TMI Blog2011 (4) TMI 882X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the AO has correctly created demands u/s 201(1) and 201(1A) - Decided against the assessee - ITA Nos. 1415 and 1416/Mds/2009, - - - Dated:- 1-4-2011 - U.B.S. Bedi, B. Ramakotaiah, JJ. Shaji P. Jacob for the Appellant S.E. Dastur and Niraj Sheth for the Respondent ORDER Bench:- 1. These two appeals of the Revenue are directed against the consolidated order passed by the ld. CIT(A) II, Coimbatore dated 16.06.2009 for the assessment year 2007-08 and 2008-09, whereby deletion of demand created under section 201(1) of Rs.67,51,439/- and Rs.4,16,11,639/- in default for not deducting tax at source as per provision under section 194H and Rs.19,74,375/- and Rs.34,67,636/- being interest under section 201(1A) of the Income Tax Act for the assessment years 2007-08 and 2008-09 respectively has been challenged by the revenue. 2. Facts indicate that the assessee company is engaged in the business of Cellular Mobile Phone Services in India. This Company with its Principal Office situated at Coimbatore, carried on the business of dealing with the branded products of the Company viz. mainly Starter Packs and Rechargeable coupons viz. SIM Cards and Prepaid coup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee having failed to deduct tax as required under Sec. 194H is a defaulter within the meaning of Sec. 201(1) of the Act and created demand of Rs.67,51,439/- and Rs.4,16,11,639/- and also levied interest under Sec. 201 (1A) amounting to Rs.19,74,375/- and Rs.34,67,636/- for Asst. Years 2007-08 and 2008-09 respectively for the defaults. The Assessing Officer in his order passed under Sec. 201 (1) read with Sec. 201 (1A) has stated the following facts in the order by holding that the relationship between the assessee and the Distributor is that of Principal and Agent and by further holding that the payment partakes the character of commission:- "1. The person who sell the starter packs and re-chargeable coupons needs to get them appointed by the Cellular Company) through a series of formalities imposed upon then. Sometimes they are not allowed to sell such coupons of rival Cellular Companies. Moreover) the intermediate selling organizations are given the authority to verify the credentials of the Consumers. 2 That it is a proven situation that there remain principal agent relationship between the Cellular company and the organizations selling starter packs on which they enjoy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p vendors are placed by the law of land and therefore are mandatory. Whereas the present case, restrictions has been imposed by the assessee itself on the franchisee before being sold ultimately to the retailers/customers and therefore, the above case is not of help to the assessee. The ITAT, Kolkatta Bench held the same view in the case of Asst. Commissioner of Income-tax vs Bharti Cellular Ltd. Vide 294 ITR (AT) Kolkatta 2007 (dt. 04.04.2006 - page No. 283)." 3. The assessee took up the matter in appeal and filed its written submissions as under:- i. The Assessing Officer ought to have found from the terms and conditions laid down in the agreement that nowhere was there any mention that the relationship is that of a franchisee or an agency. In the case of a franchisee or an agency, the persons (i.e. the franchisee or the agent) are required to act on behalf of the principal and they would be under the control and supervision of the principal. All the transactions carried out by these persons would actually relate to the principal. The sale effected by these people would represents the sale of the principal who will always retain the ownership of the goods. The franchi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on some of the points put forth by the ld. AR in the course of appeal proceeding and concerned ITO (TDS) filed report, wherein in respect of various clauses of agreement entered into between the assessee and the distributors, he has raised following points:- "1) Sub-clause (v) below the sub-heading Responsibilities of the Distributor in respect of e-stock (Page 12):- "The Distributor shall appoint at its own, in consultation with VECL, retailers for the e.stock to such merchants who shall obtain a valid access card from the Distributor after authentification from VECL." The sub-clause amply shows that the relationship the Appellant has with the Distributor's is Principal-Agent relationship as claimed by the Appellant. If it is Principal-Principal Relationship as claimed, there need not be approval from the Appellant for appointment of retailers by the Distributor. 