Starting form the allegation of Reliance Communication routing international call as local call through BSNL’s network, to the recent 2G scam that calls for a Joint Parliamentary Committee to be constituted, telecom companies have been in news for inventing new means for avoiding cash outflow to the Government Treasury! The other hot topic of Vodafone stake sale though complex holding structures need not be accentuated. The novelties in the devises evolved by the telecom companies for saving their shareholder’s money are quite amazing. Applauds to the managers evolving such ‘colorable devices’. The projected losses that the Government is expected to have incurred due to such innovation is mind boggling.
Tax officials have time and again tried to prove their competency over their counterpart in private sector involved in complex tax planning, by sprouting new interpretation of tax laws. By doing so, the authorities have been striving to countervail the losses incurred by the Government due to such measures. However, in many cases, the interpretations placed by the tax authorities have been struck down by Appellate Authorities. This sad story has traveled through almost all Courts in India including the Madras High Court ruling in Skycell Communications 251 ITR 53 and the Delhi High Court in Bharti Cellular Limited 220 CTR 258 (in both cases, services rendered by telecom companies were held not to be technical in nature). However, it cannot be denied that the tax authorities have found some success in some cases like the IDEA Cellular Limited’s case 230 CTR 43 before the Delhi High Court where in it was held that discount on pre-paid recharge coupons is per se commission paid to the retailers .
This article is to discuss one such interpretation by tax officers which has recently been turned down by the Mumbai Tribunal in the case of Vodafone Essar Limited (‘Vodafone’) in I T A Nos 6058/Mum/2009 (decided on 22 December 2010). The transaction is not new, but has a new flavor. The question before Tribunal was whether Vodafone was liable to deduct tax on ‘roaming charges’ paid by it to other telecom operators. Though the matter seems to be settled by the ruling of the Delhi HC in Hutchison Essar Telecom Limited 220 CTR 258 which held that such charges are not paid for rendering of any technical services and hence not liable to deduction of tax at source, the tax officers have sought to bring in a new perspective to the issue which was hitherto not been taken up.
The facts of the case are simple and clear. If a subscriber of Vodafone Mumbai travels to Delhi where Vodafone does not have its own network, he would be requested to choose the services of other telecom operators with whom Vodafone has a ‘roaming agreement’. For instance, if the subscribers chooses to use the network of IDEA Cellular (‘IDEA’), the calls of the Vodafone customer (both incoming and outgoing) would be routed through the network of IDEA. IDEA would raise an invoice on Vodafone for the calls made to by the Vodafone subscriber at the rates agreed upon between the two service providers in the ‘roaming agreement’. The subscriber would then be billed as per the tariff subscribed. On the above facts, the question was whether Vodafone is liable to deduction of tax on payments being made to IDEA.
As the argument that such services are not technical is not being appreciated by the Courts, the tax authority had gone a step further to say that the payment is not for services at all, leave alone technical services, but for renting of equipments.
On the facts mentioned above, the tax authority concluded that IDEA has been rented its equipments to Vodafone for its use: and hence the payment by Vodafone to IDEA is liable to deduction of tax under section 194I of Income Tax Act, 1961 (‘the Act’). Thus the tax authority raised a demand of over Rs 40 Crores for a 33 months period between April 05 and December 08.
Before the Tribunal, two lines of arguments were advanced by Vodafone. The first one was that the arrangement is not a rental arrangement. Explanation to section 194I defines rent to mean any payment under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of building, equipments etc. On the basis of rule of ‘ejusdem generis’ (the application of a common sense rule of language), it was argued that the words ‘other arrangement’ should take colour from the preceding words, lease and sub lease, and accordingly for an arrangement to be classified as a rental arrangement, there needs to a transfer of interest in the goods rented. Apparently, as there was no transfer of interest in the equipments of IDEA to Vodafone, it was argued that the arrangement cannot be considered as a ‘rental arrangement’ entailing tax deduction. The Tribunal however was not inclined to this argument. It observed that the intention manifested by the language of the statute is clear to the effect that ‘any payment’ made for ‘use’ of an asset would necessitate deduction of tax under 194I of the Act. The Tribunal opined that there is no reason for confining the meaning of the word ‘rent’ to payments for transfer of interest in goods and accordingly ruled out the application of the rule of ‘ejusdem generic’.
The second line of argument put forth by Vodafone was that it has not ‘used’ the asset belonging to IDEA. Referring to the terms of the ‘roaming agreements’ which uses the words ‘roaming services’, ’services provider’ etc. and the provisions of Finance Act 1994 with regard to levy of service tax on ‘telecommunication services’, Vodafone contended that IDEA was not renting its equipments but was rendering ‘roaming services’. This argument found support from the Tribunal. The Tribunal laid down the subtle differentiated between ‘use of the equipment for rendering services to others’ and ‘use of equipments by others’.
The Tribunal proceeded to contrast the facts of the case with a common place example of a person going to an ‘atta chakki’ (floor mill to crush flour out of wheat). It cannot be disputed that the people bringing the wheat dis not use the chakki, but the service of grinding the wheat into atta. Following this analogy, the Tribunal observed that the payment in the fats before it is not for ‘use’ of the equipment of IDEA by Vodafone, but for the services provided by IDEA to the Vodafone subscriber.
The Tribunal has concluded the Forty Crore demand with the simple example of atta chakki. This may be common place examples but they do not put the point less effectively for that reason. Thus, a new avenue discovered by the tax authorities to unwarrantedly penalize the tax payers has been put to rest by the Tribunal.