BHARAT SANCHAR NIGAM LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

In the Income-Tax Appellate Tribunal, Delhi Bench ‘A’, New Delhi Before : Shri Amit Shukla, Judicial Member And Shri L.P. Sahu, Accountant Member ITA No. 920/Del./2017 Assessment Year: 2009-10 Bharat Sanchar Nigam Ltd., vs. Addl. CIT, Range -4, Taxation Sector, 1st floor, Bharat New Delhi. Sanchar Bhawan, Janpath, New Delhi. (PAN- AABCB5576G) (Appellant) (Respondent) Appellant by Sh. Tarandeep Singh, C.A. Respondent by Smt. Aparna Karan, CIT/DR

Date of Hearing 16.08.2017 Date of Pronouncement 25.10.2017

ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)-35, New Delhi dated 08.11.2016 for the assessment year 2009-10 on the following grounds :- “1. That on the facts and circumstances of the case and in law, the impugned order passed by the learned Commissioner of Income Tax (Appeals) – 35, New Delhi [‘learned CIT(A)’] under section 250 of the Income tax Act, 1961 (‘Act’) is a vitiated order having been passed in violation of principals of natural justice and is otherwise arbitrary and is thus bad in law and void ab-initio. Validity of re-opening of the assessment proceedings :- 2. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the validity of the re-

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assessment proceedings under section 147 of the Act initiated by the learned Additional Commissioner of Income-tax, Range-4, New Delhi (‘learned AO’) without appreciating the facts of the case of the Appellant. 3. That on the facts and circumstances of the case and in law, the learned CIT(A) has, without appreciating the facts of the case erred in alleging that there is omission and failure on part of the Appellant to disclose fully and truly all the material facts leading to escapement of income chargeable to tax. Addition on account of discount extended to prepaid distributors 4. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs.631,71,72,727/- made by the learned AO under the provisions of Section 40(a)(ia) of the Act by alleging that the relationship between the Appellant and its distributors / franchises is that of principal – agent and accordingly, the discounts extended by the Appellant to its distributors / franchises are in the nature of ‘commission’, liable for deduction of taxes under Section 194H of the Act. 5. Without prejudice to the Ground 4 above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that certain portion of the prepaid sales of the Appellant are effected through its own ‘Customer Service Centres’ and therefore, the discount offered on the portion of such sales cannot be treated as ‘commission’ liable for deduction of tax at source under the provisions of Section 194H of the Act. 6. Without prejudice to the Grounds 4 to 5 above, the learned CIT(A) has erred in confirming the disallowance, without appreciating the fact that all distributors / franchisees are Indian residents and accordingly, no disallowance under Section 40(a)(ia) of the Act can be made, where conditions prescribed under second proviso to Section 40(a)(ia) of the Act inserted vide Finance Act, 2012 (curative in nature are fulfilled. Addition on account of IUC charges paid to foreign / non-resident telecom operators 7. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs.57,78,92,080/-

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made by the learned AO under the provisions of Section 40(a)(ia) of the Act on account of alleged non-deduction of TDS on IUC / international roaming charges payable to the Non-resident Telecom Operators (‘NTOs’) by treating the same to be in the nature of ‘royalty under the provisions of Section 9(i)(vi) of the Act and the applicable Double Taxation Avoidance Agreements (‘DTAA’). 8. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the aforesaid disallowance by alternatively alleging the same to be in the nature of ‘fees for technical services’ under the provisions of Section 9(i)(vii) of the Act and the applicable DTAAs. 9. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the aforesaid disallowance without appreciating that the provisions of Section 40(a)(ia) are applicable only in case of payments made to residents. Penalty proceedings under section 271(1)(c) of the Act 10. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not directing the learned AO to drop the penalty proceedings under Section 271(1)(c) of the Act.”

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(iii) Disallowance u/s 40(a)(i) of Rs.57,78,92,080/- on payment of IUC Charges to International Telecom Operators.

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amounting to Rs.260,14,00,000/-. The return of income field was processed u/s 143(1) of the Act on 29.04.2010. Subsequently order u/s 143(3) of the Act was passed on 02.11.2011 at total income of Rs.5948,96,78,618/- as per normal provisions of IT Act. Tax was determined on Income under the normal provisions of the IT Act as the same was more than 10% of the book profits as determined under the provisions of section 115JB of the IT Act. From the perusal of assessment records and the Annual Report submitted, it was observed that the assessee company has reported in Segmental Information represented in a chart from titled “Segment Reporting” being part of its Annual Report at point 16 on page 51, service revenue on prepaid products on the “INCOME FROM SERVICES” at Rs.111,83,55,00,000/-. During the course of assessment proceedings for the A.Y. 2011-12, it was observed from the Annual Report of the Assessee that it has reported in Segment Reporting which is part of its ‘Annual Report at point 16 on page 77, service revenue on prepaid products on the ‘INCOME FROM SERVICES’ at Rs.10695,60,00,000/- on which the assessee company is incurring expending on account of discount to prepaid distributors and franchisee. The assessee company has shown this figure after netting off the discounted amount. The company was asked to provide the details of discount given to distributors / franchisee but the same was not provided. Further, it was assumed that the assessee company M/s BSNL is providing discount @ 5%. According the discount amount was calculated @ 5% which was found to be in the nature of commission expenses on which TDS was liable to be made u/s 194H of the Act. However, on verification, it was observed that no TDS deduction has been made by the assessee and the assessee company was an assessee in default as per the provisions of chapter XVII of the Act. Taking note of the same, the assessee was asked to show cause as to why this amount should not be disallowed u/s 40(a)(ia) of the Act. The assessee was further asked to explain as under :- “Kindly confirm that the revenues on account of sale of prepaid products such as SIMS, Recharge Coupons etc. 9see para 2(e) schedule T of accounting policies) is being recognized in the accounts at the customer sale price or on distributor sale price such that the distributor margin is earned by the distributor on transfer of such recharge product to the subscriber. In such a scenario in terms of the case of Hon’ble Delhi High Court in the matter of Idea Cellular, TDS u/s 194H will be applicable on such margin to the distributor. You are requested to confirm the company’s position and in case the tax has not been withheld during the year, why not

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such expense be disallowed u/s 40(a)(ia) of the IT Act. Kindly produce relevant books of accounts in original for supporting the replies / arguments.” The assessee vide written submission 26.03.2014 submitted that tax is being duly deducted u/s 194J and section 194H respectively on the above items as and where applicable. Further, the assessee submitted as under :- “It has been explained before that the company follows a decentralized Accounting system and procedure spread across more than 700 PAU’s. All primary records and books of account are therefore maintained there and further at the Circle / SSA or PAU level only. These unit accounts are subject to Statutory, Internal and Tax Audits by independent Auditors. Disallowances u/s 40(a)(ia) are reported by them in their Tax Audit reports and complied at H.O. level. During the year, we have voluntarily disallowed Rs.103.50 crores u/s 40(a)(ia) at line item C 2 in the computation of income, based on the Tax Audit Reports.” In view of the above reply, it is ascertained that the discounts given by the assessee to its distributors and franchisee was in the nature of commission and was liable to TDS u/s 194H for the allowability of the same as revenue expenditure. Since the assessee company failed to discharge the onus cast on it u/s 194H r.w.s. 40(a)(ia) an amount of Rs.534,78,00,000/- representing the dealers / distributors and franchisee margin the form of free airline was disallowed u/s 40(a)(ia) of the Act and was added to the income of the assessee company. The assessee company has shown during A.Y. 2009-10 service revenue on prepaid products on the ‘INCOME FROM SERVICES” At Rs.11,83,55,00,000/- on which the assessee company is incurring expenditure on account of discount to prepaid distributors and franchisee. The said amount is after netting off the discounted amount. Assuming that discount is provided @ 5%. Hence calculating the amount of discount at Rs.111,83,55,00,000/- @ 5% comes to Rs.559,17,75,000/- representing the dealers / distributors and franchisee margin in the form of free airtime on which no TDS deduction was made by the assessee and the assessee company is an assessee in default as per the provisions of chapter XVII of the Act and the same deserves to be disallowed u/s 40(a)(ia) of the Act. Reference is also invited to the judgement of Hon’ble Delhi high Court in the case of Idea Cellullar Limited (2010) 325 ITR 148 wherein the issue is settled in favor of the Revenue. The Hon’ble Delhi High Court held that

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“the relationship between the case, and the distributors was held to be one of principal to agent. It was further held that the discounts offered to distributors were in the nature of commission and thereby liable to TDS u/s 194H of the act. In view of above, I have reason to believes that Rs. 559,17,75,000/- representing the dealers/distributors and franchisee margin in the form of free airtime on which no TDS deduction was made by the assessee and the assessee company is an assessee in default as per the provisions of chapter XVII of the Act, so allowed, resulted into income escaping assessment within the meaning of section 147 of the I.T. Act and it is a fit case for initiating proceedings u/s 147 of the I.T. Act and for issue of notice u/s 148 of the I.T. Act.”