2) Further, under (Annexure III) Brand image guidelines (Page 13 of the agreement) sub-clause (i) states as under:- "not during the continuance of the agreement (and for the period of 1 year after its termination (whether alone or jointly and whether directly or indirectly) be concerned or interested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... style, reports on stock of the same need not be given to the seller i.e. appellant. d) Sub clause (y) of annexure In states that that the distributor shall "Permit VECL" and its authorized agents at all responsible times to enter any of the distribution premises for the purpose of ascertaining that the distributor is complying with its obligations under this agreement. e) The following are also brought to kind attention of CIT(Appeals):- The Appellant's contention is that the favorable decision of the Income Tax Appellate Tribunal Delhi in the case of Idea Cellular Limited vs. DCIT would apply to their case. In Para 4 of the Tribunal's order, in ITA No. 30311 Dell 2006 dated 28-03-2008 the following observation has been made:- "PMAs (Distributors) appointed the retailers without approval of the Idea Cellular and hence the Idea Cellular did not have any control on the appointment of retailers by the distributors. Therefore, it could not be said that there exist principal-agent relationship between the assessee and the distributor. In contrast, the relevant portion of agreement in the case appellant reads as follows in para 13, in page of 6/16 of the agreement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Employees to enter the premises and remove all VECL signage's if the distributor has not done so itself to the satisfaction of VECL within 7 days of termination of the Agreement." From the above it is quite evident that the Distributor is under the obligation to allow the Appellant or its authorized agents to enter any of the Distributors premises for ensuring that the distributor is complying with his obligations. If the service tickets purchased by the distributors is in accordance with the common commercial parlor of purchase and sale no such compliance is to be observed by the purchaser. CBDT in its clarification to query by INS (Indian News Service) observed thus,- "A discount is given on sale or purchase of an article in which there is no agreement between the seller and the buyer." "The Board examined the contentions of the INS that such payment is in the nature of a discount. The discount is given on sale of purchase of an article in which there is no agreement between Seller and Buyer. The Board found that the INS granted accreditation to the Advertising agency and usually the newspapers would enter into an agreement with agencies. Hence, the newspapers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utors raising invoices, there is no justification on the part of the Assessing Officer to say that because of the approval clause only it could be assumed that the VECL has control over the distributors and for this reason the relationship will be that of Principal and Agent. This sort of procedure can always be found in the case of manufacturing companies who deal with reputed products in the country, like Car, Electronic Equipments and Computers. Unless, they verify the ability of the retailer to display and sell the products effectively, their image may suffer. 4.2 In regard to the second point raised by the Assessing Officer, it was contended that that such exclusivity of the distribution of the products of VECL is required for the effective maintenance of the revenues of VECL. The Distributors with their influence and relationship that they have gained with the clients in the course of their distribution ship with VECL and with their experience and ability may terminate this agreement and immediately commence the sale of rival companies products. Along with the products of VECL they may also deal with the other company products. If such an act is done, it would adversely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product. Further, if VECL has decided to modify its products and has advertised such modifications, naturally the products that are to be sold ought to be modified or else the customers may insist on such modified product. The Assessing Officer is not justified in concluding that this clause means that VECL has right to recall each and every Service Tickets sold and hence is exercising a control over the Distributors. Because of this factor, it is not correct to hold that there is only a Principal - Agent relationship on account of existence of this clause. Requiring the co-operation of the Distributor for the limited purpose of making safety check or modification does not mean that VECL is exercising complete control of the products sold to the Distributors. Pointing Clause (w), the Assessing Officer states that because of the Distributor is required to furnish quarterly reports of Stocks of each of the Service tickets to the Appellant, there is no Principal to Principal relationship. He is of the view that if the stock of Service Tickets had been purchased, then, the reports on the stock of the Sale need not be given to the Seller. In regard to the arguments, it is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s does not have Principal to Principal relationship vis-a-vis Appellant. It is submitted that this view is erroneous. What is reiterated in Clause 18 (2) is regarding the preservation of reservation of intellectual right of VECL. This is for the limited purpose of protecting the Intellectual rights of the VECL'S manufactured products. This clause will not in any way come in the way of deciding the relationship between and seller. In regard to the high technical value of the product like SIM card the manufacture of the product is the intellectual right of VECL. This right is intended to be protected by inserting this clause. 