TDS U/s. 194J not applicable on roaming charges

Brief of the case:

In the case of Vofafone East Ltd. Vs. Addl. CIT Kolkata Bench of ITAT observed the applicability of various provision of TDS where tax was not deducted on the roaming charges paid by the Appellant to its telecom operators. Tribunal considered the applicability of section 194C, 194I, 194J etc. on the basis of agreement between assessee and other telecom operators.

Following issues were considered by ITAT in appeals:

• Applicability of section 194C, 194I & 194J
• Whether insertion of second provisio to section 40 (a) (ia) via Finance Act, 2012 is curative in nature.
• Whether payment of roaming charges to other service provider can be considered as rent or not?
• Disallowance of Interest on loans borrowed.

Applicability of section 194C, 194I & 194J

• 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 has entered into roaming arrangements with other telecom operators which have been given licence to operate as telecom serv ice providers in other territories.
• The assessee incurred domestic roaming charges of Rs.55,41,01,320/- towards roaming facility provided by other telecom operato rs to the subscribers of the assessee
• 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).
• Action of AO was confirmed by CIT (A).
• Assessee contended 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. For the said purpose assessee has entered into roaming arrangements with other telecom operators to make or receive calls when the subscribers move out of the licensed territory.
• 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.
• Pursuant to said 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.
• 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 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.
• 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.
• Assessee 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.
• Revenue contended that no technology in world could survive without human intervention.
• The assessee pays roaming charges for services provided by the other operator (Visiting Operator) for connectivity of two mobile handsets while roaming.
• The roaming charges are paid for both interconnectivity as well as fo r usage of transmission lines. Revenue 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.
• Revenue 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.
• Question before tribunal is that whether the payment made by the home operator i.e. assessee to the host operator for roaming charges would come under the ambit of TDS provisions.
• ITAT held that 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.
• The issue need not be set aside to the file of the 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 (Vodafone Essar Mobile Services Ltd.) and CBDT had also issued Instructions in this regard to seek evidences. The statement which have already been obtained is admitted as additional evidence under rule 29.
• 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.
• From the aforesaid statement recorded from technical experts pursuant to the directions of the Supreme Court in CIT v s 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, Tribunal held without hesitation that 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.
• As far as the applicability of provisions of section 194C are concerned, ITAT 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 .
• Regarding applicability of section 194I, 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.
• At the conclusion ITAT 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.

Whether insertion of second provisio to section 40 (a) (ia) via Finance Act, 2012 is curative in nature

• Assessee argued in this connection 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.
• Reliance was placed on the decision of the Hon’ble Delhi High Court in the case of CIT Vs Ansal Land Mark Township (P) Ltd wherein it was held 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.

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.

• Respectfully following the above observation it was held that proviso to section 40 (a) (ia) is curative in nature.

Disallowance of Interest on loans borrowed

• Assessee advanced loan of Rs. 410 crores to its subsidiary Vodafone Digilink Ltd. It is 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.
• AO 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.
• The above action of the AO was upheld by the Learned CIT(A) on the ground that the assessee has not established commercial expediency on funds advanced to its subsidiary.
• The CIT(A) invoked the provisions of section 14A of the Act though the AO invoked the provisions of section 36(1)(iii) of the Act while making the disallowance.
• Assessee contended 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.
• 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.
• 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.
• 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 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.
• After considering the facts of the case ITAT held that 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.
• On verification of the balance sheet and the cash flow statement of subsidiary company, ITAT satisfied that the subsidiary company had utilized the funds borrowed from the assessee for its business purposes only.
• ITAT held that 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 al so established and proved beyond doubt
• ITAT further held that the action of the CIT(A) 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 inv estments 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.
• It would be pertinent to consider the judgment of Hon’ble SC in the matter of S.A. Builders Ltd. vs CIT reported in 28 8 ITR 1 (SC) where it was held that “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 businessman incurs for the purpose of business.
• The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.
• At last, ITAT held that the borrowed funds advanced to subsidiary by the assessee were on the ground of commercial expediency and accordingly the interest paid would be allowed as deduction in the hands of the assessee.