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Vodafone Essar Gujarat Limited Ahmedabad Versus Assistant Commissioner of Income Tax, TDS Circle, Ahmedabad

2015 (7) TMI 474 - ITAT AHMEDABAD

Tax withholding demand raised under section 201(1) and 201(1A) read with Section 194 H - non deduction of tax at source on trade discount granted to prepaid distributor - whether the provisions of section 194H will come into play in respect of the difference between the price at which the airtime is thus sold to the distributors and its recommended retail price to the end consumers? - Held that:- This issue is covered, in favour of the assessee, by Hon’ble Karnataka High Court‘s common judgement .....

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₹ 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 distribut .....

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ds - 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 .....

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this, the assessee appellant has called into question the correctness of order dated 31st December 2010 passed by the learned CIT(A), in the matter of tax withholding demand raised under section 201(1) and 201(1A) read with Section 194 H of the Income Tax Act, 1961, for the assessment year 2008-09. 2. In the first ground of appeal, the assessee has raised the following grievance: The CIT(A) has erred in upholding the tax liability of ₹ 6,00,99,245 (excluding interest under section 201(1A) .....

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mises on 26th August 2008. During the course of this survey, it was noted that the assessee sells pre-paid vouchers, of various face value, to its distributors, at a rate lower than its face value . It was also noted that the the difference (between the face value and the price at which is sold) is nothing but commission on which no tax has been deducted . It was also noted the relationship between the .... (appellant) and the distributor was on principal and agent basis, and, therefore, any amo .....

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hat there is no principal agent relationship between the assessee and its distributors, and that the assessee sells the products, on the outright sale basis though at a discounted price, to its distributors who, in turn, are free to sell the same to the retailer at such price, as they may deem expedient, within the MRP. It was also explained that the distributors are making advance payments to the assessee, that the distributors are free to decide their terms and conditions of doing business wit .....

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194H. Certain judicial precedents were also cited by the assessee to support his case but, for the reasons we will set out in a short while, it is not really necessary to go into that aspect of the matter. None of these submissions, however, impressed the Assessing Officer. He proceeded to reject these submissions and hold the assessee as an assessee in default, for not deducting tax at source from commission on sale of prepaid airt ime, under section 201 of the Income Tax Act, 1961. While doing .....

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;ble High Courts of Kerala WP No. 29202/2001 in the case of BPL Mobile Ltd. held that sim card as well as recharge company delivered by BPL Mobile Cellular Ltd is to be considered as transaction between Service Provider & Distributors and the said transaction is only that of service and not sale and purchase of goods. In the present case the deductor is doing exactly the same business. Therefore, it is not possible to hold that sim card and recharge coupon delivered by the company to distrib .....

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ge. Therefore, essence of service rendered by the distributors are not sale of any product or goods. Since it is not possible for the company to provide all these services directly to the customers, the deductor has made out business solution to appoint distributors to take care of operational activity of the company to provide service and the distributor is important link in that chain of service. Moreover, the essence of prepaid card and postpaid card, sim card etc are same to provide service .....

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Principal and Agent relationship and the commission offered in form of Discount on pre paid SIM Cards is liable to TDS u/s 194H of the IT Act. In view of the above facts and considering the findings in the case of M/s. BPL Mobile Cellular Limited (WP No. 29202 of 2005), and also in view of finding of Delhi High Court, the essence of the contract between company and distributors is that of service and margin between MRP and sale price is nothing but commission. This view has also been upheld by .....

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unt of difference between MRP and sale price paid by the distributors. The such difference is works out to ₹ 51,67,60,486/ -. Therefore, the deductor is treated as deemed defaulter u/s,201(1) of the I.T. Act to the above extent and also liable to charge interest u/s.201(1A) of the I.T. Act. 4. Aggrieved by the stand so taken by the Assessing Officer carried the matter in appeal before the CIT(A) but without much success. Learned CIT(A) extensively reproduced from the written submissions fi .....

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se of the appellant is squarely covered by the judgment of the Kerala High Court in the case of Vodafone Essar Cellular Limited reported at 235 ITR 393. The Kerala High Court has, in paragraph 6, categorically held as under: ……..because we have clearly found that the discount paid to the distributors is for service rendered by them and the same amounts to "commission" within the meaning of that term contained under Expln. (i) to s. 194H of the Act. The impugned orders iss .....

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e of commission within meanings of Explanation (i) to Section 194 H of the Act. I, therefore, hold that the learned AO has rightly held that the appellant was required to deduct tax at source under section 194 H of the Act on commission given by the assessee. 5. The assessee is not satisfied with the stand so taken by the learned CIT(A) as well, and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the .....

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face value, to its distributors, at a rate lower than its face value , and that the difference (between the face value and the price at which is sold) is nothing but commission on which no tax has been deducted . The short issue that we are required to adjudicate in this appeal is whether the provisions of section 194H will come into play in respect of the difference between the price at which the airtime is thus sold to the distributors and its recommended retail price to the end consumers. 8. .....

