M/S VODAFONE EAST LTD.(FORMERLY KNOWN AS VODAFONE ESSAR EAST LIMITED),KOLKATA vs. A.D.I.T RANGE - 7,KOL., KOLKATA

Per Shri M. Balaganesh, A.M.: The identical issues are involved in the assessee’s appeal for the Asst Year 2009-10 and 2010-11 and cross appeal of the Revenue for the Asst Year 2010-11 and hence they are taken up together and disposed off by a common order for the sake of convenience.

ITA No. 1864/ 2012 (A.Y. 2009-2010)- Assessee’s appeal 1. This appeal arises out of the order of the Learned Commissioner of Income Tax (Appeals) in Appeal No. 337/CIT(A)-VIII/Kol-11-12 dated 31.10.2012 for the Asst Year 2009-10 arising out of the order of the Learned Assessing Officer framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 3 of 56 filed a chart comprising of various issues at the time of hearing wherein in respect of Ground No.1, he has specifically stated against this Ground as Not Pressed. Accordingly, the Ground No. 1 raised by the assessee is dismissed as not pressed.

4.1. The brief facts of this issue are that the assessee is a subsidiary of Vodafone Essar Limited, engaged in providing Cellular Mobile Telephony Services (CMTS) in Kolkata Telecom Circle after receipt of approval from the Department of Telecommunications (DOT). The assessee incurred domestic roaming charges of Rs.55,41,01,320/- towards roaming facility provided by other telecom operators to the subscribers of the assessee. The assessee has entered into roaming arrangements with other telecom operators which have been given licence to operate as telecom service providers in other territories. The Learned AO initially proceeded to show cause the assessee for disallowance of roaming charges by invoking the provisions of section 40(a)(ia) r.w.s. 194C of the Act but later gave up and proceeded to section 194I /194J of the Act and made disallowance u/s 40(a)(ia) of the Act which was also upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following grounds:- “2.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the addition under section 40(a)(ia) of the Act on account of non-deduction of taxes on the roaming charges of INR 554,101,320 paid by the Appellant to other telecom operators for the financial year relevant to the subject AY.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 4 of 56 2.2. Without prejudice to the above ground 2.1, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not restricting the disallowance under section 40(a)(ia) of the Act to the amount which remains payable at the end of the year. 2.3. Without prejudice to the above grounds 2.1 and 2.2, on the facts and in the circumstances of the case and in law, since the insertion of second proviso to section 40(a)(ia) of the Act vide Finance Act, 2012 is curative in nature, the benefit of the same should be extended to the past years and accordingly, the learned CIT(A) ought to have directed the Additional Commissioner of Income Tax, Range 7, Kolkata ('learned AO'): 2.3.1. to allow deduction in respect of the addition made under section 40(a)(ia) of the Act for the subject AY in the subsequent year/s, basis the conditions prescribed in the second proviso to section 40(a)(ia) of the Act; 2.3.2. to allow deduction in the subject AY (i.e. AY 2009-10) for the similar disallowance of roaming charges made in prior year (i.e. in AY 2008-09) basis the conditions prescribed in the second proviso to section 40(a)(ia) of the Act”.

4.2. The Learned AR argued that roaming means an arrangement whereby a subscriber of a cellular phone uses cellular services outside the home network and will get services from the host operator. The assessee has entered into roaming arrangements with other telecom operators to make or receive calls when the subscribers move out of the licensed territory. For example, suppose the Home Operator is licensed to provide telecom services only in Kolkata Telecom Circle and Visiting Operator is licensed to provide services only in Delhi Telecom Circle. Further Home Operator and Visiting Operator have entered into a roaming arrangement whereby a customer of Home Operator, travelling to Delhi would be able to use the network of Visiting Operator to avail telecom services. Pursuant to this roaming arrangement, when a subscriber of Home Operator travels to Delhi, he will be able to

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 5 of 56 seamlessly latch on the network of Visiting Operator and continue to use telecom services in Delhi. Depending upon the usage of the subscriber and the arrangement between the Home Operator and Visiting Operator, Visiting Operator shall raise an invoice on Home Operator for such usage by the subscriber and Home Operator shall subsequently recover such charges from the subscriber. For the sake of clarity, the process involved in provision of roaming services is given below:-

a) A Vodafone East Ltd (VEL) Subscriber in Kolkata travelling to Delhi switches on his mobile device after reaching Delhi (in case of air travel). Where the subscriber travels by land he automatically receives a message requesting for selection of the roaming network on visiting another telecom circle.

b) The subscriber has a choice of manual network selection or automatic network selection.

c) Under automatic network selection, the services of the most preferred roaming partner of subscriber’s home network will be selected ; and

d) Under the manual selection, the subscriber can choose the roaming partner whose services he would like to use out of the ones which are available in that area (subscriber can only choose the roaming partner with whom VEL has a tie-up).

e) Visiting network locates mobile device and identifies that it is not registered with its system i.e. Visitor Location Register.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 6 of 56 f) Visiting network contacts home network of VEL’s subscriber i.e Home Location Register (HLR) and requests service information about roaming device using International Mobile Subscriber Identity (IMSI) Number – IMSI number is a unique subscriber identity number granted to the customer at the time of subscription.

g) Visiting network maintains temporary subscriber record for said mobile device and provides an internal temporary phone number to the mobile device.

h) Home network also updates its register to indicate that the mobile is on visitor network so that information sent to that device is correctly routed.

A caller from Kolkata makes a call to VEL’s subscriber which is routed to the Home network of VEL subscriber. VEL’s network then transfers all incoming calls to the temporary phone number which terminates at the device of VEL’s subscriber, currently roaming in Delhi and using the network of the Visiting Operator (i.e. the Visiting Network).

4.3. Accordingly, pursuant to the aforesaid roaming arrangements, VEL’s subscribers are able to make and receive calls while they are in the territory of such other telecom operator. In lieu of the services provided to VEL’s subscribers, VEL is under an obligation to pay roaming charges to the other telecom operator. The short point that arises for our consideration is whether the payment made by the home operator (i.e. the assessee herein) to the host operator for roaming charges would come under the ambit of TDS provisions.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 7 of 56 4.4. The Learned AR argued that an identical issue was the subject matter of litigation before the Hon’ble Supreme Court in the case of CIT - vs.- Bharti Cellular Ltd reported in 330 ITR 239 (SC), wherein the question raised before the Supreme Court is as below:- “Whether tax was deductible by Bharti Cellular Ltd when it paid interconnect charges/access/port charges to BSNL”?

The Supreme Court observed that the problem which arose in such cases was that there was no expert evidence from the side of the department to show how human intervention takes place, particularly during the process when calls take place , let us say, from Delhi to Nainital and vice versa. If , for example, M/s Bharti Cellular Ltd has no network in Nainital, whereas it had a network in Delhi, the interconnect agreement enabled M/s. Bharti Cellular Ltd to access the network of BSNL in Nainital; and the same situation could arise vice versa in a given case. During the traffic of such calls, whether there is any manual intervention, was one of the points which required expert evidence. Similarly, on what basis was the ‘capacity’ of each service provider fixed when interconnection agreements were arrived at? For example, as informed, each service provider is allotted a certain ‘capacity’. On what basis such ‘capacity’ is allotted and what happens if a situation arises where a service provider’s ‘allotted capacity’ gets exhausted and it wants, on an urgent basis, ’additional capacity’? Whether at what stage, any human intervention was involved was required to be examined, which again required technical data. According to the Supreme Court, these type of matters could not be decided without any technical assistance available on record. The Supreme Court directed the Assessing Officer (TDS) in each case to examine a technical expert from the side of the Department and to decide the matter. Liberty was also given to the respondents to examine its expert and to adduce any other evidence.

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4.5. Pursuant to the directions of the Supreme Court, statements were recorded by ACIT, Circle 51(1), New Delhi from Shri Tanay Krishna in connection with the assessment proceedings of M/s Vodafone Essar Mobile Services Ltd (formerly known as Hutchison Essar Telecom Ltd) for the Asst Year 2003-04 on 29.9.2010 which was relied upon by the Learned CITA for deciding the issue under appeal before us. The Learned AR produced the statement recorded from Shri Tanay Krishna on 29.9.2010 before us. He also produced the copy of statement recorded from Shri Tanay Krishna during cross examination proceedings. He took us to the relevant questions of the said statement and argued that Shri Tanay Krishna had categorically stated in both the statements that no human intervention is required in respect of roaming charges. He also argued that the reliance placed by the Learned CIT(Appeals) on the said statement is actually in favour of the assessee for which purpose he specifically took us to the tabulation of questions to Shri Tanay Krishna recorded by Learned CIT(Appeals) in page 20 of his order.

4.6. The Learned AR argued that though initially the Learned AO proceeded to disallow the roaming charges u/s 40(a)(ia) of the Act by applying the provisions of section 194C of the Act , but later gave up and proceeded to apply section 194I/ 194J of the Act. However, he assailed the impugned issue to prove that none of the provisions of section 194C, 194I and 194J of the Act are applicable in the facts and circumstances of the case.

