TMI Blog2009 (4) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... in to the bulk distributors on pre-paid mobile service products and passed orders u/s 201(1) and u/s 201(1A) and demanded the amount of tax involved and interest thereon. HELD THAT:- The assessee-company has made a lot of reliance on the contention regarding the freedom of pricing. It is the case of the assessee-company that the distributors are free to fix the selling price but the price should not exceed the MRP. The revenue says that there is no such freedom in fixing the sale price. As far as the present case is concerned, earlier it was BPL and thereafter BPL Hutch and now it is M/s. Vodafone Essar Cellular Ltd. In the earlier two occasions, there was no clause on pricing in the agreements entered into between the predecessors of the assessee-company and the distributors. It is in the latest agreement between the assessee and its distributors that the clause on pricing has been inserted that the distributors are free to determine the ultimate sale price subject to MRP. We do not think that this so-called pricing freedom is so crucial in examining the exact nature of the business relation between the assessee-company and its distributors. The pricing factor is also a mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, viz., M/s. Vodaf one Essar Cellular Ltd. ('VECL' for short). These appeals relate to four assessment years 2004-05, 2005-06, 2006-07 and 2007-08. There are two appeals each for every assessment year. One is in the context of the order passed under Section 201(1) and the other is in the context of the order passed under Section 201(1A). 2. These appeals are directed against the common order passed by the CIT (Appeals)-IH at Kochi on 12-1-2009. The appeals arise out of the common order passed by the Assistant Commissioner of Income-tax (TDS), Central Revenue Building, Kochi, on 30-7-2008 under Section 201(1) and 201(1A) of the Income-tax Act, 1961. 3. Section 201 of the Income-tax Act, 1961, provides for the consequence of failure to deduct tax at source or fails to pay the tax deducted at source. Section 201(1) provides that where any person, including the Principal Officer of a Company does not deduct, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. But the assessee-company is not deducting any tax in respect of monetary transactions arising out of providing prepaid cellular services to the consumers. The pre-paid cellular services are provided by the assessee-company by distributing pre-paid cards, service tickets, Refill, Refill slip, SIM cards, etc. to the consumers through its distribution network. The assessee has entered into separate agreements with its distributors for providing pre-paid cellular services. Generally, the devices used for providing the Pre-paid cellular services are known as SIM Cards/Electronic Recharge. 8. Section 194H of the Income-tax Act provides that any person, not being an Individual or a Hindu undivided family, who is responsible for paying, on or after the 1-6-2001, to a resident, any income by way of commission (not being insurance commission referred to in Section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the prescribed rate. 9. The TDS Officer held the view that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. In furtherance of its defence, the assessee-company tendered the following explanations before the TDS Officer: (i) In the course of its business, the assessee appoints bulk distributors for SIM Cards and Recharge coupons. The distributors are given certain amount of discount on the price of these items. The distributors sell these items to the retailers at a price not exceeding MRP printed on these items. The assessee is giving only a trade discount and is not paying any commission to the bulk distributors. The relationship between the assessee-company and the bulk distributors as construed in the Distributorship Agreement is a principal-to-principal relationship. Therefore, the distributors' earnings do not qualify to be commission and, therefore, no tax is deductible. (ii) The margin enjoyed by the bulk distributors is in the nature of a discount given on SIM Cards and Recharge coupons which is classified as discount on Airtime. No TDS is required to be made on such payments as it is different from the commission due to postpaid distributors where the assessee is making deduction of tax at source. (iii) As per the terms of the agreement entered into betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he complexities of modern times and the 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 an agreement impose a number of restrictions on the buyer, like fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidences of a sale. The Court further held that a Stamp Vendor under the provisions of Gujarat Stamps Supply and Sales Rules, 1987 does not fall within the expression Commission or Brokerage under Section 194H of the Income-tax Act. (ii) Asstt. CIT v. Samaj [2007] 77 ITD 358 (Cuttack): It has been held in that case that commission paid to the agents, by way of deduction from the gross amount in the relevant periodic bills was in the nature of trade discount. The fact that the agent had to make payment for the entire quantity of newspaper lifted irrespective of the papers actually sold, abundantly disproved the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may advertise locally so as to increase their own sale, they ensure that the unsold stock is properly maintained, as the assessee is not liable to take back such stock if they are damaged. In the case of Singapore Airlines (supra) considered by the Delhi Tribunal, the case was that of a service provider. The only additional point in the case of the assessee is that there will be a contract entered into between the assessee and the subscriber at the beginning through a prescribed form that a pre-paid subscriber has to fill-in. This peculiar fact should not have any bearing on deciding whether there is a 'principal to principal' relationship. It is to remember that the agreement of warranty is always between the end user and the manufacturer but the warranty agreement would not alter a 'principal to principal' arrangement between the manufacturer and distributor to that of an agency. 12. The assessee concluded before the TDS authority that the relationship between the assessee and the distributors is 'principal to principal' basis and, therefore, the assessee is not required to deduct tax at source under Section 194Hand the assessee cannot be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pre-paid cellular mobile telephony service. The products are not mere physical commodities but rather tied to certain services, vizcellular mobile services. What is being traded in the form of SIM Cards/Recharge coupons is only a token; the actual items involved are services that include access to a cellular mobile telephony network. While there may be a physical commodity in the form of a SIM Card or Recharge coupon/slips, the actual product is the non-physical goods/services involved such as access to the cellular network and e-Top-up . Therefore, the distributors are acting all the times on behalf of the assessee. The distributors are exclusively marketing the goods and services in connection with mobile telephony of assessee's brand conforming to the display guidelines, sale guidelines and stock maintenance as well as customer identification, verification and documentation. 