2023 (2) TMI 1250 - AT - Income Tax

TDS u/s 194H - disallowance of discount given to prepaid distributors u/s. 40(a)(ia) of the Act for non-deduction of tds - HELD THAT - We find that assessee in the course of its business appoints prepaid distributors (i.e. distributors). The assessee supplies prepaid sim cards and recharge vouchers to its distributors at a discounted price. The assessee supplies prepaid sim cards containing the talk time worth at a higher figure than the discounted price to the distributors. The distributors supply them to the retailers and retailers sell the same to the ultimate customer / user. The distributors make payment of the discounted price in advance to the assessee and there is no payment of any kind made by the assessee to its distributors. The distributors would sell to the retailers after adding its margin and the retailers would sell to the customer after adding his margin. The ultimate price to the customer / user is subjected to the Maximum Retail Price (MRP) fixed by the assessee. It is pertinent to note that the distributor does not earn any income just by obtaining the prepaid sim cards and recharge vouchers from the assessee. From the perusal of the distributors agreement we find that the distributor is allowed to distribute to its retailers at any price between the consideration paid to the assessee and the MRP fixed by the assessee. The distributor possesses complete freedom of pricing. Hence the first tranche of the transaction is selling of prepaid sim cards and recharge vouchers containing the talk time for a higher value by the assessee to the distributors on which the distributor does not earn any income at all. As stated supra the distributors earn income only when the said sim cards and recharge vouchers were sold at a price higher than its purchase price (i.e. the price paid by the distributor to the assessee herein). Hence it is highly impossible to determine the amount of income that would accrue to the distributor on which tax ought to have been deducted by the assessee u/s. 194H of the Act. Hence the entire TDS computation mechanism fails in this case. Thus we hold that the sale of prepaid sim cards / recharge vouchers by the assessee to distributors cannot be treated as commission / discount to attract the provisions of section 194H of the Act and hence there cannot be any obligation on the part of the assessee to deduct tax at source thereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. TDS u/s 194J - Disallowance of roaming charges paid / payable to other telecom operators u/s. 40(a)(ia) for nondeduction of tax at source - HELD THAT - We find that the Chandigarh Tribunal in the case of DCIT vs. Idea Cellular Ltd 2018 (6) TMI 1646 - ITAT CHANDIGARH held that it does not require any human intervention and charges received or paid on account of this is not fees for technical services as envisaged in section 194J read with section 9(1) (vii) read with Explanation-2 of the Act. We find that in the absence of any change in facts or law the payments made for interconnection are not fees for rendering any technical services as envisaged in section 194J of the Act. Therefore no tax is deductible at source u/s 194J of the Act on payment of roaming charges to the OTOS and the assessee therefore cannot be treated as an assessee in default. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of discount given to prepaid distributors under Section 40(a)(ia) for non-deduction of tax under Section 194H.
2. Disallowance of roaming charges paid to other telecom operators under Section 40(a)(ia) for non-deduction of tax under Section 194J.

Issue-Wise Detailed Analysis:

1. Disallowance of Discount Given to Prepaid Distributors:

The assessee, engaged in providing cellular services, had given discounts to prepaid distributors without deducting tax at source under Section 194H. The Assessing Officer (AO) disallowed this discount under Section 40(a)(ia), treating it as commission. The AO relied on a Delhi High Court decision, which categorized the relationship between the assessee and distributors as principal-agent, necessitating tax deduction on the discount.

The assessee argued that the relationship was principal-to-principal, not principal-agent, and thus, the discount did not qualify as commission. The assessee further contended that the entire sale price was received in advance from distributors, and no payment or credit was made to them, negating the need for tax deduction.

The Tribunal noted that the assessee supplied prepaid sim cards and recharge vouchers at a discounted price, and the distributors earned income only upon resale. The Tribunal emphasized that the distributor had complete freedom in pricing, and the income was not ascertainable at the time of sale by the assessee. Therefore, the assessee was not obligated to deduct tax at source on the discount.

The Tribunal relied on the Karnataka High Court decision in Bharti Airtel Ltd vs DCIT, which held that the relationship between the telecom operator and distributors was principal-to-principal, and no tax deduction was required on the discount. The Tribunal also referred to the Bombay High Court decision in CIT(TDS) vs Super Religare Laboratories Ltd, which supported the assessee's stance that no tax deduction was necessary when no payment was made by the assessee.

The Tribunal concluded that the relationship between the assessee and distributors was principal-to-principal, and the discount given did not attract Section 194H. Consequently, the disallowance under Section 40(a)(ia) was deleted.

2. Disallowance of Roaming Charges:

The assessee incurred roaming charges paid to other telecom operators without deducting tax at source under Section 194J. The AO treated these charges as fees for technical services, necessitating tax deduction, and disallowed the expenditure under Section 40(a)(ia).

The assessee argued that roaming charges were for standard facilities provided by other telecom operators and did not involve human intervention, thus not qualifying as fees for technical services. The assessee relied on various judicial precedents, including the Madras High Court decision in Skycell Communications Ltd vs DCIT, which held that payments for standard facilities did not amount to fees for technical services.

The Tribunal noted that the issue of human intervention in roaming charges was examined in several cases, including the Supreme Court decision in CIT vs Bharti Cellular Ltd, which required factual verification. The Tribunal referred to the Chandigarh Tribunal decision in Idea Cellular Ltd, which held that roaming charges did not involve human intervention and thus did not attract Section 194J.

The Tribunal observed that the CIT(A) had relied on a previous decision involving Idea Cellular Ltd, which was later reversed by the Chandigarh Tribunal. The Tribunal, following the Chandigarh Tribunal's decision, concluded that roaming charges did not involve human intervention and were not fees for technical services. Consequently, the disallowance under Section 40(a)(ia) was deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the disallowances under Section 40(a)(ia) for both the discount given to prepaid distributors and the roaming charges paid to other telecom operators, holding that neither transaction required tax deduction at source under Sections 194H and 194J, respectively.