3.1 Vide written objections dated 20th February, 2015 appellant raised objections against assumption of jurisdiction to reassess. Ld. AO did not find any merit in the objections so raised and vide order dated 9th March, 2015 he disposed off the objections in accordance with law laid down by Hon’ble Apex Court in case of GKN Driveshafts India Ltd., 259 ITR 19 (SC). Thereafter the AO proceeded to pass the reassessment order. 4. During the course of hearing before us Ld. AR strongly objected to the action of assumption of jurisdiction by issuance of notice u/s 148 dated 31st March, 2014. In this regard, it was submitted by the Ld. AR that there was no omission on the part of the appellant to disclose fully and truly all material facts necessary for its assessment during the course of original assessment proceedings since all material facts like audited financial statements, tax audit report were specifically called upon and furnished before the AO during the course of proceedings u/s 143(3) of the Act. It was further submitted by the ld. AR that since the order u/s 143(3) was passed after an in depth examination of the facts of the case the present reassessment proceedings are bad in law as it tantamount to a case of change of opinion.

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distinguishable on the facts of the present case. Hon’ble jurisdictional High Court in the case of Consolidated Photo (supra) has observed as under : “The principal that a mere change of opinion cannot be a basis for reopening completed assessments would be applicable only to situation where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important is whether the Assessing Officer had based on the material available to him taken a view. If he had not done so, the proposed reopening cannot be assailed on the ground that the same is based only on a change of opinion.”

6.1 This decision is squarely applicable in the instant case, as the Assessing Officer has not addressed the relevant issue in the original assessment order nor formed any opinion nor took any express decision thereupon. Moreover, we observe that the reassessment proceedings in the instant case got triggered on the basis of findings recorded by the Ld. AO in the assessment proceedings for the subsequent year i.e., AY 2011-12, vis a vis issue in dispute. This in our opinion would constitute to a material relevant for assumption of jurisdiction u/s 147. Support in this regard can safely be drawn from the decision of Hon’ble Bombay High Court in the case of Multiscreen Media Pvt. Ltd. vs. UOI reported in 324 ITR 54 (Bom) wherein it is held that reassessment proceedings on the basis of subsequent assessment is valid. It was also submitted before us that there is no failure or omission on part of the appellant to disclose material relevant during the course of original assessment proceedings. We find that this is totally irrelevant. Proviso to section 147 is not applicable in the instant case since action u/s 147 has been

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initiated by issuance of notice u/s 148 dated 31st March, 2014 i.e., before expiry of 4 years from the end of the relevant assessment year. Therefore, respectfully following the decisions stated above, we sustain the conclusion reached by the ld. CIT(A) on this count. Accordingly, Ground Nos. 2 and 3 of the Appeal are dismissed. 7. Now coming to the merits of the case. In ground Nos.4 to 6 the appellant is aggrieved by the action of AO in making a disallowance u/s 40(a)(ia) of Rs.631,71,72,727/-. In this regard, it is noted by the Ld. AO that for the year under consideration in the profits and loss account appellant has shown income from prepaid services at a net figure after reducing a discount given by it to the distributors / franchisees of its prepaid Sim Card and Recharge Vouchers. During course of reassessment Ld. AO directed the appellant to submit as to why said discount should not be treated as a commission paid to distributors / franchisees on which tax was deductible as per provisions of section 194H of the Act. In reply it was submitted by the appellant that the distributor margin is in nature of “discount” and not “commission” which would triger applicability of section 194H. It was further submitted that the relationship between BSNL and Distributors / Franchisees was on principal to principal basis and hence TDS was not deductible. In support of its claim the appellant relied upon the decision of Karnataka High Court in the case of Bharti Airtel Ltd. reported in 372 ITR 33 (Kar). The Ld. AO, however, was not convinced by the submissions made by the appellant and in his order of assessment he rejected the claim of the assessee by observing as under :- “The submissions of the assessee have been considered and are discussed here under :- (i) The assessee’s contention that the distributor margin is in the nature of ‘discount’ and not commission which would attract section 194H is not acceptable since in subsequent years, the assessee itself had issued

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circular (H.O. Instructions No.772/4.3.11 & 774/14.3.11) directing deduction of tax in terms of section 194H on the discount given to distributors / franchisees. In the submission filed on 17/3/2015 during the course of assessment proceedings for A.Y.2012-13 the assessee contended that instructions had been issued to the field formations regarding strict adherence to TDS u/s 194H on payment under discount scheme to adherence to TDS u/s 194H on payment under discount scheme to Franchisees / Distributors. The assessee had further submitted that any cases of non-compliance are duly reported by the Branch Tax Auditors u/s 44AB and taken into account for voluntary disallowance u/s 40(a)(ia) while framing the computation of income at the central level. Thus the assessee itself accepted the factum and voluntarily deducted the TDS u/s 194H on the discount in the subsequent year. Thus, taking the cognizance of this fact and consistency, it is clear that for A.Y.2007-08, the assessee is under default for not deducting the TDS u/s 194H of the income tax act, 1961 on the discount offered to the franchisees / distributors. (ii) The decision of the Karnataka High Court cited above has not been accepted by the Department and SLP has been filed. (iii) The above position is also vindicated by the decision of Hon’ble ITAT Delhi Bench in the assessee’s own case in BSNL vs. ITO (TDS & Survey) in ITA No.258, 259 & 260/Del/2011. In that case, the AO (TDS) had raised demand u/s 201/201(1A) r.w.s. 194H of the I.T. Act on the assessee. The ITAT referred to the following observation made by the Co-ordinate Bench in the case of ICICI Bank Limited vs. DCIT, 156 TTJ 569; “…The onus is on the revenue to demonstrate that the taxes have not been recovered from the person who had the primarily liability to pay tax, and it is only when the primary liability is not discharged that vicarious recovery liability can invoked. Once all the details of the persons to whom payments have been made are on record, it is for the Assessing Officer, who has all the powers to requisition the information from such payers and from the income tax authorities to ascertain whether or not taxes have been paid by the persons in receipt of the amounts from which taxes have not been withheld. …………………… The provisions regarding interest in delay in depositing the taxes are set out in Section 201(1). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned, these provisions are set out in Section 201(1) which seeks to make good any loss to revenue on account of lapse by

