 15t August, 1999 should be treated as revenue 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 the case of Hutchison Essar Pvt. Ltd., pertains to the assessment year 1999- 2000 i.e. year ending 315t March, 1999. It is for the period prior to the period 315t July, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be treated as capital expenditure and the licence fee payable thereafter should be treated as revenue expenditure. In view of the aforesaid position, the question of law admitted for hearing in this appeal as recorded in the order dated 21st August, 2013, has to be answered in favour of the revenue and against the respondent assessee. 61. Respectfully following the decision of Hon'ble Delhi High court, the revenue's ground is dismissed. 62. Brief facts apropos ground no. 2 are that the AO noticed from notes to return of income, note no. 1, which reads as under: "The company has entered into a composite agreement for services and equipment with IBM India for provision of Information Technology (IT). The company has ace unfed for IBM composite outsourcing agreement as Finance Lease following AS-19. Accordingly, in the books of account the company has made additions to fixed assets amounting to ₹ 4,47,18,653/- and depreciation thereon amounting to ₹ 50,26,726/- has been charged Additionally, ₹ 20, 98, 38, 684/- on account of services received (as part of the composite IT contract) has been debited to Legal and Professional charges. The above charge t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above submission we further submit that in any case the depreciation on these assets should be allowed at the rate of 60% to the Assessee Company. Should your goodself is not in agreement with our submissions filed during the whole assessment proceeding, we would strongly urge for an opportunity of being heard in person before any order is passed to the contrary. 64. AO, however, after considering the above submissions did not accept the same and treating the whole transaction as financial lease allowed only depreciation on leased assets as per books amounting to ₹ 50,26,726/- and legal and professional charges amounting to ₹ 20,98,38,684/- were also allowed. The AO made addition of ₹ 4,94,27,528/- on this count. 65. Before ld. CIT(A) the assessee had pointed out that assessee had accounted for IBM composite outsourcing agreement as finance lease following AS-19. Similarly, the assessee had entered into a contract with Nortel Networks India Pvt. Ltd. to outsource its call center service. The accounting of this outsource agreement was done as Finance Lease following AS-19. The assessee submitted that the AO disregarded service cum lease agreement, enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce lease. He referred to page 242 of PB, wherein the agreement between Bharti Tele-Ventures Ltd. and IBM Global Services India Pvt. Ltd. is contained, wherein it had been agreed between IBM and Bharti that Bharti will outsource to IBM and IBM will provide to Bharti information technology services, processes, applications, software, hardware, packages and products, as specified in the agreement ("S1 ITO"). He referred to page 315, wherein clause 6.9 Asset Management, outsource agreement reads as under: "6.9 Asset Management Asset Register IBM will maintain lists of hardware. Software, Licenses. Manuals, Type 1 Materials, Type II Materials and other resources (collectively the "Asset Register") during the Term and Transition for the purpose of physical verification, which are used/provided in the provision of the SI ITO. The Asset Register shall be accessible to SHARTI at all times. IBM will perform physical asset tracking using bar codes or equivalent technology. The Asset Register will contain three classifications of Assets: a. Bharti owned, rented or leased Assets which IBM will manage and maintain during the Term. b. IBM owned Assets for the internal use of IBM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: "IBM represents and warrants that during the Term IBM has the right to access and use Service Machines in order for IBM to provide SI ITO and will thereafter transfer the applicable service Machines in accordance with Section 6 11 (Machines). 76. Thus, he submitted that in effect control remained with the IBM. 77. Ld. counsel further referred to page 260 of the PB wherein clause 2.2 of agreement is contained, wherein the list of software has been given in detail and it has been observed that for all the assets initial and on-going charges like license fees, AMC, upgrades, updates, subscription will be to IBM account. 78. Ld. counsel further referred to page 344 of PB, wherein the covenant relating to Insurance and Risk of loans is contained, which reads as under: "IBM will comprehensively insure all insurable assets contained in the Asset Register, except BHARTI Machines. Against loss or damage, including loss or damage by fire, floods, riots and other natural calamities Bharti will insure all Bharti Machines. IBM will procure transportation insurance, where applicable IBM will procure insurance for its employees in accordance with its human resources policies and as requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o states that these assets could be handed over to the assessee upon exit of IBM. With reference to these two aspects, ld. CIT(DR) submits that the assessee was the beneficial owner of these assets and the IBM was only titular owner. His contention is that these being movable properties, such titular ownership does not entitle the owner to any benefit or right except, principal security against finance lease charges. 85. However, ld. AR has referred to various clauses, which we have noted in the argument advanced by him, to demonstrate that for all practical purposes IBM was exercising all the ownership rights on the assets such as their maintenance, insurance etc. Had the ownership rights been effectively transferred to assessee it would have taken all necessary steps to protect the assets from all risks. However, the agreement clearly lays liability on IBM on this count. Therefore, the substance of the transaction clearly suggests that the beneficial ownership remained with IBM and not with assessee and, therefore, the assessee had rightly claimed the entire lease rent paid by it to IBM. 86. In view of above discussion, we dismiss the ground raised by the department. 87. Reven ..... 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