S.Rahumathulla, Trivandrum v. ACIT, Trivandrum

ITA 479/COCH/2009 | 2006-2007
Pronouncement Date: 20-04-2010

Appeal Details

RSA Number 47921914 RSA 2009
Assessee PAN AIWPS8912M
Bench Cochin
Appeal Number ITA 479/COCH/2009
Duration Of Justice 7 month(s) 27 day(s)
Appellant S.Rahumathulla, Trivandrum
Respondent ACIT, Trivandrum
Appeal Type Income Tax Appeal
Pronouncement Date 20-04-2010
Appeal Filed By Assessee
Bench Allotted DB
Tribunal Order Date 20-04-2010
Date Of Final Hearing 15-02-2010
Next Hearing Date 15-02-2010
Assessment Year 2006-2007
Appeal Filed On 24-08-2009
Judgment Text
IN THE INCOME TAX APPELLATE TR IBUNAL COCHIN BENCH COC HIN BEFORE S/SHRI N.VIJAYAKUMARAN JM AND SANJAY ARORA AM I.T.A. NO. 479/COCH./2009 ASSESSMENT YEAR : 2006-07 SHRI S.RAHUMATHULLA M/S. CEE AND CEE FOREX SHOP NO. 17 HEERA CHAMBERS PAZHAVANGADI TRIVANDRUM. [PAN: AIWPS 8912M] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX-(II) KOWDIAR TRIVANDRUM. (APPELLANT-ASSESSEE) (RESPONDENT-REVENUE ) ASSESSEE BY DR. ANITA SUMANTH ADVOCATE REVENUE BY DR. BABU JOSEPH SR. DR O R D E R PER SANJAY ARORA AM : THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-I TRIVANDRUM (CIT(A) FOR SH ORT) DATED 16.6.2009 AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2006-07. 2.1 EVEN AS THE APPEAL RAISES SEVERAL GROUNDS T HESE INVOLVE A SINGLE ISSUE I.E. THE MAINTAINABILITY OF THE DISALLOWANCE U/S. 40A (3) OF THE INCOME-TAX ACT 1961 (THE ACT HEREINAFTER) IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE AN INDIVIDUAL IS A DISTRIBUTOR FOR BHARA T SANCHAR NIGAM LTD. (BSNL) IN ITS CARD DIVISION (INDIA TELEPHONE CARD) AS ALSO ENGAGED IN FOREIGN EXCHANGE BUSINESS. BSNL AMONG OTHERS IS A CELLULAR SERVICE PROVIDER PROVI DING CELLULAR MOBILE TELEPHONY SERVICES ACROSS THE COUNTRY. THE BUSINESS MODEL INVOLVES AP POINTMENT OF FRANCHISEES FOR DISTRIBUTION OF THE VARIOUS SERVICE PRODUCTS VIZ. SIM CARDS RE CHARGE COUPONS SERVICE TICKETS ETC. WHICH ARE CHANNELLED TO THE RETAIL CUSTOMERS OPTING FOR THE TELEPHONY SERVICES OF THE SERVICE PROVIDER. THE ASSESSEE AS SUCH DEALS IN BSNL IT C AND EXCEL CARDS. DURING THE PERIOD UNDER REFERENCE BEING THE PREVIOUS YEAR RELEVANT T O A.Y. 2006-07 THE ASSESSEE MADE TOTAL PURCHASES OF INDIA TELEPHONE CARDS AT RS. 270.64 LA KHS OF WHICH RS. 187.73 LAKHS WERE BY ITA. NO. 479/COCH./2009 2 WAY OF CASH PURCHASES AS REPORTED PER ITS TAX AUDI T CERTIFICATE FORMING PART OF HIS RETURN OF INCOME. THE ASSESSEE HAVING MADE THESE PAYMENTS IN CASH AND THUS HAVING APPARENTLY CONTRAVENED THE PROVISIONS OF SECTION 40A(3) OF THE ACT DISALLOWANCE AT THE RATE OF TWENTY PER CENT. (20%) OF THE IMPUGNED EXPENDITURE OF RS. 18 773 475/- I.E. RS. 37 54 695/- STOOD PROPOSED DURING THE ASSESSMENT PROCEEDINGS U/S. 143 (3) OF THE ACT AND AFFECTED VIDE ASSESSMENT ORDER DATED 31.12.2008. 