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the assessee tax deductor. However, the question of making the loss of revenue arise only when there is indeed a loss of revenue can be there only when recipient of income has not paid tax.” The ITAT observed that there is no finding by the AO to the effect that the recipient of the money i.e., franchisees have not paid the taxes on income embedded in the amounts in question. It held that for raising demand u/s 201/201(1A) r.w.s. 194H, the AO had to prove that the principal liability (of payment of tax by the distributor / franchisees) remained undischarged and therefore sent the matter back to the file to the AO for reconsideration. Perusal of the above shows that, in fact, the wrong ITAT’s order reaffirms that the assessee was under an obligation to deduct tax at source u/s 194H in respect of the discount so allowed to the franchisees. (iv) No evidence regarding sale effected through BSNL’S own Customers Services Centers (CSCs) has been furnished. (v) As per the sales and Distribution Policy, 2006 of the assessee company, discount of 6.5% is prescribed for prepaid recharge coupons. 8.4 Further, the issue has been settled in favour of the Revenue by the jurisdictional High Court of Delhi in the case of Idea Cellular Limited (2010) 325 ITR 0148 wherein it was held that the relationship between the assessee, who was also a telecom service provider like the assessee in the present case, and the distributors was one of Principal-to-Agent. It was further held that the discounts offered to distributors were in the nature of commission and thereby liable to TDS u/s 194H of the Act. 8.5 In view of the above, it is held that as the assessee has failed to deduct tax at source, in terms of provisions of section 194H of the I.T. Act, 1961 from the discount given to the distributors / franchisees, the same is disallowable u/s 40(a)(ia). During the course of assessment proceedings for A.Y.12-13, the assessee furnished copy of its Sales and Distribution Policy, 2006. As per this policy, discount of 6.5% is prescribed for prepaid recharge coupons.”

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“4.4.22. The contention of the appellant that the Delhi High Court judgment in the case of Idea Cellular Ltd., 325 ITR 145 (Del) is not applicable to the present case, is also not acceptable as in view of analysis and discussions in the preceding paras by me. I hold that the facts of the present case are very much similar to that of the case of Idea Cellular. 4.4.23. After considering the arguments put forth by the appellant during appellate proceedings and after perusing the provision of the agreement, it leaves no doubt whatsoever that the relationship between BSNL and Franchisees is that of a principal and agent. I have also considered the judgment of Delhi, Kolkata & Kerala High Court in the case of Idea Cellular Ltd. 325 ITR 148 (Del), Bharti Cellular Ltd. vs. ACIT 244 CTR 185 (Cal) and Vodafone Esaar Cellular Ltd. vs. ACIT (2009) 317 ITR (AT) 234 (Cochin), I hold that the discounts allowed and incentives given by the appellant to its Franchisees on sale of its products is in nature of commission and the same attracts the provision of section 194H of the Act. During appellate proceedings the ld. AR has quoted the judgment of Karnataka High Court which is in favour of appellant. It would be pertinent to state that the said judgment has not been accepted by Revenue and the judicial pronouncement has been contended before the Supreme Court. The SLP proposed by Revenue has been admitted by the Apex Court which proves that the issue is alive and debatable. Considering all these facts, Ground No.3 is dismissed.”

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In support of the above contentions ld. AR filed a written note summarizing the contents of franchisee agreement as under:

S. Submission Agreement Clause Page No. No. 1. Explicit The BSNL has the right to terminate the Pg 171 understanding agreement forthwith in case it comes to cl 19.1 that there is no conclusion that the Franchisee has violated any of Agency the clauses of the agreement which has resulted in or could result in loss to the BSNL or may cause damage to the BSNL services being provided by the BSNL. The decision of the BSNL will be final in this regard. The Franchisee, its employees, agents and Pg 173 representatives shall provide services as an cl 24.1 independent “entity” on a exclusive basis and nothing contained herein shall be deemed to create any partnership, joint venture, employment or relationship of principal and agent between the parties hereto or between BSNL and the Franchisee representatives and employees or to provide service with any right, power or Authority, or to provide the Franchisee with any right, power or authority, whether express or implied to create any such duty or obligation. The Franchisee’s / Franchisees’ personnel Pg 173 employees, agents or representatives have no cl 24.2 authority and / or right to bind BSNL in any manner. It is clarified that the personnel employed by the Franchisee shall be the sole employees of the Franchisee and BSNL shall have no financial or statutory responsibility towards them.

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The Franchisee represents and warrants that no Pg 173 officer, director, employees of BSNL or immediate cl 25 family member thereof (“collectively, BSNL, personnel”) has received or will receive anything of value of any kind from the Franchisee or its officers, directors, employees or agents in connection with this Agreement and that no BSNL personnel have a business relationship of any kind with the Franchisee or its officers. The Franchisee, its agents and employees will not Pg 175 be the legal representatives, employees or agents cl 27.2 of the BSNL for any purpose and have no right or authority to incur any expenses on behalf of the BSNL or to create, in writing or otherwise, obligations of any kind, express or implied, in the name of or on behalf of BSNL excluding the rights and duties under this Agreement. The Franchisee shall make no representations inconsistent with the foregoing, but so long as this Agreement remains in force, the Franchisee shall be entitled to describe itself as the “Authorised Franchisee” of BSNL for the services in the territory. As long as this agreement remains in force but Page not thereafter, subject to clause 15.2 above, the 170 Franchisee may identify itself as an Authorized Para Franchisee of the BSNL, but shall not use the 15.3 brand names, logos or trademarks of the BSNL as part of its corporate or partnership name or otherwise indicate to the public that it is an affiliate or agent of the BSNL. 2. Sale of The merchandise sold to the franchisee as Pg 169 products by provided in the agreement shall be stored and cl 11.4 BSNL to wherever necessary displayed in its outlet by the Franchisee Franchisee. BSNL will not be a party between Franchisee to Pg 169 Franchisee, Franchisee to Sub- Franchisee or to cl 13.3 retailers or Franchisee’s dispute of any nature

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whatsoever it may be. The merchandise for storage and sale will be Pg 169 collected by the Franchisee from the BSNL’s cl 13.4 designated place against payment by cheque / pay order / cash. In special circumstances, the goods may be delivered by the BSNL also. All expenses incurred in the storage, cartage, transport and outlet expenses shall be borne by the Franchisee. 3. Franchisee to The BSNL may from time to time require the Pg 167 bear Risk and Franchisee to carry out customer satisfaction cl 9.2 Rewards vis-à- survey as decided by the BSNL, the cost Thereof, if vis unsold any, be borne by the Franchisee. stock The Franchisee shall, if so desired by BSNL, make Pg 168 alterations, modifications and install such cl 9.6 furniture, fixtures and air-conditioning equipments, introduce customer care hardware including computer with UPS, Modem, etc. as required and mutually agreed upon, the cost of such alterations, renovation shall be borne by the Franchisee. The merchandise will be sold at the premises by Pg 168 the Franchisee and it is clarified : (a) That the Cl 9.7 Franchisee shall not have any authority to store, sell or transfer or in any way dispose of the merchandise except as provided in this Agreement. (b) That the BSNL shall not be liable for the quality and genuineness of the goods sold by the Franchisee, (c) That the BSNL shall not be liable for any loss, pilferage or damage to the goods stored and sold at the premises and the merchandise shall be the entire responsibility of the Franchisee unless the same is occasioned by willful neglect or default of the BSNL, (d) That it shall be the responsibility of the Franchisee to effect the sales through proper invoices detailing the material particulars of the BSNL phones

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including the IMEI number. The Franchisee shall keep the BSNL indemnified against claims regarding unauthorized handsets sold or alleged to have been sold from the Franchisee / Franchisee’s outlet (s), being raised against the BSNL by any third party. The Franchisee and any person(s) assigned by the Pg 170 Franchisee to provide services as hereunder shall cl 14.1 in consultations with local authorities may get any state and local taxes including sales tax, etc. from the customer. The BSNL shall have no liability or obligation for any state or local income tax liability of the Franchisee or any person assigned by the Franchisee. However, nothing contained herein shall prevent the BSNL from deducting tax at source as required by law and regulation from payment to the Franchisee. The liability to insure the stocks in the outlet(s) Pg 173 and in the possession of the Franchisee will be of cl 22 the Franchisee and the liability for any loss or damage due to any fire, burglary, theft etc. will be that of the Franchisee. The Franchisee may publish advertisement in Pg 174 newspapers at his own cost with the prior cl 26.3 approval from the BSNL for text matter and design. 4. Effect of The Franchisee shall at its own expense return to Pg 172 Termination the BSNL promptly all information, cl 20.5 documentation and materials to the BSNL which relate to the services and / or software and future marketing plans of future models of the BSNL together with any copies thereof or any other documents entrusted to the Franchisee by the BSNL. On termination of this Agreement howsoever Pg 172 occasioned, the Franchisee shall deliver to the cl 20.6 BSNL, all papers including the unused

