TMI Blog2014 (12) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken up together for consideration and disposed of by this common order. BRIEF FACTS 2. In ITA No. 158/2013, the assessee is M/s Tata Teleservices Limited. It is engaged in the business of providing telecommunication services across the country. They provide telecommunication services, sell service products such as Starter Kits and the Recharge Coupon Vouchers. Recharge Coupon Vouchers (RCVs) are the prepaid vouchers used for selling talk time to the pre-paid subscribers. Starter Kits are the new connections containing 'Removable User Identity Module' for providing the telecommunication connection. The assessee has entered into agreement with its Channel Partners. The second respondent conducted a survey under Section 133A of the Income Tax Act, 1961 (for short hereinafter referred to as 'the Act') on 29.2.2008. After hearing the explanation of the assessee, the second respondent opined that the Channel Partners are the Commission Agents of the assessee acting on fixed margins and fixed responsibilities, the difference between MRP and the selling price constitutes commission payment. Therefore, the assessee failed to deduct tax at source under Section 194H of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the agreement show that on sale of SIM cards, the Channel Partner becomes the absolute owner of the SIM cards and the assessee has not retained any title over the property. In the invoices raised, it is categorically mentioned what is the MRP of such SIM cards, what is the trade discount to which the Channel Partner is entitled to. It is after giving deductions to the said discount, the amount due from the Channel Partner as purchase price of the SIM cards is mentioned. On payment of such amount, the SIM card is sold, sales tax is paid on that consideration. Therefore, in the case of prepaid services it is a case of out and out sale. No relationship of principal and agent exists. The assessee has not paid any amount to the Channel Partner and, therefore, Section 194H of the Act is not attracted. The reliance of the judgment of the Kerala High Court as well as the Delhi High Court has no application to the facts of this case. 8. Sri Chythanya, learned counsel appearing for Bharti Airtel Limited submitted that the terms of the agreement between the parties had not created any relationship of principal and agent. On the contrary, it makes it clear that there is a relationsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter, as the facts of the case do not fall within the scope of Section 194H, there is no liability on the part of the assessee to deduct tax from an income, which has not arisen. 10. Per contra, Sri Indra kumar, learned Senior counsel appearing for the Revenue sought to support the impugned orders. He pointed out from the judgment of the Kerala High Court where the judgment of the Tribunal has been extracted, which shows that when the sim-cards/prepaid/e-coupon/e-topups is given to the distributor, the assessee-company was crediting the sales account with ₹ 100/-. Assessee was debiting the cash amount with ₹ 80/- though by paying cash to the distributor. The assessee was paying a commission amount of ₹ 20/-. This is the commission enjoyed by the distributor. In the said case, it was held that there existed a relationship of principal and agent. That is ₹ 20/- represented the commission. Therefore, he submitted that in the instant case, the assessee being the same, the contention of the assessee that there is no relationship of principal and agent is factually incorrect and therefore, he submits that the authorities were justified in passing the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds ? (2) Whether Section 194H of the Income Tax Act is attracted to sale of RCVs, prepaid cards and starter kits and the trade discount allowed by appellant to its distributors would amount to payment of Commission requiring deduction of tax at source? TELECOMMUNICATION 13. The Apex Court in the case of Bharat Sanchar Nigam Limited and another Vs. Union of India and others reported in 282 ITR 273 was called upon to decide the question as to what is the nature of the transaction by which mobile phone connections are enjoyed. Whether it is a sale or is it a service or is it both? Answering the said question at para 82 of the said judgment, it was held that telephone service is nothing but a service. There is no sales element apart from the obvious one related to the hand set, if any. Dealing with the question whether a sim card was goods within the definition of the word in the Sales Tax Act it was held that what a simcard represents is ultimately a question of fact. In determining the issue, the Assessing Authorities will have to keep in mind the following principles: If the SIM card is not sold by the assessee to the subscribers, but is merely part of the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phone company from its subscribers towards the SIM cards will form part of the taxable value for levy of service tax, for the SIM cards are never sold as goods independent of the services provided. They are considered as part and parcel of the services provided and the dominant purpose of the transaction is to provide services and not to sell the materials, i.e., SIM card which on its own but without the service would hardly have any value at all. Thus, it was established from the records and facts of the case that the value of the SIM cards formed part of activation charges as no activation was possible without a proper functioning of a SIM card and the value of the taxable service was calculated on the gross total amount received by the operator from the subscribers. Therefore, the judgment of the Kerala High Court was upheld. 