4.7. The Learned DR vehemently argued that no technology in world could survive without human intervention. He argued that even nuclear reactor requires human intervention and he explained further that 100

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 9 of 56 scientists view the monitor in a control room and though nothing could be seen and everything is automated, but without the intervention of the human beings the reactor would not function without any defects. He argued that similar is the case with space technology. He argued that telecom technology could not be different. The assessee pays roaming charges for services provided by the other operator (Visiting Operator) for connectivity of two mobile handsets while roaming. This is not wireless connectivity. Wireless connection is between handset and connecting tower. Thereafter it is only transmission lines through which the electrical signals travel. It has to be seen that how the voice travels to the other mobile network. It is pertinent to note that the sound does not travel. It gets converted into electrical signals and only those signals travel to the other network. He vehemently argued that the roaming charges are paid for both interconnectivity as well as for usage of transmission lines. He fairly conceded that for the interconnectivity charges, no human intervention is required. But he argued that for usage of transmission lines, human intervention is definitely required and hence TDS is applicable.

4.8. The Learned DR further argued the provisions of Explanation 2 to section 9(1)(vii) of the Act. For the sake of convenience, it is reproduced hereunder:- (vii) income by way of fees for technical services payable by – Explanation 2 – For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

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He argued that the term ‘managerial’ or ‘consultancy’ services definitely requires human intervention. Hence the term ‘technical’ which is sandwiched between the term ‘managerial’ and ‘consultancy’ should be given the same meaning as having human intervention. He also argued that these three words are not inter connected. Rather they are independent. He argued that this aspect was not considered by the Delhi High Court in 319 ITR 139 (Del) which travelled later to Supreme Court while rendering the judgement in CIT vs Bharti Cellular Ltd in 330 ITR 239(SC) case.

4.9. He further argued that independent examination needs to be carried out with technical experts on the impugned issue and accordingly prayed for setting aside of the issue to the file of the Learned Assessing Officer.

4.10. We have heard the rival submissions and perused the materials available on record. It would be pertinent to note here that roaming services are provided by other telecom operators by using their existing telecom network/ infrastructure and no incremental investment is required to put up any additional network /infrastructure for provision of such roaming services. The aforesaid fact lends further support to the contention that roaming services are standard automated services, which are provided by other telecom operators to subscribers of VEL using the same network/infrastructure as is used by such operators for provision of telecommunication services to its own subscribers. Therefore, in essence, roaming services are similar in nature to the telecom services provided by a telecom operator to its own subscribers and hence roaming

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 11 of 56 charges would partake the same character as the normal telecommunication charges paid by a subscriber to its service provider.

4.11. We are not in agreement with the arguments of the Learned DR that the word ‘technical’ used in Explanation 2 to Section 9(1)(vii) of the Act should take the same character of ‘managerial’ or ‘consultancy’ provided in the said section wherein human intervention is required and accordingly even for technical services, human intervention is definitely required. In this regard, the Hon’ble Delhi High Court in the case of CIT vs Bharti Cellular Ltd in 319 ITR 139 (Del) had held that since the entire process of making a call and switching the call from one network to the other is done automatically on the basis of machines and does not involve any human interface, the interconnect charges cannot be regarded as Fee for Technical Services (FTS) and hence would not fall in the ambit of section 194J of the Act. We find that on further appeal by the revenue to the Hon’ble Supreme Court in CIT vs Bharti Cellular Ltd in 330 ITR 239 (SC) , the Hon’ble Apex Court had stated that “right from 1979 various judgements of the High Courts and Tribunal have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) r.w. Explanation 2 comes in between the words “managerial and consultancy services”. We find that the principles laid down by the Delhi High Court have been accepted by the apex court as such and the Apex Court has merely directed the TDS officer to carry out factual verification to determine the extent of human involvement. Based on this direction, the CBDT had also issued Instruction No. 5 of 2011 dated 30.3.2011 instructing the revenue authorities to seek opinion of technical experts in case of complex technical matters.

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4.12. As per the directions of the Supreme Court in the case of CIT vs Bharti Cellular Ltd in 330 ITR 239 (SC), the TDS officer has been directed to obtain technical evidence from the experts in the telecom field with regard to the fact of existence of human intervention for the roaming services and accordingly the ACIT, Circle 51(1), New Delhi had recorded statement from Shri.Tanay Krishna on 29.9.2010. The Learned AR has also filed prayer for receipt of additional evidence in terms of Rule 29 of ITAT Rules on 20.7.2015 containing the statements recorded from Shri Tanay Krishna on 29.9.2010 in the case of Vodafone Essar Mobile Services Ltd & cross examination by Vodafone Essar Mobile Services Ltd on 29.9.2010. This application under Rule 29 contains a prayer with reasons that these documents could not be filed before the lower authorities and that these documents are very crucial for the disposal of the case under appeal as the examination of the technical experts had taken place post the proceedings before the Assessing Officer and as per the directions of the Hon’ble Supreme Court, these statements were recorded in the case of the group company of the assessee. However, it is seen that the statement of Shri Tanay Krishna on 29.9.2010 have been relied upon by the Learned CIT(Appeals) vide page 29 of his order but the cross examination of Shri Tanay Krishna is not in records of the lower authorities. We find that the statement is very much relevant for the disposal of these appeals and are hereby admitted as additional evidence (in respect of cross examination statement of Shri Tanay Krishna on 29.9.2010) in terms of Rule 29 of ITAT Rules as they go into the root of the issue.

4.13. We find that this issue need not be set aside to the file of the Learned Assessing Officer for seeking fresh technical evidences from experts as the same had already been obtained in the case of the group

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 13 of 56 company of the assessee and CBDT had also issued Instructions in this regard to seek evidences. Any technical evidence obtained in a case can be used in the case of another assessee as long as the facts and circumstances involved are identical. In the instant case, the facts in the case of Vodafone Essar Mobile Services Ltd are identical with the facts of the assessee herein and also it happens to be the group company of the assessee.

4.14. Shri Tanay Krishna’s statement–questions and answers – 4, 5, 6 & 16 are reproduced below :- Question 4: Can you enlighten us about the functioning of the network system of the cellular operators at the time of receiving or providing inter-connect services to each other including installation, interconnectivity etc from the very beginning?

Ans. 4: As regards to interconnect to Gateway switches/MSC of two different operators are interconnected using any transport technology which involves wires as well as human interface for setting up.

It involves different phases - i) Planning phase- where how much capacity required and how much traffic handling capacity is required on these basis hardware and software is determined.

ii) Selection of vendor - is done to determine who will provide these services along with his consultancy.

iii) Hardware and software is supplied by the vendor and it is customized to the need of the network as per the TEC specifications. iv) Installation as per vendor guidelines - it involves installation of both hardware and software.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 14 of 56 v) Call configuration/provisioning of system - in this the operator has to configure and make provision in data base as to how the calls will flow. This has to be done by a technically competent person. vi) Testing - it is exhaustive testing. The calls are tested on various modes (terminating, loading etc) on network portion. (a) Software by hardware testing - Stand alone testing (b) Interconnect testing - it is done to test if it is compatible with other hardware/software. This testing employs technically qualified professionals and tested as per the agreed plan between services provider and vendor. Question 5 : In your expert opinion, does the system work automatically when network system of one cellular operator gets connected with the network system of other cellular operator? Ans. 5: When a calls get connected by one operator to other, per se it is an automatic connection, but there can be instances when there is a problem in the call connect which may require resolution through human intervention. Question 6: Hence there is no 100% automatic operation of this network. Can you explain what kind of human intervention is required? Ans. 6: Yes as I said earlier it can't be 100% fully automated. There are several circumstances under which human intervention would be required. I would briefly tell you about each of such circumstances - (a) There could be a case where there is failure in physical hardware. (b) There could be a problem due to software bug. (c) There could be snapping of fibre optic cables. In (a), (b), (c) above you are required intervention of teams of technical experts to remedy the situation.

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Question 16: Please tell us the places or points or areas where human intervention with each other? Ans. 16: As has been detailed in several answers that I have given earlier, one can broadly say that when there is an interconnection between two service providers, human intervention is constantly required for management of network/System, capacity enhancement and monitoring of system/network.

4.15. Cross examination proceedings of Shri Tanay Krishna – questions and answers – 3,4,5,7,11 & 12 are reproduced below:- Q.3. What is the process of carriage of calls originating on network of one operator and terminating on the network of the other operator? The call from one network to the other network flows automatically, i.e. without any human intervention. Once a call originates, the call travels automatically. In establishment of a call, therein no human intervention i.e., once a subscriber dials and the call gets connected without any fault, then there is no human intervention. Intervention is required only ~hen the call is not successful, i.e., the call fails due to any reason. Q. 4. Is any human intervention involved in the entire process of carriage of call from one operator to another? No, as stated above, no human intervention is required in the process of carriage of calls. However, human intervention is required at the inter-connect set-up stage (including configuration, installation, testing, etc.) and capacity enhancement, monitoring (including network monitoring), maintenance, fault identification, repair and ensuring quality of service as per interconnect. Q.5. From the perusal of your answer to Question 4 of your Statement, it appears that the phases described thereon are restricted to merely setting-up of the inter-connect between the networks of the two operators and not during actual carriage of the call by one operator for the other. Please confirm. Yes. Q.7. From perusal of your answers to various questions posed to you by the Tax Department, you have mentioned that services of a technical expert are required for inter-connect arrangements. Please confirm whether such services

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 16 of 56 are required for provision of inter-connect services, i.e., carriage of calls from one network to another, or are primarily for fault detection and removal. Please refer to answer to Question 4 of this cross examination. Q.11. What is the extent of human involvement in provision of interconnect services. i.e., carriage of calls originating on network of one operator and termination the network of the other operator? We have answered in question no 5. Q.I2. In answer to Question 21 of your Statement, you have stated that in cellular networks the level of human intervention is much higher and of sophisticated technical level. In this regard, do you agree that cellular networks are based on sophisticated technology and work on an automated mode? The human intervention as referred by you for network operations is limited to network monitoring and maintenance and fault repair, rectification, enhancement, configuration, and set-up? We agree that the telecom networks are automated networks and do not require human intervention for carriage of calls. However, as stated in Question 4 of this cross examination, human intervention is required at the inter-connect set-up stage (including configuration, installation, testing, etc) and capacity enhancement, monitoring (including network monitoring), maintenance, fault identification, repair and ensuring quality of service as per interconnect.