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t of guidance by Hon ble jurisdictional High Court. 9. This issue is covered, in favour of the assessee, by Hon ble Karnataka High Court s common judgement in the cases of Bharti Airtel Limited, Tata Teleservices Limited and Voadfone South Limited, reported as Bharti Airtel Limited vs. DCIT [(2015) 372 ITR 33 (Kar)] wherein their Lordships have, inter alia, observed as follows: 62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assesse .....

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t 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. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor .....

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eement 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 .....

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responsibility, the assessee has no obligation to deduct TDS. Once it is held that 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. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. 63. It was contended by the revenue .....

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Act and which belongs to the payee. A statutory obligation is cast on the payer to deduct the tax at source and remit the same to the Department. If the payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. As held by the Apex Court in Bhavani Cotton Mills Limited s case, if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stag .....

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tax under Section 194H of the Act. This exercise has to be done by the assessing authority before granting any relief. The same exercise can be done even in respect of other assessees also. 65. In the light of the aforesaid discussions, we are of the view that the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable. 10. As we take note of the views so expressed by Hon ble Karnataka High Court, we may also note that this iss .....

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observed as follows :- 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 commiss .....

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other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far a .....

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as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rendering services to ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee. The terms of distribution agreement clearly indicate that it is for the distributor to enroll the subscribers with proper identification and documentation which responsibility is entrusted by the assessee on the distr .....

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ncipal to principal basis, we are unable to accept this contention because the role of the distributors as explained above is that of a middleman between the service provider namely, the assessee, and the consumers. The essence of a contract of agency is the agent's authority to commit the principal. In this case the distributors actually canvass business for the assesssee and only through distributors and retailers appointed by them assessee gets subscribers for the mobile service. Assessee .....

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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 s .....

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Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but comm .....

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t or given full discount and recovered tax amount thereon from the distributors to remit the same in terms of Section 194H of the Act.' 11. There is no, and there cannot be any, dispute about the fundamental legal position that in the hierarchical judicial system, that we have in our country, lower tiers of judicial hierarchy has to respectfully follow the views expressed by the higher tiers of judicial hierarchy. In the case of ACIT Vs Dunlop India Limited [(1985) 154 ITR 172 (SC)], Hon ble .....

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here are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary.... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted" (See observations of Lord Hailsham and Lord Diplock in Broome vs. Cassell). The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system 12. The .....

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under s. 140A(3) was legal ? The specific question before Their Lordships thus was whether the Tribunal, while sitting in Bombay, was justified in following the Madras High Court decision. It was in this context that Hon ble Bombay High Court concluded as follows: "It should not be overlooked that IT Act is an all India statute, and if a Tribunal in Madras has to proceed on the footing that s. 140A(3) was non-existent, the order of penalty under that section cannot be imposed by any author .....

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High Court………" 13. In the case of CIT Vs Shah Electrical Corporation [(1994) 207 ITR 350 (Guj)], vide judgment dated 23rd June 1993, Their Lordships had an occasion to consider the aforesaid views. It was in this context that Their Lordships have observed as follows: 3. What is contended by the learned advocate for the Revenue is that the Tribunal decided the appeal on 26th Oct. , 1976. By that time, the Andhra Pradesh High Court had upheld the validity of s. 140A(3). H .....

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udgment of the Bombay High Court in Godavaridevi s case (supra). 4. In our opinion, the legal position is correctly stated by the Punjab & Haryana High Court in CIT vs. Ved Prakash (1989) 77 CTR (P&H) 116 : (1989) 178 ITR 332 (P&H) when it observed that "unless and until the Supreme Court or the High Court of the State in question, under Art. 226 of the Constitution, declares a provision of the Act to be ultra vires, it must be taken to be constitutionally valid and treated as s .....

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al Panchal (HUF) [(1994) 210 ITR 580 (Guj)], vide judgment dated 1st September 1994, Their Lordships have held as follows: …….. At the time when the Tribunal decided the appeal, that was the only decision in the field and, therefore, in view of what the Bombay High Court has held in CIT vs. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom) and CIT vs. Smt. Nirmalabai K. Darekar (1990) 186 ITR 242 (Bom), the Tribunal was bound to follow the said judgment of the Madras High Cour. It, .....

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tional High Courts are binding on the lower tiers of judicial hierarchy such as this Tribunal. As we hold so, we are alive to the school of thought that non jurisdictional High Courts are not binding on the subordinate courts and Tribunals, as articulated by Hon ble Punjab & Haryana High Court in the case of CIT vs. Ved Prakash [(1989) 178 ITR 332 (P&H)] but then that was a case in the context of validity of a statutory provision, i.e. 140A(3), covered by the rider to the general proposi .....

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the subordinate courts and Tribunals donot have the benefit of guidance from Hon ble jurisdictional High Court. 17. In our humble understanding of the legal position and of the propriety, it will be wholly inappropriate for us to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon ble High Courts- something diametrically opposed to the very basi .....

