M/S. BHARTI AIRTEL LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2”: NEW DELHI BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No.5816/Del/2012 (Assessment Year: 2008-09)

Bharti Airtel Ltd, Addl CIT, Bharti Crescent, 1, Vs. Range-2, CR Building, IP Nelson Mandela Road, Vasant Estate, New Delhi Kunj, New Delhi PAN:AAACB2894G (Appellant) (Respondent)

ITA No.5636/Del/2011 (Assessment Year: 2007-08)

Bharti Airtel Ltd, Addl CIT, Bharti Crescent, 1, Vs. Range-2, CR Building, IP Nelson Mandela Road, Vaxant Estate, New Delhi Kunj, New Delhi PAN:AAACB2894G (Appellant) (Respondent)

Assessee by : Sh. Ajay Vohra, Sr. Sh. Rohit Jain, Adv Ms. Deepashree Rao, CA Revenue by: Sh. NC Swain, CIT DR (OSD) Date of Hearing 25/07/2016 Date of pronouncement 24/10/2016

Page 2 of 59 O R D E R PER PRASHANT MAHARISHI, A. M. 1. The present appeal for the assessment year 2007 -2008 was decided by the coordinate bench of tribunal, New Delhi wide order dated 11/03/2014. Thereafter, the appellant filed miscellaneous application under section 254 (2) of the income tax act, 1961 for rectification of certain mistakes apparent from record in the said order of the tribunal. The above miscellaneous application in M. A No. 133/DL/2014 was decided on 04/12/2015 and the coordinate bench has recalled the order dated 11/03/2004 wherein the ground No. 6.7 to 6.9 of the main ground of appeal were not adjudicated and further the additional ground of appeal mentioned in the para No. 8 of the order dated 04/12/2015 was also not adjudicated and therefore the above present appeal has arisen to decide the above stated grounds of appeal. 2. We have culled out the above 3 grounds which are not adjudicated in the original appeal from the order dated 04/12/2015 in MA No. 133/del/2014 in ITA No. 5636/del/2011 for assessment year 2007 – 08 as under: 6.7 that the AO further failed to appreciate that the disallowance under section 40 (a) (ia) of the act was, in any case, not warranted, since no deduction of tax at source was on account of bonafides view taken by the appellant. 6.8 that the AO further failed to appreciate that the disallowance under section 40 (A) (i.a) of the act should have, if at all, been restricted to the amount remaining is payable is on the last day of the relevant previous year. 6.9 that in any case deduction in respect of the amount of discount on which tax was ultimately been paid by the payees/distributors, either in the year under consideration in the year of filing the return of income, or to have been allowed in view of amendment to section 40 (a) (ia) of the act.

Page 3 of 59 “that in the facts and circumstances of the case and in law, the assessee ought to be allow deduction of liability borne by the assessee in pursuance order passed under section 201 (1) of the income tax act, 1961 (the act).”

i. It is submitted that where tax is not deducted by an assessee under bonafide belief that tax was not deductible at source on

Page 4 of 59 payments made, the assessee cannot be treated as an assessee in default for not deducting the tax at source and consequently, disallowance under Section 40(a)(ia) of the Act is not warranted. ii. The aforesaid principle has been upheld by the Bombay High Court in the case of CIT vs. Kotak Securities Ltd: 340 ITR 333. In the said case, the assessee company was engaged in the business of share broking, depositories, mobilisation of deposits and marketing of public issues. The assessee had paid to the BSE transaction charges. The question before the Court was whether the said payment of transaction charges constituted payment of fees for technical services' covered under section 194J of the Act so as to hold that the assessee was liable to deduct tax at source at the time of crediting the said transaction charges to the account of the stock exchange. Apart from the primary argument raised by the assessee on the issue of non-applicability of provisions of section 194J of the Act on the said transaction, the assessee also argued that though provisions of the said section was introduced with effect from 01.07.1995, the Revenue had never invoked the said section upto assessment year 2005-06 (i.e., the year under consideration) and thus the assessee harboured bonafide belief that the said transaction was not amenable to tax withholding. Accordingly, the assessee could not be penalized by disallowance of the payment under section 40(a)(ia) of the Act. iii. Considering the aforesaid contention, the Bombay High Court held in favour of the assessee observing 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 194'J was not applicable to the

Page 5 of 59 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 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 194Jofthe 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. 32. Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute "fees for technical services" covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of (he stock exchange. However, since both the

Page 6 of 59 Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can he found with the assessee In not deducting the tax at source in the assessment Year in question and consequently disallowance made by the Assessing Officer tinder section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., 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, 33. The question raised in the appeal is answered accordingly and the appeal is disposed off in the above terms with no order as to costs. " (emphasis supplied) iv. Similar view has been endorsed by the Bombay High Court in the case of CIT vs. HSBC Securities & Capital Markets (India) (P.) Ltd: 379 ITR 146 wherein, again, it has been reiterated that where assessee was under bona fide belief that tax was not deductible at source, disallowance made under section 40(a)(ia) of the Act could not be sustained for non-deduction of tax at source. v. Further, the Delhi Bench of the Tribunal in the case of Convergys India Services Pvt. Ltd vs. ACIT: ITA No. 5451 of 2011 deleted disallowance under section 40(a)(ia) of the Act, accepting the contention of the assessee that tax was not deducted at source on interest payment made to KMPL since the assessee was under bonafide belief that no tax was required to be deducted at source on such payments. The relevant findings of the Tribunal are reproduced as under:

Page 7 of 59 11.6 Learned AR pointed out that KMPL, being a resident, has duly furnished a return of income and has considered the interest income amounting to Rs.5,75,760 received from the assessee while computing its total income for the year under consideration. Further, taxes have also been paid by KMPL on such interest income for the year under consideration. In view of the amended provisions, the assessee cannot be termed as "assessee in default" and therefore, the amount of Rs.5,75,706 sought to be disallowed under sec. 40(a)(ia) of the Act in the hands of the assessee. 11.7 The Learned CIT(DR) on the other hand placed reliance on the orders of the authorities below. 11.8 Considering the above submission, we, prime facie, find substance in the contention of the Learned A R that the assessee was under the bona fide belief that no tax was required to be deducted at source from the payment made to KMPL in terms of the exceptions carried out in sec. 194A of the Act as the provisions of sec.!94A shall not apply where income is credited or paid to any banking company to which the Banking Regulation Act, 1949 applied. especially when there is no dispute that Kotak Mohindra Bank Ltd, is a banking company to which the Banking Regulation Act, 1949 applies and further that section 19of Banking Regulation Act, 1949 provides that a banking company shall not form any subsidiary company except a subsidiary company formed for under taking of any business which is permissible for a banking company to undertake. Again there is substance in the alternative submission of the assessee which is supported by the above cited decisions in the case of Rajiv Kumar Aggarwal (supra), Dr. Jai Deep Kumar Sharma (supra) and Raja Chakravorty (supra) that the amendments made by the Finance Act, 2012 to section 201 and Section 40(a)(ia) of the Act sought to be applied to cases prior to 01,07.2012

Page 8 of 59 since the amendments are procedural in nature and are intended to remove the hardship being faced by the assessee, the amendments are declaratory and curative in nature and shall have retrospective effect. We thus set aside the matter to the file of the Assessing Officer to examine the submission of the assessee that KMPL had duly furnished the return of income and had considered the interest income amounting to Rs. 5,75,706 received from the assessee while computing its total income for the year under consideration and further that the taxes had also been paid by KMPL on such interest income for the year under consideration and decide the issue afresh in view of above submissions and cited decisions by the Learned AR after affording opportunity of being heard to the assessee. The ground No. 5 is accordingly allowed for statistical purposes. " (emphasis supplied) vi. To the same effect are the following decisions: i. CIT vs. ITC Ltd: 263 CTR 241 (All) ii. ACIT vs. M/s. UBS Securities India Pvt. Ltd.: ITA No. 6451 of 2011 (Del) iii. DCIT vs. Satellite Television Asian Region Ltd: 23 taxmann.com 100 (Mum Tri.) iv. ACIT vs. Priyasha Meven Finance Ltd: ITA No. 115/Mum/2012 (Mum) v. DCIT vs. Anant Investment - ITA No. 6428/Mum/2010 (Mum) vi. CMS (India) Operations & Maintenance Co. (P.) Ltd: 19 taxmann.com 139 (Chen Tri.) vii. Infotech Enterprises Ltd. vs. ACIT: 41 taxmann.com 364 (Hyd Tri.) viii. Cyient Ltd vs. DCIT: 58 taxmann.com 70 (Hyd. Trib.)

vii. In the case of the appellant too, it is submitted, the appellant, has been undertaking similar transaction of sale of pre-paid sim cards since assessment year 1995-96 where no tax was

Page 9 of 59 deducted there from in the earlier years as well and the Revenue did not draw any adverse inference. In other words, no disallowance on this account was ever made in the past. It is for the first time in assessment year 2007-08, i.e. the immediately preceding assessment year that disallowance under section 40(a)(ia) r.w.s. 194H of the Act was made. In the aforesaid circumstances, the appellant, it will kindly be appreciated entertained bonafide belief that no tax was deductible under section I94H of the Act in respect of the transaction under consideration. viii. It has been the case of the appellant that tax is not deductible at source in view of the following contentions: (a) the transaction between the appellant and distributor(s) being on principal to principal basis, provisions of section 194H was not applicable; (b) transaction of sale of sim-card is a transaction of sale of a product/ service by the appellant to its distributors, not involving giving of any discount and therefore, provisions of section 194H of the Act are not applicable; (c) In the absence of payment or credit of an amount, which constitutes "income" in the hands of the recipient, provisions of section 194H were not applicable; (d) the provisions of section 194H of the Act, which deal with tax deduction on payments of commission or brokerage are in any case not applicable in case of trade discounts1; (e) the amount on which tax was required to be deducted at source under section 194H of the Act was indeterminable and hence it was impossible for the appellant to withhold tax under section 194H of the Act; and (f) in the absence of any actual payment or credit of any amount in the books of the appellant (i.e. the payer), the machinery provisions contained in section 40(a)(ia) of

