TATA SKY LTD,MUMBAI vs. ASST CIT CIR 7(3), MUMBAI

The facts and circumstances of both the years are identical as admitted by Ld. Senior Counsel for the assessee as well by ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 Ld. CIT-DR. Hence, we will take the facts from AY 2009-10 and decide the issues raised by the assessee in this year. For this, assessee has raised the following grounds in AY 2009-10: - “1. On the facts and in the circumstances of the case and in law, the Hon’ble Commissioner of Income-tax (Appeals) -

On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the disallowance of distribution channel support expenses of Rs. 10,81,11,728 under Section 40(a)(ia) of the Act.”

Briefly stated facts are that the assessee has given discount on the sale of Set-top Boxes and Recharge Coupon Vouchers, which is referred to as a primary discount. As a part of its sale promotion the assessee also provides additional discounts like a festival discount, quantity discount, etc. to the distributors to encourage them to purchase and in turn sell higher quantities of products. This additional discount is referred to as a secondary discount. The secondary discounts are recognized by the Assessee as Sale promotion expense or distribution channel support expenses. The AO during assessment of TDS had passed the order under sections 201 and 201(1A) of the Act for AY 2009-10 & AY 2010- 11, wherein the primary discount and secondary discount were held to be subject to provisions of section 194H of the Act. However, the Mumbai Tribunal has held that the primary discount and secondary discount provided by the assessee is not in the nature of commission and not subject to TDS under section 194H of the 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 Act. In this regard, the Ld. Counsel for the assessee SH JD Mistry stated that the Tribunal has relied on the decisions of the Hon’ble Bombay High Court in the case of Piramal Healthcare Ltd (230 Taxman 505), Qatar Airways Ltd (332 ITR 253) and Intervet India (P.) Ltd (49 taxmann.com 14/3M ITR 238). Ld. Counsel filed a chart before us in regard to the issues decided by the Tribunal, which reads as under: - Summary chart for AY 2009-10 Ground Grounds of appeal

The learned Counsel for the assessee stated that the issue is squarely covered by Tribunal’s decision in to 6926/Mum/2012 in assessee’s own case for AYs 2009-10 to 2012-13 order dated 12.10.2018, wherein, while adjudicating the appeal under section 201(1) and 201(1A) of the Act, whether the assessee is liable for TDS, he stated that the Tribunal vide Para 39 has categorically held that the assessee should not be visited with the liability to deduct TDS under section 201(1) and 201(1A) of the Act. For this he referred to Para 39 and 40 of Tribunal’s order as under: -

When the same was confronted to the learned CIT DR, he could not controvert the above except filing of following case laws: - “1. CIT vs. Idea Cellular Ltd. (2020) 189 Taxman 118 (Delhi)

Idea Cellular Ltd. vs. ACIT (2014) 51 taxmann.com 50 (Hyderabad-Trib.)

We have heard both parties and perused materials on record. After considering the facts in entirety and hearing both the sides, we are of the view that this issue is squarely covered 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 by Tribunal’s decision in assessee’s own case, wherein Tribunal has categorically observed that the assessee was not required to deduct TDS on the amounts of discount on sale of Set-top box and hardware, discount on sale of recharge coupon and vouchers, bonus or credit provided by assessee to subscribers, sales promotion expenses and distribution channel support expenses. Further, the transaction between the company and distributor is on principal to principal basis and all the risk, loss, damages are transferred to distributor on delivery. Further, distributors are free to sale at any price below maximum retail price. In this regard, the assesse has filed the sample copy of invoices for sale of Set Top Box (STB) and other recharge coupons to prove that it is a sale but not services to come within the ambit of the definition of commission as defined under section 194H of the Act. Therefore, we are of the considered view that the assessee is not required to deduct TDS on discount allowed on sale of Set Top Box and hardware, recharge coupons vouchers and disallowance of bonus or credit provided to subscribers including sales promotion expenses. Hence, by following the decision of ITAT in assessee’s own case in the proceeding under section 201(1) and 201(1A) in ITA No. 6923 to 6926/Mum/2012 direct the Assessing Officer to delete the addition towards disallowances under section 40(a)(ia) of the Act on discount of sale of STB & hardware, recharge coupon vouchers & disallowance of bonus or credit provided to subscribers, sales promotion expenses and distribution channel support expenses for failure to deduct TDS u/s 194H of the IT Act, 1961. This issue of assessee’s appeal is allowed. ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 9. Similar is the facts in respect of this ground for AY 2010-11 in ITA No. 3215/Mum/2014 hence, in that year also the disallowance is deleted on this account.

