COMMISSIONER OF INCOME TAX vs. HIMANSHU V. SHAH

O/TAXAP/1098/2005 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1098 of 2005 TO TAX APPEAL NO. 1102 of 2005 With TAX APPEAL NO. 1878 of 2005 With TAX APPEAL NO. 131 of 2010 With TAX APPEAL NO. 487 of 2013 With TAX APPEAL NO. 1217 of 2006 With TAX APPEAL NO. 321 of 2007 with TAX APPEAL NO. 223 of 2010 TO TAX APPEAL NO. 225 of 2010

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE KS JHAVERI

and HONOURABLE MR.JUSTICE K.J.THAKER

================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any Page 1 of 7

O/TAXAP/1098/2005 JUDGMENT order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX....Appellant(s) Versus HIMANSHU V. SHAH....Opponent(s) ================================================================ Appearance: MR.VARUN K.PATEL & MR NITIN MEHTA, ADVOCATES for the Appellant(s) No. 1 MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER

Date : 16/12/2014

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench (hereinafter referred to as ‘the Tribunal’), the revenue has preferred the present Tax Appeals assailing the following orders Tax Appeal No. Date of Tribunal’s order ITA No. Assessment Year 1098/2006 30.11.2004 830/Ahd/2004 1997-98 1099/2006 30.11.2004 831/Ahd/2004 1999-00 1100/2006 30.11.2004 832/Ahd/2004 2000-01 1101/2006 30.11.2004 1219/Ahd/2004 1998-99 1102/2006 30.11.2004 1859/Ahd/2004 2001-02 Page 2 of 7

O/TAXAP/1098/2005 JUDGMENT 1878/2005 24.05.2005 3349/Ahd/2004 1999-00 487/2013 30.11.2012 726/Ahd/2010 2007-08 223/2010 16.03.2009 155/Ahd/2009 2002-03 224/2010 16.03.2009 156/Ahd/2009 2004-05 225/2010 16.03.2009 157/Ahd/2009 2005-06 131/2010 10/08/09 1912/Ahd/2009 2006-07 1217/2006 24.05.2005 3350/Ahd/2004 2000-01 321/2007 31.07.2006 1363/Ahd/2006 2001-02 1.1 These matters were admitted by this Court for consideration of the substantial question of law as to whether the Appellate Tribunal is right in law and on facts in holding that the assessees who are franchisees of BSNL and who have been permitted to install, maintain and operate in-dialling PABX under franchisee to support the department, can be treated to have provided “basic telephone services” entitling them for deduction u/s 80IA?” 2. The gist of the facts in these appeals is that the assessees who carry on business of rendering services as Pvt. Telephone Exchange claimed deduction u/s 80IA of the Act while filing return of income. The Assessing Officer found that the basic services are provided by the dept of Telecommunication and not by the assessees and therefore the assessees cannot be termed as dept of telecommunications. 3. On appeal before the Tribunal, pursuant to the orders passed by CIT(A), vide impugned orders, Tribunal held in favour of the assessees. Being aggrieved and dissatisfied with the impugned orders passed by the Tribunal, the revenue has preferred the present Tax Appeals for consideration of the Page 3 of 7

O/TAXAP/1098/2005 JUDGMENT aforesaid substantial question of law. 4. Mr. Varun Patel, learned advocate appearing for the revenue has drawn our attention to the definition of “Basic Telephone Service” as provided in the notification dated 01.12.2010 issued by the Telecom Regulatory Authority of India which reads as under: ““Basic Telephone Service” covers collection, carriage, transmission and delivery of voice or non- voice messages over licensee’s Public Switched Telephone Network in the licensed service area and includes provision of all types of services except for those requiring a separate licence” 4.1 Mr. Patel submitted that the Tribunal committed an error in not appreciating the fact that the assessees are only franchisees providing franchisee service whereas the basic services are rendered by department of telecommunications. He submitted that since the assessees do not provide basic services but carry out franchisee services, they are not eligible for deduction under section 80IA of the Act. 5. Mr. Nitin Mehta, learned advocate appearing for the revenue adopted the submissions made by Mr. Patel and further submitted that the franchisees are given to support the department which provides the basic telephone service and therefore the assessees cannot be eligible for deduction u/s 80IA of the Act. He has drawn our attention to the terms and conditions of the license given by the Ahmedabad Telecom District, more particularly clause 13 and submitted that the Assessing Officer was just in arriving at the Page 4 of 7

