Mobile Companies can recognize revenue to extent of talk time used in case of prepaid talk time

 ITAT DELHI BENCH ‘G’

Assistant Commissioner of Income-tax

versus

Shyam Telelink Ltd.

IT Appeal Nos. 177, 178 & 3802 (Delhi) of 2009
[A.Y.  2003-04, 2004-05 AND 2006-07]

Date of Pronouncement- 09.07.2012

ORDER

1. These three appeals are directed against three separate orders of learned CIT(A) dt. 24th Oct., 2008, 31st Oct., 2008 and 26th June, 2009 for asst. yrs. 2003-04, 2004-05 and 2006-07 respectively.

2. In all the three appeals, there are some common grounds of appeal. Therefore, for the sake of convenience all the three appeals are being disposed of by this common order.

3. First we take up ITA No. 177 for the asst. yr. 2003-04 :

The assessee company, a wholly-owned subsidiary company of M/s Shyam Telecom Ltd., in the relevant assessment year continued providing basic telecom services under license from DOT in the State of Rajasthan. It had filed its return of income declaring loss of Rs. 1,09,56,32,444. The assessment was completed at net loss of Rs, 1,06,42,74,823, inter alia, after making following disallowances :

4. The assessee preferred appeal before the learned CIT(A) who while partly allowing the assessee’s appeal, deleted the aforementioned disallowances.

5. Being aggrieved with the order of learned CIT(A) the Department is in appeal before us and has taken following grounds of appeal :

“1. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 44,42,221 made by the AO on account of revenue for services on unused prepaid cards without appreciating the fact that the income of one year cannot be shifted to subsequent years.

2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 21 lac made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid.

3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 44,39,367 made by the AO on account of late payments of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relation with the IT Act.”

6. Brief facts, apropos ground No. 1 are that from the tax audit report, the AO noticed that the assessee company had declared income from services revenues including revenue from basic telephony services rendered through prepaid cards. It was explained by the assessee that the revenue from telephony services rendered through prepaid cards was recognized on the basis of actual usage by the customers. The AO required the assessee to furnish the details of actual sales of prepaid cards and actual usage by the customers. On going through the details, the AO noticed that the company had sold prepaid cards amounting to Rs. 2,79,32,820 as against which services revenue had been declared at Rs. 2,34,90,599. The AO further observed that assessee company had paid commission to the dealers on actual sales of prepaid cards aggregating to Rs. 2,79,32,820 and the commission had been claimed as expenditure in computing the income/loss of the company. He, therefore, did not accept the assessee’s contention and made an addition of Rs. 44,42,221 being the difference between the actual value of prepaid cards sold (Rs. 2,79,32,820) and actual usage declared as services revenue (Rs. 2,34,90,599).

7. Before the learned CIT(A), it was submitted that the company had to share its revenue with DOT (Department of Telecommunication, Government of India) as per terms of license granted to the assessee. The revenue was generated on the basis of services provided by the assessee company, which was done through prepaid and post-paid cards. The service that was provided was telephone facility, the quantum of which was called “talk time”. It was further submitted that in order to adopt a transparent system for payment of license fee on revenue sharing basis, the assessee installed integrated software for billing and accounting purpose. It was clarified that as per this system the revenue in respect of services that had been provided to the clients was automatically recognized in the accounts both in respect of prepaid and post-paid cards. The prepaid cards sold by the assessee had two parts, one was fixed amount known as activation charge and second talk time charge. The activation charge was accounted for immediately when the phone was activated. However, talk time charges were recognized on the basis of actual use which is normal practice followed in this field as per the terms with DOT. The amount in respect of which the customer had not used the prepaid card, was treated as advance in the balance sheet and recognized in the subsequent year when the talk time was actually used. It was further clarified by assessee’s counsel that once the validity period for the prepaid card was over, entire amount was recognized as revenue, whether used or not. It was pointed out that since the services in respect of unused cards were still to be rendered by the assessee, this could not be recognized as revenue during the year. The assessee referred to AS-IX, issued by the ICAI on revenue recognition. Further, with reference to AO’s observations that payment of commission was on entire value of sale of prepaid card, it was clarified that the same had nothing to do with revenue recognition. The commission was paid to the dealer for sale of cards. Once card was sold the company receives entire amount of card value and the services of dealer (in selling the card) stood received. Therefore, he had to be paid commission on the basis of value of cards sold.