2.2 IN APPEAL IT WAS EXPLAINED THAT THE PURCHA SES HAD TO BE MADE ON ACCOUNT OF PAUCITY OF CARDS FROM THE OPEN MARKET AND PAYMENTS TOWARD WH ICH HAD TO BE NECESSARILY MADE IN CASH AS THE SELLERS WOULD NOT ACCEPT PAYMENT THRO THE B ANKING CHANNEL. ALL THE PAYMENTS WERE THUS NECESSITATED BY THE EXIGENCIES OF BUSINESS. F URTHER THERE IS NO ISSUE OR DOUBT EXPRESSED WITH REGARD TO THE GENUINENESS OF THE EXPENDITURE. THE LD. CIT(A) HOWEVER WAS OF THE VIEW THAT EVEN THOUGH THE ASSESSEE HAD TRIED TO EXPLAIN THE CONDITIONS LEADING TO THE CASH PURCHASES THE SAME WOULD BE OF NO AVAIL IN VIEW OF THE STATUTORY PRESCRIPTION PER SECTION 40A(3) AND UPHELD THE DISALLOWANCE. AGGRIEVED THE ASSESSEE IS IN APPEAL. 3.1 BEFORE US THE MATTER WAS ARGUED AT LENGTH BY THE LD. AR. THE ASSESSEE IS IN THE BUSINESS FOR THE PAST SIX TO SEVEN YEARS. THIS IS THE FIRST TIME THAT THE SAID ISSUE OR DISPUTE HAS BEEN RAISED BY THE REVENUE. SECTION 40A(3) IS NOT AN ABSOLUTE RULE AND IT IS PRECISELY FOR THIS REASON WHICH WEIGHED WITH THE HONBLE APEX COURT IN APPROVING ITS CONSTITUTIONALITY (REFER: ATTAR SINGH GURMUKH SINGH VS. ITO 191 ITR 667 (SC)). THE ASSESSEES CASE IS FURTHER SUPPORTED BY THE DECISION IN THE CASE OF CIT VS. EASTERN CONDIMENTS PVT. LTD . 261 ITR 76 (KER.) AND RAMADITYA INVESTMENTS LTD. VS. CIT 262 ITR 491 (DELHI). IN FACT IT WOULD STAND TO BE COVERED BY RULE 6DD(K) OF THE INCOME TA X RULES 1962 (THE RULES HEREINAFTER) WHICH READS AS UNDER: 6DD . NO DISALLOWANCE UNDER SUB SECTION (3) OF SECTIO N 40A SHALL BE MADE AND NO PAYMENT SHALL BE DEEM TO BE THE PROFITS AND GAINS O F BUSINESS UNDER CLAUSE (B) OF SUB SECTION (3) OF SECTION 40A WHERE ANY PAYMENT IN A SUM EXCEE DING RS. 20 000/- IS MADE OTHERWISE THAN BY ACCOUNT PAYEE CHEQUE DRAWN ON A BANK OR ACC OUNT PAYEE DRAFT IN THE FACTS AND CIRCUMSTANCES SPECIFIED HEREUNDER NAMELY: A) . B) ITA. NO. 479/COCH./2009 3 K) WHERE THE PAYMENT WAS REQUIRED TO BE MADE ON A DAY ON WHICH THE BANKS WERE CLOSED EITHER ON ACCOUNT OF HOLIDAY OR STRIKE; 3.2 THE LD. DR ON THE OTHER HAND WOULD SUB MIT THAT THERE IS NO QUESTION THAT SECTION 40A(3) IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTA NCES OF THE CASE WHICH ARE NOT IN DISPUTE. IN FACT THE ASSESSEE HAS MADE PURCHASES OTHER THA N BY WAY OF CASH PURCHASES TO THE TUNE OF RS. 82.91 LAKH (RS. 270.64 LAKHS - 187.73 LAKHS) A ND WHICH WOULD ITSELF DEMONSTRATE THAT ITS TRADE COULD BE CARRIED OUT BY DISCHARGING THE PURCH ASE OBLIGATION OTHER THAN IN LEGAL TENDER. IN REJOINDER IT WAS SUBMITTED BY THE LD. COUNSEL F OR THE ASSESSEE THAT THE VERY FACT THAT A PART OF THE PAYMENTS IN RESPECT OF PURCHASES STOOD MADE THROUGH THE BANKING CHANNEL WOULD RATHER SUPPORT THE ASSESSEES CASE IN-AS-MUCH AS IT EXHIBITS THAT WHEREVER POSSIBLE THE ASSESSEE DISCHARGED