4.6 As regards the view of the Assessing officer's interpretation of agreement in clause 10(1) in Page 6 of the Agreement, it is contended that this clause has been wrongly understood by the ITO. This term only stipulates that after termination of the Agreement, the Distributor is required to remove all the VECL sign boards and other display materials. Only if such a thing is not done, then, the VECL gets the irrevocable license to enter the premise and remove signages. This clause will operate only after the termination of agreement and not during the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertakes to train personnel for taking after sales care and also provide necessary training to the people installed these equipments. In the circumstances, this clause does not convey the meaning that there is an element of service at the time of or in the course of buying and selling goods. VECL does not provide this service at the time of transfer of goods. This is what is covered by Section 194 H. 4.8 It is submitted that in Bharti Cellular's case they have been initially deducting Tax on the discount and later discontinued as is evident from the ITAT's decision. Further as per Term 4.8 of Agreement of Bharti Cellular (as cited by ITAT) there is a denial of right or title of prepaid cards to the distributor. In the Appellant's case, no such clause exists. Certain clauses recall of goods sold are existing with the limited aim of monitoring the quality or safety checks or quality modification otherwise there is no such restriction on the rights of goods transferred or sold to VECL on the basis of Sale invoices. 4.9 It is also contended that it is not fair to pick up a few clauses of the agreement here and there to argue that there is relationship of Principal Agency. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne/2006 dated 28.4.2008 in the case of Foster India (P) Ltd. vs ITO is submitted. In this case, the ITAT has considered both the decision rendered in the case of ACIT vs Bharti Cellular Limited and in the case of CIT vs Hindustan Coca Cola Beverages. The ITAT took into the consideration the binding nature of Apex Court in the case of Bhopal Sugar Industries Limited vs STO AIR 1977 of SC 1279 and was cited by the learned ITAT as under:- "The essence of the matter is that in a contract of sale, title and the property passes on to the buyer on the delivery of goods for a price paid or promised. Once this happens, buyer becomes the owner of the property and buyer has no vestige left in the property. The concept of sale, however, has undergone revolutionary change, having regard to the complexities of the modern times and expanding needs of society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may, by virtue of agreement, imposes a number of conditions on the buyer e.g. fixation of price, submission of accounts, selling in a particular area of territory and so on. These restrictions per se w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IM card, service coupons etc. by M/s VECL to the distributor does not by itself any transfer of property at that point of time but it only reflects commitment to rendering service to the customers. 2.2 The Ld. CIT{A) ought to have appreciated that clause 22 of the customer agreement which state that 'SIM Card and Mobile Phones service numbers shall always be the sole property of M/s. VECL and shall be returned by you(customer) upon termination and/or deactivation or temporary suspension of services. You shall have no right to the same at any point in time, for any reason whatsoever clearly Indicates that the essence- of the agency only exists in the above transactions between M/s. VECL and the distributors as against principal to principal relationship. 2.3 The learned CIT{A) ought to have followed the decision of Hon'ble Tribunal of Cochin in the assessee's own case in ITA no. 106 to 113/Cochln/2009 and SP nos. 11 to 18/Cochln/2009 dt: 30/04/2009 where in it was held that 'the distributors are linking agents in the chain of delivery of services to consumers and as such the relationship is not of a principal to principal'. 2.4 The learned C.I.T. {A) having referred to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of payments towards Pre-paid card and Sim cards, therefore, the assessee was bound to deduct tax at source as per section 194H,moreover ,the assessee itself is deducting and paying the tax on post paid card on the amount of commission/brokerage and there is no material difference between two transactions, thus it was further pleaded that the issue in the case of the assessee has been decided in favour of the Revenue by Cochin Bench of the Tribunal in I.T.A. No. 106 to 113/Cochin/2009 and SP Nos. 11 to 18/Cochin/2009 dated 30.04.2009 which decision has further been upheld by the Hon'ble Kerala High Court in I.T.A. No. 1742 of 2009 dated 17.08.2010 [2010] 194 TAXMAN 518 (Ker.) so it is covered matter which needs to be decided in favour of the department. That apart, the Hon'ble Delhi High Court in the case of CIT v. Idea Cellular Ltd. [2010] 189 TAXMAN 118 (Delhi) has also decided similar issue with regard to application of 194H in relation to offering discount to the prepaid calling service to its distributors and taken similar view vide order dated 19.02.2010 by discussing and applying Cochin Bench of Tribunal's decision in the case of Vodafone Essar Cellular Ltd. dated 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ala High Court in the case of M.S. Hameed v. Director of State Lotteries [2001] 114 TAXMAN 394 (Ker.), wherein in relation to provisions of section 194G with regard to