4.16. The next argument of Learned DR that roaming charges are paid for both interconnectivity and also for usage of transmission lines and human intervention is very much involved with regard to usage of transmission lines. We find that the human involvement is involved only when something goes wrong in the maintenance of transmission lines and for connectivity per se, human intervention is not involved. This issue could also be looked into from the angle of applicability of TDS provisions on Transmission Charges / wheeling charges paid by power generating companies. This issue had reached the corridors of various judicial forums and now has been put to rest by the following decisions:- CIT(TDS)- vs Maharashtra State Electricity Distribution Co. Ltd reported in 375 ITR 23 (Bom) –

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 17 of 56 “By this appeal, the Revenue has proposed the following questions to be substantial questions of law:- “(a) Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was justified in holding that the payments of the wheeling and transmission charges made by the assessee to the entities like Maharashtra State Electricity Transmission Co. Ltd. (MSETCL) and Power Grid Corporation of India Ltd. (PGCIL) for the use of transmission lines or other infrastructure, i.e., plant, machinery and equipment could not be termed as rent under the provisions of section 194I of the Act and, consequently, the provisions of section 201 and section 201(IA) could not be applied? (b) Without prejudice to the above, whether, on the facts and in the circumstances of the case and in law, payment of wheeling and transmission charges to the entitles like MSETCL and PGCIL, should have been treated as fees for technical services and tax should have been deducted at source under section 194J of the Act from the payments?”

He submitted that in the case of Chhattisgarh State Electricity Board no appeal had been filed by the Revenue and the Revenue accepted the decision of the Tribunal which was followed by the Tribunal in the case of the present assessee as well. Merely drawing power and carrying power through transmission lines and transmission system would not amount to renting up equipment or its charge or rent”. The Hon'ble Supreme Court has also shown us some direction in this behalf. While interpreting the expression "rent", the applicability of section 194-1 must be gathered from whether the wheeling and transmission charges draw its colour from the basic meaning of the expression "rent". It is seen from the decision of the Supreme Court in Singapore Airlines (supra) that the meaning of "rent" must be understood in the context in which they are used. In the present set of facts, it is not possible to equate the wheeling and transmission charges payable MSETCL with rent. On facts it is seen that the MERC order dated June 27, 2006, deals with MSEDCL's contentions, apropos the methodology proposed by MERC. The transmission charges contemplated by MERC includes the cross-subsidisation of transmission charges across licensees when found to be uneconomical and uncompetitive. It is further observed that MERC has considered pooling of transmission charges during bulk power transmission from one licensee to another licensee. It is after considering all these aspects that a composite charge method for any such transmission was adopted. Thus, it is seen that the methodology for determining of the transmission tariff could not be

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 18 of 56 determined in a mechanical manner as if the charge was only for use of the State transmission utility. The MERC while passing this order on transmission charges had received various objections some, inter alia, supporting the composite tariff, some against. However, we need not divert our attention to the details of pricing formula finally adopted. There is nothing on record to support the Revenue's contention that the wheeling and transmission charges assumes the character of rent. We are in agreement with Mr. Mistri that the expression "rent" must be conceptually understood. The concept of rent under the Income-tax Act does not encompass, in our view, the wheeling and transmission charges payable by the assessee especially when the assessee is discharging a public function. The expression of "transmission charges and/or "wheeling charges" entails distribution of electricity in the area of the corporation and they cannot be subjected to provisions of section 194-1 of the Act. We, however, clarify that this is restricted to the case of the assessee in view of the public function to be undertaken by it, as a result of the restructuring of the Maharashtra State Electricity Board. It is pertinent to mention here that section 62 of the Act provides that the Commission may, in the case of supply of electricity fix a maximum ceiling of the tariff, in an attempt to promote competition amongst the distribution licensees. Thus, the very concept of the charge for transmission electricity and wheeling of electricity, as the case may be, is subject to the tariff that will be determined by the MERC in public interest. Hence, it is incomprehensible that the tariff passes the test as fees for technical services. Once again applying the principles of conceptual interpretation to the tariff to be fixed for the wheeling and transmission charges of electricity, it cannot be interpreted to mean fees for the providing technical services. Under the open access system, it is the MSEDCL which will be availing of the said transmission facility. No "service" is being provided by the MSETCL or the State transmission utility. No doubt, MSEDCL, as transmission licensee is required to provide superintendence, maintenance and repairs to the system. However, no such service is rendered by the MSETCL to MSEDCL. MSETCL is obliged to maintain the system by value of operation of law under the Electricity Act. The MSEDCL accesses the State transmission utility and distributes electricity passing through the State transmission utility. Our views stand fortified by the very fact that the Revenue itself is confused and unsure as to the nature of the charge. The focus of the Revenue is only the requirement of deduction of tax whether under section 194- 1 or section 194J. This approach is erroneous. The Revenue contends that the wheeling and transmission charges could be rent or fees for

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 19 of 56 technical services but, in our view it is neither. Wheeling charges represent the charge for permitting use of the State transmission utility by persons other than the distribution licence. The transmission charges simply constitute fees for availing of the said transmission utility to be used by open access concept for distribution of electricity to the licensees and consumers. In view of the above discussion, we are of the view that the wheeling and transmission charges are neither rent nor fees for technical services. Keeping the said interpretation into effect, we find that while interpreting the expression "rent" in the present scenario, we must bear in mind that taking into account the functioning of MSEDCL which is a public utility, it will not be appropriate to equate the transmission charges or wheeling charges to rent or fees for technical service. In our view, the transmission charges and/or wheeling charges are not amounts paid under any arrangement for use of land, building, plant machinery, equipment, furniture, fitting, etc. and, therefore, not rent. Equally, the amounts are not fees for technical services. In the facts and circumstances of this case, we answer the question in favour of the assessee and against the Revenue. The appeal is disposed of accordingly. There will be no order as to costs.

b) Auro Mira Biopower India P Ltd vs ITO TDS reported in (2015) 55 taxmann.com 452 (Chennai-Tribunal) – “Section 194 read with section 9 of the Income Tax Act, 1961- Deduction of tax at source- Fees for professional or technical services (Transmission charges)- Assessment Year 2012-13- Whether, where assessee paid wheeling, scheduling and transmission charges to State power utility for using its distribution network to sell energy generated by assessee to end consumers and same did not involve any human element, assessee was not required to deduct TDS under section 194J- Held, yes [Para 6] in favour of assessee”.

c) DCIT vs Delhi Transco Ltd reported in (2014) 52 taxmann.com 261 (Delhi – “This finding has been followed by the ITAT in ITA No. 3965/ Del/2011 in the case of assessee for Assessment Year 2006-07. Apart from the finding of tribunal recorded in the assessee’s own cases, we deem it pertinent to take note of the finding recorded by the tribunal in the case of Chhattisgarh State Electricity Board –vs.- ITO (supra) (2012) 50 SOT 33 (Mum.)- No further appeal to High Court by Department. The relevant finding read as under :

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 20 of 56 “ 11. We find that the Power Purchase Agreement entered into by the assessee with NTPC, (copy placed before us at pages 15-27 of the paper-book), specifically provides that "power shall be made available by the NTPC at the busbars of the Station and it shall be obligation and responsibility of the CSEB to make the required arrangement for evacuation of power from such delivery points of NTPC". It is pursuant to these obligations that the assessee, along with other bulk power beneficiaries - namely M P State Electricity Board, Gujarat Electricity Board, Maharashtra State Electricity Board, Electricity Department - Government of Goa, Administration of Daman & Diu, and Electricity Department - Administration of Dadra and Nagar Haveli, has entered into a 'Bulk Power Transmission Agreement' with PGCIL. The preamble of this agreement, inter alia, notes that the PGCIL "is desirous to transmit energy from the Central Sector Power Station(s) to the Bulk Power Beneficiaries and that the said Bulk Power Beneficiaries are desirous of receiving the same through POWERGRID transmission system on mutually agreed terms and conditions". This agreement provides that "POWERGRID shall operate and maintain the transmission system belonging to it in the Western Region as per agreed guidelines and the directives of the Western Regional Electricity Board and the Regional Load Dispatch Centers, and cooperate with the Bulk Power Beneficiaries of the Region, so as to maintain the system parameters within acceptable/reasonable limits except where it is necessary to take measures to prevent imminent damage to any equipment". In respect of these services, the bulk power beneficiaries are to pay to PGCIL a monthly charges computed in the manner set out in clause 9 of the said agreement. This clause, in turn, refers to formula set out in A.4 of Annexure 1 which refers to the same ratio of agreed annual charges divided by 12 as is between power transmitted to each beneficiary to total sales from that particular point of delivery. In other words, while the annual charges are fixed, these are divided between the beneficiaries in the same ratio as is ratio of power evacuated by a beneficiary to the total sale of power from that delivery point. It is, however, not in dispute that the transmission lines are in the physical control of PGCIL, these are maintained and operated by the PGCIL and, so far as the assessee is concerned, its interest in the transmission lines is restricted to the fact that electrical power purchased by the assessee, simultaneously alongwith electrical power purchased by other bulk power beneficiaries, is transmitted through these transmission lines. The way it works is like this. The power available at the delivery points, collectively for all the bulk power beneficiaries, is loaded for transmission on these transmission lines or powergrid and each of the beneficiaries is allowed to utilize the power to the extent allocated to him. It is not the case that purchases by each of the bulk beneficiary can be physically identified and that particular beneficiary is only allowed to use that physically identified portion of power. Strictly speaking, therefore, it is not the transmission of power from one point to another but availability of power on the entire power grid or transmission lines enabling the beneficiary to utilize the power to the extent of his allocation. On these facts, the question that requires our adjudication is whether or not the payment for transmission charges can be termed as 'rent' for the purposes of Section 194-I of the Act. 12. Let us now take a look at the statutory provision with regard to tax withholding from rent payments, which is set out in Section 194-I of the Act, and analyze the same. Section 194-I provides as follows: Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of - (a) two per cent. for the use

