BHARTI AIRTEL LIMITED,NEW DELHI vs. ACIT CIRCLE 4(2), NEW DELHI

Learned counsel has also raised some arguments, said to besupported bysome judicial precedents, on the question whether disallowance under section40(a)(i) can be made in a situation in which even if the foreign remittance hadtax withholding obligations under section 195 but the assessee had Bonafide reasons to believe that there were no tax with withholding obligations.However, as we have remitted the matter to the file of the Assessing Officer foradjudication on the basic question as to whether there were tax withholdingobligations, this aspect of the matter is academic at this stage. However, in theevent of the Assessing Officer coming to the conclusion that there was indeedtax withholding obligation, whether in part or in full, in respect of interestpayments, this aspect of the matter will also have to be adjudicated upon. Theassessee is at liberty to take up this aspect of the matter also, if so advised,before the Assessing Officer.”

Shri Rohit Jain, appearing on behalf of the assessee narrating facts of the casesubmits, that this is a second round of litigation before the Tribunal. In the first round the Tribunal had restored the issue of disallowance of interest paid to ABN Amro u/s 40(a)(i) of the Act for limited purpose to consider assessee’s plea of ‘Bonafide’ in not deducting TDS on interest payment. The assessee was incorporated on 07.07.1995 and since then isengaged in the business of telecommunication services, providing cellular, landline and broad band services.The assessee purchased telecom equipments from Swedish supplier, Ericsson. To fund purchase of the equipments, the assessee took advance term loan from ABN Amro. The assessee entered into four Facility Agreements with original lender (ABN Amro) for availing foreign currency term loans, which were guaranteed by Swedish Export Credit Guarantee Board (in short ‘EKN’). The aforesaid loan facility was utilized by the assessee for the purpose of payment to Ericsson, Sweden, the supplier of telecom equipments. ABN Amro novated a portion of Facility Agreement-I and the entire Facility Agreement nos. II, III & IV.During the period relevant to assessment year under appeal, the assessee paid interest amounting to Rs.878,392,587/-to ABN Amro comprising of the followings: Interest payable to novated lenders: Rs.62,47,96,308/- Interest paid to ABN Amro : Rs.25,35,96,279/- Total Rs.87,83,92,587/- Since ABN Amro had furnished Tax Residency Certificate (TRC) issued by Swedish Tax Authority (at page 159-160 of the paper book), the assessee on the strength of said TRC did not deduct withholding tax on the payment of interest to the bank. The Assessing Officer (AO) in assessment order dated 31/1/2017 passed u/s 254/143(3)/144C of the Act disallowed assessee’s claim of interest expenditure paid to ABN Amro Bank i.e. Rs.25,35,96,279/- u/s. 40(a)(i) of the Act and allowed the balance amount of Rs.62,47,96,308/-. The assessee had raised a plea of bonafide ignorance in not deducting tax at source, in light of TRC furnished by ABN Amro. The Assessing Officer in violation of Tribunal’s specific direction to consider assessee’s plea of bonafide, did not give any finding on the plea of ‘bonafide’. 5.1. The assessee carried the issue in appeal before the CIT(A), the CIT(A) considering entire facts of the case, and following the decision in the case of CIT vs. Nestle India Ltd. 243 ITR 435 (Delhi) accepted assessee’s plea of bonafide and deleted the disallowance. The ld. Counsel submits that the TRC issued toresident of a Contracting State is sufficient evidence that the person is a resident of that Contracting State, thus, the assessee had no reason to doubt or dispute the same. In support of his submissions, the ld. Counsel placed reliance on CBDT Circular no. 789 dated 13.04.2000 and the decision rendered in the case of ADIT vs Universal International Music BV, 141 TTJ 364 (Mumbai). The ld. Counsel for the assessee further submitted that considering TRCs issued by Swedish Tax Authorities, the assessee was under bonafide belief that the taxability of payments made to ABN Amro was to be determined with reference to the provisions of Article 11 of the Indo-Sweden DTAA, to the extent it was more beneficial as compared to the provisions of the Act.

Rebutting the submissions made on behalf of the Department, the ld. Counsel for the assessee reiterated that in light of TRC issued by Swedish Tax Authorities, the assessee had no occasion to raise any doubt that no TDS is required to be deducted in respect of payments to ABN Amro.

Both sides heard. The short issue for our consideration in the second round of litigation before us is the taxability of interest in the light of factual findings on tax residency status of beneficial owner of the interest paid by the assessee and also the assessee’s plea of ‘bonafide’ in not deducting tax at source on interest payment to ABN Amro.