lottery tickets, view has been taken in favour of the assessee to the effect that where there is no income, there should not be TDS when income or earning is only taxable. If the clause of the agreement of the assessee company with distributors are looked into, there is a clear provision that once Sim cards and pre-paid cards are given to the distributors, no refund is permissible and as regards case of M.S. Hameed and others (supra) is concerned, the SLP filed by the Department against the Hon'ble Kerala High Court judgment has already been dismissed on 03.12.2010. So relying upon such decision of the Kerala High Court and making special reference to page 530, it was pleaded that when two non-jurisdictional High Court decisions are there on the same point, the decision favourable to the assessee is to be applied and as regards such decision, the Department's SLP has also been dismissed with the remarks "we see no reason to interfere", it was thus pleaded that since it is not simple dismissal of the SLP, but reasoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if some decisions have been pronounced incorrectly, without considering the same, the Hon'ble High Court's decision already pronounced in which SLP filed by the Department has also been dismissed by the Hon'ble Supreme Court, so, this Bench can take a different view in the light of Hon'ble Supreme Court's decision in the case of Distributors (Baroda) P. Ltd. v. Union of India and Others 155 ITR 120 in which it has categorically been held that to perpetuate an error is not a heroism and to correct it ,is the compulsion of law. Therefore, it was strongly pleaded that the Hon'ble Kerala High Court's decision in the case of M.S. Hameed (supra), which is almost on similar facts, though in relation to 194G, this Bench should follow the said decision to confirm the order of the ld. CIT(A) and dismiss the appeals of the Department for both the years. 8. The ld. DR in order to counter the submissions of the ld. Counsel for the assessee has pleaded that even in the absence of any payment having been made to the distributors and only discounts having been allowed, which is payment and reliance was placed on 240 ITR 740 (Mad), Hon'ble Supreme Court's decision in the case of 223 ITR 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded to hold that the amount below MRP allowed by the assessee to various distributor is discount/commission and as the assessee has failed to deduct any tax at source on such less amount, so he worked out the TDS as payable by the assessee under section 194H and raised demand under section 201(1) and 201(1A) as detailed in para 2 above. The assessee filed appeal and same was allowed by the first appellate authority, against which the Department has come up in appeal before us and it is the main argument of the ld. DR that since amount has been allowed as discount/commission to the distributors as the assessee has charged the amount less than the MRP, therefore, it amounts to commission/brokerage and tax is liable to be deducted at source in terms of section 194H, which was not deducted, so the demand created by AO is proper and justified. Whereas, the ld. AR has mainly contended that the assessee has not paid any commission to the distributors, so there is no question of making deduction of tax at source. Therefore, the demand raised by the Assessing Officer is not sustainable which has correctly been deleted by the ld. CIT(A). Rival sides have referred to various clauses of ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relating to any asset, valuable article or thing, not being securities; What appears from Explanation (i) of the definition clause above is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case above referred that a customer can have access to mobile phone service only by inserting Sim Card in his hand set (mobile phone) and on assessee activating it. Besides getting connection to the mobile network, the Sim Card has no value or use for the subscriber. In other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far as Recharge coupons or E Topups are concerned which are only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmaterial and in substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute that discount is nothing but a margin given by the assessee to the distributor at the time of delivery of Sim Cards or Recharge coupons against advance payment made by the distributor. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot charge anything more than the MRP shown in the product namely, Sim Card or Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net proceeds available to the assessee is Rs.80/-. Let us see how the assessee is accounting for the above. When the SIM Card is given to the distributor, the assessee company is crediting the sales account for an amount of Rs.100/-. Assessee is debiting the cash account with Rs.80/- being the cash paid by the distributor. Assessee company is debiting the commission account for Rs.20/-.This is the margin enjoyed by the distributor. As far as the assessee company is concerned, it has given a commission of Rs.20/-. On delivery of a pre-paid card of Rs.100/-, assessee is adjusting the payment of commission through accounts and invoice. In the first instance sale is accounted for Rs.100/-; the second cash is accounted for Rs.80/-; and the third commission