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 21 of 56 of any machinery or plant or equipment; and (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings: Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed [one hundred eighty thousand rupees] : Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section. Explanation : For the purposes of this section, [(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement orarrangement for the use of (either separately or together) any, -, (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings, whether or not any or all of the above are owned by the payee;] (ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. 13. The case of the Assessing Officer, which has been sustained in the first appeal, is that since expression "rent", for the purpose of Section 194 I, includes "any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement" for the use of machinery, plant or equipment, and since the assessee has made the payments towards transmission charges for use of the machinery, plant and equipment collectively constituting mode of transmission of power, the provisions of Section 194-I come into play on the facts of this case. 14. The core issue that we must deal with is whether the present arrangement under the Bulk Power Transmission Agreement can be termed can be covered by the scope of expression any other agreement or arrangement 'for the use of' appearing in Explanation (i) to Section 194-I. 15. Explanation (i) to Section 194-I, as we have noted above, defines rent as any payment, by whatever name called, under any lease, sublease, or tenancy or any other agreement or arrangement "for the use of" land, building, plant, machinery or equipment etc. As evident from a plain reading of the agreements under which impugned payments have been made, the payments

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 22 of 56 have been made for the services of transmission of electricity and not the use of transmission wires per se. It is a significant fact that these transmission lines are not only being used for transmission of electricity to the assessee but also for transmission to electricity to various other entities. The transmission lines continue to be not only under control and possession of the PGCIL in legal terms, but, what is more important, these transmission lines are effectively in the control of PGCIL, without any involvement of the assessee in actual operations of the same. On these facts, in our humble understanding, the assessee has made the payments for transmission of electricity in which transmission lines have been used rather than for the use of transmission lines per se. The payments could be said to have been made for "the use of transmission lines" in a case in which the object of consideration for which payments are made was the use of transmission lines simplictor, and such a use by the assessee does not extend beyond the transmission of electricity through such lines in the sense that the same transmission lines continue to be in the control of PGCIL for transmission of electricity for other entities and for all practical purposes. Even as electricity purchased by the assessee is transmitted to the assessee from the NTPC busbar to its landing points, the same transmission lines continue to be engaged in similar transmission of electricity for other entities and the assessee has no say in the manner in which such transmission lines can be controlled and used by the PGCIL. Undoubtedly, for the purpose of an arrangement being termed as in the nature of rent for the purpose of Section 194-I, the 'control' and 'possession', in legal terms, of an asset may not not needed to be with the person benefiting from the asset in question, it is a condition precedent for invoking Section 194 I that the asset, for the use of which the payment in question is made, should have some element of its control by the assessee. Here is a case in which the assessee has no control over the operations of the transmission lines, and all that he gets from the arrangements is that he can draw the electrical power purchased from PGCIL's transmission lines in an agreed manner. 16. While on the issue of distinction between use of an asset and benefit from an asset, we may usefully refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asstt. Commr. of Commercial Taxes [2001] 124 STC 426 (Kar.), which has been followed by Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 ITR 340 / 197 Taxman 263/ 9 taxmann.com 168, in the following terms : "9. Thus if the transaction is one of leasing/hiring/letting simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the framework of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of "sale". On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of "sale". Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO.[1990] 77 STC 182 (AP). Illustration (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 23 of 56 The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the "use of the lorry" for the following reasons : (i) The lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (iii) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry; or the carrier may unload the consignment en route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8 a.m. to 8 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km. subject to an assured minimum, for a period of one month or one week or even one day; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. ……." 17. It is thus clear that in a situation in which the payment in made for the use of an asset simpliciter, whether with control and possession in its legal sense or not, the payment could be said to be for the use of an asset. However, in a situation in which the payment is made only for the purpose a specific act, i.e. power transmission in this case, and even if an asset is used in the said process, the payment cannot be said to be for the use of an asset. When control of the asset (transmission lines in the present case) always remains with the PGCIL, any payment made to the PGCIL for transmission of power on the transmission lines and infrastructure owned controlled and in physical possession of PGCIL can be said to have been made for 'the use of ' these transmission lines or other related infrastructure. Viewed in this perspective, Section 194 I has no application so far as the impugned payments for transmission of electricity is concerned. For this short reason alone the impugned demands must be held to unsustainable in law.” 9. On due consideration the order of the coordinate bench in the assessee’s own case in assessment year 2005-06, and 2006-07 as well as in the case Chhattisgarh State Electricity Board, we are of the view hat Ld. Commissioner of Income Tax (appeals) has appreciated the controversy in right prospective and no interference is called for. Therefore, ITA No. 3526,3528,3629,3530 are dismissed. The various decisions cited supra have held that there will be no TDS on transmission charges and the same analogy would apply with equal force in the case of transmission charges in telecom industry.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 24 of 56

4.17. From the aforesaid statement recorded from technical experts pursuant to the directions of the Supreme Court in CIT vs Bharti Cellular Ltd ( 330 ITR 239) which has been heavily relied upon by the Learned CITA, we find that human intervention is required only for installation / setting up / repairing / servicing / maintenance / capacity augmentation of the network. But after completing this process, mere interconnection between the operators while roaming, is done automatically and does not require any human intervention and accordingly cannot be construed as technical services. It is common knowledge that when one of the subscribers in the assessee’s circle travels to the jurisdiction of another circle, the call gets connected automatically without any human intervention and it is for this, the roaming charges is paid by the assessee to the Visiting Operator for providing this service. Hence we have no hesitation to hold that the provision of roaming services do not require any human intervention and accordingly we hold that the payment of roaming charges does not fall under the ambit of TDS provisions u/s 194J of the Act.

4.18. As far as the applicability of provisions of section 194C are concerned, we hold that the provisions of section 194C of the Act would become applicable only where some work (works contract) is being carried out and there is some human intervention involved in the carriage of such work. The term ‘work’ is defined in section 194C as follows:-

“Work shall include: a) Advertising; b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 25 of 56 c) carriage of goods or passengers by any mode of transport other than by railways;

d) catering; e) manufacturing or supplying a product according to the requirement or specification of the customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.”

We hold that 194C is applicable only where any sum is paid for carrying out any work including supply of labour for carrying out any work. Thus, ‘carrying out any work’ is the substance for making the payment relating to such work, liable for deduction of tax at source u/s 194Cof the Act. For carrying out any work, manpower is sine qua non and without manpower, it cannot be said that work has been carried out. Under section 194C each and every work/service is not covered, hence the nature of work done or service performed is required to be seen. Moreover, the term ‘work’ is defined in section 194C of the Act. The word ‘work’ in section 194C referred to and comprehends only the activities of workman. It is the physical force which has comprehended in the word ‘work’. We have already held that the payment of roaming charges does not require any human intervention. Hence in the absence of human intervention, the services rendered in the context of the impugned issue does not fall under the definition of ‘work’ as defined in section 194C and hence the provisions of section 194C are not applicable to the impugned issue.

4.19. Let us now get into the applicability of provisions of section 194I of the Act to the facts of the impugned issue. The term ‘rent’ is defined in section 194I as below:-

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 26 of 56

“For the purposes of this section, “rent” means any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,- (a) land; or (b) building (including factory building); or (c) land appurtenant to a building (including factory building); or (d) machinery; or (e) plant; or (f) equipment; or (g) furniture; or (h) fittings whether or not any or all of the above are owned by the payee.”

The real test to be considered is whether it is possible to say that it is the assessee who has used the equipment and has paid the roaming charges to the other service provider with whom it has entered into a national roaming agreement. We hold that it is not possible to say so because if at all anyone can be said to have used the equipment it can only be the subscriber of the assessee but not the assessee. If anything the assessee is placed in a position of a mere facilitator between its subscriber and the other service provider, facilitating a roaming call to be made by the subscriber. The assessee cannot be said to have used the equipment which is involved in providing the roaming facility. The assessee collects the roaming charges from its subscriber and passes it on to the other service provider. It is relevant at this juncture to get into the judgement of the apex court in the case of BSNL and Another vs Union of India and Others (2006) 282 ITR 273 (SC). One of the questions which arose for consideration was whether there was any transfer of a right to use any

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 27 of 56 goods by providing access or telephone connection by the telephone service provider to a subscriber. Referring to section 4 of the Telegraph Act, 1885, which gives exclusive privilege in respect of telecommunication and the power to grant licences to the Central Government, it was contended by the service providers that they provided only a service by the utilization of telegraph licensed to them for the benefit of the subscribers.