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iterion for deciding as to which of the Hon ble High Court should be followed by us. We find guidance from the judgment of Hon ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd. [(1972) 88 ITR 192 (SC)]. Hon ble Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted" Although this principle so laid down was in the context of penalty, and Their Lordshi .....

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In support of that contention, learned counsel has placed reliance upon a few decisions of this Court in CIT vs. Madho Prasad Jatia (1976) 105 ITR 179 (SC); CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) and CIT vs. Kulu Valley Transport Co. P. Ltd. (1970) 77 ITR 518 (SC) : ………The above principle of law is well-established and there is no doubt about that……. 19. Having noted the legal position as above, it is appropriate, for the sake of completeness, .....

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y apex Court in Mangalore Chemicals & Fertilizers Ltd. vs. Dy. Commr. of CT (1992) Suppl. (1) SCC 21 and Novopan India Ltd. vs. CCE & C 1994 (73) ELT 769 (SC), has been summed up in the words of Lord Lohen, "in case of ambiguity, a taxing statute should be construed in favour of a taxpayer does not apply to a provision giving tax-payer relief in certain cases from a section clearly imposing liability". This exception has been also reiterated by Hon ble Supreme Court in the case .....

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is what Hon ble jurisdictional High Court has also held in the case of Shah Electrical Corporation (supra). None of these exceptions, however, admittedly apply to the situation that we are dealing with at present. 20. There can be no dispute on the proposition that irrespective of whether or not the judgments of Hon ble non jurisdictional High Courts are binding on us, these judgments deserve utmost respect which implies that, at the minimum, these judgments are to be considered reasonable inter .....

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mble understanding, it is only on this basis, without sitting in value judgment on the views expressed by a higher tier of judicial hierarchy, that the conflicting views of Hon ble non jurisdictional High Courts can be resolved by us in a transparent, objective and predictable manner. 21. It is very tempting to believe, or pretend to believe, that, in the absence of direct decision on the issue by the Hon ble jurisdictional High Court, we have unfettered discretions in exercise of our judicial p .....

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ited (supra), was stated to be that Since no jurisdictional High Court decision is available as on date, the latest decision of Karnataka High Court, which has considered and distinguished earlier rulings of other High Courts, deserves to be followed . Our conclusion is the same but our decision to follow Hon ble Karnataka High Court s judgment is simply this judgment is to be preferred over, in the light of settled legal principles set out above, other Hon ble High Court judgments, because it i .....

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preferred over a decision from another Hon ble non jurisdictional High Court decision, of equal stature, in favour of the assessee. That is, as we understand, correct approach to the matter and that is the reason why we come to the same conclusion as the SMC did but for altogether different reasons. 23. We have also noted that material facts of the case and the terms of agreements with the distributors are the same as were before Hon ble Karnataka High Court in the above case. A comparative char .....

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butor - Page 68. Clause 17.2 specifically provides that the relationship created by the agreement is that of a buyer and seller and that the agreement is on a principal to principal basis and neither party is, nor shall be deemed to be, an agent/partner of the other. It Is also provided that nothing in the Agreement shall be construed to render the distributor a partner or agent of the assessee 2 Distributor shall not make any promise, representation or to give any warranty or guarantee with res .....

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reference will be of the Distributor and the liability for any loss or damage due to any fire, burglary, theft etc., will be of the Distributor. - Page 69. As per clause (iv) of Annexure II to the agreement, the assessee is not liable for any loss, pilferage or damage to the recharge vouchers/service tickets post-delivery of the same to the distributors. The assessee does not compensate the distributors for any unsold stock 4 The Distributor has no express or implied right or authority to assume .....

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stributor shall pay all licenses, fee, taxes, duties, sales tax, service tax and any other charges, assessments penalties whether statutory or otherwise levied by any authority in connection with the operation of distributor s office (Clause III(b) of Annexure III to agreement). 6 After sale of products distributor/channel partner cannot return goods to the assessee for whatever reason - Page 74. The assessee shall not be responsible for any post delivery defect in the service tickets. No reques .....

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at the factual matrix of all the cases before the Hon ble non jurisdictional High Courts were materially the same as in this case, in conformity with the esteemed views of Hon ble Karnataka High Court in Bharti Airtlel s case (supra), and hold as follows: (a) On the facts of the case, and as is evident from a reading of the agreements before us, the assessee has sold, by way of prepaid vouchers, e-top ups and prepaid SIM cards, the right to service on principal to principal basis to its distribu .....

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oes not affect the character of sale on principal to principal basis. (c) Section 194 H comes into play only in a situation in which any person, ……..responsible for paying….. to a resident, any income by way of commission pays or credits such income by way of commission . However, since at the time of the assessee selling these rights for a consideration to the distributor, the distributor does not earn any income, the provisions of Section 194 H donot come into play on the .....

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incur expenditure for the purchase of prepaid cards. Therefore, at the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor . Accordingly, 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. (e) In a situation in which the assessee has credited the sale proceeds at the transaction value (in contrast with the transaction bei .....

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