is accounted for Rs.20/-. It shows that as far as the sale is concerned, it is Rs.100/- and the assessee has given a commission of Rs.20/- to the distributor and the net cash proceeds is Rs.80/-. Instead of treating the sale at the net value of Rs.80/-, the assessee is accounting the sales at the gross value of Rs.100/- and thereafter debiting an expenses account for commission paid of Rs.20/-. Therefore, in the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x at source is not the actual tax payable by the recipient who is free to claim refund of TDS amount with interest, if excess tax is recovered under TDS Scheme". "6. Senior counsel appearing for the assessee has relied on several judgments, particularly two decisions of this court in M.S. HAMEED V. DIRECTOR OF STATE LOTTERIES reported in (2001) 114 TAXMAN 394 (KER.) and KERALA STATE STAMP VENDORS ASSOCIATION V. OFFICE OF THE ACCOUNTANT GENERAL reported in (2006) 150 TAXMAN 30 (KER.), the decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS ASSOCIATION V. UNION OF INDIA reported in (2002) 124 TAXMAN 628 (GUJ.), and the decision of the Bombay High Court in COMMISSIONER OF INCOME TAX V. QUTAR AIRWAYS in I.T.A. No.99 of 2009 dated 26.3.2009. The first decision of this court pertains to sale of lottery tickets wherein this court held that the commission given by way of discount at the time of sale of lottery tickets is not a commission on which tax is deductible under Section 194G of the Act. The second decision of this court pertains to sale of stamp paper by the licensed stamp vendors wherein also the finding of this court following the decision of the Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NUFACTURERS ASSOCIATION reported in (1980) 121 ITR 1, KEDARNATH JUTE MANUFACTURING CO. V. COMMISSIONER OF INCOME TAX reported in 82 ITR 363, COMMISSIONER OF INCOME TAX V. MOTORS and GENERAL STORES (P) LTD. (1967) 66 ITR 692, COMMISSIONER OF INCOME TAX V. AJAX PRODUCTS LTD. (1965) 55 ITR 741, COMMISSIONER OF INCOME TAX V. B.C.SRINIVASA SETTY (1981) 128 ITR 294, TUTICORIN ALKALI CHEMICALS and FERTILIZERS LTD. V. COMMISSIONER OF INCOME TAX (1997) 227 ITR 172 and decisions of House of Lords in INLAND REVNUE COMMISSIONERS V. WESLEYAN GENERAL ASSURANCE SOCIETY reported in (1948) 16 ITR 101 and another decision in REVENUE COMMISSIONERS V. DUKE OF WESTMINSTER reported in (1936) A.C. 1.However, on going through these judgments we do not find any of the judgment has any direct application to the facts of this case. The very scheme of deduction of tax at source under the Income Tax Act is to trace recipients of income and their accountability to the department for payment of tax on various transactions. In fact, major portion of the income tax collection is through recovery of tax at source and but for the mechanism, there would have been massive evasion of tax by the recipients of various ki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it - It offers discount for prepaid calling services to its distributors - Legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further appointed by the PMA5 with the consent of the assessee- Fact that the PMA is supposed to make the payment in advance as per the agreement does not make any difference to the nature of the transaction in view of the other terms of the agreement - Even though advance payment is made by the PMA qua SIM cards, it does not amount to 'sale' of goods in as much as unsold SIM cards are to be returned to the assessee and it is required to make payment against them - This is an antithesis of 'sale'- Therefore, the discount offered by the assessee to the distributors on payments made by the latter for the SIM cards/recharge coupons which are eventually sold to the subscribers at the listed price is commission and it is subject to TDS under s. 194H - Contention of the assessee that 5. 194H is not applicable as there is no 'payment or credit' by the assessee to the distributor cannot be accepted. Held:- The argument of the counsel that s. 194H is not applicable, as there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance payment is made by the PMA on receipt of the SIM cards, qua those SIM cards, it does not amount to "sale" of goods. The purpose is to ensure that the payment is received in respect of those SIM cards, which are ultimately sold to the subscribers in as much as unsold SIM cards are to be returned to the assessee and the assessee is required to make payment against them. This is an antithesis of "sale". There cannot be any such obligation to receive back the unsold stocks. Further, cl. 25(f) lays down that on termination of agreement, PMA or its authorized retailer appointed by it, is not entitled to any compensation for cost or expenses incurred by it in either setting up or promotion of its business, etc. No such clause was required in case of sale". Thus, the Tribunal erred in holding that the payments paid by the assessee are not commission as envisaged under s. 194H. - CIT vs. Singapore Airlines Ltd. and Ors. (2009) 224 CTR (Del) 168 : (2009) 22 DTR (Del) 129 followed; Bharat Sanchar Nigam Ltd. and Anr. vs. Union of India and Ors. (2006) 201 CTR (SC) 346 : AIR 2006 SC 1383 relied on; Vodafone Essar Cellular Ltd. vs. Asstt. CIT (2010) 35 DTR (Coch)(Trib) 393 and Asstt. CIT vs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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