THE TRADING LIABILITY AGAINST P URCHASES THROUGH THE BANKING CHANNEL I.E. AS PROVIDED FOR. SO HOWEVER IT WAS CONCEDED BY HE R ON AN ENQUIRY BY THE BENCH THAT THE ARGUMENT THAT THE PAYMENTS STOOD MADE TO A PUBLIC S ECTOR UNDERTAKING (PSU) WOULD BE OF NO CONSEQUENCE INSOFAR AS THE GENUINENESS OF THE PAYME NTS IS NOT IN DISPUTE AND THE LAW DOES NOT DRAW ANY EXCEPTION FOR PAYMENTS TO THE GOVERNME NT OR GOVERNMENT UNDERTAKING (EXCEPT THOSE SPECIFIED) TREATING BUSINESS PAYMENTS IRRES PECTIVE OF THE IDENTITY OF THE PAYEE AT PAR. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD INCLUDING THE CASE LAW CITED. 4.1 WE WOULD FIRSTLY DEAL WITH THE CASE LAW CITE D BY THE ASSESSEE AS IF ITS CASE IS COVERED BY THE PRINCIPLES LAID DOWN THERE-UNDER IT WOULD S TAND TO SUCCEED. IN THE CASE OF EASTERN CONDIMENTS PVT. LTD . (SUPRA) THE ASSESSEE FOUND FAVOUR WITH THE HONB LE JURISDICTIONAL HIGH COURT IN VIEW OF THE PROVISION OF RULE 6DD(J) OF TH E RULES WHICH PROVIDED THAT WHERE THE ASSESSEE SATISFIED THE ASSESSING OFFICER THAT THE PAYMENT(S) COULD NOT BE MADE BY CROSSED CHEQUE DRAWN ON A BANK OR A CROSSED BANK DRAFT DUE TO EXCEPTIONAL OR UNAVOIDABLE CIRCUMSTANCES OR BECAUSE THE PAYMENT IN THE MANNER AFORESAID WAS NOT PRACTICAL OR WOULD HAVE CAUSED GENUINE DIFFICULTY TO THE PAYEE HAVING REGARD TO THE NATURE OF THE TRANSACTION AND THE NECESSITY FOR EXPEDITIOUS SETTLEMENT THEREO F ALSO FURNISHING EVIDENCE TO THE LATTERS SATISFACTION AS TO THE GENUINENESS OF THE PAYMENT A ND THE IDENTITY OF THE PAYEE THE ASSESSING AUTHORITY HAD THE DISCRETION TO ALLOW THE EXPENDITU RE EVEN WHERE THERE WAS AN APPARENT ITA. NO. 479/COCH./2009 4 VIOLATION OF THE PROVISION SO THAT THE REVENUES A PPEAL CONTESTING THE ORDER OF THE TRIBUNAL STOOD DISMISSED BY THE HONBLE COURT. AT THIS STAGE IT WOULD BE RELEVANT TO POI NT OUT THAT SECTION 40A (3) HAS UNDERGONE MATERIAL CHANGES VIDE AMENDMENTS PER THE FINANCE AC T 1995 W.E.F. 1/4/1996 AND FINANCE ACT (NO. 2) 1996 W.E.F. 1/4/1997. VIDE THE SAID AM ENDMENTS FIRSTLY THE THRESHOLD LIMIT QUA EACH INDIVIDUAL PAYMENT I.E. FOR THE APPLICABILIT Y OF THE SECTION STOOD ENHANCED FROM RUPEES TEN THOUSAND TO TWENTY THOUSAND. SECONDLY THE EXTE NT OF DISALLOWANCE UNDER THE SECTION WHICH WAS EARLIER MANDATED AT 100% OR THE WHOLE OF THE IMPUGNED EXPENDITURE STOOD RESTRICTED TO A FRACTION (20%) THEREOF. RULE 6DD OF THE RULES SPECIFYING THE SAVING CIRCUMSTANCES THE EXISTENCE OF WHICH WOULD ESCHEW APPLICATION OF THE SECTION STOOD ALSO AMENDED; THE EXTANT CLAUSE (J) CONCERNING ITSELF WI TH THE PAYMENT OF SALARY TO AN EMPLOYEE WORKING ON A SHIP UNDER CERTAIN DEFINED CIRCUMSTANC ES. THE SAME CLEARLY HAS NO BEARING TO THE EARLIER CLAUSE (J) OR RELEVANCE TO THE ASSESSE ES CASE. CIRCULAR (# 717 DATED 14/8/1995) ISSUED BY THE CBDT EXPLAINING THE AMENDMENTS