8. Learned CIT(A) deleted the addition for the following reasons :

(i)           telephonic services provided by the company are measured in the form of “talk time”.

(ii)           unused value as on the last day of the accounting year was the amount with respect to which the company had not provided services to the customer during the year.

(iii)          since the revenue in the case of a service company is received by providing services, the revenue only to the extent services were actually provided during the year could be recognized.

(iv)          the assessee was following correct system of accounting of revenue in respect of prepaid cards which was also used for payment of license fee to DOT. The amount of unused “talk time” which was carried forward was shown as revenue in subsequent year.

9. Learned Departmental Representative submitted that admittedly, the commission had been paid on entire value of prepaid card sold. But revenue has been declared only with reference to actual user of prepaid card. She submitted that assessee does not refund the amount in respect of unused prepaid card after the expiry of period of prepaid card. She submitted that under such circumstances, revenue leakage cannot be ruled out. She further submitted that assessee was following hybrid system of accounting cash being in respect of revenue declaration and mercantile in respect of commission payment. She relied on following decisions for the proposition that dual system of accounting is not permissible :

(1)          G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR 1

(2)          Sutlej Cotton Mills Ltd. v. CIT[1979] 116 ITR 1 (SC);

(3)          CIT v. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.);

She relied on the assessment order.

10. Learned counsel submitted that assessee is a cellular provider and is following the same system of accounting as is followed by other cellular providers. He submitted that assessee is following mercantile system of accounting. Learned counsel pointed out that prepaid charges comprise of two charges—first activation charges and second talk time charges. Activation charges are immediately booked on sale of prepaid card, whereas out of talk time charges the revenue is recognized only to the extent the talk time has actually been utilized. He further clarified that to the extent talk time is available as at the end of the year on a particular prepaid card, the amount in respect thereof is treated as advance with the company. He further pointed out that in case of lapsed cards entire revenue is recognized on expiry of period and this can be duly demonstrated before AO, if so required.

11. Learned counsel referred to the decision in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC) at p. 50 to submit that income is to be recognized only when right to receive the same accrues. He submitted that right accrues only after providing services and, therefore, the income is recognized accordingly. Learned counsel relied on following decisions in support of his proposition that revenue is to be recognized only when right to receive the same accrues :

(1) CIT v. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231 (SC). In this case, the assessee was granted compensation of Rs. 5 lac for property acquired by the Government in 1949. The Government paid Rs. 2,54,885 in the asst. yr. 1955-56 and Rs. 3,73,831 in the asst. yr. 1956-57. The excess of Rs. 1,28,716 over the compensation of Rs. 5 lac was treated as interest and the Tribunal held that the amount had to be allocated between those two years. On a reference at the instance of the assessee, the Hon’ble High Court held that the method of accounting of the assessee being mercantile, the interest accrued to the assessee when the amount due to him had not been paid in each of the relevant assessment years and, therefore, the interest was to be spread over the years between the date of acquisition and the date of payment. Hon’ble Supreme Court upheld the decision of Hon’ble Madras High Court.

(2) CIT v. Punjab Tractors Co-op. Multipurpose Society Ltd. [1998] 234 ITR 105. In this case, the assessee was engaged in the purchase and sales of tractors and motorcycles and their parts, besides doing repair of tractors and motorcycles. The assessee had shown in its balance sheet a sum of Rs. 2,01,236 on the liability side under the head “Post warranty services advances”. The assessee had received advance from the buyers of tractors to cover the service charges of tractors for a period of one year from the expiry of the warranty period of one year. The assessee explained before the AO, that there was an obligation on the part of the assessee to provide free services to the tractors under warranty for one year as required by the manufacturers. After the expiry of warranty period of one year, further period of one year was also covered by the assessee for servicing the tractors, and for those services of the post warranty period, the assessee received money from the buyers. The AO examined the quarterly receipts of the money and looked into the period covered by each quarterly receipt and treated, on proportionate basis, a sum of Rs. 15,953 as the income of the assessee. However, the CIT acting under s. 263 of the IT Act, 1961, set aside the assessment. The CIT noticed that a credit balance of Rs. 55,746 was brought forward from the preceding year (1977-78) in the aforesaid account and the sum of Rs. 1,64,810 received by the assessee from the customers, towards PWS charges during the year under assessment was further credit. A sum of Rs. 19,320 was shown as outgoing under that head. The balance or the net amount was, however, not taken to the P&L A/c but directly to the balance sheet. The CIT, therefore, held that these were trading receipts directly connected with the business of servicing the repair of tractors. In the appeal filed by the assessee, the Tribunal held that the view taken by the AO was correct. The Hon’ble Punjab & Haryana High Court held as under :