The next issue in AY 2009-10 of assessee’s appeal is against the order of CIT(A) confirming the action of the AO in making disallowance of year end provisions was made by assessee in respect of expenses. For this assessee has raised the following ground No. 6: -

During the relevant AY 2009-10, the assessee made ad- hoc year-end provision of expenses of Rs.56,97,54,762/- in the absence of receipt of the invoices. Since, the assessee had not deducted tax in AY 2009-10 on such year-end provision, the AO has disallowed the same under section 40(a)(ia) of the Act. Now, before us, the learned Counsel argument having regard to the Gujarat High Court's decision in the case of PCIT vs. Sanghi Infrastructure Ltd. (2018) 257 Taxman 371(Guj.)(HC) in of 2018, Ahmedabad Tribunal's decision in the case of Sanghi Infrastructure Ltd. vs. DCIT in ITA No. 2576/Ahd/2012 for Assessment Year 2009-10 vide order dated 30.09.2016 and ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 Mumbai Tribunal's decision in the case of Mahindra & Mahindra Limited vs. DCIT in ITA No.8597/Mum/2010 for Assessment Year 2006-07 vide order dated 06.06.2012 and Aditya Birla Nuvo Ltd. Vs. DCIT in ITA No. 8427/Mum/2010 for Assessment Year 2006- 07 vide order dated 17.09.2014. He argued that there is no obligation on the assessee to deduct tax on the year-end provisions and accordingly, the same should not be disallowed under section 40(a)(ia) of Act for AY 2009-10.

The Learned Counsel further stated that in response to above ground, the Bench expressed that AO may be requested to verify whether TDS is deducted in the subsequent years pursuant to bills received and payments made. In this connection, he pointed out that this exercise has been carried out by the AO, who has verified the same and allowed full amount in AY 2010-11. See paras 5.4.2 & 5.4.3 on page 16 of the assessment order for AY 2010-11 reproduced herein below:

The learned DR on the other hand strongly supported the order of the CIT(A) and submitted that as per the provision of chapter XVII-B of the Act, TDS is required to be deducted either at the time of payment or at the time of credit including even a credit in the suspense account is subject to TDS. Therefore, there is no merit in the argument of the assessee is that TDS is not applicable on year end provisions.

We have heard both the parties, perused the materials available on record and gone through the orders of the lower 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 authorities below including case laws relied upon by the learned counsel for the assessee. The facts borne out from record indicate that the assessee made year-end provisions in respect of sale promotion, legal and professional fees, interest and programming costs as under: - S NO Particulars Section of applicability of TDS 1. Provision for sales 194H 1,97,48,132 promotion 2. Provision for legal & 194J 2,74,55,451 Professional 3. Provisions for 194A 61,77,862 Interest 4. Provisions for 194J 51,58,47,558 programming cost Total 56,92,29,003 15. Further, these provisions were debited to the profit and loss account and not added back to the computation of total income by the assessee. Once, the assessee has claimed these expenses by debiting into profit and loss account, it needs to deduct TDS on such expenditure, even if not credited to respective parties account. Since, the assessee has not deducted TDS, the expenses claimed are liable to be disallowed under section 40(a)(ia) of the Act, because as per the provisions of chapter XVII-B of the Act, TDS needs to be deducted either at the time of payment or at the time of credit to the party account. Further, even in a case where credit into the suspense account is subject to TDS under the provisions of the Act. Therefore, we are of the considered view that there is no merit in the argument of the assessee that TDS provisions are not ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 applicable when year-end provisions are made without crediting to respective parties account. To this extent, we are fully subscribed to the findings recorded by the learned AO as well as learned CIT(A). As regards to the claim of the assessee that in subsequent Financial Year year-end provisions have been either reversed or paid subject to deduction of TDS, does not alter the legal position in so far as disallowance of expenses under section 40(a)(ia) of the Act for non-deduction of Tax at source. The law is very clear as per which TDS is required to be deducted when credit or payment whichever is earlier. As regards various case laws referred by the assessee, we find that all those cases are contrary to the provisions of chapter XVII-B r.w.s.40(a)(ia) of the Act, and hence are not followed. Therefore, considering facts and circumstances of the case, we are of the considered view that there is no error in findings recorded by the lower authorities in disallowing year-end provisions for non-deduction of TDS under respective provisions of the Act. Accordingly, we reject the ground taken by the assessee.

Similar is the facts in respect of this ground for AY 2010- 11 in hence, the ground taken by assessee challenging disallowance of year end provisions u/s 40(a)(ia) of the Act for non-deduction of TDS is rejected.