Page 10 of 59 the Act would fail and accordingly, the payer could not be required to deduct tax at source. ix. The principal issue whether tax is deductible at source on aforesaid transaction of sale of a product in the form of pre-paid sim-card is, it is further submitted, a highly disputed and vexed legal issue. x. In the following cases, the Courts and various benches of the Tribunal have held that tax is not deductible: i. Bharti Airtel Ltd. DCIT: 372 ITR 33 (Kar) ii. Vodafone Essar Gujarat Ltd. vs. ACIT: 60 taxmann.com 214 (Ahd.) iii. Bharti Hexacom Ltd vs. ITO: 42 ITR(T) 686 (Jaipur) xi. A contrary view has however, been taken by the Delhi High Court in the case of CIT vs. Idea Cellular Ltd.: 325 ITR 148. The matter is pending consideration before the Hon'ble Supreme Court. xii. The aforesaid cleavage of judicial opinion further fortifies the contention of the appellant that the fundamental question as to whether tax is deductible is a highly debatable and vexed legal issue, still to be finally resolved one way or the other. xiii. In view of the above, it is respectfully submitted that since the appellant was under bonafide belief that tax was not deductible at source on the transaction under consideration, no fault can be found in not deducting the tax at source and consequently, disallowance under Section 40(a)(ia) of the Act is not warranted.

Page 11 of 59 contemplated under the said section is only in respect of such expenditure, payment for which remains outstanding at the end of the year. b) In this regard, it is respectfully submitted, that the normal rule of interpretation is that the intention of the Legislature is to be gathered primarily from the words used by the statute. Thus, one must regard the letter of the law strictly and not go by what is inferred as the spirit of the statute or the substance of law. Reliance in this regard is placed on the following decisions: i. CIT vs. Sodra Devi: 32 ITR 615 (SC) ii. Tarulata Shyam vs. CIT: 108 ITR 345 (SC) iii. CIT vs. Sundaram Iyengar& Sons Pvt. Ltd: 101 ITR 764 (SC) iv. Keshavji Ravji & Co vs. CIT: 183 ITR 1 (SC) c) It may, in this regard, also be pertinent to note that Rule 30 of the Income-tax Rules, 1962 ("the Rules") provides for time and mode of payment of TDS to the Government. A cursory reading of the rule shows that it only covers situations where tax is deducted at source as and when required in law. It does not envisage a situation where payment has already been made and tax is to be subsequently deducted and paid. In view of the same, disallowance under section 40(a)(ia) of the Act should also be restricted to amounts which are payable on which tax can be deducted and paid as per Rule 30 of the Rules. d) Further, Rule 30, prior to its substitution by the Income-tax (Sixth Amendment) Rules, 2010 with retrospective effect from April 1, 2010 allowed 2 months for depositing TDS for amounts payable at the year-end as against one week from the end of the month in which TDS is deducted for amounts paid during the year. The words 'paid1 and 'payable1 have different connotations and, therefore, different time periods have been prescribed for depositing TDS. Since the language used in section 40(a)(ia) of the Act uses the word 'payable', it should only be restricted to amounts payable at the year end and should not cover amounts paid during the year.

Page 12 of 59 e) It is further respectfully submitted, that there is a marked difference between the language of the provision introduced at the enactment stage and the provision which was actually inserted in the statute. The difference was that at the enactment stage, the proposed section read as follows: "...fees for professional services or fees for technical services payable to a resident, or amount credited or paid to a contractor or sub-contractor, being resident, for......." (emphasis supplied)

f) The words 'amount credited or paid1 were removed before the Finance Bill, 2004 was passed and received the assent of the President. This indicates that there was a deliberate and intentional change carried out to keep out amounts paid from the purview of section 40(a)(ia) of the Act. g) The aforesaid principle has been affirmed by the Allahabad High Court in the case of CIT vs. Vector Shipping Service (P) Ltd: 357 ITR 642 (All), where the Court categorically held that section 40(a)(ia) of the Act can apply only to expenditure which is "payable" as on 31st March and does not apply to expenditure which has already been paid during the year. h) The Special Leave petition preferred by the Department against the aforesaid order passed by the Allahabad High Court has been dismissed vide order dated 02.07.2014 in CC No(s). 8068/2014. i) Further, specific reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Al-Hind Exports vs. ITO: ITA No. 439/Del/2015, where the facts before the Tribunal were that the assessing officer made disallowance under section 40(a)(ia) of the Act in respect of payments made to various parties towards shipping charges on which tax was not deducted. On appeal, the CIT(A) confirmed the disallowance made by the assessing officer. j) On further appeal, the Tribunal, following the ratio laid down by the Allahabad High Court in the case of CIT vs. Vector Shipping

Page 13 of 59 (supra.), held that disallowance under section 40(a)(ia) of the Act, if any, was to be restricted to the amount(s) remaining payable as on the last day of the relevant previous year. Relevant findings of the Tribunal in this regard are reproduced as under: 10. We have carefully considered the rival contentions the assessee has submitted that payment have been made to various parties who are shipping agents. If the facts are so then according to us the provision of section 172 applies to them and tax is not required to be deducted u/s. 194C of the act. Secondly if the expenses are already paid and not payable in that case the provision of section 40a (ia} is required to be applied and no disallowance is called for to the extent sums are paid, in view of the decision of the Hon'ble Allahabad High Court in the case of CIT v. Vector Shinning Pvt. Ltd.: 357 ITR 642. In view of this above two directions, we set aside the issue to the file of the AO for verification if the payments are made to the agents of foreign shipping agents then no disallowance is called for. Further, the disallowance is also required to be reduced to the extent of amount paid by the assessee in view of decision of the Hon'ble Allahabad High Court. 11. In the result ground, No. 3 of the appeal is allowed with above direction, "(emphasis supplied)

k) To the same effect is the decision of the Delhi Bench of the Tribunal in the case of Opitech Software (P) Ltd. v. ITO: 1584/Delhi/2013, wherein the Tribunal, following the decision of the Allahabad High Court in Vector Shipping (supra) deleted the disallowance made under section 40(a)(ia) of the Act on the ground that all payments on which disallowance was attracted, were made during the year itself with no amount outstanding as on the last day of the relevant previous year. Relevant findings of the Tribunal are reproduced hereunder:

Page 14 of 59

"3. As regards the 1st addition and disallowance u/s. 40(a)(ia), Ld. A.R. submitted that the amount was paid during the year itself and were not outstanding as payables and, therefore, in view of the decisions of the Tribunal in the case of Sim Anooy Khandelwal in I.T.A. No. 18/Del/2013, dated 17th Oct. 2014 the addition was not warranted. It was submitted that the Tribunal has decided the similar issue relying on the case law of CIT v. Vector Shipping Services Pvt. Ltd.: 355 ITR 642, Regarding the 2nd ground of appeal, Ld. A.R. submitted that the provisions were outstanding in the books of account and it was not written back by the assessee and, therefore, the provision of Section 41(1) were not applicable. As regards the 3rd addition for violation of the provision of Section 269SS, Ld. A.R. submitted that the assessee had not accepted the loan in cash and rather the director had directly paid to Hundai Motors and assessee had just passed a journal entry by crediting the amount to the account of Directors and therefore there was no violation of the provisions of Section 269SS. Reliance in this respect was placed on the case la\v of CIT v. Worldwide Townships Projects Ltd. decided by Hon'ble Delhi High Court in I.T.A. No. 232/2014 for the proposition that provisions of section 269SS are not applicable in a case where loan was not accepted in cash. 4. Ld, A.R. on the other hand heavily relied upon the order of authorities below. 5. We have hard rival parties and have sone through the material placed on record, We find that the issue of addition u/s. 40(a)(ia) is duly covered in favour of assessee because it is an undisputed fact that payments were made during the year itself and therefore, were not outstanding as payable. The Special Bench in the case of Merlyn Shipping ^Transport Co. in 136 ITD 23 has clearly held

Page 15 of 59 that disallowance u/s. 4Q(a)(ia), can be made of the amounts which are payable and cannot be made of the amounts which have already been paid. Similar findings has also been made by Hon'ble Allahabad High Court in case of Vector Shipping Service Pvt. Ltd. Reported at 357ITR 642 against which SLP filed by the department has also been dismissed, Though Hon'ble Calcutta High Court in the case of CIT v, Crescent Export Syndicate 216 Taxman 250 and Hon'ble Gujarat High Court in the case of CIT v. Sikander Khan 357 ITR 312 are not in favour of assessee but keening in view of Hon Supreme Court decision in the cane of CIT v. Vegetable Products 88 ITR 92, the assessee is entitled to application of judgment benefiting to it and, therefore* applying the Hon'ble Allahabad High Court judgment, the 1st ground of appeal is decided in favour of assessee and is therefore, allowed, "(emphasis supplied)

l) To the same effect are the following decisions: - Matrix Infrastructure vs. ITO: 5428 and 5548/Del./2010(Del) - ITO vs. Vinod Datta 22 ITR (Trib.) 243 (Mum) - DCIT vs. Halani Shipping Pvt Ltd.: ITA No. 1919/Mum/2013 (Mum) - Arcadia Share & Stock Brokers Pvt. Ltd. vs. DCIT: ITA No. 1871/Mum/2013 (Mum) - ITO vs. MGB Transport 23 ITR (Trib.) 391(Kol) - DCIT vs. Ananda Marakala: 150 ITD 323 (Bang) - DCIT vs. Udupi Ananda Marakala: ITA No.l584/Bang/2013 (Bang) - DCIT vs. MRF Limited: ITA. No, 1985/Mds/2011 (Chennai) - Devendra Exports (P.) Ltd. vs. ACIT: ITA No.849 & 850/Mds/2013 (Chen) - DCIT vs. Gupta Overseas: 153 ITD 357 (Agra)

Page 16 of 59 - Raja Mahendri Shipping & Oil Field Services Ltd. v. ACIT: 51 SOT 242 (Vishk.)

m) In view of the above and without prejudice to the contention on merits, it is respectfully submitted, that disallowance under section 40(a)(ia) of the Act should, if at all, be restricted to the amount remaining payable as on the last day of the relevant previous year.