The Supreme Court proceeded on the assumption that incorporeal rights may be goods for the purpose of levying sales tax and posed to itself the question whether the electromagnetic waves through which the signals are transmitted can fulfil the criteria for being described as “goods”. The court held that the electromagnetic waves cannot be called goods. They were held to be merely the medium of communication; the waves are neither abstracted nor consumed, they are not delivered, stored or possessed, nor are they marketable. What was transmitted is not an electromagnetic wave but the signal through such means. The Supreme Court thereafter gave a more basic reason to hold that the electromagnetic waves cannot be considered as goods and it is this reason which is relevant for our purpose. It was held that a subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 28 of 56 In view of the above, we hold that the payment of roaming charges by the asesssee to other service provider cannot be considered as rent within the meaning of section 194I of the Act.

4.20. Accordingly, we hold that the payment of roaming charges of Rs.55,41,01,320/- does not fall under the ambit of TDS provisions either u/s 194C / 194I or 194J of the Act and hence we have no hesitation in directing the Learned Assessing Officer to delete the addition made u/s 40(a)(ia) on this account.

4.21. Without prejudice to the aforesaid main ground with regard to the non-applicability of TDS provisions for roaming charges, the next argument of the Learned AR that the provisions of section 40(a)(ia) of the Act would apparently be applicable only for amounts payable at the end of the year and not for amounts paid before the end of the previous year. We find that this issue is already covered against the assessee by the decision of the Jurisdictional High Court in CIT vs Crescent Export Syndicate (2013) 33 taxmann.com 250 (Cal) wherein it was held that provisions of 40(a)(ia) could be invoked on amounts paid before the end of the previous year. Accordingly, this ground no. 2.2 raised by the assessee is dismissed. However, this ground becomes infructuous in view of our decision rendered for Ground No. 2.1.

4.22. Without prejudice to the main Ground No. 2.1 and alternative Ground No. 2.2, the Learned AR argued that the second proviso to section 40(a)(ia) inserted with effect from 1.4.2013 should be construed as curative in nature and hence has to be given retrospective effect. This issue has been recently decided by the Hon’ble Delhi High Court in the

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 29 of 56 case of CIT vs Ansal Land Mark Township (P) Ltd wherein it was held as follows:- “Whether the second proviso to Section 40(a)(ia) (inserted by the Finance Act, 2012), which states that TDS shall be deemed to be deducted and paid by a deductor if resident recipient has disclosed the amount in his return of income and paid tax thereon, is retrospective in nature or not? The High Court held as under- Section 40(a)(ia) was introduced by the Finance (No. 2) Act, 2004 to ensure that an expenditure should not be allowed as deduction in the hands of an assessee in a situation where income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. Hence, section 40(a)(ia) is not a penalty provision for tax withholding lapse but it is a provision introduced to compensate any loss to the revenue in cases where deductor hasn't deducted TDS on amount paid to deductee and, in turn, deductee also hasn't offered to tax income embedded in such amount. The penalty for tax withholding lapse per se is separately provided under section 271C. and, therefore, section 40(a)(ia) isn't attracted to the same. Hence, an assessee could not be penalized under section 40(a)(ia) when there was no loss to revenue. The Agra Tribunal in the case of Rajiv Kumar Agarwal-vs.- ACIT [2014] 45 taxmann.com 555 (Agra - Trib.) had held that the second proviso to Section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(8) was inserted by the Finance No. 2) Act, 2004, even though the Finance Act, 2012 had not specifically stated that proviso is retrospective in nature. The High Court affirmed the ratio laid down by The Agra Tribunal and held that said proviso is declaratory and curative in nature and has retrospective effect from 1st April, 2005. Respectfully following the said decision, the ground no. 2.2 is allowed in favour of the assessee. However, this ground becomes infructuous in view of our decision rendered for Ground No. 2.1.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 30 of 56 The next ground of appeal raised by the assessee is as to whether the Learned CIT(Appeals) is correct in upholding the disallowance of interest paid on borrowed funds in the sum of Rs.17,57,91,780/- in respect of interest free loans advanced by the assessee to its subsidiary.

5.1. The brief facts of this issue is that the assessee advanced loan of Rs.410 crores to its subsidiary Vodafone Digilink Ltd. It is also not in dispute that out of Rs.410 crores advanced by the assessee, a sum of Rs.250 crores represent loan funds of the assessee and balance Rs.160 crores was advanced out of internal accruals and own funds of the assessee. The Learned Assessing Officer disallowed the interest payment on a proportionate basis as according to him the borrowed funds were diverted for granting interest free loans to subsidiary which is for non- business purposes. This addition was also upheld by the Learned CIT(Appeals) on the ground that the assessee has not established commercial expediency on funds advanced to its subsidiary The Learned CIT(Appeals) invoked the provisions of section 14A of the Act though the Learned Assessing Officer invoked the provisions of section 36(1)(iii) of the Act while making the disallowance. Aggrieved, the assessee is in appeal before us on the following grounds:- Ground No. 3- Disallowance of interest on loans borrowed 3.1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the disallowance of interest of INR 175,791,780 on interest free loans given by the Appellant to its subsidiary. 3.2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that interest incurred by the Appellant on interest free loans given by the Appellant to its subsidiary is not allowable in view of the provisions of section 14A of the Act.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 31 of 56 3.3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding that extension of loans by the Appellant to its subsidiary is not driven by commercial expediency.

5.2. The Learned AR argued that there is significant interdependence between the assessee and its group companies. Subscribers of one entity avail roaming services from other entities when they visit their circles. Similarly, there are interconnect arrangements between these entities for termination of calls originating in one circle and terminating in another. Therefore, he argued that the funds advanced by the assessee to its subsidiary were driven by commercial considerations, since such funds would not only assist the operation of subsidiary but also equally assist the assessee in its operations. Further, it is a matter of fact that any disruption in the business of the sister concern of the assessee would adversely impact the business of the assessee itself. He further argued that since Vodafone group acquired telecom circles across India, it resulted in acquisition of telecom circles under various group entities, as against any single entity. Had all the circles been under a single entity, funds from one telecom circle to another would have been liberally extended and used owing to the interdependence between various telecom circles. This is a common practice that is adopted by other telecom operators who have most of their circles under one operating entity. Therefore, in the instant case, merely owing to the fact that the telecom circles are held by various group entities, the extension of funds by entity to another does not mitigate the commercial rationale behind sharing of such funds. Since the funds were utilized for business purposes, the interest expense thereon is deductible in the hands of the assessee. It is a judicially settled matter that if funds are advanced by an enterprise to a subsidiary for commercial expediency, and such funds are

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 32 of 56 utilized by the subsidiary for business purposes, then the interest expenses incurred for availing such funds necessarily need to be allowed as deduction in the hands of the said enterprise.

In response to this, the Learned DR vehemently supported the orders of the lower authorities and the case laws relied upon in the Learned CIT(Appeals) order for justifying the disallowance of interest.

5.3. We have heard the rival submissions and perused the materials available on record. There is no dispute on the facts with regard to usage of borrowed funds to the tune of Rs.250 crores for advancing interest free loans to subsidiary. Hence the nexus between borrowed funds and interest free loans have been clearly established by the Learned Assessing Officer. Now the short point that arises for our consideration whether the said interest free loans advanced is done by the assessee during the course of its business of the assessee and done as a measure of commercial expediency. We also admit the additional evidences filed by the Learned AR filed before us in the form of filing the balance sheets of Subsidiary Company to prove that how the funds borrowed from the assessee were utilized by it in its business. On verification of the same and the cash flow statement of subsidiary company, we are satisfied that the subsidiary company had utilized the funds borrowed from the assessee for its business purposes only. From the undisputed facts stated hereinabove and in view of the fact that the subsidiary company is also in the same line of business as that of the assessee and the interdependence between the two entitles for obtaining the network and the requirement of funds, we hold that the funds were advanced by the assessee to its subsidiary as strategic advances made only during the course of its business and the principles of commercial expediency

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 33 of 56 thereon is also established and proved beyond doubt. The case law relied upon by the Learned AR is very well placed and directly applicable to the facts of the instant case. It is also observed that the case laws relied upon by the Learned DR have been rendered prior to the supreme court judgement in 288 ITR 1 and hence are not considered herein.

5.4. We also hold that the action of the Learned CIT(Appeals) in invoking the provisions of section 14A of the Act is totally misplaced as the income received from the subsidiary, if any, would only be in the nature of interest which is taxable. Admittedly, the provisions of section 14A of the Act could be invoked only for the investments made by the assessee out of borrowed funds where the resultant gain would be in the form of dividend income which is exempt from tax.

5.5. At this juncture, it would be pertinent to get into the following decisions to understand the principles laid down thereunder:-

S.A.Builders Ltd vs CIT reported in 288 ITR 1 (SC) “The assessee borrowed the funds from the bank and lent some of it to the sister concern (a subsidiary company) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) of the Act because in section 37 also the expression used is “for the purpose of business”.

It has been consistently held in decisions relating to section 37 that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 34 of 56 businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.

It has been repeatedly held by this court that the expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits” vide CIT vs Malayalam Plantations Ltd (1964) 53 ITR 140 , CIT vs Birla Cotton Spinning & Weaving Mills Ltd (1971) 82 ITR 166.

The High court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.

We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot b said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 35 of 56 is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”

Dalmia Cement Bharat Ltd reported in 2009-TIOL-467-HC-DEL-IT “The Delhi High Court held that no portion of interest paid by the assessee on its borrowed funds can be disallowed on the ground that the portion thereof has been diverted to subsidiary company and that the assessing officer was not justified in disallowing the assessee company in debiting the interest paid to the bank as a revenue expenditure merely because it had given further loan to its subsidiary company.”