“Held, that the assessee had made adjustment of the amount received, from the PWS advances account to the workshop income account during the quarter in which the work of repairs and servicing was done. The amount, received one year earlier, was thus not relevant to the assessee’s income and was dependent upon the services rendered by the assessee. The assessee did not become the owner of the amount and could not appropriate it till service was rendered in lieu of which it was received in advance. The assessee could legally claim the amount after rendering the services. Part of the amount could be treated as income in the year under assessment on the basis of the accrual of the right to appropriate the money. Since the receipt was relatable to a particular period in future, it would fructify and mature into income during that period and not earlier. The assessee was also bound to refund the deposit to a member of the scheme if that member so desired. The assessee was regularly following the system of adjustment. The money received from the buyers could not be treated to be income unless the right to appropriate it towards the services had accrued or arisen. So long as the right did not exist, the money received from the buyers remained advance money. Deposits or advances received by the assessee became trading receipts when the assessee became entitled to appropriate the same to its income at the time of rendering the service. The Tribunal was right in holding that Rs. 1,45,490 received by the assessee under post-warranty services charges was not assessable in the asst. yr. 1978-79 and, therefore, the CIT had no jurisdiction to pass order under s. 263 of the Act.” (Emphasis, italicized in print, supplied)

(3) Asstt. CIT v. Mahindra Holidays & Resorts (India) Ltd. [2010] 39 SOT 438 (Chennai) (SB). The assessee company was in the business of selling time share units in its resorts. The assessee had shown substantial amount under the heading “deferred income advance towards member’s facilities”. This figure represented the amount collected from time share members but not recognized as revenue for the current year. The explanation of the assessee was that it had considered only 40 per cent of the membership fees collected as income and the balance 60 per cent was treated as deferred income. The balance amount was to be spread over the next 33 years during which the assessee was expected to provide time share facilities to the members. The AO was of the view that since assessee was following mercantile system of accounting and hence, income had to be accounted for on accrual basis. He was of the view that the receipt was undisputedly income as the assessee itself had shown it as deferred income. However, the Act does not recognize the concept of deferred income and, therefore, he did not accept the assessee’s explanation. The Tribunal relying on the decision of Hon’ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. (supra), inter alia, held as under :

“From the above observations, it is evident that two conditions are necessary to say that income has accrued to or earned by the assessee. They are : (i) it is necessary that the assessee must have contributed to its accruing, or arising by rendering services or otherwise, and (ii) a debt must have come into existence and he must have acquired a right to receive the payment. In the present case, a debt is created in favour of the assessee immediately on execution of the agreement. However, it cannot be said that the assessee has fully contributed to its accruing by rendering services. The assessee is bound to provide accommodation to the members for one week every year till the currency of the membership. Till the assessee fulfils its promise, the parenthood cannot be traced to it. In this connection, certain clauses in the membership rules need to be examined. The reservation for holiday can be done 90 days to 1 day before the commencement of holiday but the same is subject to availability. In other words, if the resort requested for is not available, the member would be deprived of the holiday. If the assessee confirms the reservation but is not able to provide the allotted or the alternate accommodation, assessee is liable to pay liquidated damages to the member. It is worth noting that the assessee is liable to pay liquidated confirmed reservation. But it is not liable to pay any damages if it is no 1 able : to provide an accommodation on account of non-availability. Under such circumstances, the only recourse for the member is to approach the Consumer Forum which will term it as deficiency in services and direct the assessee to pay damages. The point we are trying to drive home is that the matter does not end on signing of the agreement and on a person becoming a member. There is a continuing liability on the part of the assessee not only to provide accommodation but also to provide other-incidental services attached with the accommodation. This is an important aspect of the matter.