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registration forms, partially used and unused books, marketing / publicity and display material given free of cost and documents etc. which may have come to the possession or custody. On the termination of the agreement for any Pg 172 cause whatsoever, all rights and privileges cl 20.7 granted to the Franchisee shall immediately terminate. The Franchisee and all persons claiming under it shall immediately cease and desist from the use of the trade name BSNL and any other sign, slogan, symbol or other distinguishing characteristic owned by or associated with BSNL’s services. The Franchisee shall immediately cease carrying on any business permitted under the agreement. Ld AR also submitted a note highlighting the factual inaccuracies committed by the ld. CIT(A) as under :- “3. It is submitted that CIT(A) at page 12 to 15 of its order has drawn erroneous inferences from the above Franchisee Agreement and has wrongly recorded a conclusion that there existed a Principal – Agency relationship in the instant case. It is submitted that relevant clause of the agreement do not support the conclusions so drawn by CIT(A). Broadly it is submitted that : (i) At page 12, para 4.4.11(iii) CIT(A) has erred in concluding that as per clause 15.1 of the agreement “full legal rights and interest in all the products and services shall remain with BSNL” – it is submitted that clause 15.1 does not state this. Clause 15.1 merely clarifies that for all purposes Brand Name, logo and Trademark shall remain exclusive property of BSNL. (ii) At page 12, para 4.4.11(v) CIT(A) has erred in concluding that as per clauses 18, 19 & 20 “BSNL reserves exclusive right to bring changes in terms and condition of the agreement with franchisee”. – It is submitted that clause 18 deals with Software and recognizes BSNL’s IPR rights therein. Clause 19 deals with Termination and clause 20 deals with consequences of Termination.

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(iii) At page 13, para 4.4.11(x) CIT(A) has concluded that “BSNL shall have the exclusive right to terminate the business arrangement by written notices to Franchisees and then the Franchisees shall return to BSNL all information of customers/subscribers and other material pertaining to products and services” – It is submitted that as per clause 19.3 either party has a right to terminate the arrangement. As per the agreement upon termination there is no obligation upon BSNL to receive back the unsold goods lying with the Franchisee. Obligations of franchisee are clearly stated in clauses 20.6 and 20.7. (iv) At page 13, para 4.4.13 the CIT(A) has erred in concluding that “the ownership / legal and equitable title and interest in sim cards / recharge vouchers remains with the appellant. The distributers are supposed the store the sim cards / recharge coupons in such a way as to clearly indicate at all times that these are owned by BSNL and is not allowed to remove, obscure, delete any mark placed on the simcard.”. Further at page 14, para 4.4.18 it is wrongly stated by CIT(A) that “it is also evident from a reading of various clauses of the agreement, that the cell phone connection or recharge coupons and other product at all times, remain the property of BSNL” and at page 15, para 4.4.20 the CIT(A) has erred in holding that “Perusal of clauses 8, 9, 11, 15, 16, 17, 18 & 19 clearly indicate that the Franchisees has no right over the product” - In this regard kind reference of Hon’ble Bench is invited to Appendix A, point no 3. (v) At page 13, para 4.4.14 the CIT(A) has erred in holding that “Also the owner of the Sim Cards / Recharge coupons is the appellant as it is operating under the right of a license agreement entered into with DOT. The sim cards is in the nature of a key to the consumer to have access to the telephone network established and operated by the appellant. Since the sim card is only a devise to have access to the mobile phone network there is no question of passing of any ownership or title of the goods from the appellant to the distributor or from the distributor to the ultimate consumer” – it is submitted that while alleging as such the CIT(A) has not appreciated the findings recorded by Hon’ble Karnataka High Court in case of Bharti Airtel Ltd reported in 372 ITR 33(Kar) copy enclosed at pages 240 to 260 of PB wherein it is held at para 59 that “Service can only be rendered and cannot be sold. However, right to service can be sold. What is sold by the service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may

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use it by himself. He may also sell the right to sub-distributors who in turn may sell it to retailers.” (vi) At page 14, para 4.4.18 the CIT(A) has held that “channel partner makes BSNL liable to a legal action by cell phone users i.e third party…” . - As submitted above franchisee in the instant case acquires and then resells or distributes a right to demand service. While doing so the terms of the agreement clearly prescribe in clause 9.7 that “BSNL shall not be liable for the quality and genuineness of the gods sold by the franchisee”

9.1 Ld. AR further submitted that the decision of Hon’ble Delhi High Court in the case of Idea Cellular is also distinguishable in law in as much as Hon’ble Delhi High Court has proceeded on the basis that services cannot be sold. It has to be rendered. It was submitted that Hon’ble Delhi High Court did not examine the question whether right to services can be sold. It was submitted by Ld. AR that this legal aspect has specifically been considered by Hon’ble Karnataka High Court in the case of Bharti Airtel (supra) and inviting our attention to para 56 to 58 of the decision Ld. AR submitted that on this legal aspect Hon’ble Karnataka High court has differed with the view expressed by the Hon’ble Delhi High Court. Relying upon extracts from Salmond on jurisprudence Twelfth Edition (pg.153-154) it was submitted by Ld. AR that the decision of Hon’ble Delhi High Court being passed without taking the above legal aspect into consideration is not a binding precedent. 9.2 Without prejudice to the above contentions, Ld. AR also invited our attention towards provisions of section 194H wherein the 3rd Proviso specifically provides an exemption to the appellant from deducting TDS on commission / brokerages payable to the public call office franchisees as under :- “Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or

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Mahanagar Telephone Nigam Limited to their public call office franchisees”

It was submitted by the ld. AR that even otherwise the above proviso exonerates the appellant from liability to deduct TDS on commissions / brokerages payable to the franchisees. In support of this proposition Ld. AR relied upon the judgment in case of appellant itself for the year under consideration by Hyderabad Bench of ITAT vide order dated 5th June, 2015 reported in 42 ITR (Trib.) 669 (Hyd). Ld AR also submitted that the presumption drawn by Ld. AO in the reassessment order that Delhi ITAT in the case of appellant vide order dated 18th November, 2014 in ITA Nos.258 to 260/Del/2011 for A.Ys.2008-09 to 2010-11 has decided this issue in favor of the tax department is factually incorrect. In this regard, inviting our attention to this decision it was submitted by the Ld AR that Delhi ITAT in that case has while examining the case from the view point of section 201 has remanded the matter back to the AO to investigate into the fact as to whether the recipient of the money i.e., the franchisees have paid tax on discounts received by them i.e income embedded in the amounts in question. Ld. AR specifically invited our attention to para 6 of the decision wherein Delhi ITAT has held that “in any event, the issue also seems to be covered on merits, in favour of the assessee by decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Bharat Sanchar Nigam Ltd…..”. Ld. AR submitted that decision of Punjab Haryana High Court in the case of appellant is reported in 265 CTR 212 (P&H) and in that decision Hon’ble Punjab & Haryana High Court has held that 3rd proviso to section 194H which was inserted by Finance Act 2007 w.e.f., 1st June, 2007 is applicable retrospectively. Accordingly, it was submitted that the findings recorded by Delhi ITAT in this judgment supports the case of the appellant. Without prejudice, to the above contentions Ld. AR also submitted