EFFEC TED VIDE FINANCE ACT 1995 INCLUDING TO S. 40A(3) OF THE ACT CLARIFIED THAT WITH THE BA NKING SERVICES HAVING TAKEN ROOT EVEN IN RURAL AREAS THE ACCENTUATING CIRCUMSTANCES PROVIDI NG EXCEPTION TO THE RIGOUR OF S. 40A(3) IN GENUINE AND BONA FIDE CASES PER R. 6DD(J) WAS NO LONGER CONSIDERED UTILI TARIAN OR NECESSARY. BESIDES THE PROVISION R/W R. 6DD(J) HAD GIVEN RISE TO SUBSTANTIAL LITIGATION ARISING OUT OF THE INTERPRETATION AND SCOPE OF THESE PROVISIONS. PERHA PS THE LEGISLATURE WAS OF THE VIEW THAT IT WAS DIFFICULT TO ESTABLISH THE MITIGATING CIRCUMSTA NCES OF THE PAYMENTS SO THAT WHERE THE GENUINENESS IS NOT IN DOUBT IT WOULD SUFFICE IF A FRACTION THEREOF IS DEEMED AS AN INFLATION IN THE CLAIMED EXPENDITURE WITH REFERENCE TO THE MODE OF ITS PAYMENT AND DISALLOWANCE EFFECTED ON THAT BASIS. THE SAME THUS IMPACTS THE C HARACTER OF THE DISALLOWANCE OR OF THE PROSCRIPTION MANDATED THEREBY INASMUCH AS THE GENUI NENESS OF THE PAYMENT WAS NO LONGER IN ISSUE OR RELEVANT FOR THE PURPOSE OF THE DISALLOWAN CE WHICH AS AGAINST THE ENTIRE PAYMENT EARLIER STOOD RESTRICTED TO A FRACTION THEREOF. TH E AMENDED EXTANT LAW THUS IS CAST MORE AS AN ABSOLUTE RULE; THE EXCEPTIONAL CIRCUMSTANCES HAVING BEEN ENLISTED UNDER RULE 6DD AND IS IN THE NATURE OF A DEEMING SECTION WITH THE LAW PRESC RIBING DISALLOWANCE WITH REFERENCE TO THE MODE OF PAYMENT OF THE CONCERNED EXPENDITURE RATHER THAN WITH REFERENCE TO THE EXPENDITURE ITSELF DEEMING AN INFLATION THEREIN WHERE THE PAYM ENT IS NOT AFFECTED PER THE PRESCRIBED MODE WHILE THE GENUINENESS OF THE PAYMENT WHERE I MPUGNED WOULD WARRANT DISALLOWANCE ITA. NO. 479/COCH./2009 5 OF THE ENTIRE EXPENDITURE. IN FACT PER A SUBSEQUEN T AMENDMENT TO THE SECTION THE PRESCRIBED MODE GETS FURTHER NARROWED DOWN TO ACCOUNT PAYEE BA NKING INSTRUMENTS ONLY WHICH WOULD FACILITATE TRACKING OF THE PAYMENT TO ANY EXTENT. R EFERENCE IN THIS CONTEXT MAY BE PROFITABLY MADE TO THE ORDER BY THE SPECIAL BENCH OF THE TRIBU NAL IN THE CASE OF ITO VS. KENARAM SAHA & SUBHASH SAHA 301 ITR (AT) 171 (KOL.) (SB) WHEREIN IT WAS HELD AS UNDER: HELD THAT ONCE THERE IS PAYMENT OF ANY EXPENDITUR E IN VIOLATION OF SECTION 40A(3) THE ASSESSEE CAN ESCAPE THE DISALLOWANCE UNDER THE SAID SECTION ONLY IF THE ASSESSEES CASE FALLS WITHIN THE AMBIT OF ANY OF THE CLAUSES OF RUL E 6DD. THE MATTER WAS REQUIRED TO BE EXAMINED WHETHER THE ASSESSEES CASE FELL UNDER ANY SPECIFIC CLAUSE. NEITHER HAD THE ASSESSEE PROPERLY CLAIMED NOR HAD THE ASSESSING OFF ICER EXAMINED THE CASE WITH REFERENCE TO THE RELEVANT RULE. THE ORDERS OF THE AUTHORITIES B ELOW WERE TO BE SET ASIDE AND THE MATTER RESTORED TO THE ASSESSING OFFICER TO ALLOW ADEQUATE OPPORTUNITY TO THE ASSESSEE TO PRODUCE THE NECESSARY EVIDENCE IN SUPPORT OF ITS CLAIM AND READJUDICATE THE MATTER IN ACCORDANCE