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2015 (11) TMI 860 - ITAT BANGALORE

2015 (11) TMI 860 - ITAT BANGALORE - TMI - TDS u/s 194H - sale of SIM cards - assessee has not deducted TDS on discount/commission allowed to distributors - Held that:- There is no dispute that initially, the issue was decided against the assessee in Commissioner of Income Tax-XVII Versus Idea Cellular Ltd. [2010 (2) TMI 24 - DELHI HIGH COURT] by holding that service can be rendered and cannot be sold and therefore, the payment to distributors, who are acting as a link in the chain of service pr .....

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ble 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 .....

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rds 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 pr .....

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SON P BOAZ, ACCOUNTANT MEMBER For The Assessee : Shri Ronak G Doshi, CA. For The Revenue : Shri Sunil Kumar Agarwala, JCIT(DR) ORDE R Per BENCH : These are set of four cross appeals directed against the composite order dated 25/11/2013 of the CIT(A)-V, Bangalore, arising from the orders passed u/s 201(1) and 201(1A) of the Income-tax Act, 1961 [hereinafter referred to as the Act for short] for the assessment years 2009-10 to 2012-13. 2. The assessee is a telecom operator providing cellular servi .....

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and agents who remit the sale proceeds back to the assessee after retaining discount portion of the amount. The AO was of the view that this discount represents income earned by the distributor and the nature of which in its very substance and effect is commission. The AO held that roaming costs paid to other telecom/mobile operators was fee for technical service within the meaning of sec.194J and that the assessee failed to deduct tax on such payments. Accordingly, AO treated the assessee as a .....

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Amount payable u/s 201(1)/ 201(1A) on discount Total TDS 2009-10 30122073 199169552 4878690 31917293 36795983 2010-11 133104942 196896554 1735139 25587837 27322976 2011-12 21686807 254018113 2538840 29740086 32278926 2012-13 12462617 151471425 1342861 16429447 17772308 3. Aggrieved by the action of the AO, assessee filed appeals before the CIT(A). Since common issues were involved in all the appeals, therefore, the CIT(A) disposed of the appeals for four years by the impugned composite order. T .....

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pugned order of the CIT(A) and filed cross appeals. Common grounds are raised by the revenue well as by the assessee in all the four assessment years. 4. The grounds raised by the revenue are as under: 1. The CIT (A) has fail ed to apprec iate the fac t that the asses see neither produced any evidence nor made a claim before the AO that certain amount of roaming charges was paid to International operators. 2. The CIT (A) has erred in not appreciating the fact that the assessee was liable to pr o .....

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the assessee are as under: GROUND NO. I: PRINCIPLE OF NATURAL JUSTICE: 1. On the facts and in circumstances of the case and in law, the CIT(A) erred in dismissing the appeal without giving a fair and reasonable opportunity of hearing to the Appellant and thereby violating the principles of natural justice. 2. The Appellant prays that it be held that the order passed by the CIT(A) be quashed/annulled. GROUND NO. II: ORDER BARRED BY LIMITATION: 1. On the facts and in circumstances of the case and .....

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ROUND NO. III: NON-DEDUCTION OF TAX AT SOURCE ("TDS") UNDER SECTION 194H OF THE ACT ON DISCOUNT ALLOWED TO THE PRE-PAID DISTIBUTORS ("the Distributors"): 1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the order passed by the TDS Officer under section 201(1)/201(1A) of the Act by treating "discount" offered by the Appellant to the Distributors as "commission" and thereby treating the Appellant as an & .....

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III: GROUND NO. IV: 1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in confirming the observations of the TDS Officer by treating the Appellant as an "assessee in default" under section 201(1) of the Act, without appreciating that it is a settled legal position that, if TDS machinery fails, the Appellant cannot be treated as an "assessee in default" under section 201(1) of the Act. 2. The Appellant thus prays that in the absence of a .....

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e for the use of standard facility does not amounts to 'fees for technical services' as defined in Explanation 2 to section 9(i)(vii) of the Act. 2. The Appellant prays that the payment made for use of standard facility does not amounts to fees for technical services' and hence, the Appellant is not required to deduct tax on roaming charges paid to the OTOs under section 194J of the Act and consequently, it be held that the Appellant cannot be an "assessee in default" under .....

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1(IA) of the Act be deleted or be appropriately reduced. GROUND NO. VII: GENERAL: The appellant craves leave to add to/alter and/or amend all or any of the foregoing grounds of appeal. 6. First we take up the grounds raised by the assessee. At the time of hearing, the learned AR of the assessee has stated that the assessee does not press ground No.I and the same may be dismissed as not pressed. The learned departmental representative has no objection if the ground No.I of the assessee is dismiss .....

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e Hon'ble jurisdictional High Court in the case of Bharti Airtel Ltd. Vodafone Essar South Ltd. & others vs. DCIT reported in 372 ITR 33. The learned AR of the assessee has pointed out that the Hon'ble jurisdictional High Court, after considering the decision of the Hon ble Delhi High Court in the case of CIT vs. Idea Cellular Ltd.(assessee s own case) reported in 325 ITR 148 has held that though the service cannot be sold and be rendered only however, the right to service can be sol .....

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ht to service. Thus, learned AR of the assessee has submitted that once it is held that right to service can be sold then the relationship between the assessee and the distributor would be that of principal to principal and not a principal and agent. 9. On the other hand, learned departmental representative has submitted that an identical issue has been decided against the assessee in the assessee s own case by the Hon ble Delhi High Court reported in 325 ITR 148 therefore, the decision of the H .....