Page 17 of 59 and iii. the payee furnishes certificate from a Chartered Accountant in support thereof.

d) Non-deduction of tax at source from the amounts genuinely spent by the assessee for business purpose, resulting into disallowance under section 40(a)(ia) of the Act, notwithstanding that tax was paid by the payee treating the amount received from the payer as its taxable income, caused lot of hardship to assesses. The amendment by the Finance Act, 2012, relaxing the rigors of section 40(a)(ia) of the Act should be construed as having retrospective operation from assessment year 2005- 2006, being the year of insertion of this provision.

e) Attention in this regard is invited to the Memorandum explaining the provisions of the Finance Bill, 2012, which provides the rationale of the aforesaid amendment to section 40(a)(ia) of the Act in the following words:- "In order to rationalise the Prows ions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. " (emphasis supplied)

f) On perusal of the above, it may kindly be noted that the wordings 'In order to rationalise the provisions' indicates that the amendment was made with a view to remove unnecessary hardship caused to assesses by the earlier provision. The said amendment is thus remedial/ curative in nature and should

Page 18 of 59 accordingly be regarded as clarificatory and retrospective in nature, notwithstanding that the same has been made applicable from 1st April, 2013, i.e. from assessment year 2013- 14 onwards. g) It is well settled law that when a provision is inserted as a remedy to make the provision workable, it is required to be considered to be applicable retrospectively. Kind attention for the aforesaid is invited to the decision of the Supreme Court in the case of Allied Motors (P.) Ltd. vs. CIT: 224 ITR 677. In that case, the Court held that proviso to section 43B of the Act though inserted w.e.f. 01.04.1989 had to be held to be applicable retrospectively from 1.04.1984, i.e., the date from which the said section was brought on the statute. It was observed by their Lordships that the amendment which was made by the Finance Act, 1987 in section 43B of the Act by inserting, inter alia, the first proviso, was remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessees and which made the provision unworkable or unjust in a specific situation.

h) To the same effect is the subsequent decision of the Supreme Court in the case of CIT vs. Alom Extrusions Ltd: 319 ITR 306 wherein, too, the apex Court, while following the aforesaid decision of Allied Motors (supra), held that the deletion of second proviso to section 43B was curative in nature and, hence, retrospective and would operate with effect from 01.04.1988, when the first proviso came to be inserted.

i) Reference at this juncture may also be made to the amendment to section 40(a)(ia) vide Finance Act, 2010, w.e.f. 01.04.2010 by way of insertion of the first proviso thereto, which provided relaxation from disallowance under the said section, where the assessee had deducted tax at source on payments made in conformity with Chapter XVII-B and deposited the same on or before due date specified in section 139(1) of the Act.

Page 19 of 59

j) Controversy arose as to whether amendment made by the Finance Act, 2010, by way of insertion of first proviso to section 40(a)(ia) of the Act was prospective or retrospective in nature. On the aforesaid issue the Courts have, in a catena of decisions, consistently held that the amendment brought by Finance Act, 2010, being remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the taxpayers, had to be regarded as clarificatory in nature and having retrospective operation with effect from 1st April, 2005, viz., the date on which section 40(a)(ia) was brought on the statute.

k) The Hon'ble Delhi High Court in the case of CIT vs. Rajinder Kumar: 362 ITR 241 (Del), held that the amendment to section 40(a)(ia) of the Act by the Finance Act, 2010, extending period of payment till due date of filing of return was retrospective in nature as the said amendment was procedural in nature, intended to ensure collection of TDS. The pertinent findings of the Court in this regard, are reproduced as under: "25. In view of the aforesaid discussion in paras 18,19 and 20, it is apparent that the respondent assesse did not violate the unamended section 40(a)(ia) of the Act. We have noted the ambiguity and referred their contention of Revenue and rejected the interpretation placed by them. The amended provisions are clear and free from any ambiguity and doubt. They will help curtail litigation. The amended provision clearly support view taken in paragraphs 17-20 that the expression "said due date" used in clause A of proviso to unamended section refers to time specified in Section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statue when it stipulates that deductions made in the first eleven months of the previous year but paid before the due date of filing of the return, will constitute sufficient compliance ………………………………

Page 20 of 59 The intention behind Section 40(a)(ia) is to ensure that TDS is deducted and paid. The object of introduction of Section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assessee when payment has been made within the time staled. Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/paid and the respondent who is following cash system of accountancy has made actual payment to the third party for services rendered. If the said object and purpose is kept in view, we do not think the Assessing Officer was justified in disallowing and in invoking Section 40(a)(ia) in the present case. The question of law is accordingly answered in negative, i.e., in favour of the respondent-assessee and against the Revenue. The appeal is accordingly disposed of. No costs." (emphasis supplied)

l) To the same effect is the decision of the Hon'ble Delhi High Court in the case of CIT vs. Naresh Kumar: 326 ITR 256 (Del).

m) Further, the aforesaid principle has also been applied by the Calcutta High Court in the case of CIT vs. Virgin Creations [ITA No. 302 of 2011] wherein the issue before the Court was whether section 40(a)(ia) which was amended by Finance Act, 2010 with effect from 1st April 2010 to provide that payer would not be subject to disallowance if the TDS is paid before due date of filing of tax return would be retrospective or prospective in nature. The Court held that since the amendment was curative and remedial in nature, the same must have retrospective operation. The observations of the Court are as under:

Page 21 of 59 "It is argued by Mr. Nizamuddin that this court needs to take decision as to whether section 40(a)(ia) is having retrospective operation or not. The learned Tribunal on fact found that the assessee had deducted tax at source from the paid charges between the period April 1, 2005 and April 28, 2006 and the same were paid by the assessee in July and August 2006, i.e. well before-the due date of filing of the return of income for the year under consideration. This factual position was undisputed. Moreover, the Supreme Court, as has been recorded by the learned Tribunal, in the case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., has already decided that the aforesaid provision has retrospective application. Again, in the case reported in 82 1TR 570, the Supreme Court held that the provision, which has inserted the remedy to make the provision workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well

In view of the authoritative pronouncement of the Supreme Court, this court cannot decide otherwise. Hence we dismiss the appeal without any order as to costs. "

n) The aforesaid position is also buttressed by the amendment made in section 201(1) of the Act vide the Finance Act, 2012 which provides that a person, including the principal officer of a company, who fails to deduct tax on the sum paid to a resident shall not be deemed to be "assessee in default" in respect of such tax if such resident - i) has duly furnished his return of income; ii) has taken into account such sum for computing income in such return of income; and, iii) has paid the tax due on the income declared by him in such return of income.

Page 22 of 59 o) The aforesaid amendment made to section 201(1) of the Act vide Finance Act, 2012 has been held to have retrospective effect in the following decisions:

p) Thus, in view of the aforesaid legal principles laid down by various Courts (supra), including in relation to construction of the first proviso to section 40(a)(ia) itself, it may reasonably be concluded that where a proviso is inserted to remedy unintended consequences and to make the provision workable, the same should be treated as retrospective in operation. Accordingly, second proviso to section 40(a)(ia) of the Act inserted by Finance Act, 2012 being declaratory and curative in nature, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

q) It is respectfully submitted, that the aforesaid analogy provided by the Courts in relation to the retrospective operation of the first proviso to section 40(a)(ia), clearly applies even in case of the amendment made vide Finance Act 2012, by way of insertion of second proviso to section 40(a)(ia) and the same would, it is respectfully submitted, have retrospective application.

r) Specific reliance in this regard is placed on the decision of the Delhi High Court in the case of CIT vs. Ansal Land Mark Township (P) Ltd: 377 ITR 635 wherein the assessing officer made disallowance under section 40(a)(ia) of the Act in respect of certain payments on which tax was allegedly not deducted under section 194J of the Act. The assessee filed appeal against the aforesaid disallowance contending that in view of insertion of second proviso to section 40(a)(ia), the payment made could not have been disallowed since the payees had ultimately paid tax on the said sum. The Tribunal accepted the assessee's plea and deleted the impugned disallowance.