16. It is in this background we have to understand the telecommunication services provided to the customers by the assessee. It is in two models. (1) Prepaid: Under the prepaid model, the subscriber is required to take a mobile telephone connection, through a distributor, from a telecom operator. Under this model, the subscriber pays for the talk time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the provisions of this Chapter. (2) Nothing in this section shall prejudice the charge of tax on such income under the provisions of Sub-section (1) of Section 4. 19. Section 190 of the Act, provides for deduction at source and advance payment. Section 190(2) of the IT Act makes it very clear that the TDS provisions are subservient and subordinate to the charging provisions of Section 4 of the IT Act. Section 194H reads as under:- 194H. Commission or brokerage Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 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 rate of ten per cent : Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person; Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-Section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act. JUDGMENTS 21. Section 194 H of the Act, has been the subject matter of interpretation by various High Courts across the Country. We have two streams of judgments delivered in favour of and against the revenue. The judgments in favour of the assessee are as under: 22. The High Court of Bombay in the case of COMMISSIONER OF INCOME TAX vs QATAR AIRWAYS [(2011) 332 ITR 253 dealing with Section 194H of the Act held as under : - 3. .. Be that as it may, for section 194H to be attracted, the income being paid out by the assessee must be in the nature of commission or brokerage. Counsel for the Revenue contended that it was not the case of the Revenue tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of buying or selling of goods, or (iii) in relation to any transaction relating to any asset, valuable article or thing. The element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to Section 194H. If a car dealer purchases cars from the manufacturer by paying price less discount, he would be the purchaser and not the agent of the company, but in the course of selling cars, he may enter into a contract of maintenance during the warranty period, with the customer (purchaser of the car) on behalf of the company. However, such services rendered by the dealer in the course of selling cars does not make the activity of selling cars itself an act of agent of the manufacturer when the dealings between the company and the dealer in the matter of sale of cars are on principal to principal basis. This is just an illustration to clarify that a service in the course of buying or selling of goods has to be something more than the act of buying or selling of goods. When the licensed stamp vendors took delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot return the milk under any circumstance, which is another clear indication that the relationship was that of principal to principal. Even if the milk gets spoiled for any reason after delivery is taken, that is to the account of the concessionaire and the Dairy is not responsible for the same. These clauses have all been noticed by the Tribunal. The fact that the booth and the equipment installed therein were owned by the Dairy is of no relevance in deciding the nature of relationship between the assessee and the concessionaire. Further, the fact that the Dairy can inspect the booths and check the records maintained by the concessionaire is also not decisive. As rightly pointed out by the tribunal the Dairy having given space, machinery and equipment to the concessionaire would naturally like to incorporate clauses in the agreement to ensure that its property is properly maintained by the concessionaire, particularly because milk and the other products are consumed in large quantities by the general public and any defect in the storage facilities which remains unattended can cause serious health hazards. These are only terms included in the agreement to ensure that the system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue relied on the judgment of the Delhi High Court in the case of Commissioner Of Income Tax v. Singapore Airlines Limited And Others [(2009) 224 CTR (DEL) 168] where it was held as under : - 24. The submission of some of the learned counsel for the assessee-airline that the monies retained in the form of supplementary commission are really in the nature of discount rather than commission is not tenable. The fact that this is a payment which the travel agent receives from the passenger by virtue of the sale of the Traffic Documents/Air Tickets of which the assessee is the proprietor at a point till the transaction is made would clearly establish that it is a commission as against the discount. The word 'discount' is normally used to describe a deduction from the full amount or value of something, especially a price (see Black's Law Dictionary VIIth Edition page 477) whereas a commission is defined in Explanation (1) to Section 194H as any payment received or receivable, directly or indirectly by an agent for services rendered acting on behalf of the assessee-airline. In view of the fact that the payment retained by the travel agent is inextricably linked to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the travel agent retains over and above the net fare, the question was whether it was a commission. The Delhi High Court held that, under an agreement only one relationship exists and transaction is a singular transaction which is executed between the travel agent while acting on the principal-Airline in selling the traffic document/air ticket to third party who is a passenger and, therefore, the second leg of transaction cannot be different from the first leg of the transaction. 