5.6. Respectfully following the aforesaid judicial precedents and in the facts and circumstances of this case, we hold that the borrowed funds advanced to subsidiary by the assessee was on the ground of commercial expediency and accordingly the interest paid would be allowed as deduction in the hands of the assessee. We direct the Learned Assessing Officer to delete the addition made towards disallowance of interest in the sum of Rs.17,57,91,780/-. Accordingly, the Ground Nos. 3.1 to 3.3 of the assessee are allowed.

These grounds are only consequential in nature to the aforesaid grounds and hence not adjudicated herein. We also hold in respect of levy of penalty u/s 271(1)(c ) of the Act that the aforesaid issues had reached the corridors of several tribunals and courts and that itself goes to prove that the issues are highly debatable and involves substantial question of law. Hence there cannot be any levy of penalty on a legal issue.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 36 of 56 In the result, the appeal of the assessee in ITA No. 1864/Kol/2012 for the Asst Year 2009-10 is partly allowed.

ITA No. 243 / Kol / 2014 – Asst Year 2010-11 – Assessee’s Appeal 7. This appeal arises out of the order of the Learned CIT(Appeals) in Appeal No.118/CIT(A)-VIII/Kol/13-14 dated 31.12.2013 for the Asst Year 2010-11 arising out of the order of the Learned Assessing Officer framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

8.1. This issue is elaborately discussed above for the Asst Year 2009-10 and the decision rendered thereon is applicable for this asst year also.

9.1. The Learned AO held that in respect of international roaming charges, the provisions of section 40(a)(i) r.w.s. 195 of the Act would become applicable and accordingly proceeded to make the disallowance of Rs.10,64,45,346/-. On first appeal, the Learned CIT(Appeals) upheld the disallowance made by the Learned Assessing Officer. Aggrieved, the assessee is in appeal before us.

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9.2. The Learned AR argued that the obligation to deduct tax at source by the assessee on international roaming charges shall be applicable only where such charges are chargeable to tax in the hands of the non-resident telecom operator in India. He argued that since the payments on account of international roaming charges have been made to foreign telecom operators for roaming facility provided outside the territorial jurisdiction of India, such charges would fall within the exception provided in section 9(1)(vii)(b) of the Act and are not liable to tax in India. The Learned AR further argued that even under the tax treaty, since the roaming services do not make available any technical knowledge, skill, knowhow, etc., to the telecom operators which can be applied by assessee on its own and hence, the payments do not qualify as Fee for Technical Services under the tax treaties that contain ‘make available’ clause. He further argued that it is an established principle that where service charges, being in the nature of Fee for Technical Services under the Act, are paid to a non-resident person and the applicable DTAA does not contain a specific article on Fee for Technical Service, such charges shall be construed as business profits of the non- resident recipient. Hence in the absence of a permanent establishment of the foreign telecom operator in India, the said charges cannot be taxed in India.

9.3. We have heard the rival submissions and we find that the entire case of the revenue is that roaming charges are in the nature of Fee for Technical Services. We have already held that the roaming charges do not fall in the ambit of Fee for Technical Services for detailed reasoning given hereinabove, the nature being the same in respect of international roaming charges, it does not come under the ambit of withholding tax

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 38 of 56 provisions and as such the assessee is under no obligation to deduct tax at source u/s 195 of the Act. The case law of GE India Technology Centre Pvt Ltd reported in (2010) 327 ITR 456 (SC) relied upon by the assessee in this regard is well placed and directly in favour of the assessee on this principle.

9.4. We hold that the payment of roaming charges does not fall under the ambit of Fee for Technical Services as no human intervention is required for the same and hence the income of non-resident telecom operator is not chargeable to tax in India u/s 195 of the Act and hence we refrain to give our opinion on the other beneficial provisions provided in the DTAAs for the assessee in the facts of the impugned issue. Accordingly, the ground raised by the assessee with regard to applicability of TDS provisions for international roaming charges of Rs.10,64,45,346/- is allowed.

The next issue to be decided in this appeal is as to whether the sum paid as penalty to Department of Telecommunications (DOT) by the assessee would fall under the Explanation to section 37(1) of the Act treating the same as amount paid for infraction of any law.

10.1. The brief facts of this issue is that the assessee is providing cellular mobile telephonic services in Kolkata Telecom Circle based on the telecom license granted by Department of Telecommunications (DOT). As per the said license arrangement, the telecom operators are obliged to abide by the terms and conditions of the license agreement and also certain other regulations issued by DOT from time to time. In case of any

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 39 of 56 irregularities, the telecom operators are liable to pay penalty as stipulated by DOT for such failure. The Learned Assessing Officer stated in his assessment order that during the assessment year under appeal, the assessee has been levied with a penalty of Rs.5,05,000/- by DOT in respect of violation of terms and conditions of license agreement in respect of verification of the subscribers. Accordingly, he treated this as penalty paid for infraction of law and applied Explanation to Section 37(1) of the Act and disallowed a sum of Rs. 5,05,000/-. On first appeal, the Learned CIT(Appeals) upheld the disallowance made by the Learned Assessing Officer by stating that the business of telecommunication is regulated by the Indian Telegraph Act, 1885 and DOT is the nodal agency under the Govt. of India which regulates the functioning of the telecommunication business in India. The Learned CIT(Appeals) further stated that in order to ensure national security and stability, the DOT has made mandatory for telecommunication companies to obtain personal data of the subscribers and for non-maintenance of personal information of the subscribers, DOT had imposed fine of Rs.5,05,000/- which is in violation of statutory requirements of law. Aggrieved, the assessee is in appeal before us.

10.2. The Learned AR argued that the penalty was paid to DOT only for non-maintenance of certain personal information of the subscribers which would ensure verification of the same. The assessee is mandated to maintain those personal information as per the terms and conditions of the license agreement entered into with DOT. He argued that failure to do so would invite him with a penalty levied by DOT for violation of terms and conditions of license agreement which would not fall under the category of an offence prohibited by law or any other statute. The Learned AR placed on record a judgement copy of the Telecom Disputes

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 40 of 56 Settlement & Appellate Tribunal (TDSAT) New Delhi in Petition No. 252 of 2011 (M.A. No. 160 of 2011) dated 12.4.2012 between Cellular Operators Association of India & Ors (petitioner) vs Department of Telecommunication & Anr. (Respondent), wherein it has been stated as below:- “Para 16: Section 20 of Indian Telegraph Act provides for penalties. Section 20A provides for penalties for breach of conditions of license in the following terms:-

“Breach of condition of license – If the holder of a license granted under section 4 contravenes any condition contained in his license, he shall be punished with fine which may extend to one thousand rupees, and with a further fine which may extend to five hundred rupees for every week during which the breach of the condition continues.”

Para 28. “Clause 41.14 provide that the complete list of subscribers shall be made available by the LICENSEE on their website (having password controlled access) so that authorized Intelligence Agencies are able to obtain the subscriber list at any time, as per their convenience with the help of the password. The list should be updated on regular basis. Hard copy as and when required by security agencies shall also be furnished. The LICENSEE shall ensure adequate verification of each and every customer before enrolling him as a subscriber; instructions issued by the licensor in this regard from time to time shall be scrupulously followed. The SIM Card used in the User terminal or hand-held subscriber terminal (where SIM card is not used) shall be registered against each subscriber for his bonafide use. The LICENSEE shall make it clear to the subscriber that the SIM card used in the user terminal registered against him is non-transferable and that he alone will be responsible for proper and bonafide personal use of the service. ”

Para 34:- On the premise that the Respondent despite representations continued to impose penalties in terms of the

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 41 of 56 purported circular letters have filed this petition, claiming inter alia for the following reliefs :-

(a) “Declare the penalty regime introduced by DOT through its letter dated 22.11.2006 bearing reference No. 800-04/2003-VAS (Vol.II) 1104 as illegal, arbitrary, unreasonable, irrational, disproportionate and oppressive.”

TDSAT decision Para 50:- Whether in view of the provisions contained in section 7(2)(k) read with section 20 and 20A of Indian Telegraph Act, 1885, the Respondent was precluded from levying any penalty on the alleged ground of non-compliance of the customer acquisition form, is the question.

Para 52:- Only when a statute governs the field, contract between two parties shall be governed thereby. Absence of a rule would not be a bar for two parties to agree to the terms of a contract.

In Bharat Sanchar Nigam Limited & Anr. Vs BPL Mobile Cellular Limited & Ors., (2008) 13 SCC 597 at page 620,- it is stated :

“In absence of any statutory rule governing the field, the parties would be at liberty to enter into any contract containing such terms and conditions as regards the rate or the period stipulating such terms as the case may be. The matter might have been different if the parties had entered into an agreement with their eyes wide open that the circular letter shall form part of the contract. They might have also been held bound if they accepted the new rates or the periods either expressly or sub silentio.”

Para 54. In any event, it was incumbent upon the petitioner to show that rules have been framed and quantum of penalty has been specified thereby. In absence of such a rule having been made, it is difficult for us to hold that the parties to the contract could not have arrived at an agreement that in the event of breach of performance of contract on the part of the licensees, penalty to the extent of Rs 50 crores would become payable.

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Para 58. Section 20 of the Act, to which our attention has been drawn, refers to fine and , thus, can be imposed only by a Criminal Court. If only a Criminal Court can impose fine in terms of section 20 of the Act, the same, evidently cannot be imposed by the licensor.

Para 59. For similar reasons, the provision of section 20A can be resorted to only by a Criminal Court, if any case is made out therefor.