WITH LAW. THE ASSESSMENT YEAR UNDER REFERENCE IN TH E CASE OF EASTERN CONDIMENTS PVT. LTD. (SUPRA) AS ALSO RAMADITYA INVESTMENTS PVT. LTD. (SUPRA) WAS 1992-93 AND THUS THE HONBLE COURTS WERE DEALING WITH THE PROVISION AS IT STOOD PRIOR TO THE SAID AMENDMENTS. IN THE CITED CASES THE ASSESSEES FOUND FAVOUR WITH THE COURTS O N THE GROUND OF GENUINENESS OF PAYMENT AND THE PECULIAR CIRCUMSTANCES OF THE TRADE WHICH STOOD ESTABLISHED WITH REFERENCE TO THE SAVING CLAUSE OF RULE 6DD AS CLAUSE (J) IN THE CAS E OF EASTERN CONDIMENTS PVT. LTD. (SUPRA). 4.2 COMING TO THE FACTS OF THE PRESENT CASE WE FIND TH E ASSESSEES CASE AS TOTALLY UNSUBSTANTIATED. IT HAS FAILED TO EXPLAIN AS TO HOW ITS CASE FALLS UNDER RULE 6DD(K) SO AS TO PRECLUDE THE OPERATION OF THE MANDATE OF THE NON-OB STANTE PROVISION OF S. 40A(3). THE FACT OF PURCHASES FROM THE OPEN MARKET HAS NOT BEEN DEMONST RATED AND BESIDES IS CONTRARY TO THE ASSESSEES CLAIM OF THE IMPUGNED PAYMENTS AS HAVING BEEN MADE ONLY TO A GOVERNMENT ORGANIZATION AND WHICH WE HAVE EXPLAINED AS OF NO MOMENT. RATHER WE ARE INCLINED TO TAKE THE VIEW THAT THE FACT THAT A GOOD PERCENTAGE OF TH E PURCHASE PAYMENTS STAND EFFECTED OTHER THAN IN CASH DEFEATS THE ASSESSEES CASE IN-AS-MUCH AS IT CLEARLY SHOWS THAT ITS BUSINESS COULD BE CONDUCTED THROUGH THE BANKING CHANNEL. EVEN AS N O EXTENUATING CIRCUMSTANCES NECESSITATING THE PAYMENTS IN CASH HAVE BEEN STATED MUCH LESS PROVEN THE OMISSION OF THE ERSTWHILE CLAUSE (J) OF RULE 6DD EXCLUDES THE GROUN D OF HARDSHIP TO THE PAYEE FROM THE MITIGATING CIRCUMSTANCES AND THE ASSESSEES CASE AS HELD BY THE SPECIAL BENCH (SUPRA) ITA. NO. 479/COCH./2009 6 COULD SUCCEED ONLY ON IT ESTABLISHING THE SAME TO F ALL WITHIN THE SPECIFIED CLAUSES OF RULE 6DD. NONE OF THE PAYMENTS HAVE BEEN SHOWN BEFORE A NY AUTHORITY TO HAVE BEEN MADE ON A BANKING HOLIDAY OR ON ACCOUNT OF DISLOCATION OF WOR K IN THE SAID INDUSTRY FOR CLAUSE (K) OF R. 6DD TO BE APPLICABLE WITH REFERENCE TO WHICH THE A SSESSEE SEEKS TO ADVANCE ITS CASE. AS IT APPEARS; THE RELEVANT CLAUSE HAVING NOT BEEN READ O UT DURING HEARING THE ASSESSEE IS ADVERTING TO A SUBSEQUENTLY SUBSTITUTED CLAUSE (K) WHICH READS AS: K) WHERE PAYMENT IS MADE BY ANY PERSON TO HIS AGENT WHO IS REQUIRED TO MAKE PAYMENTS IN CASH FOR GOODS OR SERVICES ON BEHALF OF SUCH PERSON; WE SHALL FOR THE SAKE OF COMPLETENESS OF THE DISCU SSION IN THE MATTER ALSO EXAMINE THE SAME EVEN AS IT MAY BE MENTIONED THAT ITS PRESCRIP TION FOR THE CURRENT YEAR IS A MUST FOR IT TO BE OF RELEVANCE. THE SAME BECOMES APPLICABLE WHERE THE PAYMENT IS MADE BY A PERSON I.E. FOR THE EXPENDITURE TO HIS AGENT WHERE THE AGENT IS REQUIRED TO MAKE THE PAYMENTS IN CASH ON BEHALF OF THE PRINCIPAL. IN THE INSTANT CASE HOWE VER THE ASSESSEE-DISTRIBUTOR IS MAKING THE PAYMENT TO THE SERVICE