28. Reliance is placed on the judgment of the Delhi High Court in the case of Commissioner of Income Tax v. Idea Cellular Limited reported in (2010) 325 ITR 148, while dealing with the commission / brokerage to the distributor on the sim cards / recharge coupons under Section 194 H of the Act, it was held as under: 51. It is obvious that a service can only be rendered and cannot be sold. The owner of the SIM Cards and recharge coupons is the assesseecompany, M/s. Vodafone Essar Cellular Ltd. This is because the assessee-company is operating under the right of a licence agreement entered into with the Government of India. Nobody else can be given the right to operate as Cellular telephone service pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssar Cellular Ltd. Vs. Assistant Commissioner of Income Tax reported in (2011) 332 ITR 255, where the Cochin Bench held that the service can only be rendered and cannot be sold. The judgment at Para Nos.4 to 6, reads as under: 4. The main question to be considered is whether Section 194H is applicable for the discount given by the assessee to the distributors in the course of selling Sim Cards and Recharge coupons under prepaid scheme against advance payment received from the distributors. We have to necessarily examine this contention with reference to the statutory provisions namely, Section 194H . What is clear from Explanation (i) of the definition clause is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case (supra) abovereferred that a customer can have access to mobile phone service only by inserting Sim Card in his hand set (mobile phone) and on assessee activating it. Besides getting connection to the mobile network, the Sim Card has no value or use for the subscriber. In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and retailers appointed by them assessee gets subscribers for the mobile service. Assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed that the distributor is only rendering services to the assessee and the distributor commits the assessee to the subscribers to whom assessee is accountable under the service contract which is the subscriber connection arranged by the distributor for the assessee. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny assessment either. 32. The Apex Court in the case of Bhavani Cotton Mills Ltd., v. State of Punjab and another reported in AIR 1967 SC 1616 observed thus: If a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid because, if particular sales or purchases are exempt from taxation altogether they can never be taken into account at any stage for the purpose of calculating or arriving at the taxable turnover and for levying tax. 33. The Apex Court in the case of Ge India Technology Cen. (P) Limited v. Commissioner of Income Tax [(2010) 327 ITR 456] in para 9 has held as under:- 9 the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO (TDS). It is a provision requiring tax to be deducted at source to be paid to the revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., section 4, 5 and 9. ... While interpreting the provisions of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, one providing for sale of the goods at the catalogue price and the other providing for an allowance by way of trade discount. Having regard to the nature of a trade discount there is only one sale price between the dealer and the retailer, and that is the price payable by the retailer calculated as the difference between the catalogue price and the trade discount. There is only one contract between the parties, the contract being that the goods will be sold by the dealer to the retailer at the aforesaid sale price. 36. The Apex Court in the case of Bhopal Sugar Industries Limited v. Sales Tax Officer [(1977) 6 CTR (SC) 284] answering the question whether contract between the assessee and Caltex India was one of agency or sale held as under : - 5. This question, therefore, will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the documents and the surrounding circumstances and having regard to the course of dealings between the parties. ... 6. while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. The mere fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the payee. TDS is a vicarious liability and it presupposes existence of primary liability. Therefore, the TDS provisions have to be read in conformity with the charging provisions, i.e., section 4, 5 and 9. 40. Section 194H deals with deduction of TAS in respect of any income by way of commission or brokerage. The following three conditions are to be fulfilled for attracting the said provision. They are: (1) The assessee should be responsible for paying an income by way of commission or brokerage to the distributor. (2) There should be a payment either by cash or by issue of a cheque or draft or any other mode or credit of such income to the distributor in the accounts of the assessee. (3) Tax is to be deducted at the time of payment or credit thereof, whichever is earlier. 