Page 23 of 59

On revenue's appeal before the Hon'ble High Court, it was held as under:

9, It is seen that the second proviso to section 40(a) (la) was inserted by the Finance Act, 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an assessee fails to deduct tax in accordance with the provisions of Chapter XVIIB. Where such assessee is deemed not to be an assessee in default in terms of the first proviso to sub-section (I) of section 201 of the Act, then, in such event, 'it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso'. 11. The first proviso to section 201 (1) of the Act has been inserted to benefit the assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under section 139. No doubt, there is a mandatory requirement under section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to section 201(1). The insertion of the second proviso to section 40(a)(ia)also requires to be viewed in the same manner. This again is a proviso intended to benefit the assessee. The effect of the legal fiction created thereby is to treat the assessee

Page 24 of 59 as a person not in default of deducting tax at source under certain contingencies. 13. Turning to the decision of the Agra Bench of IT AT in Rajiv Kumar Agarwal. ACIT[ITApeeal No. 337 (Agra) of 2013], it is apparent that it has undertaken a thorough analysis of the second proviso to section 40(a)(ia) and also sought to explain the rationale behind its insertion. 14. The reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to section 40(a)(ia) and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April'2005, merits acceptance. 15. In that view of the matter, there is no infirmity in the impugned order of the Tribunal in adopting the ratio of the decision of the Agra Bench Tribunal in Rajiv Kumar Aganval's case (supra). " (emphasis supplied) s) Further reliance in this regard is placed on the decision on Delhi Bench of the Tribunal in the case of SP P. Ltd. vs. ACIT: ITA No. 880/DeI/2014 wherein the Tribunal while dealing with the issue whether amendment to section 40(a)(ia) introduced vide Finance Act, 2012 w.e.f.01.04.2013 was retrospective or not held as under:

"6. We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us. We find that the decision of the Hon'ble High Court at New Delhi in the case of CIT vs. Ansal Land Mark Township [P] Ltd in ITA No. 160 & 161/2015 vide order dated 26"' August 2015 is relevant to the case in hand. Paras 13 to 16 of this order is reproduced hereinbelow In view of the dicta laid down by the Hon'ble Jurisdictional High Court fsupra/ the insertion of

Page 25 of 59 second proviso to section 40(a)(ia) of the Act is declaratory and curative in nature and(__it_ has retrospective effect from 1.4.2005 being the date from which which sub-clause (ia} of section 40(a) w as inserted by the Finance Act [No. 2] 2004. From the operative para 6.7 of the first appellate order, it is apparent that the Id. CIT(A) upheld the disallowance by holding that the proviso, inserted by Finance Act 2012, w.e.f 1,4,2 014 is not applicable to A.YITA No. 880/Del/2014 2009-10. But in view of proposition rendered by the Hon'ble High Court of Delhi, it is settled that the proviso to section 40(a)(ia) of the Act being declaratory and curative is applicable from 1.4.2005 which is (lie date of insertion of sub-section (ia) of section 40(A) of the Act. Hence, view taken by the AO for making disallowance and basis on which the same was upheld by the Id. CITCA) is not sustainable in view of the dicta of Hon'ble Jurisdictional High Court. Thus, we are inclined to hold that the benefit of the proviso to section 40fa)(ia)of the Act is available for the assessee for A.Y 2009-10 as the AO could not controvert the fact supported by the certificate of the payee M/s Kotak Mahindra Pvt, Ltd stating that the payee has enclosed the said amount in its income in the return filed u/s 139 of the Act and has paid tax due on its income declared in the return. In tin s factual matrix the proviso to section 4Q(a)(ia) of the Act having retrospective effect from 1.4.2005 come into play to rescue the defaulter assessee and thus disallowance made by the AO and upheld by the id. CIT(A) is demolished. Accordingly, Ground No. 1 to 3 of the assessee are allowed "(emphasis supplied)

t) Similarly, the Delhi Bench of the Tribunal in the case of RAASFAA vs. ITO: ITA No. 3182 of 2013 has, following the

Page 26 of 59 aforesaid decision of the Jurisdictional High Court in the case of Ansal Land (supra), held that the second proviso to section 40(a)(ia) is declaratory and curative in nature and thus has retrospective effect from 01.04.2015, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

u) To the same effect are the following decisions: a. Convergys India Services Pvt. Ltd vs. ACIT: ITA No. 5451 of 2011 (Del) b. Rajeev Kumar Agarwal vs ACIT: 149 ITD 3 63 (Agra) c. Shri G.Shankar vs. ACIT: ITA No.l832/Bang/2013 (Bang) d. DCIT vs. Anand Marakala: ITA No.l584/Bang/2012 (Bang) e. S.MAnand vs. ACIT: ITANo.l831/Bang/2013 (Bang) f. BallabhDasAgarwalvs. ITO:ITANo. 1278/KoI./2011 (Kol) g. Ambo Exports Ltd. vs. DCIT: ITANo. 503/Kol/2015 (Kol.) h. New Alignment vs. ITO: 69 taxinann.com 122(Kol.) i. MitraGuha Builders (India) Co. vs. DCIT: 65 taxmann.com 243 (Kol.) ITO vs. Ashok Trading Company: 66 taxmann.com 85 (KoK) Dilip Kumar Roy vs. ITO: 68 taxmann.com 129 (Kol) j. Brijgopal MadhusudanBhattad vs. ITO: 155 ITD 90 (Nag.) k. RKP Company vs. ITO: 1TA No: 106/RPR/2Q16 (Raipur) l. Shiv Krupa Tin Containers vs. ITO: ITA No. 136/Ahd/2016 (Ahd)

v) Thus, without prejudice to the contention that no tax was deductible at source by the appellant under section 194H of the Act, it is further submitted that since the distributors had taken

Page 27 of 59 into consideration the said amount in the income returned under the Act and paid tax thereon, tax cannot once again be recovered on such amount from the appellant on the ground of alleged failure to deduct tax at source, w) It may be pertinent to mention here that in pursuance of proceedings initiated under section 201 for the assessment year under consideration, the appellant was deemed to be an 'assessee in default' and interest was charged under section 201(1 A), on account of non-deduction of tax at source under section 194H of the Act, on transactions entered into with distributors for sale of pre-paid cards in respect of Kolkata circle involving transactions to the tune of Rs.71,38,51,899. On appeal against the aforesaid order, the CIT(A), following the order of the Calcutta High Court in the appellant's own case for assessment years 2003-04 and 2004-05, was pleased to direct the assessing officer to verify whether the payees had considered the receipts from the assessee as part of their taxable income/ paid tax thereon and, accordingly, exclude the principal amount of taxes to that extent.

x) In pursuance of the aforesaid directions, the assessing officer vide order dated 28.06.2013, deleted the principal amount of demand raised under section 201 in relation to non-deduction of tax at source under section 194H of the Act.

y) Consistent with the aforesaid finding of the assessing officer in the order passed under section 201 dated 28.06.2013, the aforesaid amount included by the payees as part of taxable income should be directed to be excluded from consideration for the purpose of disallowance under section 40(a)(ia) of the Act. z) Further, in the assessment order passed under section 143(3) of the Act for the assessment year 2010-11, the assessing officer has suo-motu allowed deduction to the extent of amount of discount on which tax has ultimately been paid by the payees/ distributors (which was duly supported by distributor/chartered

Page 28 of 59 accountant's certificate), in the year of filing of return by the distributors/payees treating such amount as part of taxable income, in view of the amendment made to section 40(a)(ia) of the Act.

aa) In view of the above it is respectfully submitted that the assessing officer may be directed to allow deduction to the extent of amount of discount on which tax has ultimately been paid by the payees/ distributors, which is duly supported by distributor/chartered accountant's certificate. Re (it): Disallowance u/s 40(a)(ia) to be restricted to 30% of expenditure bb) Apart from the above, vide the Finance Act 2014, the provisions of section 40(a)(ia) of the Act were further amended to restrict disallowance on account of non-deduction of tax at source on payments made to residents to the extent of 30% of the expenditure as against disallowance of entire expenditure. The said section, after the amendment, reads as under:

"40, Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 ..................... " (emphasis supplied)

cc) The Memorandum explaining provisions of the Finance Bill, 2014 provides the rationale of the aforesaid amendment to section 40(a)(ia) of the Act in the following words: As mentioned above, in case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the

Page 29 of 59 entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head "Profits and gains of business or profession". The disallowance of whole of the amount of expenditure results into undue hardship.

In order to reduce the hardship, it is proposed that in case of non-deduction or nonpayment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.

Further, existing provisions of section 40(a)(ia) of the Act provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVI1-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia) of the Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) of the Act may also be claimed as expenditure for the purposes of computation of income under the head "Profits and gains from business or profession ~ Clause 14 "

Page 30 of 59 These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years, "(emphasis supplied)

dd) The aforesaid amendment, it may be noted, is curative in nature, being introduced to reduce the undue hardship caused to assessee on disallowance of entire amount of expenditure. Accordingly, the same would, in our respectful submission, have retrospective operation.

ee) Your honour's kind attention, in this regard, is invited to the decision of the Larger Bench of the Supreme Court in the case of CIT vs. Gold Coin Health Food (P) Limited: 304 ITR 308, wherein Their Lordships, while analyzing the principles regarding retrospective operation of statutes categorically observed, "The presumption against retrospective operation is not applicable to declaratory statutes... In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form."

ff) In view of the aforesaid, it is further submitted that the mere fact that the Finance Act, 2014, at the time of amending section 40(a)(ia) of the Act, referred to amendment being carried out w.e.f. 01.04.2015, cannot be construed to mean that the amendment would be applicable with effect from that date only. As has been held by the Supreme Court in the case of Gold Coin (supra), in determining the nature and the applicability of the provision, regard must be had to the substance rather than to the form. Therefore, the mere fact that the amending Act specifically referred to amendment being carried out from a particular date does not mean that the amendment, even though clarificatory/ curative would be prospective and not retrospective in operation

Page 31 of 59 gg) Further, it may also be pertinent to note that all amendments introduced under the provisions of section 40(a) of the Act have, as elaborately discussed supra, been held to be retrospective in nature as elaborately discussed supra. hh) In view of the aforesaid, it is emphatically reiterated that amendment in section 40(a)(ia) of the Act, being clarificatory/ curative in nature, is applicable retrospectively. Being so, it is submitted that disallowance, if at all, should be directed to be restricted only to 30% of the expenditure claimed in the year under consideration.

"40. Notwithstanding anything to the contrary in sections 30 to 31, the following amounts shall not be deducted in

Page 32 of 59 computing the income chargeable under the head "Profits and gains of business or profession ": (ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub- contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax_is_deductible at source under Chapter XVH-Band such tax has not been deducted or, after deduction, has not been paid on or before the due date__specified _in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. iii. The following second proviso was inserted in sub-clause (ia) of clause (a) of section 40 by the Finance Act, 2012, w.e.f. 1-4-2013: Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVH-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (I) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. " (emphasis supplied) iv. On perusal of the above, it will kindly be noticed that in terms of section 40(a)(ia), in case there is violation of provisions contained in Chapter XVII-B. then, notwithstanding anything provided under sections 30 to 38 of the Act, deduction for, inter alia, "any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident" is not allowable.