Before proceeding further, it would be imperative to refer to the findings of the Coordinate Bench in the First round of litigation before the Tribunal. The Coordinate Bench in a succinct manner has culled out the facts of the case and the transaction of advancing loan by ABN Amro to the assessee and its taxability with reference to relevant DTAA, vis a vis residential status of the Bank. For the sake of ready reference, the findings of the Tribunal in the First round in (supra) are extracted herein below: “22. So far as this ground of appeal is concerned, the relevant material facts, as culled out from material before us, are as follows. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has paid a sum of Rs 87,83,92,587 as interest on borrowings to ABN Amro Bank, Stockholm branch (ABN-S, in short), but has not deducted any tax at source from the same. When Assessing Officer probed the matter further, he found that the assessee had acquired certain supplies of telecommunication equipment form Ericsson, a Sweden based company. This transaction involved large financing, and, as an export promotion measure by the Government of Sweden, export of equipment was facilitated by Swedish Export Credit Guarantee Board, i.e. Exportkreditnamnden (EKN, in short). ABN Amro Bank, Stockholm branch, was willing to enter into a contract for advancing this term loan, but EKN was to guarantee this loan, and the actual financing of the loan was to be done by certain other lenders. The assessee, for the purpose of arranging the borrowings to finance the purchase of equipment, entered into a multilateral agreements. The parties to these agreements were the assessee (the borrower), ABN Amro Bank Stockholm branch (the arranger) and the financial institutions actually funding the loan (the original lenders). These agreements were guaranteed by EKN. The assessee’s case was that since the assessee made the payment of interest to ABN Amro Bank NV, Stockholm branch, and since, in terms of Article 11(3) of the India Sweden Double Taxation Avoidance Agreement ( 229 ITR Statute 11) any interest paid, on borrowings endorsed by EKN, to a Swedish resident is not taxable in India, the assessee was not required to withhold any taxes under section 195. The assessee had also produced a certificate dated 11th September 2002 from the Swedish tax authorities to the effect that ABN Amro Bank NV Branch, Stockholm, is “ a company resident in Sweden within meanings of the convention to avoid double taxation between Sweden and India” and that “the company is registered for taxes as a firm under number 516401-9761”. This plea was rejected by the Assessing Officer on the ground that the ABN Amro Bank NV was in fact a Dutch resident and it had a limited tax liability in Sweden in respect of its Swedish sourced income only. Reliance was also placed on the letter dated 17th April 2008 received from the Swedish Tax Authority, in terms of exchange of information provisions under the Indo Swedish tax treaty, which confirmed that the Stockholm branch of ABN Amro bank is liable to income tax Sweden within the meanings of the tax treaty, i.e. Article 7, and that it not a resident of Sweden as required by Article 4 of the treaty. It appears that the demands under section 201(1) r.w.s 195 were also raised on the assessee which are right now pending in appeal before this Tribunal. It was in this backdrop of facts that the claim of deduction for interest paid to ABN Amro Bank, amounting to Rs 87,83,92,587 was disallowed under section 40(a)(i). The assessee’s objection, raised before the DRP, was also rejected. Aggrieved by the disallowance so made, the assessee is in appeal before us.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

We find that there is no dispute about the fact that the ABN- S, was arranger of the loan and there were also other financial institutions termed as ‘original lenders’ who had actually financed this transaction. The role of the ABN-S, except to the extent of financing of its own funds in this arrangement, was confined to that of a facilitator. We have also noted that it is an undisputed position that subsequently these loan agreements were novated and the original lenders came into direct agreements with the assessee. Under these circumstances, in our considered view, the interest received by the ABN-S, except to the extent received for the financing done by itself, was not entirely in his own right but merely as a conduit for making onwards payments to identified original lenders in a transparent manner. As we take note of these facts, it is also important to bear in mind the fact that the liability under section 201(1) r.w.s. 195, which has been invoked in this case for non deduction of tax at source from payments to ABN-S – which is the bedrock of disallowance impugned in this appeal, is based on taxability of ABN Amro Bank @ 10% (before grossing up) under Article 11(2) of the Indo- Dutch tax treaty and by thus treating ABN Amro Bank as beneficial owner of the interest. It may be noted that under Article 11 of the Indo Dutch tax treaty, interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. Article 11(2), however, provides that such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount, amongst other, in the cases of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financing business. It is thus beyond doubt that the taxation of interest, even according to the revenue authorities, is being done in the hands of the beneficial owner. In these circumstances, the authorities below were clearly in error in treating ABN Amro Bank as recipient and as beneficial owner of the entire interest paid by the assessee remitted to ABN-S In our considered view, even though such interest is remitted to ABN-S, since ABN -S has mainly acted as a conduit, it is to be treated as having been paid to the beneficial owners of such interest i.e. original lenders under the financing arrangement – though through the ABN-S……”

Thus, the Tribunal after examining the facts gave an explicit finding that ABN Amro Bank, Stockholm Branch is an integral part of ABN Amro Bank, Netherlands. ABN Amro, Stockholm Branch cannot be treated as tax resident of Sweden, in terms of Article 4 of Indo-Sweden DTAA, hence, Indo-Sweden DTAA will not apply. The transaction of payment of interest shall have to be examined in light of the provisions of Article 11(2) of Indo-Dutch Tax Treaty. In the backdrop of aforesaiddefinite findings of the Coordinate Bench, the assessee’s plea of ‘bonafide’fornon deduction of tax at source on payment of interest to ABN Amro is to be tested.