41. The word income has been defined under Section 2(24) of the Act. Income includes profits and gains. A commission is defined in Explanation (i) to Section 194H as any payment received or receivable, directly or indirectly by an agent for services rendered acting on behalf of the principal. The element of agency is to be there in case of all services or transactions contemplated by Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or relationship of principal to agent. However, the question arising in a case has to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the document and the surrounding circumstances and having regard to the course of dealings between the parties and the statutory provisions and the interpretation placed by Courts in the judgments on the point. AGREEMENTS 44. The distribution agreement between Bharti Mobile Limited and its Distributors, discloses that for the promotion of Marketing and Distribution of the products/services of the assessee and also other related services/products, the assessee has desired to avail services of Distributor for marketing and distribution of Cellular Phone Connections and other related products. The Distributor has to provide services mentioned in the agreement at paras 1, 2, 3 and 4. Further the agreement stipulates that the Distributors have to represent to the customers that the Distributor's agreement with the customers/its dealers is on Principal-to-Principal basis and the assessee is in no way concerned or liable to the customer/dealers of the Distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement which does not constitute Channel Partner as a servant or employee or partner of joint venture or affiliate or group company of TTSL. The Channel Partner shall have no authority to bind TTSL in any respect whatsoever and shall not hold itself out as owned by or associated with TTSL, other than as an independent Channel Partner on a principal to principal basis, authorized and permitted to market the Products and Services under the agreement. None of the employees of Channel Partner shall be construed or deemed to be the employees of TTSL at any time the Channel Partner shall indemnify and keep indemnified TTSL, its directors and officers against any claim, demand, loss or whatsoever in this connection. 49. Clause 8.5 of the agreement stipulates that the Channel Partner be liable to pay all the taxes such as sales tax, service tax applicable and payable in respect of the subject matter of this agreement and any statutory increase in respect thereof. Clause 8.9 provides that Channel Partner shall procure the Products from TTSL or such person/s authorized by TTSL. Channel Partner shall ensure that there is no sale of spurious and unauthorized Products from Channel Partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentation to the retailers unless authorized by the assessee. What is given by the assessee to its Distributor/ Channel Partner is a trade discount. It is not commission. 52. In Qatar Airways case it was held that, when the airlines sell the air tickets it would have no information about the exact rate at which the tickets would ultimately be sold by their agents since the agents had been given discretion to sell the tickets at any rate between the fixed minimum commercial price and the published price. The question of deducting any tax at source would not arise. 53. In the Ahmedabad Stamp Vendors' Association case also, it was held that, when the licensed stamp vendors took delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the two activities can be termed as the service in the course of buying or selling of goods. Discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said amount is in the nature of cash discount and, therefore, such a transaction is a sale. Therefore, the discount made available to the licensed stamp vendors does not fall within the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the money or monies which the travel agent retains over and above the net fare. In that context, the Delhi High Court held that, under an agreement only one relationship exists and the transaction is a singular transaction which is executed between the travel agent while acting on behalf of the principal airline in selling the traffic documents/air tickets to a third party who is a passenger and, therefore, the second leg of the transaction cannot be different from the first leg of the transaction. 56. In the Idea Cellular Limited's case, the Delhi High Court proceeded on the footing that the assessee is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant for public at large. They had appointed distributors to make available the pre-paid products to the public and look after the documentation and other statutory requirements regarding the mobile phone connection and, therefore, the essence of service rendered by the distributor is not the sale of any product or goods and, therefore, it was held that all the distributors are always acting for and on behalf of the assessee company. 57. Similar is the view expressed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the products to the distributors but the products are sold and ownership vests and is transferred to the distributors. However, who ever ultimately sells the said right to customers is not entitled to charge more than the MRP. The income of these middlemen would be the difference in the sale price and the MRP, which they have to share as per the agreement between them. The said income accrues to them only when they sell this right to service and not when they purchase this right to service. The assessee is not concerned with quantum and time of accrual of income to the distributors by reselling the prepaid cards to the sub-distributors/retailers. As at the time of sale of prepaid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the Distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorized as commission. The sale is subject to conditions, and st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income to the distributor. In this context it is pertinent to mention that 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 subdistributor 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 dependant 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. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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