2014 (12) TMI 642 - KARNATAKA HIGH COURT

Liability to deduct TDS on discount/commission made u/s 194H - sale of SIM Cards - Trade discount for bulk sales within the scope or not – assessee M/s Bharti Airtel Limited is a Public Limited Company engaged in the business of telecom operations – Relationship of assessee or distributor or not – Scope of term ‘income’ u/s 2(24) –Survey conducted for verification of compliance of TDS provisions – Held that:- On delivery of the prepaid card, the assessee raises invoices and updates the accounts - In the first instance, sale is accounted for ₹ 100/-, which is the first account and ₹ 80/- is the second account and the third account is ₹ 20/- the sales is for ₹ 100/-, commission is given at ₹ 20/- to the distributors and net value is ₹ 80/- The assessee's sale is accounted at the gross value of ₹ 100/- and thereafter, the commission paid at ₹ 20/- is accounted - the essence of the contract of the assessee and distributor is that of service and therefore, Section 194H of the Act is attracted - however, in the first instance, if the assessee accounted for only ₹ 80/- and on payment of ₹ 80/-, he hands over the prepaid card prescribing the MRP as ₹ 100/-, then at the time of sale, the assessee is not making any payment - the distributor is not earning any income - this discount of ₹ 20/- if not reflected anywhere in the books of accounts, in such circumstances, Section 194H of the Act is not attracted

The assessees sell prepaid cards/vouchers to the distributors - at the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income - In fact, rather than earning income, distributors incur expenditure for the purchase of prepaid cards - Only after the resale of those prepaid cards, distributors would derive income - at the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor - Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise.

The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor – the income accrued or belonging to the distributor should be in the hands of the assessees - the assessee sells SIM cards to the distributor and allows a discount of ₹ 20/-, that ₹ 20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub-distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer - The profit earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share ₹ 20/- which is allowed as discount by the assessee to the distributor - There is no relationship between the assessee and the sub-distributor as well as the retailer.

Thus, it is a sale of right to service - The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands - The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS - the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent – thus, the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable.

The matter is remitted back to the assessing authority only to find out how the books are maintained and how the sale price and the sale discount is treated and whether the sale discount is reflected in their books - If the accounts are not reflected Section 194H of the Act is not attracted. - Decided in favour of assessee.