10.3. The Learned AR argued that from the aforesaid citation of TDSAT, it could be concluded that the DOT per se does not have any authority to levy penalty as the said power is vested only with a Criminal Court. He argued that the proceedings challenging the jurisdiction of DOT to levy penalty are pending and however the assessee had paid the penalty of Rs. 5,05,000/- under protest and claimed the same as deduction u/s 37(1) of the Act.

10.4. He argued that the lower authorities had not pointed out which law or statute has been violated by the assessee to come under the ambit of Explanation to section 37(1) of the Act. He further argued that there is no law or statute which governs the license agreement entered into with DOT by the assessee and accordingly pleaded that Explanation to section 37(1) could not be invoked in the facts of the case. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

10.5. We have heard the rival submissions and perused the materials available on record. We find that the penalty is paid to DOT for non- maintenance of personal information of the subscribers which would ensure verification of the same in time of need. To this extent, the assessee had committed a breach of contractual obligation of the terms

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 43 of 56 and conditions of the license agreement entered into with DOT. We find that the amount paid is towards damages for breach of contractual obligation and are part and parcel of the business of the assessee and hence should be regarded as an expenditure laid out wholly and exclusively for the purpose of business of the assessee. We find lot of force in the arguments of the Learned AR that merely the fact that penalty has been paid as a result of breach of a contract with the Government or any of its department should not change the character of such payments from contractual liability to a statutory liability. The penalty is not stipulated under any of the statutory Acts and accordingly the same cannot be construed as a statutory liability. At best it could only be construed as a contractual liability.

10.6. We find that the penalty paid to DOT is only for non-compliance of terms and conditions of the license agreement and not paid for infraction of any other law so as to warrant the Explanation to section 37(1) of the Act.

10.7. In this regard, it is relevant to get into the following case laws :-

a) ARCH Finance Ltd vs ACIT reported in (2007) 165 Taxman 188 (Delhi) – ITAT Delhi D Bench dated 10.8.2007. The head notes are reproduced below:-

“Section 37(1) of the Income Tax Act, 1961- Business expenditure –Allowability of – Assessment Year 2001-02 – Assessee, which was a stock/share broker and was a member of Delhi Stock Exchange paid various amounts as penalty on account of his late delivery, short delivery, short margin etc., to National Stock Exchange and claimed deduction of same as revenue expenditure – Whether since impugned payments

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 44 of 56 made by assessee were not for infraction of law, same were allowable as revenue expenditure – Held, Yes”.

(b) Goldcrest Capital Markets Ltd vs ITO reported in (2010) 2 ITR (TRIB.) 355 (Mum) – ITAT Mumbai B Bench dated 21.1.2009. The head notes are reproduced below:- “Section 37(1) of the Income Tax Act, 1961- Business expenditure –Allowability of – Assessment Years 2002-03 & 2003-04 Fine paid by assessee stock broker who was a member of NSE, on account of unfair trade practice and un-business like conduct is not for violation of law and hence, cannot be disallowed. The members of NSE Ltd are bound through the articles of association to abide by the rules, regulations and bye-laws of the NSE Ltd. Nevertheless, such rules, regulations and bye-laws can be considered as regulations for controlling the internal inter se obligations and rights of the members of NSE Ltd. Though every member of NSE Ltd would be obliged to abide by such rules and regulations, a violation thereof cannot be treated as violation of a statutory law or rule. The fines and penalties levied for violation on account of “unfair trading practice” as specified in 4.6 of the NSE regulations and “un-business like conduct” as specified in IV(4)(e) of the NSE rules cannot be equated with violation of a statutory rule or law. Thus, fine paid by the assessee stock broker who was a NSE member, on account of unfair trade practice and un-business like conduct, is not for violation of law and, hence, cannot be disallowed”.

c) Master Capital Services Ltd vs DCIT reported in (2008) 23 SOT 60 (CHD.) (URO) – ITAT Chandigarh A Bench dated 26.2.2007- It was held that : “The asesssee incurred the expense in the shape of fines during normal course of business and there was no infraction of any statutory law. In the type of business of the assessee, it is beyond the control of share broker to know in advance that the trading volume would increase beyond the fixed exposure limit because trading depends upon the market trend and on certain dates there can be extraordinary increase in trading volume. On that increased trading volume, the concerned member also earns

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 45 of 56 income in the shape of commission, etc., which is taxable. So, the fine by the share broker which was correlated with the increase in trading volume, which cross the fixed exposure limit, could not be considered as an infraction of law, although irregularities were there. In the instant case, for the said irregularities, the assessee suffered and paid the fine but this payment could not be termed as penal in nature. Similarly, late submission of margin certificate due to computer software problem could not be considered as infraction of law and if any fine was paid for such late submission, due to unavoidable circumstances in the regular course of business that could not also be termed as penal in nature. Similarly, fine paid for delay in making the deliveries of shares due to deficiencies in the documents like non-matching of signatures, et., could not be considered as penal in nature. Irregularities of that type could not be ruled out in such type of business and any fine paid for those irregularities could not be considered as an infraction of any law. So, the payments made by the assessee in the regular course of business could not be termed as penal in nature, particularly when the assessee did not commit those irregularities intentionally and regularly. Therefore, considering the totality of the facts of the case, it was to be held that , although some violations of the conditions prescribed by the NSE was there, but those violations occurred in the regular course of business ad same could not be considered as infraction of any statutory law. So, the expenses incurred by the assessee in regular course of business were allowable. Hence, the impugned orders were to be set aside. In the result, the appeal was to be allowed.”

10.8. We find that analogy could be drawn from the aforesaid case laws to the facts of the instant issue before us and hold that the penalty paid to DOT does not come under the ambit of Explanation to Section 37(1) of the Act and accordingly, the grounds raised by the assessee in this regard are allowed.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 46 of 56 The next issue to be decided in this appeal is that whether the Learned CIT(Appeals) is correct in upholding the action of the Learned Assessing Officer in not allowing to reduce the provision for Asset Restoration Obligation written back to the tune of Rs.6,52,00,000/- while computing taxable income of the assessee.

11.1. The brief facts of this issue is that the assessee reduced a sum of Rs. 6,52,00,000/- while computing taxable income towards provision for Asset Restoration Obligation written back in the revised return of income filed belatedly. This was disallowed by the Learned Assessing Officer on the ground that revised return was filed beyond the time limit prescribed u/s 139(5) of the Act and hence cannot be considered for this item. This action of the Learned Assessing Officer was upheld by the Learned CIT(Appeals) on the ground that the assessee has not placed on record any documentary evidence to show that the provision for ARO was debited to from year to year through depreciation account and sufficient documentary evidences has not been placed on record by the assessee to substantiate that in all the past years the provision for ARO was in fact included in the book depreciation which stood disallowed while arriving at the taxable income. The Learned CIT(Appeals) also stated that the assessee has also not explained that whether the said provision was allowed deprecation or similar claim in the earlier years. Aggrieved, the assessee is in appeal before us.

11.2. The Learned AR argued that the assessee had entered into lease agreements with owners of certain premises for setting up cell sites for rendering cellular services. Such agreements are usually entered into for a long period of time say in the range of 15-20 years. He stated that further such lease agreements cast an obligation on the lessee (i.e. the

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 47 of 56 assessee herein) to restore the leased premises to their original form at the time of vacating such premises. Accordingly for this obligation, a provision for such liability was created in accordance with the guidelines issued by ICAI. The provision made thereon was capitalized in the books and income tax depreciation claimed on the same by treating the same as cost of acquisition. He argued that while capitalizing to the cost of acquisition, a corresponding liability is created in the books of the assessee towards provision for ARO. Subsequently due to demerger, the assets were transferred to Vodafone Infrastructure Ltd together with lease agreements and therefore the obligation to restore the premises to their original condition also stands transferred to Vodafone Infrastructure Ltd with effect from Asst Year 2010-11. Accordingly, the assessee in Asst Year 2010-11 reversed the ARO provision amounting to Rs. 6,52,00,000/- created in its books in the past years as the same is no longer required as a result of demerger. He further argued that at the time of reversal, the ARO provision appearing in the books of account of the assessee was cancelled against the cost base of the corresponding written down value of the fixed assets of ARO and the balance (i.e such portion of ARO as has been already charged off as depreciation in earlier years), was credited to profit and loss account. He argued that since the provision for ARO in relation to assets was included in the cost of assets under the block of ‘plant and machinery’, the amount of ARO written back to the profit and loss account in fact represents the amount of book depreciation that was charged by the appellant on the provision for ARO obligation in the prior years prior to the demerger. Given that such write back of ARO provision is capital in nature, the same has been reduced in the computation of income for the Asst year 2010-11 in the revised return of income. The Learned AR argued that provisions of section 41(1) of the Act would not become applicable in the instant case as this

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 48 of 56 provision was not charged to the profit and loss account for any earlier period. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

11.3. We have heard the rival submissions and perused the materials available on record. From the arguments of the Learned AR , it could be seen that the provision for ARO was capitalized in the books and tax depreciation was claimed on the same by the assessee. The corresponding liability which remained in the books and which were not taken over pursuant to demerger, was written back and credited to profit and loss account. This income was sought to be reduced by the assessee in the revised return filed on 5.12.2011 while computing its taxable income on the ground that section 41(1) would not be applicable. We find that the revised return was filed within the time limit prescribed u/s 139(5) of the Act and hence the action of the Learned AO in not considering the claim of expenditure alone during the course of assessment, while considering the additional income offered in the said revised return, is not appreciated.