16. The TDS Officer further distinguished the case laws relied on by the assessee-company and placed more reliance on the decision of the Income-tax Appellate Tribunal, Kolkata in the case of Asstt. CIT v. Bharati Cellular Ltd. [2007] 105 ITD 129. The Tribunal in the said case has held that in a norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or call for reports of stock movements. This is not true in the instant case. (vii) A significant clause in the distributorship agreements is that of brand exclusivity. Therefore, once a distributor signs the agreement, he becomes an exclusive representative of the assessee-company. It is in the light of the above findings and conclusions that the TDS Officer has held that the assessee-company is liable to deduct tax at source under Section 194H while giving margin to the bulk distributors on pre-paid mobile service products. 18. Accordingly, the TDS Officer passed orders under Section 201(1) and under Section 201(1A) and demanded the amount of tax involved and interest thereon. 19. The order of the TDS Officer has been taken before CIT (Appeals)-III at Kochi. He considered the grounds and disposed of the appeals through a common order. The CIT (Appeals) reiterating the facts of the case and after examining the reasons made out by the Assessing Officer and the explanations of the assessee-company held that the TDS Officer was right in law in passing orders under Section 201(1) and 201(1A) against the assessee demanding the tax amount and the interest thereon. The firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Office of Accountant General [2006] 282 ITR 5 (Ken); and Dy. CIT v. Idea Cellular [2009] 121 TTJ (Del) 352. (ii) The risks and remedies relating to the products do pass to the distributors, immediately on receipt of the purchase price in advance and upon the delivery of products. The assessee is not liable to bear any loss, damage or destruction of the stock and the assessee is not liable to take back the stock on termination of the agreement. The distributors are free to appoint sub-dealers/retailers and the assessee is not accountable for the actions of those sub-dealers/retailers in any manner whatsoever. (iii) In the case of a relation of agency vis-a-vis principal, the principal is always liable for the loss on account of damage, stock, or of that sorts. Further, the principal shall be bound by the acts and omissions of the agents. In the present case, there is no such binding relation between the assessee and the distributors. (iv) The relationship of principal vis-a-vis agent cannot be imposed on the assessee only on the ground that the distributors are bound by certain conditions imposed by the assessee in terms of the agreement regarding fixation of price, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he machinery provisions fail and the assessee cannot be treated as assessee in default under Section 201(1), read with Section 194H. The assessee receives the entire purchase price in advance from the distributors and there is no actual payment of any commission or brokerage or discount or making any credit entry in the name of distributors for the income earned by them, in the books of account of the assessee. Regarding the expression any other mode , it is necessary to follow the rule of interpretation ejusdem generis thereby the said expression has to be read in the company of words like cash, cheque and draft. (vii) In the present case there was no payment from the assessee to the distributors and no credit of income in the books of account of the assessee in favour of the distributors and, therefore, no occasion ever arises to deduct any tax on account of the distributors. 22. Shri C. Karthikeyan Nair, the learned Additional Commissioner of Income-tax, appeared for the revenue and argued that the assessee is liable under the provisions of law to deduct tax at source on the benefits earned by the distributors which is essentially in the nature of commission and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard both sides in detail; examined the rival contentions and considered the issue in the light of the facts placed before us, the law explained before us and the judicial pronouncements relied on by both sides. 25. There is no dispute or dis-agreement regarding the nature of transactions entered into between the assessee and its distributors. The assessee-company, by virtue of the licence issued by the Department of Telecommunications, Government of India, is engaged in providing Mobile telephone services to the public at large. The Government of India is allotting the licence to various parties in the field on the basis of geographical specifications. The assessee is operating on all India level and, therefore, provides services in various States. The services provided by the assessee-company in the State of Kerala is treated as a unit, under the name and style of Kerala Circle for the purpose of sales, administration and control. The assessee-company either of its own or through outsourcing establishes the infrastructure facilities for providing Cellular services. 26. The assessee is offering two types of services to the public. The first of its kind is post-paid mobile se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee appoints a number of distributors on the basis of agreements. As already stated, just like consumers are paying in advance for obtaining SIM Cards from the distributors, the distributors are also paying in advance to the assessee-company for getting the pre-paid products. Against such advance payment, the assessee-company is delivering the necessary products to the distributors. The Maximum Retail Price (MRP) is mentioned on every product. Distributors/Retailers are not permitted to sell the products to the ultimate consumers beyond the MRP. The assessee-company is delivering these products to the distributors for a specified margin. For example, if the MRP is Rs. 100, the assessee-company may deliver the same to its distributors at Rs. 80. This is the invoice price of the assessee-company. The assessee-company collects this invoice price in advance from the distributors. The distributors are permitted to deliver these products to the ultimate consumers at a price of their choice but not exceeding Rs. 100 per unit, which is the MRP. The margin earned by the distributors being the difference between the sale price and the invoice price is the remuneration of the distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Essar Cellular Ltd. In the earlier two occasions, there was no clause on pricing in the agreements entered into between the predecessors of the assessee-company and the distributors. It is in the latest agreement between the assessee and its distributors that the clause on pricing has been inserted that the distributors are free to determine the ultimate sale price subject to MRP. 34. We do not think that this so-called pricing freedom is so crucial in examining the exact nature of the business relation between the assessee-company and its distributors. The pricing factor is also a matter of mutual consent between the parties. Even in the case of an agency, there can be a clause by which an agent is authorized to sell the goods for a price less than the MRP. Even in a case of principal-to-principal, there may be a clause that the distributor cannot sell a product for a price less than the MRP unless a consent is given by the manufacturer. The matter of pricing in both the cases, i.e., principal-to-principal and principal to agents can be a matter of mutual consent between the parties and even a matter of negotiation after the execution of the agreement. There are no hard and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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