The next common issue in these two appeals of assessee for AYs 2009-10 & 2010-11, is as regards disallowance of interest expenses. The issue is exactly identical in both the years. Hence, we take following ground for Assessment Year 2009-10 and decide the issue for both the years: - 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 “Disallowance of interest expense under section 36(1)(iii)

Briefly stated, facts are that during the AY 2009-10 and AY 2010-11, the Assessee had Capital Work-in-progress ('WIP') of Rs.51.87 crores and Rs. 55.09 crores respectively, which consisted of:

The learned AR submitted that the learned CIT(A) has erred in confirming disallowance of interest expenses u/s 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 36(1)(iii) of the Act without appreciating the fact that for interest expenses to be disallowed it is necessary that capital borrowed should be for acquisition of asset. The AR further submitted that in this case the assessee has not borrowed any specific loans against capital work in progress and it has utilized its own funds being share capital of Rs. 517.92 crores and Rs.276.87 crores respectively raised during assessment years 2009-10 and 2010-11. In this connection, the assessee stated that the share capital received by it was more than the amount of investment into Capital WIP. Hence, it was argued that no interest bearing funds have been utilized for the purpose of making an investment in Capital WIP. The decision of the Bombay High Court in the case of Reliance Utilities & Power Limited (313 ITR 340) also proceeds on the footing that the cash flow of the relevant year should be considered vis-ã-vis investment made in that year. In response to the said ground, the Bench had requested for a reason for receipt of share capital. In this connection, Ld Counsel for the assessee argued that there is no requirement set out in law to specify the reason for the issue of share capital. Nevertheless, the assessee wishes to point out that it had obtained the license to provide the DTH services from the Central Government of India in 2006. It was explained that the DTH industry is capital intensive and the assessee being in its initial years of operations required significant amount of long term equity funds for its business operations. Accordingly, the assessee has raised share capital of Rs. 517.92 crores in AY 2009-10 & Rs. 276.87 crores in AY ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 2010-11, which were utilized for the purpose of its DTH business.

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with case laws cited by the learned counsel for the assessee. The facts borne out from record indicate that during the AY 2009-10 and AY 2010-11, the Assessee had Capital Work-in-progress ('WIP') of Rs.51.87 crores and Rs. 55.09 crores respectively. Further, assessee has paid huge interest expenditure on various loans. The AO has disallowed proportionate interest expenses debited to the profit and loss account by invoking proviso to section 36(1)(iii) of the Act and held that interest paid on loan availed for purchase of capital asset needs to be capitalized till such period the assessee put the asset to use. There is no doubt with regard to legal position, because interest paid on borrowed capital shall be capitalized to work in progress till such time the capital asset is put to use. But, what is to be seen is whether the assessee has borrowed any fund for acquisition of capital asset or not. In case, no borrowed fund is used for acquisition of asset then question of capitalization of interest does not arise. In this case, on perusal of facts available on record it is very clear that the assessee has not borrowed specific loan for acquiring capital asset. In fact, the assessment order is silent on this aspect. However, the AO has disallowed proportionate interest paid on other loans including loans borrowed for working capital purpose on the ground that the assessee has used interest bearing funds for acquisition of 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 capital asset, without bringing on record any evidence to prove that loan funds have been used for acquisition of capital work in progress. But, fact remains that the assessee has categorically demonstrated with evidences that capital work in progress has been acquired out of its own funds being share capital raised for two assessment years. It is settled position of law that if own funds are used for acquisition of capital assets, then the question of disallowance of interest does not arise. Further, if there are funds available, both interest free and interest bearing, then a presumption can be made that the investments were made out of interest free funds available with the company, if the interest free funds are sufficient to meet the investment as held by the Hon’ble Bombay High Court in the case of Reliance Utilities and Power (313 ITR 340). In this case, on perusal of facts we find that the assessee has filed necessary evidences to prove availability of own funds which is sufficient to cover investment in capital work in progress. Therefore, we are of considered view that the AO was erred in disallowing proportionate interest expenses u/s 36(1)(iii) of the Act. Hence, we direct the AO to delete disallowances of interest for both assessment years.

The only common issue in these two appeals of Revenue in & 3972/Mum/2014 for AYs 2009-10 and 2010-11 respectively, is as regards to the order of CIT(A) deleting the disallowance under section 14A of the Act amounting to ₹90,67,986/-. For this, Revenue has raised exactly identical grounds in both Assessment Years the i.e. AYs 2009-10 and ITA Nos. 3214, 3215,3971 & 3972/Mum/2014 Tata Sky Limited; AYs 09-10 & 10-11 2010-11, hence, we will take the grounds from Assessment Year 2009-10 and will decide the issue. For this, assessee has raised the following grounds: - “(i) the learned CIT(A) has erred on facts and in law in deleting the disallowance under section 14A of the Act of ₹90,67,986/- made by the Assessing Officer without properly appreciating the factual and legal matrix of the case as clearly brought out by the Assessing Officer.