Page 33 of 59 v. Chapter XVII-B, it is submitted, is a self-contained code consisting of sections 192 to 206AA of the Act, regulating deduction of tax at source, its compliances and also consequences of any default. The said Chapter broadly comprises of the following: (a) Sections 192 to 195 of the Act specifying payments on which tax is deductible at source; (b) Duties of person deducting tax at source, including section 200 of the Act, prescribing the period within which the deducted amount should be paid to the Government and also mandating filing of TDS return; (c) Section 201 provides for the consequences of failure to deduct or pay tax at source and mandates the assessing officer to pass an order where the asscssee is in default of failure to deduct/ deposit TDS under the provisions of the Act. vi. In terms of section 40(a)(ia), violation of provisions contained in Chapter XVII-B of the Act is sine qua non for making disallowance under that section. Default under Chapter XVII-B is, on the other hand, determined by way of an order passed under section 201 of the Act vii. As a necessary corollary, unless there is an order under section 201 holding the assessee to be in default under Chapter XVII-B, the provisions of section 40(a)(ia) of the Act cannot, it is submitted, be applied to make any disallowance under the latter section. This is for the simple reason that under the scheme of the Act, determination of default under Chapter XVII-B, which is sine qua non for application of section 40(a)(ia), is only possible by way of an order under section 201 of the Act. Consequently, unless there is an order under section 201 holding the assessee to be default under Chapter XVII-B, section 40(a)(ia) of the Act cannot, it is submitted, be applied. viii. As stated above, Chapter XVII-B of the Act provides a complete code in itself not only specifying the provisions relating to deduction and recovery of tax but also the consequential

Page 34 of 59 implications of default thereof. Being an integrated code, it is quite fundamental that default under Chapter XVII-B can only be determined by way of an order passed under the said Chapter itself, i.e., section 201 of the Act as mandated therein, and not under any other Chapter. ix. The provisions of section 40(a)(ia), on the other hand are, it is submitted, in the nature of penal provisions, triggering harsh consequence of disallowance of expenditure in case of any default under Chapter XVI-B of the Act. Thus, section 40(a)(ia)of the Act can, in our respectful submission, would get trigged if and only if the assessee is held to be in 'default' by way of an order passed under section 201 under Chapter XVII-B of the Act. x. Reliance in this regard is placed on the decision of the jurisdictional Delhi High Court in the case of CIT vs. JDS Apparels (P.) Ltd.: 370 ITR 454 wherein it has been held that doubtful penalization should be avoided in case of disallowance made under section 40(a)(ia) of the Act. The relevant findings of the Court are reproduced as under: "77. Another reason why we feel Section 4Q(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 venal provisions. The said principle applies not only to criminal statutes but also to provisions, which create deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalizing 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

Page 35 of 59 present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell's The Interpretation of Statutes, 12th edition (1969) it has been observed:— 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 fulfillment 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." ................,....." (emphasis supplied) xi. It will thus, kindly be appreciated that the jurisdictional Delhi High Court has clearly held, "Section 40(a)(ia) is a deterrent and a penal provision". xii. It is trite law that penal consequences follow the charging/ substantive provisions. Therefore, the provisions of section 40(a)(ia), it is respectfully submitted, could only be invoked to make disallowance under that section subsequent to determination of default under the principal section, i.e. Chapter XVII-B of the Act, and not otherwise. xiii. It will kindly be appreciated that disallowance under section 40(a)(ia), in the absence of any default being determined under section 201, would result in doubtful penalization by way of disallowance of entire claim of expenditure incurred by the assessee, notwithstanding the fact that the assessee has not even been proved/ established to be in default, which would be totally contrary to the scheme of the Act. xiv. Kind attention, in this regard, is invited to the decision of the Delhi Bench of the Tribunal in the case of Bharti Hexacom Ltd vs. ACIT: 68 Taxman.com 350. In that case, the issue before the

Page 36 of 59 Tribunal was regarding disallowance of discount provided to distributor on sale of prepaid cash, roaming charges and interconnect charges on account of non-deduction of tax at source under section 194H/194J of the Act. In that assessee's case for the same assessment year, the Tribunal, while adjudicating appeal against order under section 201 of the Act had held that there was no default on the part of the assessee in not deducting tax at source, despite, the jurisdictional High Court decision in the case of Idea Cellular (supra) which had held that the assessee was under obligation to deduct tax at source on payment(s) made to the distributor. In these circumstances, the issue before the Tribunal was whether disallowance under section 40(a)(ia) was justified despite the fact that the assessee was held to be 'not in default' in proceedings under section 201 of the Act, notwithstanding contrary decision of the jurisdictional High Court mandating tax to be deducted at source. xv. The Tribunal after elaborately considering the scheme of the Act, in particular the concept of principle of doubtful penalization, held that before provisions of section 40(a)(ia) of the Act could come into place, there should be sum paid by the assessee on which tax was defaulted under Chapter XVII-B of the Act.. Accordingly, the Tribunal held that since the assessee was held 'not to be in default' under section 201, disallowance under section 40(a)(ia) of the Act was not justified. xvi. The aforesaid decision, it is respectfully submitted, fortifies the contention of the appellant that unless the assessee is held to be an 'assessee in default' under section 201, it is not permissible for the assessing officer to make disallowance of any expenditure under section 40(a)(ia) of the Act. The application of provisions of section 40(a)(ia) must, it is submitted, necessarily follow determination of default, if any, in deduction of tax at source in proceedings under section 201 of the Act. xvii. Accordingly, in the following kinds of cases, where the assessee has not been held to be in default under Chapter XVII-B, the necessary corollary would be that such payment cannot be

Page 37 of 59 subject matter of any disallowance under section 40(a)(ia) of the Act. a) where TDS return filed stands accepted and there is no specific order under section 201 of the Act; b) where TDS return filed is followed by an order under section 201, wherein there is no specific adverse finding of default in respect of the expenditure under consideration. xviii. It will kindly be appreciated that in case one were to hold that provisions of 40(a)(ia) could be invoked independent of any finding of default in proceedings under section 201 of the Act, the same would, in our respectful submission, lead to absurd results inasmuch the same would result in the assessee being saddled with penal consequences of disallowance of expenditure, without any finding of default under the primary/ principal provision. It is trite law that any interpretation which results in absurd/ unintended consequences should be avoided [refer CIT vs. J.H. Gotla: 156 ITR 323(SC)]. xix. In the present case, it is respectfully submitted that order under section 201 has been, as stated above, passed in respect of 10 circles holding the assessee to be in default on account of non- payment of tax at source in respect of payments aggregating to Rs.458,74,48,622. Against the said order(s), the appellant has filed appeals, which are presently pending adjudication before the Tribunal. Accordingly, till date, the appellant has been held to be in default on transactions to the extent of Rs.458,74,48,622 out of total amount of Rs.866,59,50,444. However, no order has been passed under section 201 of the Act in respect of 11 circles in respect of transactions aggregating to Rs.407,85,01,823. xx. In view of the aforesaid, it is respectfully submitted that since the appellant has not been held to be in default under Chapter XVII- B to the extent of Rs.407,85,01,823, the same could not have been subject matter of disallowance under section 40(a)(ia) of the Act.

Page 38 of 59 xxi. Insofar as the balance payment of Rs.458,74,48,622 is concerned, in respect of which the assesse has been held to be in default vide order passed under section 201 of the Act, the assessing officer may be directed to allow the same in case appeal filed by the appellant against the said order is allowed by the Tribunal. xxii. For the aforesaid cumulative reasons, it is respectfully submitted that disallowance of Rs.866,59,50,444 made under section 40(a) of the Act is legally unsustainable and calls for being deleted in toto.

Page 39 of 59 6.4 That the assessing officer erred on facts and in law in not appreciating that no 'income' per se accrued in favour of the distributor, requiring deduction of tax at source under section 194H of the Act. 6.5 That the assessing officer failed to appreciate that no tax could have possibly been deducted at source by the appellant under section 194H of the Act, as income accruing in the hands of the distributors was indeterminable. 6.6 That the assessing officer failed to appreciate that in the absence of any actual payment or credit of any amount in the books of the appellant, the machinery provisions contained in section 40(a)(ia) of the Act failed and accordingly, the appellant was not required to deduct tax at source. 6.7 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since non-deduction of tax at source was on account of bona fide view taken by the appellant. 6.8 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year. 6.9 That in any case deduction in respect of the amount of discount on which tax has ultimately been paid by the payees/distributors, either in the year under consideration or in the year of filing their return of income, ought to have been allowed in view of amendment to section 40(a)(ia) of the Act." 30. So far as this grievance of the assessee is concerned, the relevant material facts are as follows. During the course of assessment proceedings, the Assessing Officer noted that the assessee has allowed free airtime to its distributors amounting to Rs 505,47,21,495. This free airtime was given as a discount to the distributors on the retail price of prepaid products. The Assessing Officer, accordingly, concluded that this amount is in the nature of commission and the assessee ought to have deducted tax at source under section 194 H in respect of the same. In this backdrop, the Assessing Officer required the assessee to show cause as to why disallowance under section

Page 40 of 59 40(a)(ia) not be made in respect of the commission expenses so incurred by the assessee. The assessee's explanation was that since the transactions between the assessee and the distributors were in the nature of principal to principal transactions, these transactions were outside the ambit of Section 194 H, and, accordingly, disallowance under section 40(a)(ia) does not come into play. This explanation, however, was brushed aside by the Assessing Officer on the ground that, on materially identical facts and in the case of CIT v. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118 (Delhi), Hon'ble Delhi High Court has decided the issue against the assessee. The assessee carried his objection to this disallowance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 31. Having heard the rival contentions and having perused the material on record, and having noted that the issue is covered against the assessee by Hon'ble High Court decisions in the case of Idea Cellular Ltd (supra) as in assessee's own case, we see no reasons to interfere in the matter. Learned counsel for the assessee has pointed out that there is no element of agency, that talk time is traded and distributed, that it's a principal to principal relationship that the assessee has with his distributors, that flow of payment is in the reverse direction which is contrary to the concept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability. However, as the issue is covered against the assessee by direct decision of Hon'ble jurisdictional High Court, we are not inclined to deal with all these arguments. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, We hold that the assessee was required to deduct tax at source from the commission so allowed by the assessee, and, accordingly, his failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H. The disallowance is thus confirmed.”

