2018 (5) TMI 1912 - AT - Income Tax

TDS u /s 194H and 194C - payment made towards incentives on prepaid Sim cards sold to distributors and also on the roaming charges paid to other service providers - assessee in default for not deducting tax at source and consequently demand was created on the assessee u/s 201(1)/(1A) - nature of transaction between the assessee telecommunication services provider and its distributors in so far as it relates to sale of prepaid SIM cards - HELD THAT - TDS on incentives paid to distributors on sale of cards u/s 194 H - sale of prepaid sim cards by the assessee to the distributors are on principal to principal basis and hence out side the ambit of section 194H of the Act. Therefore the assessee was not required to deduct tax on the same and therefore could not be held to be an assessee in default for not deducting tax at source. The demand raised on the assessee u/s 201(1) and 201(1A) of the Act is therefore directed to be deleted. TDS on roaming charges u/s 194C - CIT(A) while adjudicating the issue noted that the issue of tax deduction at source on the domestic roaming charges had been examined by the Hon ble Supreme Court in the case of CIT vs M/s Bharati Cellular 2010 (8) TMI 332 - SUPREME COURT opining that it was necessary to find out if any human intervention was involved at any stage so as to determine whether the services rendered were in the nature of technical services warranting tax deduction at source u/s 194J of the Act. no grievance against the aforesaid directions of the Ld.CIT(Appeals) since the Ld.CIT(Appeals) had only restored the issue to the Assessing Officer for considering the same afresh in the light of the directions of the Hon ble Apex Court in the case of M/s Bharati Cellular 2010 (8) TMI 332 - SUPREME COURT on the issue of TDS on roaming charges and also on the alternate contention raised by the assessee of no tax to be deducted at source where payees have paid taxes on the same for verification of facts relating to the same

Summary

Issues Involved:
1. Tax Deduction at Source (TDS) on incentives paid to distributors on the sale of prepaid SIM cards under Section 194H of the Income Tax Act.
2. TDS on roaming charges paid to other telecommunication service providers under Sections 194C and 194J of the Income Tax Act.

Detailed Analysis:

1. TDS on Incentives Paid to Distributors on Sale of Prepaid SIM Cards (Section 194H):

The primary issue revolves around whether the discount given to distributors on the sale of prepaid SIM cards constitutes commission, thereby attracting TDS under Section 194H of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the relationship between the assessee and the distributors as principal to agent, thereby categorizing the discount as commission.

The CIT(A) upheld the AO's decision but allowed relief to the extent that if the distributors had paid taxes on the incentives received, the assessee should not be treated as in default. The CIT(A) directed the AO to verify this fact.

On appeal, the assessee argued that the relationship with distributors was principal to principal, not principal to agent. The assessee cited the Karnataka High Court's decision in M/s Bharti Airtel Ltd., which held that the sale of prepaid SIM cards was a sale of the right to service on a principal to principal basis, not commission, thus not attracting Section 194H.

Various High Courts and ITAT Benches, including the Rajasthan High Court in M/s Bharti Hexacom Ltd., supported this view. The ITAT Chandigarh followed these precedents, holding that the sale of prepaid SIM cards was on a principal to principal basis and outside the ambit of Section 194H. Consequently, the assessee was not required to deduct tax, and the demand raised under Sections 201(1) and 201(1A) was deleted.

Ground Nos. 1 to 1.2 were allowed, while Ground No. 1.3 was dismissed as the assessee did not press it.

2. TDS on Roaming Charges (Sections 194C and 194J):

The AO held the assessee liable for TDS on roaming charges paid to other telecommunication service providers under Section 194C, treating it as a service contract. The CIT(A) restored the issue to the AO to reconsider in light of the Supreme Court's direction in CIT vs. Bharti Cellular Ltd., which required examining whether human intervention was involved, potentially categorizing the service under Section 194J as technical services.

The CIT(A) also directed the AO to verify if taxes were paid by the payees on the roaming charges, allowing relief to the extent of such payments.

The assessee did not contest these directions, and the ITAT treated Ground Nos. 2 to 2.1 as dismissed.

In ITA No. 216/Chd/2013, the issues were identical to those in ITA No. 340/Chd/2013. The ITAT applied the same reasoning, dismissing the appeal.

In ITA No. 217/Chd/2013, the issues were identical to those in ITA No. 340/Chd/2013 regarding TDS on incentives to distributors. The ITAT followed the same reasoning, allowing Ground Nos. 1, 1.1, 1.2, and 2, while dismissing Ground No. 1.3.

Conclusion:

The appeals in ITA No. 340/Chd/2013 and ITA No. 217/Chd/2013 were partly allowed, and the appeal in ITA No. 216/Chd/2013 was dismissed.

Order pronounced in the Open Court.