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that since as per decision of Hyderabad ITAT there is no default u/s 201 hence disallowance u/s 40(a)(i) for the year under consideration cannot be made in support of this claim our attention was invited to the decision of Bharti Hexacom Ltd. reported in 179 TTJ 25 (Del). Ld. AR clarified that subsequent deduction of tax by BSNL in ensuing year was due to a change in business model. Lastly it was submitted by the Ld. AR that since provision of section 40(a)(ia) lead to penal consequences benefit of bona fide belief be granted to the appellant specially when the issue is highly debatable. It was submitted that as claimed by tax department decision of Hon’ble Delhi High Court in case of Idea Cellular (supra) is against the appellant and as accepted by tax department the decision of Hon’ble Karnataka High Court in case of Bharti Airtel (supra) is in favour of the appellant. In support Ld. AR relied upon the decision of JDS Apparels Pvt. Ltd. reported in 370 ITR 454 (Del). Before concluding, Ld. AR also invited our attention towards pleadings made before lower authorities wherein it was specifically submitted by the appellant that the quantum of disallowance has been wrongly computed, however, the lower authorities thereafter have not addressed this grievance. 10. Repudiating the above contentions, the Ld. CIT(DR) relied upon the findings recorded by CIT(A). It was submitted by her that CIT(A) has after an in depth examination of the franchisee agreement rightly concluded that the nature of relationship between appellant and its franchisee is that of principal to agent and hence provision of section 194H are applicable. Ld. CIT(DR) relied upon the decision of Hon’ble Jurisdictional High Court in the case of Idea Cellular (supra) and submitted that the claim made by the appellant merits to be dismissed as it is directly covered against it by the decision of Jurisdictional High Court. Ld. CIT(DR) also relied upon following decisions :- • Vodafone South Limited reported in 155 ITD 109 (Chd)

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• Idea Cellular Ltd reported in 66 SOT 184 (Hyd) 11. We have carefully considered the submissions made by the rival parties and the material available on record. It is claimed by Ld CIT(DR) that the decision of Hon’ble Delhi High Court in case of Idea Cellular (supra) supports the contentions raised by the lower authorities. On the other hand, Ld AR claims that decision of Hon’ble Karnataka High Court in case of Bharti Airtel (supra) supports the claim made by the appellant. We have been addressed at length by both the sides. First moot issue to be decided is whether there is any variance in views expressed by both these High Court decisions. Hon’ble Jurisdictional High Court in case of Idea Cellular (supra) concluded that the relationship between parties in that case was principal to agent premised upon following reasoning: “23. We, thus, come back to the central question, which is to be addressed viz., the nature of relationship. Reverting back to this aspect, in the present case, we are of the opinion that the legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further appointed by the PMAs with the consent of the assessee. It is created by : (a) Activation of the said SIM card by the assessee in the name of the consumer/subscriber. (b) Service provided by the assessee to the subscriber. Further, dealings between the subscribers and the assessee in relation to the said SIM card including any complaint, etc. for improper service/defect in service. (c) Entering into the ultimate agreement between the subscriber and the assessee (Clause 15 of the Agreement). It is to be borne in mind that the nature of service provided by the assessee to the ultimate consumers/subscribers, whether it is pre-paid or post-paid SIM card - remains the same. In the instant case, the SIM cards are pre- paid, which are sold by the assessee to the consumers through the medium of PMAs. In the case of post-paid SIM card transaction is entered into directly between the assessee and the subscriber and the subscriber is sent bill periodically depending upon the user of the SIM card for the period in

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question. In both the cases, legal relationship is created between the subscriber and the assessee that too by entering into specific agreement between these two parties. 24. In contrast, the legal position when the goods are sold by principal to its distributors creating 'principal and principal' relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. v. Union of India AIR 2006 SC 1383, the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof Sales Tax Act is not attracted, though the decision was rendered in the context of liability of sales tax.”

The vital fact which Hon’ble Jurisdictional High Court has found relevant is that a legal relationship is established between the telephone service provider and the consumer i.e the subscriber to its products. Hon’ble Jurisdictional High Court has also followed the dictum of Hon’ble Apex Court in appellants’ case i.e BSNL vs UOI reported in AIR 2006 SC 1383 to hold that this is not a case for sale of goods but a case of providing telephone services and hence there can be no sale of goods from the service provider to its distributor so as to create a principal to principal relationship. 11.1 Contrary to above view is the decision of Hon’ble Karnataka High Court (supra) which holds that a right to service can be sold. The relevant observations of the Hon’ble Karnataka High Court read as under: “56. In the Idea Cellular Ltd. case (supra), the Delhi High Court proceeded on the footing that the assessee is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant

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for public at large. They had appointed distributors to make available the pre-paid products to the public and look after the documentation and other statutory requirements regarding the mobile phone connection and, therefore, the essence of service rendered by the distributor is not the sale of any product or goods and, therefore, it was held that all the distributors are always acting for and on behalf of the assessee company. 57. Similar is the view expressed by the Kerala High Court in the Vodafone Essar Cellular Ltd.'s case (Supra), where it was held that, the distributor is only rendering services to the assessee and the distributor commits the assessee to the subscribers to whom assessee is accountable under the service contract which is the subscriber connection arranged by the distributor for the assessee. In that context it was held that, discount is nothing but a margin given by the assessee to the distributor at the time of delivery of SIM Cards or Recharge Coupons against advance payment made by the distributor. 58. In both the aforesaid cases, the Court proceeded on the basis that service cannot be sold. It has to be rendered. But, they did not go into the question whether right to service can be sold. 59. The telephone service is nothing but service. SIM cards, have no intrinsic sale value. It is supplied to the customers for providing mobile services to them. The SIM card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to the distributor or from the distributor to the ultimate consumer. Therefore, the SIM card, on its own but without service would hardly have any value. A customer, who wants to have its service initially, has to purchase a sim- card. When he pays for the sim-card, he gets the mobile service activated. Service can only be rendered and cannot be sold. However, right to service can be sold. What is sold by the service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may use it by himself. He may also sell the right to sub- distributors who in turn may sell it to retailers. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the distributor at the time of the delivery then he is thereafter liable for the same and would be dealing with them in his own right as a principal

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and not as an agent. The seller may have fixed the MRP and the price at which they sell the products to the distributors but the products are sold and ownership vests and is transferred to the distributors. However, who ever ultimately sells the said right to customers is not entitled to charge more than the MRP. The income of these middlemen would be the difference in the sale price and the MRP, which they have to share as per the agreement between them. The said income accrues to them only when they sell this right to service and not when they purchase this right to service. The assessee is not concerned with quantum and time of accrual of income to the distributors by reselling the prepaid cards to the sub- distributors/retailers. As at the time of sale of prepaid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the Distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorized as commission. The sale is subject to conditions, and stipulations. This by itself does not show and establish principal and agent relationship.”