Page 41 of 59 Ltd. [2010] 325 ITR 148/189 Taxman 118 (Delhi), . The Above decision of Honourable Delhi high court was delivered on 19/02/2010 where in the decision of coordinate bench in case of that assessee was reversed by the Hon high court. Further in case of Bharati Airtel limited V DCIT 372 ITR 33 (kar) the appeal was concurrently dismissed of the parties and before high court the appellant found favour with the decision of Honourable high court vide order dated 14/08/2014 . Further in Vodafone Essar Gujarat Limited V ACIT 60 taxmann.com 214 (ahd) dated 7/7/2015 it has been held as under :- “7. We find that what is sold by the assessee is air time, whether through the physical vouchers or through the electronic transfer of refill/recharge value, to its distributors. It is this transaction which is subject-matter of different perceptions, so far as tax withholding obligations of the seller are concerned, of the parties before us. As a matter of fact, the assessment order itself states that the assessee has sold the "prepaid vouchers, of various face value, to its distributors, at a rate lower than its face value", and that "the difference (between the face value and the price at which is sold) is nothing but commission on which no tax has been deducted". The short issue that we are required to adjudicate in this appeal is whether the provisions of section 194H will come into play in respect of the difference between the price at which the air time is thus sold to the distributors and its recommended retail price to the end consumers. 8. This issue is no longer res integra. As the same business model, with no or peripheral variations, has been followed by almost all the operators in the mobile telecommunication industry, this issue has been subject-matter before various forums, and more importantly, before various Hon'ble High Courts. Learned Representatives fairly agree that the above issue in appeal is subject-matter of difference of opinion by various Hon'ble non-jurisdictional High Courts and that we do not have the benefit of guidance by Hon'ble jurisdictional High Court. 9. This issue is covered, in favour of the assessee, by Hon'ble Karnataka High Court's common judgment in the cases of Bharti Airtel Limited, Tata Teleservices Limited and Voadfone South Limited, reported as Bharti Airtel Ltd. v. Dy.CIT [2015] 372 ITR 33/228 Taxman 219 (Mag)/[2014] 52 taxmann.com 31 (Kar) wherein their Lordships have, inter alia, observed as follows: "62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these prepaid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors incur

Page 42 of 59 expenditure for the purchase of prepaid cards. Only after the resale of those prepaid cards, distributors would derive income. At the time of the assessee selling these prepaid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor. In this context it is pertinent to mention that the assessee sells SIM cards to the distributor and allows a discount of Rs.20/-, that Rs.20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub-distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer. The profit 86 earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share Rs.20/- which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow insofar as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal

Page 43 of 59 and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. 63. It was contended by the revenue that, in the event of the assessee deducting the amount and paying into the department, ultimately if the dealer is not liable to tax it is always open to him to seek for refund of the tax and, therefore, it cannot be said that Section 194H is not attracted to the case on hand. As stated earlier, on a proper construction of Section 194H and keeping in mind the object with which Chapter XVII is introduced, the person paying should be in possession of an income which is chargeable to tax under the Act and which belongs to the payee. A statutory obligation is cast on the payer to deduct the tax at source and remit the same to the Department. If the payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. As held by the Apex Court in Bhavani Cotton Mills Limited's case, if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage will not make the original levy valid. 64. In the case of Vodafone, it is necessary to look into the accounts before granting any relief to them as set out above. They have accounted the entire price of the prepaid card at Rs. 100/- in their books of account and showing the discount of Rs. 20/- to the dealer. Only if they are showing Rs. 80/- as the sale price and not reflecting in their accounts a credit of Rs. 20/- to the distributor, then there is no liability to deduct tax under Section 194H of the Act. This exercise has to be done by the assessing authority before granting any relief. The same exercise can be done even in respect of other assessees also. 65. In the light of the aforesaid discussions, we are of the view that the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable." 10. As we take note of the views so expressed by Hon'ble Karnataka High Court, we may also note that this issue has been decided against the assessee by, amongst others, Hon'ble Kerala High Court, in the case of Vodafone Essar Cellular Ltd v. Asstt. CIT [2010] 332 ITR 255/194 Taxman 518. The same approach has been

Page 44 of 59 adopted by some various other Hon'ble non-jurisdictional High Courts as well, such as in the cases of Bharti Cellular Ltd. v. Asstt. CIT [2013] 354 ITR 507/[2000] 200 Taxman 254/12 taxmann.com 30 (Cal) and CIT v. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118 (Delhi). In the case of Vodafone Essar Cellular Ltd (supra) Their Lordships have, inter alia, observed as follows :— "4. The main question to be considered is whether Section 194H is applicable for the "discount" given by the assessee to the distributors in the course of selling Sim Cards and Recharge coupons under prepaid scheme against advance payment received from the distributors. We have to necessarily examine this contention with reference to the statutory provisions namely, Section 194H. . . . . . What is clear from Explanation (i) of the definition clause is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case (supra) above referred that a customer can have access to mobile phone service only by inserting Sim Card in his handset (mobile phone) and on assessee activating it. Besides getting connection to the mobile network, the Sim Card has no value or use for the subscriber. In other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far as Recharge coupons or e-Top ups are concerned which are only air time charges collected from the subscribers in advance. We have to necessarily hold that our findings based on the observations of the Supreme Court in BSNL'scase (supra) in the context of sales tax in the case of BPL Cellular Ltd. (supra) squarely apply to the assessee which is nothing but the successor company which has taken over the business of BPL Cellular Ltd. in Kerala. So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rendering services to ultimate subscribers and the distributor is only the middleman arranging customers

Page 45 of 59 or subscribers for the assessee. The terms of distribution agreement clearly indicate that it is for the distributor to enroll the subscribers with proper identification and documentation which responsibility is entrusted by the assessee on the distributors under the agreement. It is pertinent to note that besides the discount given at the time of supply of Sim Cards and Recharge coupons, the assessee is not paying any amount to the distributors for the services rendered by them like getting the subscribers identified, doing the documentation work and enrolling them as mobile subscribers to the service provider namely, the assessee. Even though the assessee has contended that the relationship between the assessee and the distributors is principal to principal basis, we are unable to accept this contention because the role of the distributors as explained above is that of a middleman between the service provider namely, the assessee, and the consumers. The essence of a contract of agency is the agent's authority to commit the principal. In this case the distributors actually canvass business for the assessee and only through distributors and retailers appointed by them assessee gets subscribers for the mobile service. Assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed 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. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute 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. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot

Page 46 of 59 charge anything more than the MRP shown in the product namely, Sim Card or Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but commission within the meaning of Explanation (i) on which tax is deductible under Section 194H of the Act. The contention of the assessee that discount is not paid by the assessee to the distributor but is reduced from the price and so much so, deduction under Section 194H is not possible also does not apply because it was the duty of the assessee to deduct tax at source at the time of passing on the discount benefit to the distributors and the assessee could have given discount net of the tax amount or given full discount and recovered tax amount thereon from the distributors to remit the same in terms of Section 194H of the Act." 11. There is no, and there cannot be any, dispute about the fundamental legal position that in the hierarchical judicial system, that we have in our country, lower tiers of judicial hierarchy has to respectfully follow the views expressed by the higher tiers of judicial hierarchy. In the case of Asstt. Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 (SC), Supreme Court has observed, quoting the House of Lords, as follows: 'We desire to add and as was said in Cassell & Co. Ltd. v. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that "in the hierarchical system of Courts" which exists in our country, "it is necessary for lower tier", including the High Court, "to accept loyally the decisions of the higher tiers". "It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate Tribunal which do not attract the unanimous approval of all members of the judiciary. . . . But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted" (See observations of Lord Hailsham and Lord Diplock in Broome v. Cassell). The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system.'