PROVIDER I.E. DIRECTLY TO THE PAYEE AND NOT TO HIS OWN AGENT FOR ONWARD REMISSION. SECONDLY NO STIPULATION HAS BEE N SHOWN TO US WHEREBY THE SERVICE PROVIDER (BSNL) REQUIRED OF ITS DISTRIBUTORS OR FRA NCHISEES TO MAKE THE PAYMENTS THERETO IN CASH AS DONE BY THE ASSESSEE. AS REGARDS THE PAYME NTS TOWARD OPEN MARKET PURCHASES IF AND TO THE EXTENT THESE ARE IN CASH THE SAME COULD HAR DLY BE CONSIDERED AS FALLING WITHIN THE AMBIT OF THE CLAUSE. 4.3 IT IS THUS ABUNDANTLY CLEAR FROM THE FORE GOING THAT THE ASSESSEES CASE DOES NOT FALL WITHIN THE SPECIFIC CLAUSE OF RULE 6DD. THE PROVISI ON OF SECTION 40A (3) WHICH IS A NON- OBSTANTE PROVISION WOULD THUS HOLD AND OPERATE TO DEEM TWENTY PER CENT. OF THE IMPUGNED EXPENDITURE AS THE ASSESSEES PROFIT FROM ITS BUSIN ESS AND LIABLE TO BE DISALLOWED THERE-UNDER. AGAIN THE PLEADING OR THE ARGUMENT THAT THE ASSESS EE OPERATES AT A NOMINAL COMMISSION OR TRADE MARGIN WHICH IS LARGELY FIXED EVEN IF TRUE WOULD BE OF NO CONSEQUENCE IN VIEW OF THE STATUTORY MANDATE OF SECTION 40A(3). 4.4 WITHOUT PREJUDICE TO WHAT STANDS STATED HERE INABOVE THIS TRIBUNAL IN THE CASE OF VODAFONE ESSAR CELLULAR LTD. KOCHI VS. ACIT (TDS) KOCHI (IN I.T.A. NOS. 106 TO 113/COCH/2009) VIDE ITS ORDER DATED 30.4.2009 (COP Y ON RECORD) HAS HELD THAT THE PAYMENTS ITA. NO. 479/COCH./2009 7 BY THE SERVICE-PROVIDER TO THE DISTRIBUTOR IN RESPE CT OF THE SIM CARDS AND RECHARGE COUPONS SUPPLIED TO THE CUSTOMERS WOULD ATTRACT THE PROVISI ON OF SECTION 194H OF THE ACT. THIS IS ON THE PREMISE THAT THE SIM CARDS AND OTHER SERVICE PR ODUCTS PROVIDED TO THE CUSTOMERS BY THE DISTRIBUTORS EITHER DIRECTLY OR THROUGH THE AGENCY OR MEDIUM OF WHOLESALERS OR RETAILERS ARE NOT MERE PHYSICAL COMMODITIES OR `GOODS IN THAT SE NSE BUT ONLY DEVICES FOR ACCESS TO THE TELEPHONY SERVICES PROVIDED BY THE SERVICE-PROVIDER WHO ONLY ACTIVATES THE SAME (ON THE SATISFACTORY COMPLIANCE OF THE TERMS OF THE SERVICE RELATIONSHIP) LEADING TO AN ACCESS TO THE NETWORK WITHOUT OR APART FROM WHICH THESE ARE OF N O USE OR VALUE. AS SUCH THERE IS NO DE FACTO PURCHASE OR SALE OF ANY PRODUCT AND THE RELATIONS HIP BETWEEN THE TWO I.E. THE FRANCHISEE-DISTRIBUTOR AND THE SERVICE-PROVIDER BO TH DE FACTO AND DE JURE IS ONE OF THE PRINCIPAL AND AGENT. IN ARRIVING AT ITS DECISION T HE TRIBUNAL RELIED ON THE DECISION BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF BPL MOBILE CELLULAR LTD. VS. UNION OF INDIA AND OTHERS [IN W.P.