31. We have held that there is a definite liability cast on the assessee to fulfil its promise and therefore, it cannot be said that the entire fee received by it has accrued as income.”

(4) CIT v. Dinesh Kumar Goel [2011] 331 ITR 10. In this case the assessee ran a coaching institute where students were coached for entrance examinations conducted by engineering institutions. The total fee for the entire course, which may be of two years duration, was taken at the time of admission of the students. For the asst. yr. 1997-98, the assessee claimed that fees received in the financial year relevant to that assessment year were to be carried forward to the next assessment year as they related to the next financial year. The AO did not permit this deduction on the premise that the assessee was following the mercantile method of accounting. On appeal the CIT(A) accepted the assessee’s contention that the same, though received in financial year 1997-98, was only a deposit made by the students which was taken as. advance money in the hands of the assessee, that the services against this money were yet to be provided by the assessee to these students in the asst. yr. 1998-99, and that the receipt was without acquiring the right to receive it as income. The Tribunal dismissed the Department’s appeal noting additionally, that the Consumer Forum, in a case filed by a student who had left the course a few months after joining the institute, directed refund of fees relating to the unexpired period. Hon’ble Delhi High Court upheld the Tribunal’s decision observing as under :

“Under s. 5(l)(b) of the IT Act, 1961 when the income accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year, it is to be taxed in that year. It is important, therefore, that receipt of a particular amount in the relevant year should be an ‘income’ under the provision. The relevant yardstick is the time of accrual or arisal for the purpose of taxation, viz., in order to be chargeable, the income should accrue or arise to the assessee during the previous year. There must be a ‘right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date’. A right to receive a particular sum under agreement would not be sufficient unless the right accrued by rendering of services and not by a promise for services where the right to receive is anterior to the rendering of services, the income would accrue on the rendering of the services.

Sec. 145 of the Act states that business income is to be computed in accordance with the cash or mercantile system of accounting. Sub-s. (2) thereof authorizes the Central Government to notify in the Official Gazette from time to time Accounting Standards to be followed by any class of assessees or in respect of any class of income. Sub-s. (2) casts a duty on a company to give true and fair view of a profit and loss of a company for the financial year in its P&L a/c. Sub-s. (3A) adheres to the Accounting Standards for preparing P&L a/c and balance sheet. Sub-s. (3C) defines ‘Accounting Standards’. A conjoint reading of these provisions of the Act and the Companies Act, 1956 shows that assessees, which are companies and showing income, inter alia, under the head ‘Business or profession’ have to follow the Accounting Standards prescribed. The Government of India has notified Accounting Standards in exercise of its power under s. 145(2) of the Act. AS-1 relates to the disclosure of accounting policy and puts an obligation on the assessee to disclose all significant accounting policies adopted in the preparation and presentation of financial statements. Para 6(b) defines accrual as the assumption that revenues and costs are accrued that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. Two things follow from this, viz., unless the revenue is earned, it is not accrued likewise, unless the expenses are incurred, cost in respect thereof cannot be treated as accrued. Secondly, It recognizes the matching concept, viz., receipts are to be matched against expenses to arrive at the net income, which would then be exigible to tax. Under AS-9 revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services.”

(5) Asstt. CIT v. Nana G. Patekar [2009] 27 SOT 8 (Mum.). In this case the assessee, a film actor, was following mercantile system of accounting. He used to receive certain advance money by way of professional fees for acting in films. However, he did not show said advances as the income of the year. They were reflected in books as ‘the liabilities’ under advances account in the balance sheet. In the year of completion/release of the film the said advances from the balance sheet were transferred to the professional fees account as the credit in the P&L a/c. The AO rejected the account books of the assessee under s. 145 on the plea that the system of accounting followed by the assessee was not justified. Thereupon, the AO completed the assessment following cash system of accounting and brought to tax advances received by the assessee during assessment year in question. On appeal, the CIT(A) deleted those advances which were returned by the assessee to the producers. However, in respect of remaining advances impugned order of the AO was confirmed. The Tribunal allowed the assessee’s appeal, inter alia, observing that assessee had finally recognized the unrefunded advances as income of the assessee in the later year.