The assessee has built its plea of ‘bonafide’ only on the ground that TRC issued by Swedish Tax Authority indicated ABN Amro to be Tax resident of Sweden. The TRC issued by Swedish Tax Authority dated 11.09.2002 is at page 159-160 of the paper book. Except for the said TRC there is no other document on record to show that ABN Amro at any point of time had asked the assessee not to deduct tax at source on the payment of interest or deduct tax at source at concessional rate. The Revenue has been disputing non deduction of tax at source on payment of interest to ABN Amro right through.This is evident from the order passed u/s. 201(1) and 201(1A) of the Act dated 27.06.2008 for AYs 2003-04 to 2008-09. It is elementary that global income of the corporates/banks is taxable with reference to ‘Rule of Residence’. Article 4 of DTAA defines the term ‘Resident’. In case of a person other than individual or to put it in simple words, in case of the corporates, the place of residence is determined with reference to ‘place of effective management’. ABN Amro Bank is headquartered in Netherlands, thus its effective place of management is Netherlands, ABN Amro, Stockholm, Sweden is only a Branch of the Bank. The Branch is a Permanent Establishment of the Bank and an integral part of ABN Amro Netherlands. Therefore, ABN Amro, Stockholm, Sweden fails the test of Resident set out in Article 4(3) of Indo-Sweden DTAA.

The assessee has placed reliance on the decision rendered in the case of Kotak Securities Ltd.(supra) to support its plea of ‘bonafide’. We find that the Hon’ble High Court accepted assessee’s plea of ‘bonafide’ in the peculiar facts of the case, as both the Revenue and the assessee were under the bonafide belief for nearly a decade that tax was not deductible at source on payment of transaction charges. The Hon’ble Court in the backdrop of above fact held that no fault can be attributed to the assessee in non deduction of tax at source as for considerable period of time the Department was also of the view that no tax at source was required to be deducted. Whereas in the instant case it is the assessee alone who has been reiterating ‘bonafide belief’ of non deduction of tax at source based on TRC,whereas the consistent stand of the Department is that the assessee is liable to deduct tax on the interest payment made to ABN Amro. Thus, we find no merit assessee’s plea of ‘bonafide’.

The ground no.2 of Revenue’s appeal is with regard to restricting disallowance of roaming charges paid u/s. 40(a)(ia) of the Act. The assessee in its appeal, has also assailed the findings of CIT(A) on this issue, therefore, ground no. 2 of Revenue’s appeal is decided alongwith the appeal of assessee.

The assessee in appeal has assailed the order of CIT(A), in confirming the disallowance u/s. 40(a)(ia) of the Act on roaming charges of Rs.247,31,57,620/- paid to other telecom operators.

The ld. Counsel for the assessee submits that the short issue in assessee’s appeal is against confirming disallowance of roaming charges paid by the assessee to other telecom operators u/s. 40(a)(ia) of the Act. The ld. Counsel for the assessee submits that the issue has now been laid to rest by Hon’ble Jurisdictional High Court in the case of CIT vs. Tata Teleservices Ltd. in decided on 23.05.2022 and by Hon’ble Karnataka High Court in the case of CIT vs. Vodafone South Ltd. 72 taxmann.com 347. The Hon’ble High Courts have held that payment made by mobile service provider company to another mobile service provider company for utilization of roaming, mobile data and connectivity could not be termed as technical services, therefore, no TDS is deductable on such roaming charges. The Hon’ble Delhi Court in assessee’s own case CIT vs. Bharti Cellular, 319 ITR 139 has held that payment for use of services of other telecom operators via interconnect/port access would not fall within the preview of payments as provided u/s. 194J of the Act, therefore, not liable for deduction of tax at source. To further buttress his arguments, the ld. Counsel for the assessee placed reliance on the decision of Coordinate Bench of the Tribunal in assessee’s own case Bharti Airtel vs. ITO, 67 taxmann.com 223 (Delhi-Trib.).

Per contra, the ld. DR vehemently defended the findings of AO and the order of CIT(A) to the extent disallowance made by the AO u/s 40(a)(ia) of the Act was confirmed. The ld. DR placed reliance on the decision of Madras High Court rendered in the case of CIT vs. Dishnet Wireless Ltd. 165 taxmann.com 416 to contend that roaming charges paid by telecom company to other telecom operators constitutes fee for technical services u/s. 194J of the Act, hence, TDS is liable to be deducted on such payments. The ld. DR prayed for upholding the findings of the AO on this issue.