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that all these decisions are prior to the decision of the Hon'ble jurisdictional High Court in the case of Bharti Airtel, Vodafone Essar South Ltd. & others (supra) and therefore, once the issue is covered by the judgment of the Hon'ble jurisdictional High Court, then this Tribunal is bound to follow the same. He has further pointed out that this Tribunal has followed the judgment of the Hon'ble jurisdictional High Court in the case of Bharati Airtel,Vodafone (supra) in a series .....

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see by following the judgment of the Hon'ble jurisdictional High Court. 10. We have considered the rival submissions as well as the relevant material on record. There is no dispute that initially, the issue was decided against the assessee by the Hon ble Delhi High Court in the decision reported in 325 ITR 148 by holding that service can be rendered and cannot be sold and therefore, the payment to distributors, who are acting as a link in the chain of service provider, cannot be a discount b .....

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ad 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 the Kerala High Court in the Vodafone Essar Cellular Limi .....

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ributor. 58. In both the aforesaid cases, the Court proceeded on the basis that service cannot be sold. It has to be rendered. But, they did not go into the question whether right to service can be sold. 59. The telephone service is nothing but service. SIM cards, have no intrinsic sale value. It is supplied to the customers for providing mobile services to them. The SIM card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assesse .....

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tivated. Service can only be rendered and cannot be sold. However, right to service can be sold. What is sold by the service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may use it by himself. He may also sell the right to sub-distributors who in turn may sell it to retailers. It i .....

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t 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 ti .....

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s subject to conditions, and stipulations. This by itself does not show and establish principal and agent relationship. 60. The following illustration makes the point clear: 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/-. It shows that the sales is for ₹ 100/-, commission is given at S .....

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er the prepaid card prescribing the MRP as ₹ 100/-, then at the time of sale, the assessee is not making any payment. Consequently, 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. 62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to .....

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sessee 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. In this context it is pertinent to mention that the .....

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; 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 r .....

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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 that, in the event of the assessee deducting the amount .....

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ion 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 stage will not make the original levy valid. 64. In the case .....

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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. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue. Hence, we pass the following order: ORDER 1. Appeals are allowe .....

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case vide order dated 22/5/2015 has decided the issue in favour of the assessee by following the judgment of the Hon'ble jurisdictional High Court. The judgment of the Hon'ble jurisdictional High Court is a binding precedent for the Bangalore benches of the Tribunal and therefore, by following the judgment of the Hon'ble jurisdictional High Court, this issue is set aside to the record of the AO for fresh consideration in the light of the direction of the Hon'ble jurisdictional Hi .....

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essee s subscriber cannot be treated as fee for technical services as there is no human intervention in providing such roaming services by the telecom operators. In support of his contention, he has relied upon the following judgments: i) Bharti Hexacom Ltd. vs. ITO(TDS-II) - ITA No.656/JP/2010 dt.12/06/2015 - Trib. Jaipur ii) M/s.Dishent Wireless Ltd. vs. DCIT - ITA Nos.320 to 329/MDS/2014 dt.20/07/2015 - Trib. Chennai iii) Idea Cellular Ltd. vs. ITO (TDS) - ITA Nos.94- 96/JP/2013 and 917/JP/20 .....

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ed by the Hon ble Delhi High Court in the case of CIT vs. Bharti cellular Ltd. (175 Taxman 573) whereby the Hon ble High Court held that the roaming charges paid by the operator to other operator is not in the nature of fee for technical services (FTS). The revenue carried the matter to the Hon ble Supreme Court. The Hon ble Supreme Court in the case of CIT vs. Bharati Cellular Ltd.(193 Taxman 97) has observed that the issue can be decided after the expert s opinion on the point whether any huma .....

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reas it has a network in Delhi, the interconnect agreement enables M/s Bharti Cellular Ltd. to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the "capacity" of each service provider fixed when interconnect agreements are arrived at ? For example, we are informed that each service .....

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d without any technical assistance available on record. 8. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s Bharti Cellular Ltd. and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to respondent No. 1, s. 194J of the Act is not attracted in the case of "revenue sharing contract". According to r .....

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as never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian companies and multinational corporations, we are of the view that the cases herein are required to be remitted to the AO(TDS). 10. Accordingly, we are directing the AO(TDS) in each of these cases to e .....

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e the matter. Though the AO, while deciding the issue has considered the statement of the expert who was examined in the case of Bharti Cellular, however, we note that in the case of Bharti Hexacom Ltd. (supra), Jaipur Bench of this Tribunal has decided this issue by giving a finding that no intervention is required for providing the roaming facility to the other operators/subscribers. We further note that in the case of Idea Cellular Ltd. vs. ITO (supra) Jaipur bench of the Tribunal again consi .....

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and held that such payment does not amount to fee for technical services and not liable for TDS u/s 194J. The Hon'ble ITAT has held as under:- "We have heard the rival contentions of both the parties and perused the material available on the record. After going through the order of the Assessing Officer, ld CIT(A); submissions of the assessee as well as going through the process of providing roaming services; examination of technical experts by the ACIT TDS, New Delhi in the case of Bha .....

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between the operators is automatic and does not require any human intervention. The term Inter Connecting User Charges (IUC) also signifies charges for connecting two entities. The Coordinate Bench also considered the Hon'ble Supreme Court decision in the case of Bharti Cellular Ltd. in the case of i-GATE Computer System Ltd. and held that Data Link transfer does not require any human intervention and charges received or paid on account 4 ITA 94 to 96/JP/2013 & 917/JP/2012_ Idea Cellular .....

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ssessee's appeal is allowed on this ground also. It is contended that the facts, circumstances and issues of appeals in question are similar to M/s Bharti Hexacom Limited judgment (supra). 3. The ld DR is heard, who supported the order of the Assessing Officer. 4. We have heard the rival contentions of both the parties and perused the material available on the record. The issue about levy of TDS U/s 194J on the roaming charges paid by the telecom operators to service providers and applicabil .....

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