12. Learned counsel referred to the decision of Tribunal, Delhi in the case of BTA Cellcom Ltd. v. ITO [ITA No. 133/Del/2009] delivered on 30th June, 2011, and pointed out that under identical circumstances the assessee’s claim has been accepted. Learned counsel further submitted that assessee is following this system of recognizing revenue since inception. In this regard he relied on the following decisions :

(a)          CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254. In this case it was, inter alia held that the accounting method followed by assessee continuously for a given period of time has to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits.

               He also relied on following Tribunal decisions :

(b)          K.K. Khullar v. Dy. CIT [2009] 116 ITD 301 (Delhi)

(c)           Treasure Island Resorts (P.) Ltd. v. Dy. CIT [2004] 90 ITD 814 (Hyd.).

(d)          T.K. International Ltd. v. Asstt. CIT [2004] 91 ITD 481 (Cuttack)

(e)          Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414

13. We have heard the submissions of both the parties and have perused the record of the case.

14. The facts are not disputed. The assessee’s main source of income is on account of providing services through prepaid and post-paid cards. The service was provided in the form of talk time. Once the assessee provided the talk time to its subscriber, its obligation to provide any further service gets over. The company had to share its revenue with DOT (Department of Telecommunication, Government of India) as per terms of license granted to the assessee. It is not disputed that license fee was paid on revenue sharing basis and for this purpose assessee had installed an integrated software for billing and accounting purposes. According to this system the revenue in respect of services that had been provided in the form of talk time to the subscribers was automatically recognized in the accounts, both in respect of prepaid and post-paid cards. Further it is not disputed that the prepaid card sold by the assessee had two parts, one fixed amount known as activation charge and second the talk time charge. The activation charge was accounted for immediately when the phone was activated. However, talk time charges were recognized on the basis of actual use which was as per the terms with DOT. That amount in respect of which the customer had not used the prepaid card, was treated as advances in the balance sheet and recognized in the subsequent year when the talk time was actually used. The Department’s case is that immediately on sale of prepaid card the entire sale proceeds should be treated as income because assessee had paid the commission to its agents on the basis of gross sale proceeds of the prepaid cards. In our opinion the very premise on which the AO has proceeded in making the addition is not correct. The fundamental principle is that income is to be recognized when it accrues to assessee, whereas expenditure is to be charged the moment liability gets crystallized. The two aspects cannot be mingled and have to be considered separately.

15. There is no gainsaying that receipt of amount and accrual of income are entirely two different concepts. Every receipt of amount cannot be treated as income and only that part of receipt can be treated as income which can be legally appropriated by the receiver in his own right to the exclusion of its giver. As long as the payer has some right over the amount it has paid to the payee, it cannot be said that income has accrued to the payee. A legal right to appropriate the amount should have accrued in favour of the payee for recognizing the sum as income. Unless debt has accrued in favour of payee, it cannot be said that income has accrued to the payee. We have extensively considered the various decisions relied upon by the learned counsel for the assessee in order to demonstrate that this principle has been applied in all the decisions which has its root in the decision of Hon’ble Supreme Court in the case of E.D. Sassoon & Co. (supra). In this case, the Hon’ble Supreme Court noticed the observations of Hon’ble Mukherji J. in Rogers Pyatt Shellac & Co. v. Secretary of State for India [1924] ITC 363 (Cal.) which are reproduced hereunder :

“Now what is income ? The term is nowhere defined in the Act……. In the absence of a statutory definition we must take its ordinary dictionary meaning ‘that which comes in as the periodical produce of one’s work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. ‘Accrues’, ‘arises’ and ‘is received’ are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word ‘receiving’ itself. The words ‘accrue’ and ‘arise’ also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. ‘Accruing’ is synonymous with ‘arising’ in the sense of springing as a natural growth or result. The three expressions ‘accrues’, ‘arises’ and ‘is received’ having been used in the section, strictly speaking ‘accrues’ should not be taken as synonymous with ‘arises’ but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word ‘arises’ means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L., J., in Colquhoun v. Brooks (this part of the decision not having been affected by the reversal of the decision by the Houses of Lords) that both the words are used in contradistinction to the word ‘receive’ and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.