Both sides heard. The solitary issue raised by the assessee in appeal is with respect to assessee’s obligation to deduct tax at source on the payments made for roaming charges to other telecom operators. During the period relevant to assessment year under appeal, the assessee made payment of Rs.247,31,57,620/- on account of roaming charges to various operators. The AO held that the payments were made for technical services; hence, the assessee was liable to deduct TDS on such payments u/s. 194J of the Act. Since, no TDS was deducted by the assessee on the said payments the AO disallowed the payments invoking the provisions of section 40(a)(ia) of the Act. The assessee carried the issue in appeal before the CIT(A). The First Appellate Authority referred to the decision rendered in the case of Victor Shipping Services P Ltd. in ITA No. 122/2013(All. High Court) and held that the disallowance u/s. 40(a)(ia) of the Act can be made in respect of amount payable and not the amount paid and thus, restricted the disallowance to 30% of the amount payable. The Revenue in its appeal has assailed the findings of the CIT(A) to the extent relief granted on such payments, whereas, the assessee in its appeal has assailed the order of CIT(A) to the extent of disallowance confirmed.

The issue raised in assessee’s appeal and ground no. 2 of appeal by the Department has been considered by Hon’ble High Courts and the Coordinate Benches of the Tribunal in assessee’s own case as well as in the case of various other telecom operators in India. The substantial questions of law for consideration before the Hon’ble Delhi High Court in assessee’s own case were:- “(a) Whether the payments made by the assessee to the MTN/other companies for the services provided through interconnect/port/access/toll were liable for tax deduction at source in view of the provisions of section 194J of the Act. (b) Whether the Id. ITAT erred in holding that the payment for use of services for MTN/other companies via the interconnect/port/access/toll by the assessee would not fall within the purview of payments as provided for under section 194) of the Act, so as to be eligible for tax deduction at source.” The Hon’ble High Court after examining the technicalities and the expression,‘fee for technical services’ as appearing in section 194J of the Act concluded that the interconnect charges/port access charges cannot be regarded as fee for technical services, hence, no TDS was required to be deducted under section 194J of the Act. Thus, both the above questions were answered against the Revenue and in favour of the assessee.

The Hon’ble Karnataka High Court had occasion to consider similar issue in the case of CIT vs. Vodafone South Ltd. (supra). The substantial question of law for consideration before the Hon’ble High Court were: “1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee could not have been deemed as one in default for non-deduction of tax at source on roaming charges paid by it to other service providers when the Assessing Authority has rightly held as assessee in default due to no deduction of TDS as required under Section 194H and 194J of the Income Tax Act, 1961 (for short, 'the Act')? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the data link charges does not require any human intervention and that the charges received or paid on account of this is not technical fees and does not fall under purview of Section 194J of the Act even when the Assessing Authority rightly treated the payment made by Vodafone South Limited to various operators as 'technical services falling within the ambit of the provisions of Section 194J of the Act?” The Hon’ble High Court after considering the decision rendered in the case of CIT vs. Bharti Cellular Ltd. (supra) held as under:- “11. In our view, the contention is not only misconceived, but is on non existent premise, because the subject matter of the present appeals is not roaming services provided by mobile service provider to its subscriber or customer, but the subject matter is utilization of the roaming facility by payment of roaming charges by one mobile service provider Company to another mobile service provider Company. Hence, we do not find that the observations made are of any help to the Revenue.

In our view, the Tribunal is ultimately fact finding authority and has held that the roaming process between participating company cannot be termed as technical services and, therefore, no TDS was deductible. We do not find that any error has been committed by the Tribunal in reaching to the aforesaid conclusion. Apart from the above, the questions are already-covered by the above referred decision of the Delhi High Court, which has been considered by the Tribunal in the impugned decision.

In view of the above, we do not find that any substantial question of law would arise for consideration.” [Emphasized by us] 22. The Hon’ble Delhi High Court in the case of CIT vs. Tata Teleservices Ltd.(supra) again had an occasion to deal with a similar issue.In the said appeal by the Department, the substantial question of law for consideration before the Hon’ble High Courtwas:- "Whether the ITAT was correct in holding that no TDS under Section 194J of the Income Tax Act was required to be deducted by the assessee on payment of interconnect user charges as it could not be categorized as fee for technical services?"

In the result, the findings of CIT(A) on this issue are reversed, ground no. 2 raised in the Department’s appeal is dismissed and appeal of the assessee is allowed.

To sum up, the appeal of Revenue is partly allowed and appeal of the assessee is allowed.