O/TAXAP/1098/2005 JUDGMENT conclusion that the assessees do not provide basic telephone services. 6. Mr. S.N. Soparkar, learned Senior Counsel appearing with Mr. B.S. Soparkar, learned advocate for the assessees supported the impugned orders passed by the Tribunal. He has drawn our attention to the clauses of the license agreement and contended that from a perusal of the very terms and conditions of the license agreement itself, it is clear that merely because the services are being provided in association with BSNL, it does not mean that the assessees are not providing basic telephone services. He submitted that the assessees have invested huge amounts for the infrastructure facility for such EPABX system. 7. Having heard learned advocates appearing on behalf of the assessees and the revenue and the question posed for consideration before us, we are of the opinion that the Tribunal is justified in directing the Assessing Officer to allow deduction u/s 80IA of the Act. The Tribunal has relied upon the decision of ITAT, Mumbai Bench in ITA No. 4355/Mum/03 for the assessment year 1998-99 rendered on 12.09.2003 as the terms and conditions of the assessees in the cases before it as well as that of the assessee in ITA No. 4355/Mum/03 were identical. The relevant portion of the order dated 12.09.2003 relied upon the Tribunal is reproduced hereunder: "From the perusal of clause-1, it is evident that the EPABX owned by the assessee will provide direct in dialing services through the PSTN of the MTNL. Thus, the services provided by the assessee would come

within

the

purview

basic Page 5 of 7

O/TAXAP/1098/2005 JUDGMENT telecommunication services as per the definition u/s. 2(c) of the Telecommunication Tarrif Order, 1999. From the reading of above clauses of the agreement, it is evident that the assessee is not providing the services as a PCO. From clause 24 of the agreement, it is evident that the STD/PCO can be provided by the assessee i.e. one of the customers of the assessee, who can run the STD/PCO and to such STD/PCO commission will be paid by the assessee. Similarly, it is clear that the services provided by the assessee are not only the network of trunking as mentioned by the Ld. CIT (A). As per clause 3 of the agreement, the assessee is responsible for installation, networking operation and maintenance of EPABX equipments, user terminal equipments, connected cables etc. As per clause 4, the assessee is also responsible for treatment of 5 ITA No 726Ahd/2010 A.Yr.. 2007-08 compliances, issue of bills, collection of bills etc. Therefore, in our opinion the assessee is providing basic telephone services through in association with MTNL. However, merely because the services are being provided in association with MTNL does not mean the assessee is not providing the basic telecommunication services. In view of the above, we hold that the assessee is providing the basic telecommunication services and accordingly, we direct the A.O. to allow deduction u/s. 80IA. 7.1 We are in complete agreement with the findings of fact arrived at by the Tribunal. The Tribunal has rightly relied upon the order dated 12.09.2003 passed by the Mumbai Bench. The assessees have made huge investment in setting up and maintaining the entire PABX. In view of the agreement between the parties which has been minutely considered by this Court, the services provided by the assessees shall fall within the definition of ‘basic telephone service’ and therefore they shall be entitled to deduction u/s 80IA of the Act. The Tribunal has not committed any error in reversing the orders passed by the Assessing Officer. The Page 6 of 7

O/TAXAP/1098/2005 JUDGMENT Tribunal had examined all the aspects of the case and concluded that the assessees were providing basic telecommunication service and were entitled to deduction under section 80IA(4)(ii). 8. In view of the above, we answer the question raised in the present appeals in the affirmative i.e. in favour of the assessees and against the revenue. We hold that the Tribunal is right in law and on facts in holding that the assessees who are franchisees of BSNL and who have been permitted to install, maintain and operate in-dialling PABX under franchisee to support the department, can be treated to have provided “basic telephone services” entitling them for deduction u/s 80IA. Consequently, the impugned orders passed by the Tribunal are confirmed. Tax Appeals are accordingly dismissed. (K.S.JHAVERI, J.) (K.J.THAKER, J) divya Page 7 of 7