One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called ‘income’.”

16. In the present case, the main dispute is regarding revenue recognition relating to unused talk time remaining available as at the end of the year. As noted earlier, there is no “dispute that company had to provide talk time to its subscriber till the expiry of the period of card or till complete utilization of talk time, whichever is earlier. As long as assessee company is under obligation to provide talk time, it cannot be said that a debt has accrued in favour of assessee company against the subscriber. The assessee company cannot appropriate the charges relating to available talk time to the exclusion of subscribe as long as it is under obligation to provide said services. Therefore, we are of the opinion that learned CIT(A) in principle has rightly accepted the mode of revenue recognition by assessee. Learned Departmental Representative has submitted that from the system followed by the assessee, there is every likelihood of revenue leakage. In this regard learned counsel has submitted that the matter can be restored to the file of AO for verification of this aspect only. We, therefore, restore the matter to the file of AO for the limited purpose of verification whether in the subsequent year the assessee has declared the revenue in respect of expired prepaid cards or not. in case no discrepancy is found in this regard, no adjustment is called for with the assessee’s mode of revenue recognition. In terms of aforementioned observation this ground is partly allowed for statistical purposes.

17. Ground No. 2 reads as under :

“2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 21 lac made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid.”

18. Brief facts apropos this issue are that assessee had claimed dealers commission of Rs. 2,53,02,841. This included commission amounting to Rs. 1,90,54,200 on activation of telephone connection to M/s Jaipur Telecom (P) Ltd. The AO examined the copy of agreement with M/s Jaipur Telecom (P) Ltd. and noticed that as per Annex. A of the agreement, the assessee company was to pay base commission to the channel partner as under :

19. However, the AO noticed that commission had been quantified as under:

20. From these details the AO concluded that assessee had paid excess commission to the channel partner instead as per slabs noted earlier. He worked out the excess commission as under :

Thus, he disallowed a sum of Rs. 21 lakh being excess commission paid by assessee.

21. Before learned CIT(A) it was submitted that the slab in the agreement specifying the higher rate of commission was provided so as to encourage the dealer to make efforts for increasing the number of connections. It was further submitted that the agreement was entered into on 1st April, 2001 and later renewed on 1st April, 2002. However, since there was some confusion about the mode of calculation of commission as per the specified slab rates an addendum to the said agreement was made on 10th May, 2002 in which the impugned computation of income was further clarified as follows :

22. Thus, it was clarified and agreed upon by the two parties that in case the total connections activated in a particular month were more than 500, the rate of commission per connection would be Rs. 800 for all connections. Since the number of connections activated of all the months of the year were more than 500, the commission was computed @ Rs. 800 per connection. It was further submitted that since the AO did not grant specific opportunity to explain the matter during the assessment proceedings, the addendum to the agreement could not be produced before him. Therefore, the terms of agreement were misinterpreted and part of the commission was disallowed. Learned CIT(A) admitted the addendum under r. 46A as additional evidence and called for the comments of AO. The AO in the remand report pointed out that assessee was specifically asked to file details of dealer commission with confirmation and justification thereof in respect of parties to whom payment exceeding Rs. 5 lac was made. He further pointed out that in response to this the assessee submitted reply dt. 22nd Nov., 2005 in which details of commission as mentioned In para 6 of the assessment order were elaborated. It was therefore, submitted that additional evidence be not admitted, Further AO pointed out that in the said addendum it is not mentioned as to since when it was applicable. The assessee in its reply submitted that no query was ever raised by AO regarding calculation of commission vis-a-vis slab rates provided in the agreement, if the AO had called for clarification about working of commission with respect of slab rates, the addendum to the agreement could have been placed on record. Learned CIT(A) deleted the addition observing as under :