Apparently, therefore, legalistically both the Hon’ble High Courts have expressed a divergent opinion in the matter. Since the appellant before us is from Delhi, we are obligated to follow the decision of Hon’ble Jurisdictional High Court. Parties before us have also elaborated upon the fact that there is a distinction in terms and conditions of distribution agreement in the instant case and the facts as existing before both the Hon’ble High Courts above, however we find no reason to deliberate upon this aspect since on the legal aspect itself the decision of Hon’ble Delhi High Court which is the jurisdictional High Court is against the appellant. We are therefore compelled to hold that the discount on prepaid products offered by the appellant is in nature of “commission” which does attract rigors of section 194H. 12. The above finding given by us would however not automatically act as an accomplished fact vis a vis the issue of disallowance u/s 40(a)(ia). There is

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however another aspect of the matter before us. Ld AR argued that benefit of bonafide cause be granted to the appellant since provisions of section 40(a)(ia) are penal in consequences. We find substantial merit in this alternative claim made by the appellant. We find that appellant deserves benefit of bonafide belief premised on the following facts: (i) As is apparent this is an issue on which divergent views have been expressed by two different High Courts in our country. We have been apprised that the issue is also currently pending disposal before Hon’ble Apex Court. (ii) In case of appellant itself for AY 2009-10 i.e the assessment year under consideration, Hyderabad Bench of ITAT (supra) has held as under: “8. The Learned Departmental Representative relied upon the decision of the ITAT Kolkata Bench in the case of Asstt. CIT v. Bharti Cellular Ltd. [2007] 105 ITD 129 and Delhi High Court in the case of CIT v. Idea Cellulor Ltd. [2010] 325 ITR 148/189 Taxman 118. Whereas this decision was already considered by the learned CIT(A) and having regard to the factual matrix of the case, it was held that the assessee has followed a systematic method of accounting as given in AS-9, and therefore, it has to be treated as a trade discount only. 9. It is not in dispute that the assessee has not deducted tax at source. As per third proviso to S.194H which is inserted by the Finance Act, 2007, no deduction need to be made on any commission or brokerage paid by BSNL to its Public Call Office franchisee, and this proviso was held to be clarificatory in nature by the Hon'ble Punjab and Haryana High Court in the case of CIT v. Bharat Sanchar Nigam Ltd. [2013] 35 taxmann.com 260/216 Taxman 277. Having regard to the circumstances of the case, I notice that the assessee being public sector undertaking stands on a different footing and the view taken in the case of Idea Cellular Ltd. (supra) cannot be applied, since the relationship between the BSNL and the franchisee stands on a different footing and the same was recognised by the CBDT. In fact, the decision of Hon'ble Delhi High Court and other High courts, on this point were considered by Hon'ble Karnataka High Court in the case Bharti Airtel Ltd. v. Dy. CIT [2015] 372

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ITR 33/228 Taxman 219 (Mag.)/[2014] 52 taxmann.com 31 while holding that Section 194H is not applicable . Since no jurisdictional High Court decision is available as on date, the latest decision of Karnataka High Court, which considered and distinguished earlier rulings of other High Courts, deserves to be followed. 10. In fact, the first appellate authority has taken into consideration the circular issued by the corporate office of the BSNL dated 13.12.2007 and another circular dated 15.4.2008 while coming to the conclusion that the nature of the payment made by the assessee to its franchisee is trade discount only. Since the view taken by the learned CIT(A) is mainly based on the factual matrix of the case, I am of the firm view that the order passed by the learned CIT(A) does not call for any interference.” (iii) Appellant also merits benefit of bonafide belief considering third proviso to section 194H which states as under: “Commission or brokerage 194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent : ….. ….. Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.”

We find merit in the submissions made by Ld AR that third proviso to section 194H will get attracted only when the nature of payment is “commission or brokerage”. Parties before us agree that majorly the distribution of products by BSNL and MTNL takes place through Public Call Office franchisees since this was an infrastructure existing with them even before mobile telephone

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services became popular. Moreover, as upheld by Hon’ble Punjab & Haryana High Court in case of appellant itself (supra) that “…….the above extracts from the Board circular would show that the amendment in the Section 194 H was brought about because, as admitted by the CBDT itself, very few of the recipients had a tax liability.” Even co-ordinate bench of Delhi ITAT in case of appellant vide order 18th November 2014 (supra) has held that “in any event, the issue also seems to be covered on merits, in favour of the assessee by decision of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Bharat Sanchar Nigam Ltd…..” 12.1 Therefore facts of the case clearly show that appellant merits grant of bonafide belief for not deducting TDS. It was however argued by Ld CIT(DR) that even if there existed any bonafide cause provisions of section 40(a)(ia) calls for a strict compliance. In our considered view this plea of Ld CIT(DR) has to be rejected. In the case of JDS Apparels Hon’ble Jurisdictional High Court has held as under: “17. Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal 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

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one not inflicting the penalty or deterrent may be preferred. In Maxwell's The Interpretation of Statutes, 12th edition (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 elements 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."

To the similar effect is the decision of Hon’ble Bombay High Court in case of CIT vs Kotak Securities Limited reported in 340 ITR 333(Bom) wherein the Hon’ble High Court has held as under : “31. The object of introducing section 40(a)(ia), as explained in the Central Board of Direct Taxes Circular No. 5, dated July 15, 2005—See [2005] 276 ITR (St.) 151), is to augment compliance with the TDS provisions in the case of residents and curb bogus payments. Moreover, though section 194J was inserted with effect from July 1, 1995, till the assessment year in question that is the assessment year 2005-06 both the Revenue and the assessee proceeded on the footing that section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the Revenue has raised any objection or initiated any proceedings for not deducting the tax at source. In these circumstances, if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting the tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) of the Act. It is relevant to note that from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange though not as fees for technical services but as royalty. It is further relevant to note that it is not the case of the Revenue that on account of the failure on the part of the assessee to deduct tax at source, the Revenue has suffered presumably because, the stock exchange has discharged its tax liability for

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the assessment year in question. In any event, in the facts of the present case, in view of the undisputed decade old practice, the assessee had bona fide reason to believe that the tax was not deductible at source under section 194J of the Act and, therefore, the Assessing Officer was not justified in invoking section 40(a)(ia) of the Act and disallowing the business expenditure by way of transaction charges incurred by the assessee.”

We therefore hold that appellant had a reasonable / bonafide cause for not deducting TDS on payment of discounts to the distributors / franchises of its repaid products. This is accordingly not a fit case for making disallowance of an expense by invoking penal provisions of section 40(a)(ia). 12.2 The issue can also be considered from different prospective. As stated by us above, Hyderabad Bench of ITAT in case of appellant for the year under consideration has already held that there is no default on part of the appellant for not having deducted tax on discounts given for its prepaid products. This in our considered opinion operates res judicata for examining whether there is any default committed u/s 40(a)(ia). We find that co-ordinate bench of Delhi ITAT in case of Bharti Hexacom (supra) has held that in such a scenario disallowance cannot be sustained by invoking provisions of section 40(a)(ia), observing as under: “35. We have considered the rival submissions and have perused the record of the case. Admittedly, as regards discount allowed to distributors in respect of prepaid cards, the Gauhati Bench of the ITAT as well as Jaipur Bench of ITAT in assessee's own case for AY 2008-09 have clearly held that the said provisions of section 194H are not applicable. However, on this issue, admittedly Hon'ble Jurisdictional High Court in the case of Idea Cellular Ltd.(supra) has held that the said provision is applicable. 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 said provisions are not applicable.

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Respectfully following the above decision rendered by a co-ordinate bench of this court we find that disallowance made u/s 40(a)(ia) is not sustainable in the instant case. Grounds 4, 5 & 6 of the appeal are accordingly disposed of in favour of the assessee. 13. The next issue in dispute pertains to disallowance u/s 40(a)(i) of the Act of Rs.57,78,92,080/-. In this regard in the order of assessment it is observed by the AO that during the year under consideration appellant made payments for IUC Charges as under: (i) Payment to foreign operators Rs.57,78,92,080/- (ii) Payment to domestic operators Rs.3459,22,63,093/- It is undisputed that qua payments made to domestic operators TDS has been deducted by the appellant. The dispute solely centers round the payments made to foreign operators. IUC charges are charges paid to other telecom service providers for providing connectivity to and fro from locations where

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BSNL has no reach. The AO notes a sample sequence of carriage of international call from India to a location outside India as under:- • “A mobile subscriber in Chennai makes a call to a person in US. The call originates on the network of the local telecom services provider in Chennai, which shall carry the call upto the limits of the Chennai telecom services area and at the point, shall hand over the call to the national long distance (‘NLD’) service provider. • The NLD services provider carries the call upto ILD gateway of BSNL and hands over the call to BSNL • The call is then carried by BSNL on its ILD network upto its ILD gatesway outside India (say US), where the call is handed over to a Non-resident Telecom Operator (NTO) for carriage of the call beyond the ILD gateway of BSNL outside India and termination of the same at the destination location outside India (last leg of the communication channel). In many cases, local services provider and NLD provider could be BSNL only.”