Page 47 of 59 12. The question whether the non- jurisdictional High Court binds the Tribunal benches or not came up for consideration before Hon'ble Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589. That was a case in which Their Lordships were in seisin of the question as to "whether, on the facts and circumstances of the case, and in view of decision in the case of A.M. Sali Maricar v. ITO [1973] 90 ITR 116 (Mad) the penalty imposed on the assessee under s. 140A(3) was legal ? The specific question before Their Lordships thus was whether the Tribunal, while sitting in Bombay, was justified in following the Madras High Court decision. It was in this context that Hon'ble Bombay High Court concluded as follows: "It should not be overlooked that IT Act is an all India statute, and if a Tribunal in Madras has to proceed on the footing that s. 140A(3) was non- existent, the order of penalty under that section cannot be imposed by any authority under the Act. Until a contrary decision is given by any other competent High Court, which is binding on the Tribunal in the State of Bombay (as it then was), it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land . . . . . . an authority like Tribunal has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision on that issue by any other High Court . . . . . . " 13. In the case of CIT v. Shah Electrical Corpn. [1994] 207 ITR 350 (Guj), vide judgment dated 23rd June 1993, Their Lordships had an occasion to consider the aforesaid views. It was in this context that Their Lordships have observed as follows: "3. What is contended by the learned advocate for the Revenue is that the Tribunal decided the appeal on 26th Oct., 1976. By that time, the Andhra Pradesh High Court had upheld the validity of s. 140A(3). He drew our attention to the judgment of the Andhra Pradesh High Court in Kashiram v.ITO (1977) 107 ITR 825 (AP). From the report, it appears that the said judgment was delivered on 10th Dec., 1975. Therefore, the Tribunal was not right in proceeding on the basis that only the Madras High Court judgment was in the field and, therefore, it was open to it to proceed on the basis that s. 140A(3) was non-existent. He also submitted that for that reason, the Tribunal was not right in following the judgment of the Bombay High Court in Godavaridevi's case (supra). 4. In our opinion, the legal position is correctly stated by the Punjab & Haryana High Court in CIT v. Ved Prakash (1989) 77 CTR (P&H) 116 :

Page 48 of 59 (1989) 178 ITR 332 (P&H) when it observed that "unless and until the Supreme Court or the High Court of the State in question, under Art. 226 of the Constitution, declares a provision of the Act to be ultra vires, it must be taken to be constitutionally valid and treated as such". 5. In our opinion, the Tribunal of another State would be justified in proceeding on the basis that the provision has ceased to exist because it has been declared as ultra vires by the High Court only when there is some material to show that the said decision has been accepted by the Department. . . . . . . ." (Emphasis supplied) 14. A little later, however, while dealing with a materially similar situation, in the case of CIT v. Maganlal Mohanlal Panchal (HUF) [1994] 210 ITR 580 (Guj), vide judgment dated 1st September, 1994, Their Lordships have held as follows: ". . . . . . . . At the time when the Tribunal decided the appeal, that was the only decision in the field and, therefore, in view of what the Bombay High Court has held in CIT v. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom) and CIT v. Smt. Nirmalabai K. Darekar (1990) 186 ITR 242 (Bom), the Tribunal was bound to follow the said judgment of the Madras High Court. It, therefore, cannot be said that the Tribunal committed an error in following the said judgment of the Madras High Court. In view of the said decision of the Madras High Court, the only course which the Tribunal could have followed was to direct the ITO to consider the partial partition on the merits and pass an order under s. 171 first and then under s. 143(3) of the Act." 15. It is clear that, except on the issue of legality of the statutory provision itself, the decisions of even the non-jurisdictional High Courts are binding on the lower tiers of judicial hierarchy such as this Tribunal. As we hold so, we are alive to the school of thought that non-jurisdictional High Courts are not binding on the subordinate courts and Tribunals, as articulated by Hon'ble Punjab & Haryana High Court in the case of CIT v. Ved Parkash [1989] 178 ITR 332/44 Taxman 365 but then that was a case in the context of validity of a statutory provision, i.e. 140A(3), covered by the rider to the general proposition. This exception does not come into play in the present case as we are not, and we cannot be, dealing with the constitutional validity of a provision. Clearly, therefore, the views expressed by Hon'ble non-jurisdictional High Court, in the absence of a direct decision on that issue by the Hon'ble jurisdictional High Court, deserve utmost respect and deference.

Page 49 of 59 16. The difficulty, however, arises in the case in which Hon'ble non-jurisdictional High Courts have expressed conflicting views and the subordinate courts and Tribunals do not have the benefit of guidance from Hon'ble jurisdictional High Court. 17. In our humble understanding of the legal position and of the propriety, it will be wholly inappropriate for us to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon'ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. Of course, when the matter travels to Hon'ble jurisdictional High Court, Their Lordships, being unfettered by the views of a non-jurisdictional High Court, can take such a call on merits. That exercise, as we understand, should not be carried out by us. 18. The choice of which of Hon'ble High Court to follow must, therefore, be made on some objective criterion. We have to, with our highest respect of all the Hon'ble High Courts, adopt an objective criterion for deciding as to which of the Hon'ble High Court should be followed by us. We find guidance from the judgment of Supreme Court in the matter of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted" Although this principle so laid down was in the context of penalty, and Their Lordships specifically stated so in so many words, it has been consistently followed for the interpretation about the statutory provisions as well. In another Supreme Court judgment, Petron Engg. Construction (P.) Ltd. v. CBDT [1989] 175 ITR 523/[1988] 41 Taxman 294 the above principle of law has been reiterated by observing as follows: ". . . . . . . . Counsel submits that when two interpretations are possible to be made, the interpretation which is favourable to the assessee should be adopted. In support of that contention, learned counsel has placed reliance upon a few decisions of this Court in CIT v. Madho Prasad Jatia (1976) 105 ITR 179 (SC); CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) and CIT v. Kulu Valley Transport Co. P. Ltd. (1970) 77 ITR 518 (SC) : . . . . . . . . The above principle of law is well-established and there is no doubt about that. . . . . . . " 19. Having noted the legal position as above, it is appropriate, for the sake of completeness, to note the exception to this general rule as well. Supreme Court had, however, some occasions to deviate from this general principle of interpretation of

Page 50 of 59 taxing statute which can be construed as exceptions to this general rule. It has been held that the rule of resolving ambiguities in favour of taxpayer does not apply to deductions, exemptions and exceptions which are allowable only when plainly authorized. This exception, laid down in Littman v. Barron 1952(2) AIR 393 and followed by Apex Court in Mangalore Chemicals & Fertilizers Ltd. v. Dy. Commissioner of Commercial Taxes [1992] Suppl. (1) SCC 21 and Novopan India Ltd. v. CCE & C 1994 (73) ELT 769 (SC), has been summed up in the words of Lord Lohen, "in case of ambiguity, a taxing statute should be construed in favour of a taxpayer does not apply to a provision giving taxpayer relief in certain cases from a section clearly imposing liability". This exception has been also reiterated by Supreme Court in the case of Oil & Natural Gas Commission v. CIT [2015] 59 taxmann.com 5. However, in the present case, this exception has no application. The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretation in favour of assessee will have to treat the provisions unconstitutional, as held in the matter of State of M.P. v. Dadabhoy's New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 SC 614. That is what Hon'ble jurisdictional High Court has also held in the case of Shah Electrical Corporation (supra). None of these exceptions, however, admittedly apply to the situation that we are dealing with at present. 20. There can be no dispute on the proposition that irrespective of whether or not the judgments of Hon'ble non-jurisdictional High Courts are binding on us, these judgments deserve utmost respect which implies that, at the minimum, these judgments are to be considered reasonable interpretations of the related legal and factual situation. Viewed thus, when there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted by us. In other words, Hon'ble non-jurisdictional High Court's judgment in favour of the assessee, in the light of this legal principle laid down by Supreme Court, is to be preferred over the Hon'ble non-jurisdictional High Court not favourable to the assessee. In our humble understanding, it is only on this basis, without sitting in value judgment on the views expressed by a higher tier of judicial hierarchy, that the conflicting views of Hon'ble non-jurisdictional High Courts can be resolved by us in a transparent, objective and predictable manner. 21. It is very tempting to believe, or pretend to believe, that, in the absence of direct decision on the issue by the Hon'ble jurisdictional High Court, we have unfettered discretions in exercise of our judicial powers but then such an approach will not only be contrary to settled legal position, as set out above, but also, in a way, an exercise in impropriety.

Page 51 of 59 22. We may also mention that a single member bench of this Tribunal, in the case of ITO v. Bharat Sanchar Nigam Ltd. (ITA No 170/Hyd/2010 and CO No 10/Hyd/10; order, dated 5th June, 2015) has reached the same conclusion but the reasoning adopted, for following Hon'ble Karnataka High Court's judgment in the case of Bharti Airtel Ltd. (supra), was stated to be that "Since no jurisdictional High Court decision is available as on date, the latest decision of Karnataka High Court, which has considered and distinguished earlier rulings of other High Courts, deserves to be followed". Our conclusion is the same but our decision to follow Hon'ble Karnataka High Court's judgment is simply this judgment is to be preferred over, in the light of settled legal principles set out above, other Hon'ble High Court judgments, because it is favourable to the assessee. With utmost respect and reverence to all the Hon'ble Courts, it is not for us to choose which decision is to be followed because of its merits because of what it has discussed or because of how it has distinguished other Hon'ble High Courts or because of its timing i.e. of its being latest. Even when a non- jurisdictional High Court distinguishes all other decisions of Hon'ble High Courts but holds a view unfavourable to the assessee, that decision cannot normally be preferred over a decision from another Hon'ble non-jurisdictional High Court decision, of equal stature, in favour of the assessee. That is, as we understand, correct approach to the matter and that is the reason why we come to the same conclusion as the SMC did but for altogether different reasons.

