THE issue before the Bench is - Whether payment of such roaming charges to other service providers can be considered as 'rent', within the ambit of TDS provision u/s 194I. NO is the answer.
Facts of the case
A) The assessee is a subsidiary of Vodafone Essar Ltd., engaged in providing cellular mobile telephony services (CMTS) in Kolkata Telecom Circle. It had incurred domestic roaming charges of Rs.55,41,01,320/- towards roaming facility provided by other telecom operators to the subscribers of the assessee. During the concerned year, the assessee had entered into roaming arrangements with other telecom operators which had given licence to operate as telecom service providers in other territories. The AO initially proceeded to show cause the assessee for disallowance of roaming charges by invoking provisions of section 40(a)(ia) r.w.s. 194C but later gave up and proceeded to section 194I/194J and made disallowance u/s 40(a)(ia). On appeal, the CIT(A) confirmed the order of AO.
B) The assessee during concerned year had advanced loan of Rs.410 crores to its subsidiary Vodafone Digilink Ltd. Out of Rs.410 crores advanced by the assessee, a sum of Rs.250 crores represented loan funds of the assessee and balance Rs.160 crores was advanced out of internal accruals and own funds of the assessee. During assessment, the AO disallowed the interest payment on a proportionate basis as according to him the borrowed funds were diverted for granting interest free loans to the subsidiary which was for non business purposes. On appeal, the CIT(A) confirmed the order of AO on the ground that the assessee had not established commercial expediency on funds advanced to its subsidiary.
C) The assessee was 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 were 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 irregularities, the telecom operators were also liable to pay penalty as stipulated by DOT for such failure. The assessee had been levied with penalty of Rs.5,05,000/- by the DoT in respect of violation of terms and conditions of license agreement in respect of verification of the subscribers. Accordingly, the AO treated this as penalty paid for infraction of law and applied Explanation to Section 37(1) and disallowed a sum of Rs. 5,05,000/-. On first appeal, the CIT(A) upheld the disallowance made by the AO by stating that the business of telecommunication was regulated by the Indian Telegraph Act, 1885 and DOT was the nodal agency under the Govt. of India which regulates the functioning of the telecommunication business in India.
D) The assessee while filing its revised return belatedly had reduced a sum of Rs. 6,52,00,000/- while computing taxable income towards provision for asset restoration obligation written back. The AO however disallowed the same on ground that revised return was filed beyond the time limit prescribed u/s 139(5) and hence could not be considered for this item. On appeal, the CIT(A) confirmed the order of AO by holding that the assessee had 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 had 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.
Having heard the parties, the Tribunal held that,
Roaming charges vis-a-vis TDS
+ it is noted 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 charges would partake the same character as the normal telecommunication charges paid by a subscriber to its service provider. We are not in agreement with the arguments of the DR that the word 'technical' used in Explanation 2 to Section 9(1)(vii) 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 Delhi High Court in the case of CIT vs Bharti Cellular Ltd 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. We find that the principles laid down by the Delhi High Court have been accepted by the Supreme Court in the case of CIT vs Bharti Cellular Ltd, wherein 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. We find that this issue need not be set aside to the file of AO for seeking fresh technical evidences from experts as the same had already been obtained in the case of the group 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;
+ the next argument of the 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 the power generating companies. This issue had reached the corridors of various judicial forums and now has been put to rest by various decisions, wherein it has been 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. From the aforesaid statement recorded from technical experts pursuant to the directions of the Supreme Court in CIT vs Bharti Cellular Ltd, which has been heavily relied upon by the 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. As far as the applicability of provisions of section 194C are concerned, we hold that the provisions of section 194C would become applicable only where some work is being carried out and there is some human intervention involved in the carriage of such work. 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 194C. 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;
+ the next thing that is required to be considered is the applicability of provisions of section 194I to the facts of the impugned issue. 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 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 noted that the Apex Court in the case of BSNL and Another vs Union of India and Others, has 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. 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. Accordingly, the payment of roaming charges of Rs.55,41,01,320/- does not fall even under the ambit of TDS provisions of Section 194I and hence we direct the AO to delete the addition made u/s 40(a)(ia) on this account;
Interest free advances paid to AE
+ 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 AO. 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 AR 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 thereon is also established and proved beyond doubt. We also hold that the action of the CIT(A) in invoking the provisions of section 14A 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 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. 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. Therefore, in the present facts & circumstances, 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 AO to delete the addition made towards disallowance of interest in the sum of Rs.17,57,91,780/-;
Penalty paid to Department of Telecommunications
+ it is found 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 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 force in the arguments of the 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. 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);
Provision for asset restoration obligation written off
+ from the arguments of the 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 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) and hence the action of the AO in not considering the claim of expenditure during the course of assessment, while considering the additional income offered in the said revised return, is not appreciated. It is pertinent to note that section 41(1) 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 CIT(A) had stated in his order that the assessee had not filed any documentary evidences before the AO 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 to set aside this issue to the file of AO to decide the veracity of the claim in accordance with law.