13.1 In the order of assessment, Ld. AO holds that payment of IUC charges to non-resident telecom service provider was liable to tax deduction u/s 195 of the Act. In support of his conclusions Ld. AO after making reference to material available as per Wikipedia on roaming technology has held that payment of IUC charges is “Fee for Technical Services” both under the provisions of Act u/s 9(1)(vii) and as per provisions of Article 12 of the DTAA. Without prejudice in his order of assessment the AO has further held that payment for IUC charges also constitutes income in nature of “Royalty” as defined u/s 9(1)(vi) of the Act and Article 12 of the DTAA. In view of discussions made and findings recorded by the Ld. AO he concluded that the amount of Rs.57,78,92,080/- paid by Appellant to foreign telecom service providers was income chargeable to tax in India in hands of foreign service providers and since no application u/s 195(2) of the Act was filed by the appellant relying upon decision of Hon’ble Supreme Court in the case of

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Transmission Corporation of India reported in 239 ITR 587 (SC) it was held by the Ld. AO that the appellant had defaulted in not deducting tax u/s 195. As such, a consequential disallowance u/s 40(a)(i) of Rs.57,78,92,080/- was made. 14. Being aggrieved, the appellant approached Ld. CIT(A), however, the first appellate authority also did not find any merit in the claim so made. In this regard, it has been held by Ld. CIT(A) as under :- “4.5.3 I have considered the contention of the appellant that the aforesaid payment made by BSNL to NTO’s (non-resident telecom operators) outside India cannot be taxed as royalty u/s 9(1)(vi) read together Explanation 2 & 5 to the section. Section 40(a)(i) of the Act provides for deduction of tax at source where any tax payer in India makes a payment to a non-resident being a payment in the nature of royalty, fee for technical services, interest or any other payment chargeable to tax in the hands of the non-resident. Royalty for this purpose shall have the same meaning as in Explanation-2 to clause (vi) of sub-section (1) of section 9. 4.5.4 Explanation 5 to section 9(1)(vi) is only clarification in nature and defines the inclusions that will constitute royalty in respect of any right, property or information. The appellant contends that the provisions of deduction of tax at source u/s 195 of the Act (forming part of chapter XVII- B) are not applicable since the payments made to non-residents are not chargeable to tax under the provisions of the Act. 4.5.5. In this regard, a plain reading of Explanation-2(i), 2(iii), 2 (iva) to section 9(1)(vi) of the Act makes it clear that for a particular payment to fall within in the provision of these clauses it is imperative that there should be a “transfer of all or any rights” in respect of a process by the payee in favour of the payer or “use of” of a process belonging to the payee by the payer. It is amply clear that even if a “process or scientific equipment” is used by the user, the resultant payment will take character of “royalty”. 4.5.6. The payments are made on account of interconnection charges on calls which are carried to the International Gateway and then handed over to the International Operators for carriage on their network and handling over the call to the home operator of the subscriber located in a foreign land. These services terminate out of India but the origin of providing these services is in India. These calls are carried over the International Network

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which means that the consideration paid by BSNL is in respect of the right to use a property and a process belonging to the Non-Resident. In order that a subscriber is able to register on to a visited network, a roaming agreement needs to be in place between the visited network and the home network. This agreement is established after a series of testing processes. These payments would thus fall under the scope of Section-9 and will be deemed to have accrued or arisen in India and therefore, are taxable under the Act. In view of the above, IUC charges paid to International Operators be classified as a royalty since the same involves “use or right to use of equipment and / or process,” belonging to the non-resident. 4.5.7 On perusal of the appellant’s submission and further elaborations as discussed above, it can easily be inferred that while availing roaming connectivity, the service providers and users have to undergo a complex process of roaming technology. Therefore, using roaming services is in fact using “process” embedded in the said technology. The payment made for the use of such process takes the character of royalty within the meaning of section 9. As such it may be concluded that the appellant company has entered into agreement for use of roaming technology, which contains ‘process’, provided by the Foreign Service providers. 4.5.8. Under both the I.T. Act, 1961 as well as under the Indo-USA treaty, taken on sample basis, ‘royalty’ includes payments for the use of process or any industrial, commercial or scientific equipment (commonly known as ‘equipment royalty’). In this case, it is evident that the payments have been made for using the equipment owned by the NTOs and accordingly the same will be covered under the definition of “equipment royalty”. The Hon’ble Supreme Court of India, in a case relating to the levy of sales tax in the state of Uttar Pradesh v. Union of India (2003) 3 SCC 29, had occasion to deal with what constitutes the right to use. The court has held that physical possession by the customer is not the sine qua non of completing the transfer of the right to get the right to sue any gods. The decision in this case has been quoted to show that, for a customer to get the right to use equipment, it is not necessary for him to have physical control over it. Multiple users can have the right to use the equipment at the same time, without any of them having physical control over it. 4.5.9. For the payment for a process to be treated as ‘Royalty’, the only requirement is that the process must be used. In the present case the traffic sent by the BSNL comes into contact with the process of the NTO in the telecom network. Transmission of the data is not possible unless the same come in contact with the process. The business of the appellant is such that

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the process of transmission of traffic be made by taking its possession physically. The only way the customers can use the service is by taking advantage of the facility. Therefore using such properties shall naturally refer to taking advantage out of facility. It is noted that the appellant derived advantage by utilizing the process in the telecom facility / network facilitating relay of their traffic to and from the foreign countries. As such the process, in the telecom facility / network, is ‘used’ by the appellant for carrying on their business in India. In view of the discussion above, the payments made by the appellant squarely fall within the definition of Royalty as defined in Explanation 2 to section 9(1)(vi) of the Act as well as the respective DTAA’s of countries with which BSNL has entered into such transactions. 4.5.10 Section 195 read with Section 40(a)(i) of the Act stipulates that if there is any amount paid to a non-resident on which tax is required to be deducted and if such tax has not been deducted then the same will not allowed as expenditure for the relevant assessment year. Thus, the amount paid to the non-residents on Interconnection charges are income chargeable under the Act and therefore, will be subject to deduction of tax at source u/s 195. The appellant had cited M/s Asia Satellite Telecommunications Co. ltd. vs. Director of Income Tax [2011] 197 Taxman 263 Delhi (at pages 597-626), wherein the Hon’ble Delhi High Court has accepted the submissions that the process involved in transmission of data by way of satellites is used by the satellite operator for provision of transponder capacity to its customers cannot be construed as royalty for use of process. 4.5.11 In this case, the tele companies / customers were situated outside India and so was the assessee. Even the agreements were executed abroad under which the services were provided by the assessee to its customers. It was the payment made by the tele operators situated abroad to the assessee, also a non-resident that was sought to be brought within the tax net. In the case of BSNL, the appellant is situated in India and the services are being provided to customer in India “by the use of equipment, process or by the right to use of equipment or process’ belonging to a non-resident. This, the income accruing to NTO’s from these services are deemed to accrue or arise in India and hence is subject to tax under the Act. 4.5.12. In the case of M/s GE India Technology Centre Pvt. Ltd. (327 ITR 456) (2010), the Hon’ble Apex court held that payment made to a non- resident will be subject to tax withholding u/s 195(1) of the Act only if the sum payable is “chargeable to tax” in India in the hands of the non-resident.