(C) 29202 OF 2005 (B)] WHEREIN THE HONBLE COURT FOLLOWING THE DECISION BY THE HONBLE APEX COURT IN THE CASE OF BSNL & ORS. VS. UNION OF INDIA & ORS. 145 STC 91 HELD THAT THE VALUE OF THE SIM CARDS RECHARGE COUPONS ETC. DO NOT REPRESENT SALE OF GOODS EXIGIBLE TO SALES (GOODS) TAX BUT I S ONLY A SERVICE RENDERED BY THE SERVICE- PROVIDER LIABLE TO SERVICE TAX. IN VIEW THEREOF T HE TRIBUNAL HELD THAT THE DISTRIBUTOR OR THE FRANCHISEE IS AT ALL TIMES ACTING ONLY FOR AND ON B EHALF OF THE SERVICE-PROVIDER AS A LINK IN THE SERVICE CHAIN AND THUS THE `PAYMENTS MADE BY THE PRINCIPAL-SERVICE PROVIDER TO THE AGENT- DISTRIBUTOR ARE ONLY TOWARD THE RENDERING OF SERVIC ES BY IT AND THUS ONLY A COMMISSION WHICH STANDS BROADLY DEFINED U/S. 194H OF THE ACT A ND FURTHER IRRESPECTIVE OF THE MANNER AND NOMENCLATURE UNDER WHICH THE TRANSACTIONS BETWE EN THE TWO STAND CLASSIFIED OR DESCRIBED IN THEIR RESPECTIVE BOOKS OF ACCOUNTS. WE ARE AWARE THAT WHILE THE TRIBUNAL D ISCUSSES AND DILATES ON THE CHARACTER OF THE PAYMENTS MADE BY THE PRINCIPAL (NETWORK PROVIDER) T O THE FRANCHISEE (DISTRIBUTOR) THE PAYMENTS UNDER REFERENCE IN THE INSTANT CASE ARE IN THE OPPOSITE DIRECTION I.E. BY THE DISTRIBUTOR TO THE SERVICE-PROVIDER. HOWEVER THIS WOULD NOT BE OF ANY MOMENT AND NOT RENDER THE RATIO OF THE SAID DECISION INAPPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. IN FACT EVEN IN THE SAID CASE THERE WAS NO D IRECT PAYMENT BY THE PRINCIPAL TO THE DISTRIBUTOR AND WHICH CONSTITUTED ONE OF THE PRINC IPAL ARGUMENTS BY THE ASSESSEE-APPELLANT FOR THE NON-APPLICATION OF THE PROVISION OF S. 194H AND WHICH THE TRIBUNAL FOUND TO MATTER ITA. NO. 479/COCH./2009 8 LITTLE. THIS IS AS ONCE THE RELATIONSHIP BETWEEN TH E TWO HAS BEEN FOUND TO BE ONE OF AGENCY THE PAYMENTS BETWEEN THE TWO ONE WAY OR THE OTHER ARE ONLY TOWARD ADJUSTMENT OF THE VALUES EXCHANGED. THE PRINCIPAL IN ORDER TO ELIMIN ATE OR MINIMISE THE RISK OF DEFAULT OR FOR LIQUIDITY CONSTRAINTS OR TO TAKE BUSINESS ADVANTAG E OF ITS DOMINANT POSITION ET. AL. MAY REQUIRE OF THE DISTRIBUTOR TO MAKE AN UPFRONT PAYME NT AGAINST ALL THE SIM CARDS ETC. TAKEN DELIVERY OF FOR DISTRIBUTION. THIS THEREFORE THOU GH CLASSIFIED AS PURCHASES IN THE BOOKS OF THE DISTRIBUTOR-AGENT ARE NOT ESSENTIALLY SO; THE SIM CARDS BEING NOT `GOODS IN THE REAL SENSE PROPERTY IN WHICH WOULD STAND TO BE PASSED ON DELIV ERY AND CONCOMITANT ACCEPTANCE OF THE OBLIGATION TO PAY THE COST THEREOF. SIMILARLY THER E IS NO PURCHASE OF ANY SERVICES BY THE DISTRIBUTOR ON ASSUMING THE POSSESSION OF THE SAID SERVICE PRODUCTS. IN FACT THE ACQUISITION OF THE SAME (CARDS) ONLY EQUIPS IT TO PERFORM ITS PAR T OF THE SERVICES REQUIRED TO BE EXTENDED TO CUSTOMERS TO ENABLE FIRSTLY INITIALIZATION OF THE SERVICE RELATIONSHIP AND THEN ITS MAINTENANCE. THE POSITION WOULD BE NO DIFFERENT EVE N WHERE THE SERVICE PRODUCTS AS SOURCED FROM OUTSIDE SOURCES AS THE ORIGIN THEREOF AND TH E SERVICE BEING PROVIDED TO THE CUSTOMER IS ONLY FOR AND ON BEHALF OF THE CONCERNED SERVICE-PR OVIDER. THE ASSESSEE-DISTRIBUTOR THUS DOES NOT IN FACT MAKE ANY `PURCHASES EITHER OF GOO DS OR SERVICES ON THE ACCEPTANCE OF THE DELIVERY OF THE SIM CARDS OR OTHER SERVICE PRODUCTS AND RESULTANTLY DOES NOT INCUR ANY EXPENDITURE IN ITS RESPECT EVEN AS THE TRANSACTION MAY BE CLASSIFIED AS SUCH IN ITS ACCOUNTS WHICH AS IS TRITE CANNOT BE CONCLUSIVE AS TO THE NATURE OF THE TRANSACTION. CONSEQUENTLY THERE IS NO SCOPE FOR THE APPLICATION OF THE PROVIS ION OF S. 40A(3) IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. IN VIEW OF THE DECISION BY THE TRIBUNAL IN THE CASE OF VODAFONE ESSAR CELLULAR LTD. (SUPRA) WHICH WE HAVE SOUGHT TO EXPLAIN VIDE PARA 4.4 OF THIS ORDER WE ARE OF THE CLEAR VIEW THAT THE PROVISION OF SECTION 40A(3) WOULD NOT BE A PPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE EARLIER PART OF THE ORDER WHICH SUGGESTS OTHERWISE IS ON THE PREMISE THAT THE `TRANSFER OF THE CARDS BY THE SERVICE-PROVIDER TO THE ASSESSEE-DISTRIBUTOR REPRESENTS THE LATTERS PURCHASE THEREOF AND THUS AS BEING ONLY AN EXPENDITURE INCURRED BY IT IN THE NORMAL COURSE OF ITS BUSINESS MEETING THE ARGUMENTS OF TH E OPPOSING PARTIES AND THEIR RESPECTIVE CASES AS MADE BEFORE US. THE SAME IS DE HORS THE AFORE-SAID DECISION BY THE TRIBUNAL WHICH STANDS RENDERED FOLLOWING THE DECISIONS BY THE HON BLE JURISDICTIONAL HIGH COURT AND THE ITA. NO. 479/COCH./2009 9 HONBLE APEX COURT ON AN ASPECT OF THE MATTER WHICH IS INTEGRAL TO THE ISSUE UNDER CONSIDERATION. FURTHER AS EXPLAINED EARLIER ONCE THE TRIBUNAL FOUND THE RELATIONSHIP BETWEEN THE FRANCHISEE-DISTRIBUTOR AND THE SERVICE- PROVIDER TO BE ONE OF PRINCIPAL AND AGENT THERE IS NO QUESTION OF ANY `PURCHASE BY THE LATTE R AND THE INCOME ARISING THERETO IS ONLY IN THE NATURE OF A COMMISSION OR REMUNERATION AGAINST SERVICES RENDERED. AS SUCH THERE IS NO QUESTION OF ALLOWANCE OF ANY `EXPENDITURE IN RESPE CT OF PURCHASES QUA WHICH SECTION 40A(3) COULD APPLY IRRESPECTIVE OF THE `MODE OF PAYMENT THEREOF. THE ASSESSEE SUCCEEDS ON GROUNDS (A) TO (G) OF ITS APPEAL. 6. PER ITS GROUND NO. (H) THE ASSESSEE AGITATE S THE LEVY OF INTEREST U/S. 234B. THE SAME STOOD NOT PRESSED BEFORE US EVEN AS THE LEVY AS I S WELL SETTLED IS MANDATORY SO THAT THE ASSESSEES CASE FAILS ON THIS SCORE (REFER INTER ALIA CIT V. ANJUM M.H. GHASWALA 252 ITR 1 (SC)). 7. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY A LLOWED. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 20 TH APRIL 2010 GJ COPY TO: 1. SHRI S.RAHUMATHULLA M/S. CEE AND CEE FOREX SHO P NO. 17 HEERA CHAMBERS PAZHAVANGADI TRIVANDRUM-695 023 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX -II TR IVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I TRIV ANDRUM. 4. COMMISSIONER OF INCOME-TAX TRIVANDRUM. 5. D.R./I.T.A.T. COCHIN BENCH COCHIN. 6. GUARD FILE. FIT FOR PUBLICATION IN I.T.D. JUDICIAL MEMBER A CCOUNTANT MEMBER ITA. NO. 479/COCH./2009 10 ITA. NO. 479/COCH./2009 11 ITA. NO. 479/COCH./2009 12