“4.5 I have carefully considered the submissions made on behalf of appellant. It is seen that the commission is a contractual liability and arises out of agreement between the two parties. Subsequent to the agreement providing for calculation of commission an addendum was made between the appellant and JTPL to clarify the manner of calculation of commission payable. It is settled issue that a contract need not necessarily be in writing. If the parties to contract do not have any dispute over the terms of agreement and the transactions as a result of such agreements, it cannot be questioned simply because particular document was not made available though it existed. Since there is no iispute between the appellant and JTPL about the manner of calculation and the amount of commission calculated has been actually paid and shown as income by recipient, the disallowance made by the AO does not appear to be justified. The AO’s objection that it is not mentioned in the addendum as to since when it was applicable is also unfounded because s the name suggests, this addendum has to be read with the original agreement to which it refer. Obviously it is a kind of clarification and has to be operative from the date of agreement itself. Accordingly, the is allowance of Rs. 21 lac out of commission is deleted.”

23. Learned Departmental Representative submitted that addendum had not been produced in course of assessment proceedings and was filed as additional evidence before learned CIT(A). She submitted that as per original agreement the commission had to be calculated on the basis of rates prescribed in Annex. A of the agreement and not in the manner the assessee computed. Learned counsel for the assessee submitted that commission had been paid to channel partner viz. Jaipur Telecom (P.) Ltd. He submitted that this company is not related to assessee. He referred to the table as per which on the basis of slab rates ? commission was payable. He pointed out that once the number of connections exceeded 500, the commission was payable @ Rs. 800 in respect of all the connections. He submitted that AO misread the agreement and, therefore, the disallowance was not called for. He further submitted that, in any view of the matter, since the addendum had been executed prior to assessment proceedings the commission should have been computed as per the addendum which only clarified the original terms of agreement. In this regard learned counsel referred to p. 17 of the paper book, wherein the agreement between assessee and Jaipur Telecom (P) Ltd. is contained in which the appointment of M/s Jaipur Telecom (P) Ltd. was as under :

“2.1 Telelink hereby appoints M/s Jaipur Telecom (P) Ltd. as a channel partner of Telelink for the service area of Telelink i.e. telecom circle of Rajasthan and grants channel partner a right to :

(a) Sell and distribute basic telephony connections (wireline and wireless) and other value added services either directly or through its channel partner/agents/dealers being run by Telelink under its trade name ‘Rainbow’, ‘Citi Mobile’, ‘Fonemail’ and such other names to the public/subscribers in Rajasthan.

(b) Collection of service bills/payments from the subscribers/customers on behalf of Telelink, either directly or through its channel partner/agents/dealers, within the service area subject to the terms and conditions of this agreement. Channel partner accepts the appointment on the basis of the terms and conditions set forth in this agreement. Annexure and the manual.”

24. Learned counsel further referred to p. 33 of paper book, wherein Annex. ‘A’ to the agreement is contained in which slabs for payment of commission have been given. He further referred to pp. 35 and 36 of paper book, wherein the addendum channel partner agreement is contained which contained the necessary clarification regarding payment of commission. Learned counsel further submitted that, in any view of the matter, the AO had no jurisdiction to say that commission should have been paid as per slab on graded scale. He further submitted that AO could not call into question the commercial understanding between the parties. He submitted how the parties to contract understood that the contract is more important than how the AO understood the contract. He submitted that AO was not entitled to interpret the contract. Learned counsel submitted that AO could not call into question the commercial expediency aspect merely on the basis of interpretation of terms of agreement. He submitted that AO was going into the reasonableness aspect of the commission. In this regard, learned counsel referred to the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT [2007] 288 ITR 1, wherein it has been, inter alia observed that the expression “commercial expediency’s” one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business”. Learned counsel further submitted that even assuming assessee was imprudent but since it is not disputed that the payment of commission was for business purposes, therefore, no part of the same could be disallowed. He pointed out that it is not the case of Department that any part of the commission came back to the assessee and, therefore, the commission had not been paid for extra commercial consideration. Learned counsel further pointed out that liability for payment of commission crystallized the moment connection was activated. Learned counsel relied on the decision, of Pioneer Consolidated Co. of India Ltd. v. CIT [1972] 85 ITR 410 (All.)