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The payments made by BSNL for interconnection charges to foreign operators are “chargeable to tax” in India in the hands of the non-resident since the same fall under the definition of royalty u/s 9(1)(vi) of the Act, read together can also be categorized as “fees for technical services”. Clause (vii) to sub-section (1) of section 9 defines “fees for technical services” as rendering of any managerial, technical or consultancy services. The appellant has not disputed that payment is made for service rendered. It has submitted that consideration is paid by BSNL to the NTOs, for provision of service (of carriage / transmission of calls), pursuant to ILD (International Long Distance) Roaming Agreement. The arrangement between BSNL and the NTOs is a service contract. The nature of ‘Roaming Services’ is highly technical and cellular based. Therefore, there is no ambiguity with regard to the characterization of these services as “technical services”. 4.5.13. As per Article 12 of the Double Taxation Avoidance Agreements (‘DTAA’), taken on sample basis between India and USA, income by way of ‘fees for included services’ can be taxed in India at a reduced rate on gross basis, if the said ‘fees for included services’ are sourced in India. Article 12(4) of the India-USA tax treaty defines “fees for included services” as under :- “4. For purposes of this Article “Fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services: (a) Are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) Make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design.” 4.5.14 Perusal of the above shows that the payments would not only be covered as “fees for technical services” as per IT Act, 1961 but also as “fees for included services” under various treaties of countries with which BSNL has entered into such transactions. It may be noted that the expression “make available” would mean that the person providing the services merely enables the acquirer to use the knowledge and the provider may not participate in the act of doing the job himself, which is certainly the case here. The fact that the services were rendered outside India is immaterial. As per section 9(1)(vii), income by way of fees for technical services payable

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by a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India, shall be income deemed to accrue or arise in India. The exceptions provided in the section are not applicable in the appellant’s case. Therefore, section 9(1)(vii) is also squarely applicable in the case. It is clear that any payment made by a resident against utilization of services in India is chargeable to tax as fees for technical services. The section provides for services utilized and not the place of rendering of services. Therefore, if the information is used or services are utilized in India, there will be chargeability to tax irrespective of the fact that information or services are rendered outside India or some preparatory work has been done outside India or patent etc. have been delivered outside India. 4.5.15 For taxing any amount as FTS, its chargeability in India has to be ascertained first. Considering the discussions made above, it is clear that the sum paid / payable to the Foreign Service providers are in the nature of fees for Technical Services which have been utilised in India. Therefore, its chargeability in India is established. To clarify it further, for chargeability of the above said sum as FTS, there is no requirement of having a ‘permanent establishment’ in India by the Foreign Service provider, as per I.T. Act as well as the DTAAs. As per section 9 of the I.T. Act, the income of a non-resident shall be deemed to accrue or arise in India and shall be included in the total income of the non-resident, whether or not (i) the non- resident has a residence or lace of business or business connection in India or (ii) the non-resident has rendered services in India. Since the said sum was chargeable to tax in India, the appellant was required to deduct tax at source in accordance with the provisions of section 195(1) of the I.T. Act on the entire sum paid / payable. 4.5.16 The appellant had paid an amount of Rs.57,78,92,080/- to International Operators / foreign service providers during the current year. BSNL was required to deduct tax on the said sum u/s 195 of the Act. Hence, the decision of AO to disallow the payments u/s 40(a)(ia) of the Act is justified. In view of my above observations, ground Nos.4, 5 & 6 of the appeal is dismissed and action of the AO is therefore, confirmed.”

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Technical Services” or “Royalty” as defined under the Act or under the relevant provisions of DTAA. Ld. AR referred to a sample agreement for payment of IUC charges between BSNL and Cable & Wireless UK copy of which is placed in the paper book before us. It was further submitted by the ld. AR that the issue in dispute now stands decided in favor of the appellant by following decisions :- (i). Bharti Airtel Ltd. reported in 47 ITR (trib) 418 (Del) (ii). Vodafone South Ltd. reported in 241 Taxman 497 (Kar) (iii). Bharti Hexacom Ltd. reported in 42 ITR (Trib.) 686 (Jaipur) (iv). Bharti Hexacom Ltd. reported in 179 TTJ 25 (Del) 16. Ld. CIT(DR) on the other hand supported the orders of lower authorities. It was submitted by her that the Ld AO has correctly concluded that the payment of IUC charges constituted income chargeable to tax in India in the hands of non resident telecom service provider as income from fee for technical services and / or as income from royalty. 17. We have carefully considered the facts of the case and the material available on record and we find that the issue in dispute is directly covered by the decision of ITAT in case of Bharti Airtel Limited (supra). In that case co- ordinate bench of this court after deep examination of the issue i.e after considering and going through the process of providing roaming services; examination of technical experts and its cross examination and also opinion of Hon'ble the then Chief Justice of India Mr. S.H. Kapadia dated 03rd September 2013, has held that payment of IUC Charges is not “Fee for Technical Services” or “Royalty” within the meaning of its definition as per section 9(1)(vi) and 9(1)(vii) of the Act. While reaching the above conclusion the co-ordinate bench also took into consideration retrospective amendments made to section

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9 by Finance Act 2012. Relevant head-notes of this decision as reported in (2016) 67 taxmann.com 223(Del) are reproduced below: “Section 9 , read with sections 194J and 195, of the Income-tax Act, 1961, read with article 12 of Model OECD Convention - Income - Deemed to accrue or arise in India (Royalties and Fees for technical services) - Assessment years 2008-09 to 2011- 2012 - Assessee, as part of its International Long Distance (ILD) Telecom Services business, was responsible for providing services to its subscribers in respect of calls originated/terminated outside India - For provisions of ILD services, assessee was required to obtain services of Foreign Telecom Operators (FTOs) - ILD Operators were in turn billed by FTOs in form of Inter- connected Usage Charges(IUC) - There was no manual or human intervention during process of transportation of calls between two networks - This was done automatically, with human intervention being required only for installation of network which could not be said to be for inter-connection of a call - Assessee merely delivered calls that originated on its network to inter connection locations of FTO and FTO carried and terminated calls on its network - Whether thus payment of IUC by assessee to FTO in connection with its ILD telecom service business was neither FTS under section 9(1)(vii), nor royalty/process royalty under section 9(1)(vi) - Held, yes - Whether ever retrospective amendment in domestic legislation does not affect royalty definition under DTAA, hence retrospective insertion of Explanations 5 & 6 to section 9(1)(vi) also could not have altered this position - Held, yes [Paras 33, 44, 55, 56& 72][In favour of assessee] Section 9 of the Income-tax Act, 1961, read with section 5 and article 7 of Model OECD Convention - Income - Deemed to accrue or arise in India (Business Profits) - Assessment years 2008-09 to 2011- 2012 -Assessee made payment of Inter-connected Usage Charges(IUC) to Foreign Telecom Operators (FTOs) in connection with its ILD telecom service business - Payment in question did not accrue or arise to 'FTOs' in India - Entire business operations were carried out outside India by FTOs - FTOs also did not have any Permanent Establishment in India - Whether thus no income could be deemed to accrue or arise to FTO's in India and hence under article 7 also income could not be brought to tax in India - Held, yes - Whether further in absence of permanent establishment of FTOs in India, payment of 'IUC' to FTOs could not be deemed to accrue or arise in India

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under any of clause of section 9(1) read with section 5(2) - Held, yes [Paras 74 & 78][In favour of assessee]” To the similar effect are other decisions cited by Ld AR. The Ld CIT(DR) has not been able to controvert the fact that the issue in dispute is no more res integra considering the above binding precedents. Moreover, a perusal of sample agreement for payment of IUC charges between BSNL and Cable & Wireless UK in the instant case also clearly shows that a standard facility for availing interconnectivity services while roaming was availed by the appellant in the instant case. This does not require any human intervention. Respectfully following the above judicial precedents, we hold that payment for IUC Charges is not chargeable to tax in India in the hands of the non-resident recipients and hence TDS was not deductible as per provisions of section 195 of the Act. Therefore, we reverse the order of the Ld CIT(A) on this issue and decide the same in favour of the assessee. Accordingly, respective grounds Nos. 7, 8 & 9 are allowed. 18. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 25.10.2017. Sd/- Sd/- (Amit Shukla) (L.P. Sahu) Judicial member Accountant Member Dated: 25.10.2017 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi