2011 (4) TMI 882 - AT - Income Tax

Applicability of Section 194 on discount given by the assessee a cellular operator to the distributors in the course of selling Sim Cards and Recharge coupons under prepaid scheme against advance payment received from the distributors - Held that - Transaction between the assessee a cellular operator and the prepaid market associates (PMAs) appointed by it whereby SIM cards/recharge coupons are ultimately sold to the subscribers through the latter does not amount to sale of goods and 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 u/s 194H. Furthermore distributor acts on behalf of the assessee for procuring and retaining customers and therefore the discount given is nothing but commission. Therefore assessee is liable to deduct tax at source on the amount of commission/discount allowed to the distributors u/s 194H for both the years under consideration and since it has failed to do so therefore the AO has correctly created demands u/s 201(1) and 201(1A) - Decided against the assessee

Issues Involved:
1. Principal-Agent Relationship vs. Principal-to-Principal Relationship.
2. Applicability of Section 194H for TDS on Commission.
3. Nature of Discount as Commission.
4. Interpretation of Agreements and Clauses.
5. Jurisdictional Precedents and Applicability of Non-Jurisdictional High Court Decisions.

Detailed Analysis:

1. Principal-Agent Relationship vs. Principal-to-Principal Relationship:
The primary issue revolves around whether the relationship between the assessee (a cellular mobile phone service provider) and its distributors is that of a principal-agent or principal-to-principal. The Assessing Officer concluded that the relationship is of a principal-agent nature, as the distributors act on behalf of the assessee. The assessee contended that the relationship is principal-to-principal, arguing that the difference between the invoiced price and the MRP is a trade discount, not commission.

2. Applicability of Section 194H for TDS on Commission:
The Assessing Officer held that the discount given to distributors constitutes a commission under Section 194H, necessitating TDS deduction. The assessee argued that no commission was paid and hence, Section 194H is inapplicable. The CIT(A) sided with the assessee, but the Revenue appealed, asserting that the discount is indeed commission.

3. Nature of Discount as Commission:
The Revenue argued that the discount allowed to distributors is a commission for services rendered, making it subject to TDS under Section 194H. The assessee maintained that the discount is merely a trade discount in a principal-to-principal transaction. The Assessing Officer's view was supported by clauses in the agreement that indicated a principal-agent relationship, such as the requirement for distributors to get approval for appointing retailers and restrictions on dealing with competitors' products.

4. Interpretation of Agreements and Clauses:
Several clauses in the distributorship agreement were scrutinized to determine the nature of the relationship. Clauses requiring distributors to get approval from the assessee for appointing retailers, restrictions on dealing with competitors, and obligations to submit stock reports and allow inspections were seen as indicative of a principal-agent relationship. The assessee argued these clauses were standard business practices to protect brand integrity and did not alter the principal-to-principal nature of the transactions.

5. Jurisdictional Precedents and Applicability of Non-Jurisdictional High Court Decisions:
The Revenue cited decisions from the Kerala High Court and Delhi High Court, which supported the view that discounts given to distributors are commissions subject to TDS under Section 194H. The assessee countered with decisions from other High Courts and the Supreme Court, arguing that these should be considered. The Tribunal ultimately decided to follow the Kerala and Delhi High Court decisions, as they were directly on point regarding the interpretation of Section 194H.

Conclusion:
The Tribunal concluded that the relationship between the assessee and its distributors is indeed that of a principal-agent. Consequently, the discount given to distributors constitutes a commission under Section 194H, necessitating TDS deduction. The Tribunal set aside the order of the CIT(A) and restored the Assessing Officer's order, thereby accepting the appeals of the Revenue.

Order Pronouncement:
The appeals of the Department were accepted, and the order was pronounced on 01.04.2011.

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