11.4. It is pertinent to note that section 41(1) of the act uses the term ‘deduction’ in earlier years at the time of creation of such liability. Whereas in the instant case, the assessee had only claimed allowance of depreciation on the said provision for ARO and admittedly, claim of depreciation is only an ‘allowance’ and not a ‘deduction’. We find that the Learned CIT(Appeals) had stated in his order that the assessee had not filed any documentary evidences before the Learned Assessing Officer to enable him to verify the authenticity of claim made by the assessee. In the facts and circumstances of the case, we deem it fit and appropriate, in

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 49 of 56 the interest of justice and fair play, to set aside this issue to the file of the Learned Assessing Officer to decide the veracity of the claim in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard and assesse is also directed to provide complete details of depreciation claimed on ARO in earlier years and necessary workings in this regard. Accordingly, this ground of appeal raised by the assessee is allowed for statistical purposes.

The next ground to be decided in this appeal is as to whether the Learned CITA is correct in confirming the disallowance made by the Learned Assessing Officer in respect of amortization payments made to IBM in the sum of Rs.51,16,245/-.

12.1. The brief facts of this issue is that the assessee had entered into a service contract with IBM wherein IBM is meant to provide end to end IT services and solutions on receipt of consideration from the assessee. The sums paid by the assessee represented amortization of additional hardware charges for the support services. IBM continued to be the owner of the hardware and accordingly, the assessee sought to amortise the total payments made to IBM over the contract period in accordance with the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd (225 ITR 802). The Learned Assessing Officer sought to disallow this amortization of expenses without adducing any reasons in the assessment order. On first appeal, the Learned CIT(Appeals) sought a remand report from the Learned Assessing Officer in this regard who stated that it is not known whether the assessee had

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 50 of 56 deducted tax at source on the payments made to IBM and accordingly declined to offer extensive comments on this issue for want of full facts. The Learned CIT(Appeals) proceeded to confirm the disallowance on the fact that the assessee had not furnished the agreement copy entered into with IBM and it is not clear from the materials on record as to what is the treatment given for the impugned issue in the earlier years on amortization. Aggrieved, the assessee is in appeal before us.

12.2. The Learned AR filed a copy of the master service agreement entered into with IBM by way of additional evidences and requested us to consider the same and stated that both the Learned Assessing Officer and Learned CIT(Appeals) had not looked at the issue in the proper perspective and prayed for setting aside of this issue to the file of the Learned Assessing Officer. In response to this, the Learned DR fairly conceded to this.

12.3. We have heard the rival submissions and perused the materials available on record. We are admitting the additional evidence filed by the Learned AR containing the Master Service Agreement entered into by the assessee as it is very crucial for determining the issue under appeal. Since this agreement was not verified by the Learned Assessing Officer, we deem it fit and appropriate, in the facts and circumstances of the case, in the interest of justice and fair play, to set aside this issue to the file of the Learned Assessing Officer to decide this issue afresh in accordance with law. The Learned Assessing Officer is also directed to mention in his order regarding the status of amortization payments made in the earlier years and the tax treatment given in the assessments of earlier years for the same. Needless to mention that the assessee be given reasonable

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 51 of 56 opportunity of being heard. Accordingly, the grounds raised by the assessee in this regard are allowed for statistical purposes.

13.1. The assessee has raised the following ground on this issue:- “Disallowance of repayment of principal finance lease On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that repayment of principal amount of finance lease, amounting to INR 485,642, is not an allowable deduction”.

13.2. No arguments were advanced either by the Learned AR or by the Learned DR in this regard.

13.3. We have perused the materials available and from the same we are not able to ascertain the real facts of this issue. It is also seen that no discussion has been made by the Learned Assessing Officer in the assessment order with regard to this issue. Hence in the interest of justice and fair play, we deem it fit and appropriate to set aside this issue to the file of the Learned Assessing Officer to decide the issue afresh in accordance with law. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the ground raised by the assessee in this regard is allowed for statistical purposes.

In the result, the appeal of the assessee in ITA No. 243/KOL/2014 is partly allowed for the Asst Year 2010-11.

ITA No. 343/Kol/2014 – Department Appeal – Asst Year 2010-11

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 52 of 56 14. This appeal of the revenue arises out of the order of the Learned CIT(Appeals)-VIII, Kolkata in Appeal No. 118/CIT(A)-VIII/Kol/13-14 dated 31.12.2013 for the Asst Year 2010-11 arising out of the order of the Learned Assessing Officer framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

15.1. The brief facts of this issue are that the assessee credited a sum of Rs.2,55,01,032/- on account of unrealized foreign exchange fluctuation gain on capital account and the same was accordingly excluded from the taxable income in the return of income filed. It was explained by the assessee that the said amount pertained to notional fluctuation gain which arose on capital account and hence not includible in the total income. The Learned Assessing Officer sought to add the same in the assessment without adducing any reasons. On first appeal, the Learned CIT(Appeals) called for a remand report from the Learned Assessing Officer in this regard. The Learned Assessing Officer in his remand report had stated that notional exchange fluctuation gain was worked out in accordance with section 43A of the Act but did not give any adverse comments on the impugned issue. The Learned CIT(Appeals) accordingly directed the Learned Assessing Officer to allow the claim of the assessee by recording his satisfaction that the exchange fluctuation pertained to acquisition of capital assets and hence section 43A was applicable. Aggrieved, the revenue is in appeal before us on the following ground:- “That under the facts and circumstance of the case whether the ld. CIT(A)-VIII, Kolkata, was justified in

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 53 of 56 allowing relief of Rs.2,55,01,032/- on account of unrealized foreign exchange of fluctuation gain”.

15.2. The Learned DR vehemently supported the order of the Learned Assessing Officer. In response to this, the Learned AR argued that the exchange fluctuation to be computed as per the provisions of section 43A of the Act based on actual payment of foreign currency loan or purchase of fixed assets etc, wherein the resultant gain would be reduced from the cost of the fixed asset purchased out of the foreign currency loan. However, if the gain is recognized in the books only based on the restatement of the same at the end of the year, it only remains notional and unrealized and hence the same is not to be construed as real income of the assessee and hence the action of the assessee in this regard is correct as per law.

15.3. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove are undisputed. There is no dispute that the provisions of section 43A of the Act would become applicable for recognizing the exchange fluctuation if the loan was obtained for acquisition of fixed assets only at the time of making payment and accordingly the exchange gain , if any, would go to reduce the cost of the fixed asset. Since in the instant case, the exchange gain is derived only on a notional basis and is unrealized, by applying the provisions of section 43A of the Act, the said gain needs to be reduced from the taxable income. We also find that the Learned Assessing Officer having accepted to the facts of the case and the relevant provision of the Income Tax Act in his remand report, ought not to have come on appeal before us on this issue. We also find that this issue is covered by the decision of the Supreme Court in the case of CIT vs Woodward Governor of India P Ltd reported in 312 ITR 254 (SC) wherein the principles were

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 54 of 56 laid down for recognition of exchange gain/loss under various circumstances. Respectfully following the provisions of the act and the decision of the apex court, we are not inclined to interfere with the decision of the Learned CIT(Appeals). Accordingly, the ground no. 1 raised by the revenue is dismissed.

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 55 of 56 comments about the impugned issue, ought not to have come on appeal before us on this issue. Hence we are not inclined to interfere with the decision of the Learned CIT(Appeals). Accordingly, the ground no. 3 raised by the revenue is dismissed.

18.1. We find that the Learned AO having accepted this issue in the remand proceedings which is mentioned in page 74 para 27 of the Learned CIT(Appeals) order and had not given any adverse comments about the impugned issue, ought not to have come on appeal before us on this issue. Hence we are not inclined to interfere with the decision of the Learned CIT(Appeals). Accordingly, the ground no. 4 raised by the revenue is dismissed. In the result, the appeal of the revenue in ITA No. 343 / Kol / 2014 for the Asst Year 2010-11 is dismissed. 19. To sum up, the appeals of the assessee in ITA No. 1864/Kol/2012 for the Asst Year 2009-10 is allowed and ITA No. 243/Kol/2014 for the Asst Year 2010-11 is partly allowed. The appeal of the Revenue in ITA No. 343 / Kol / 2014 for the Asst Year 2010-11 is dismissed. Order pronounced in the open Court on 15th September, 2015. Sd/- Sd/- Mahavir Singh M. Balaganesh (Judicial Member) (Accountant Member) Kolkata, the 15t h day of September, 2015 FIT FOR PUBLICATION Sd/- Sd/- (M.S.) (M.B.)

I.T.A. No. 1864/KOL./2012 Assessment year: 2009-2010 & ITA No. 243/KOL/2014 Assessment Year : 2010-2011 & ITA No. 343/KOL/2014 Assessment Year : 2010-2011 Page 56 of 56

Copies to : (1) M/s. Vodafone East Limited,. (Formerly known as Vodafone Essar East Limited), 11, Dr. U.N. Brahmchari Road, Kolkata-700 017

(2) Additional Commissioner of Income Tax, Range-7, Kolkata (3) Joint Commissioner of Income Tax, Range-7, Kolkata (4) Deputy Commissioner of Income Tax, Range-7, Kolkata

(5) Commissioner of Income-tax (Appeals)-VIII, Kolkata (6) Commissioner of Income Tax, Kolkata (7) The Departmental Representative (8) Guard File By order

Assistant Registrar Income Tax Appellate Tribunal Kolkata Benches, Kolkata Laha/Sr. P.S.