25. We have considered the submissions of both the parties and have perused the record of the case. There is no dispute that commission was payable to the channel partners as per agreement. Therefore, it was the agreement which governed the payment of commission and the commission had to be computed as per the agreement. If the computation had not been made as per the agreement then excess amount paid could be disallowed. The terms of agreement decide quantum of expenditure, which is allowable as business expenditure. If we accept the argument of learned counsel for the assessee that it was not within the AO’s jurisdiction to examine the terms of contract then it would render the very object of entering into contract a nullity. It is true that AO cannot sit in the judgment of a businessman but at the same time he has to examine that assessee has claimed the expenditure in accordance with commercial considerations and not as per its whims and fancies. The terms of contract fixe the reasonableness of amount payable by the assessee and, therefore, any amount paid over and above the same cannot be treated wholly and exclusively for business purposes. However, in the present case, we find that learned CIT(A) had duly referred the addendum for AO’s comment and he has only disputed the admission of the said addendum but not the veracity of the addendum per se. We, therefore, do not find any reason to interfere with the order of learned CIT(A).

26. In the result, this ground is dismissed.

27. Ground No. 3 reads as under :

“3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 44,39,367 made by the AO on account of lat e payment of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relation with the IT Act.”

28. The assessee (sic—AO) noticed that the payments as mentioned at p. 2 of the assessment order relating to PF and ESI were not made within due dates.

29. He, therefore, made an addition of Rs. 51,50,459. Learned CIT(A) deleted the addition, inter alia, observing that it is almost settled issue now that the grace period of 5 days allowed as per PF rules is to be included to determine due date for payment of PF. After considering the details of payment he restricted the disallowance to Rs. 7,01,739 in respect of delayed payment of PF and Rs. 9,353 towards delayed payment of ESI.

30. We have considered the submissions of both the parties and have perused the record of the case. We do not find any reason to interfere with the order of learned CIT(A) because admittedly in respect of disallowance deleted by learned CIT(A) the payment was made before the due date of filing the return. This issue is now covered by the decision of Hon’ble Supreme Court in the case of CIT v. Atom Extrusions Ltd. [2009] 319 ITR 306.

31. In the result, this ground is dismissed.

ITA No. 178 for asst. yr. 2004-05 :

32. The Department has raised the following grounds of appeal :

“1. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 72,64,139 made by the AO on account of revenue for services on unused prepaid cards without appreciating the fact that the income of one year cannot be shifted to subsequent years.

2. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 21 lacs made by the AO on account of excess commission paid by the assessee without appreciating the fact that the assessee did not produce the addendum on the basis of which the commission was paid.

3. Learned CIT(A) has erred in the facts and under the circumstances of the case in deleting the addition of Rs. 28,15,974 made by the AO on account of late payment of PF and ESI without appreciating the fact that the grace period under PF Act and the ESI Act has no relation with the IT Act.”

33. Ground No. 1 is identical to ground No. 1 of asst. yr. 2003-04 vide ITA No. 177/Delhi/2009. Therefore, for the reasons given in asst. yr. 2003-04 this ground is allowed for statistical purposes as directed in asst. yr. 2003-04 for verification to AO.

34. Ground No. 2 is identical to ground No. 2 of asst. yr. 2003-04 vide ITA No. 177/Delhi/2009. Therefore, for the reasons given in asst. yr. 2003-04, this ground is dismissed.

35. Ground No. 3 is identical to ground No. 3 of asst. yr. 2003-04 vide ITA No. 177/Delhi/2009. Therefore, for the reasons given in asst. yr. 2003-04, this ground is dismissed.

ITA No. 3802 for asst. yr. 2006 07 :

36. Learned CIT(A) erred in law and on the facts and circumstances of the case, in deleting the addition of Rs. 43,73,662 made by the AO on account of services revenue through prepaid cards.”

Ground No. 1 is identical to ground No. 1 of asst. yr. 2004-05 vide ITA No. 178/Delhi/2009. Therefore, for the reasons given in asst. yr. 2004-05 this ground is allowed for statistical purposes as directed in asst. yr. 2004-05 for verification to AO. The only ground No. 1 for asst. yr. 2006-07 is allowed for statistical purposes.

37. In the result, all the appeals for asst. yrs. 2003-04, 2004-05 and asst. yr. 2006-07 are partly allowed for statistical purposes.

NF