Sl. No. Disclosure in the Corresponding clause in the Agreement as highlighted agreement of the assessee with its in the Hon'ble Karnataka prepaid distributors High Court's judgment - relevant extracts 'The agreement Clause 17.2 specifically provides stipulates that the that the relationship created by the distributors have to agreement is that of a buyer and represent to the customers seller and that the agreement is on a 1 that the distributor's 'principal to principal' basis and agreement with the neither party is, nor shall be deemed customers/its dealers is on to be, an agent/partner of the other. It Principal to Principal Is also provided that nothing in the

Page 52 of 59

basis and assessee is no Agreement shall be construed to way concerned or liable to render the distributor a partner or the customers/dealers of agent of the assessee the Distributor' - Page 68. Clause 1e of Annexure III to the ''Distributor shall not agreement provides that the make any promise, distributor shall not make any representation or to give promises or representation or give any warranty or guarantee any warranties or guarantees in 2 with respect to services respect of the service tickets except and products, who are not such as are consistent with those authorized by the assessee' which accompany the Service Ticket - Page 69. or as expressly authorized by the assessee in writing. That the insurance liability for the entire As per clause (iv) of Annexure II stock in trade in the to the agreement, the assessee is not premises at the address liable for any loss, pilferage or under reference will be of damage to the recharge 3 the Distributor and the vouchers/service tickets post- liability for any loss or delivery of the same to the damage due to any fire, distributors. The assessee does not burglary, theft etc., will be compensate the distributors for any of the Distributor.' - Page unsold stock 69. 'The Distributor has no Distributor does not have an express or implied right or authority to assume or create any authority to assume or obligations VWL's behalf or incur 4 undertake any obligation any liability on behalf of VWL or in respect of or on in the accept any contract binding upon name of the assessee.' VWL (clause 17.1 of the Page 70. Agreement). 'Channel Partner be The distributor shall pay all 5 liable to pay all the taxes licenses, fee, taxes, duties, sales tax,

Page 53 of 59

such as sales tax, service service tax and any other charges, tax applicable and payable assessments penalties whether in respect of the subject- statutory or otherwise levied by any matter of this agreement authority in connection with the and statutory increase in operation of distributor's office respect therof' - Page 72. (Clause III(b) of Annexure III to agreement). The assessee shall not be 'After sale of products responsible for any post-delivery distributor/channel partner defect in the service tickets. No 6 cannot return goods to the request of refund of any money shall assessee for whatever be entertained by the assessee in any reason' - Page 74. circumstances (Clause e-Annexure I). The distributor shall not make any 'Distributors are even promises or representations or give prevented from making any warranties or guarantees in 7 any representation to the respect of the products (i.e. SIM car retailers unless authorized and prepaid vouchers) (Clause 1.e. by the assessee'. Annexure III). 23. We have also noted that material facts of the case and the terms of agreements with the distributors are the same as were before Hon'ble Karnataka High Court in the above case. A comparative chart of these clauses is as follows: 24. In the light of the above discussions, and particularly as there is no dispute that the factual matrix of all the cases before the Hon'ble non jurisdictional High Courts were materially the same as in this case, in conformity with the esteemed views of Hon'ble Karnataka High Court in Bharti Airtel's case (supra), and hold as follows: (a) On the facts of the case, and as is evident from a reading of the agreements before us, the assessee has sold, by way of prepaid vouchers, e-top ups and prepaid SIM cards, the 'right to service' on principal to principal basis to its distributors. As evident from the terms and conditions for sale, placed at page 136 of the paper book, not only that the sale was final and the assessee was not responsible for any post-delivery defects in the services, it was specifically agreed that "no

Page 54 of 59

request of refund of any money shall be entertained by VEGL (i.e. the assessee) under any circumstances". (b) The fact that there are certain conditions and stipulations attached to the sale of this right of service by the assessee to his distributors does not affect the character of sale on principal to principal basis. (c) Section 194 H comes into play only in a situation in which "any person, . . . . . responsible for paying . . . . . . to a resident, any income by way of commission" pays or credits such "income by way of commission" . However, since at the time of the assessee selling these rights for a consideration to the distributor, the distributor does not earn any income, the provisions of Section 194H do not come into play on the transaction of sale of the right to service by the assessee to his distributors. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor (d) So far as the transaction of sale of 'right to service' by the assessee to his distributor is concerned, while it has income potential at a future points of time (i.e. when this right to service is sold at a profit by the distributor), rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Therefore, at the time of the assessee selling these prepaid cards, he is not in possession of any income belonging to the distributor. Accordingly, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. (e) In a situation in which the assessee has credited the sale proceeds at the transaction value (in contrast with the transaction being shown at face value and the difference between face value and the transaction value credited to the distributor), the tax deduction liability under section 194H does not arise. While learned counsel for the assessee has stated at the bar that the sale proceeds are credited at the transaction value, this aspect of the matter is to be verified by the Assessing Officer, and in case the sales is accounted for at the face value, to that extent, the tax withholding liability is to be sustained.”

Page 55 of 59 13. Further on 7/12/2015 the coordinate bench further decided the issue that no tax is required to be deducted on such payments in Bharti Hexacom limited V ITO 42 ITR (T) 686 ( jaipur). 14. In view of this it can be said that the stand taken by the assessee that no tax is required to be deducted on such payments is a bona fide claim. Hon Bombay high court in 340 ITR 333 in CIT V Kotak securities Limited has held that “30. The question then to be considered is whether the Assessing Officer was justified in invoking section 40(a)(ia) of the Act and disallowing the entire business expenses incurred on account of transaction charges on the ground that the assessee has failed to deduct tax at source under section 194J of the Act ? 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 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

Page 56 of 59 Act and disallowing the business expenditure by way of transaction charges incurred by the assessee. 32. Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute "fees for technical services" covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., 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.” [Underline supplied by us} 15. it is also been submitted by the Ld. A R that in all past years no such disallowances have been made or it has been held by the revenue that tax is required to be deducted on such discount on prepaid products sold to its distributors. In view of the divergent views of the Hon’ble high courts and coordinate benches we are of the view that no fault can be found with the assessee in not deducting the tax at source on the above discount as held by the Hon’ble Bombay High Court. Hon’ble Bombay High Court also held so for the reason that there is no loss to the revenue as presumably the recipient of income has discharged its tax liability. Therefore respectfully following the decision of the Hon’ble Bombay High Court in CIT versus Kotak securities limited (supra) we also hold that disallowance under section 40 (a)( ia) cannot be made in this case in view of the old practice of not deducting tax at source which has been accepted by the revenue and existence of bonafide belief of the assessee for non-deductibility of tax at source on such payments. However the above direction is subject to verification by the Ld. assessing officer that recipient of the income has discharged their own tax liability. In view of this we set aside this ground of

Page 57 of 59 appeal to the file of the Ld. assessing officer for verification that recipient of the income has discharged their tax liability and if found so to delete the addition accordingly.  The other argument of the assessee was that if the payee has included the above sum and discharged the tax liability no disallowance should be made in the hands of the assessee in view of the amendment made by the finance act 2012 by insertion of the 2nd proviso to the provisions of section 40 (a) (ia) of the act. The coordinate bench in the Shri Kumar Roy versus income tax officer in 68 taxman.com 129 has held that above proviso inserted by the finance act 2012 can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1-4-2005. No other contrary decision was pointed out by the learned departmental representative. In view of this we accept the argument of the assessee that the 2nd proviso inserted by the finance act 2012 should be given retrospective effect from 01/04/2005. Therefore this argument of the appellant is also set aside to the file of the ld. assessing officer with a direction to give the benefit of the above proviso to the appellant in case the 1st contention of bonafide belief of the assessee does not survive on any amount. 16. The other arguments of the ld. AR were also on the similar line with respect to the above disallowance that deduction should be directed to be allowed to the appellant in the subsequent year in which the tax has been deposited by the payer. We also agree with the contention of the Ld. A R that if in the subsequent year the assessee has deposited tax on the above sum then the deduction of the above expenditure may be allowed to the assessee in subsequent year also if in this year the addition is sustained by the learned assessing officer. 17. In the result ground No. 6.7 to 6.9 of the appeal of the assessee are allowed with the above directions. 18. In view of the facts that the assessee has succeeded on the ground no 6.7 to 6.9 of the above appeal, decision on additional ground raised by the appellant becomes academic in nature and therefore same is not answered. 19. In the result appeal of the assessee is allowed for statistical purposes accordingly.

Page 58 of 59 Appeal No 5816/Del/2012 A Y 2008-09 20. The assessee has raised the following grounds of appeal in ITA No. 5816/Del/2012 for assessment year 2008 – 09 which remained to be adjudicated in terms of order dated 25/04/2016 passed by the coordinate bench in miscellaneous application filed by the assessee in MA No. 134/del/2014. “GROUNDS OF APPEAL 7.4. Further, without prejudice, that the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since non-deduction of tax at source was on account of bona fide view taken by the appellant. 7.5. Further, without prejudice, that the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year. 7.6 Further without prejudice the Assessing Officer has erred both on facts and in law in applying the provisions of Section 40(a)(ia) of the Act ignoring the fact that the distributor has declared income in respect of the transactions of prepaid products and thus such income would have been subject to payment of income tax and the assessee would not be deemed to be an assessee in default under the proviso to sub-section (1) of Section 201. 21. The above issues are similar to the ground No. 6.7 to 6.9 of the appeal of the assessee for assessment year 2007 -2008. The parties before us submitted that there is no change in the facts and circumstances of the case compared to the assessment year 2007 – 2008 for the present assessment year. The parties have also rendered same arguments on these grounds. We’ve already disposed of the appeal of the assessee for assessment year 2007 – 08 wherein relying upon the decision of the Hon’ble Bombay High Court we have allowed the contention of the assessee that when there is a bonafide belief about non-deduction of tax then if the payee has discharge its liability no disallowance is called for under section 40() (ia) of the income tax act. We have further held that that the 2nd proviso inserted in the above section effect from finance act 2012 applies retrospectively and directed the learned assessing officer to grant benefit of the same. In view of this we also hold

Page 59 of 59 accordingly that there is a bonafide belief for non-deduction of tax at source on discount on prepaid Sim cards to the dealers and therefore no disallowance can be made in the hands of the assessee for non-deduction of tax at source, provided the assessee proves to the satisfaction of the Ld. assessing officer that recipient of that income has discharged their tax liability. Therefore we set aside this ground of appeal to the file of the assessing officer for the above verification. The Ld. assessing officer is further directed to grant benefit of 2nd proviso to the above section while calculating the disallowance. He is further directed that in case the deduction of tax has been made by the assessee in subsequent year then the claim of the assessee for deduction of those expenses is also allowable in subsequent year. 22. In the result appeal of the assessee with respect to ground No. 7.4 to 7.6 are allowed for statistical purposes with above direction. Order pronounced in the open court on 24/10/2016. -Sd/- -Sd/- (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 24/10/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi