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ACIT-7 (2) /DCIT 7 (2) , Mumbai Versus Reliance Communications Infrastructure Ltd

2016 (4) TMI 516 - ITAT MUMBAI

TDS u/s 194H - disallowance under section 40(a)(ia) - non-deduction of TDS on payments made to distributors as discount on sale of pre-paid recharge vouchers - Held that:- Once in assessee’s own case, it has been categorically held that, assessee was not liable to deduct TDS on such a trade discount given by the assessee to the Distributors then it cannot be reckoned as a “commission”, and consequentially disallowance under section 40(a)(ia) does not has any legs to stand. There could not be a s .....

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Disallowance u/s 14A - Held that:- Once the assessee has not earned any exempt income then in view of the ratio laid down by the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (2015 (9) TMI 238 - DELHI HIGH COURT ), no disallowance under section 14A can be made. The Hon’ble Delhi High Court after taking the note of Hon’ble Supreme Court in the case of CIT vs Rajendra Prasad Mody, reported in [1978 (10) TMI 133 - SUPREME Court] held that if no exempt income has been earned d .....

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quantum of assessment passed under section 143(3) for the assessment year 2007-08 and 2008-09 respectively. Since the issues involved in both the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order. As a lead case, we are taking-up the appeal in ITA No. 4677/Mum/2012 for the assessment year 2007-08, wherein the revenue has raised following grounds: (i) The Learned CIT(A) has erred in law and o .....

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r without properly appreciating the factual and legal matrix a clearly brought out by the Assessing Officer in the Assessment Order. (iii) The Leaned CIT(A) has erred in law and on facts in holding that discount given to distributor by RCIL is not commission and therefore the disallowance u/s.40a(ia) r.w.s.194H is not called for. (iv) The Learned CIT(A) has erred in law and on facts in relying on the decision of CIT(A) in which it is held that in those cases the surplus generated by the Distribu .....

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ot;commission or brokerage" which is inclusively defined in Explanation-(i) to Section 194H includes any payment by a person action on behalf of another person for any services in the course of buying and selling of goods. (vii) The Learned CIT(A) has erred in law and on facts in not appreciating that assessee was selling pre-paid SIMs and recharge vouchers of RCOM to the distributors and the services rendered by the distributors were similar to services where High Courts in the case of CIT .....

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that the nature of payment and the liability for deduction of tax at source arises from the manner in which the transactions are carried out and the purpose of payment. The various distributors rendered the service at next level to RCIL and therefore the provisions of Section 194H will be applicable as the nature of payment remains the same as transaction between RCOM and RCIL. (ix) The Learned CIT(A) has erred in law and on facts in not appreciating the facts that various judicial pronouncemen .....

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see and rendering services in connection with the sale of pre-paid SIMs and recharge vouchers and such services were within the scope of definition as contained in Explanation-(i) to Section 194H. (xi) The Learned CIT(A) has erred in law and on facts in deleting the disallowance of ₹ 8,65,06,770/- u/s.14A ignoring the fact that the Department has not accepted the decision of Bombay High Court in the case of Godrej & Boyce Mfg.Ltd.vs DCIT(2010) 328 ITR 81(B0m). (xii) The Learned CIT(A) .....

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S under section 194H on payments made to distributors as discount on sale of pre-paid recharge vouchers and secondly, disallowance under section 14A of ₹ 8,65,06,770/-. 3. Brief facts qua the first issue, is that assessee is a subsidiary of Reliance Communications Ltd (RCOM). RCOM had entered into a Marketing Agreement with the assessee, to market and distribute Starter Packs / Pre-paid Recharge Vouchers through the assessee s extensive distribution network. The assessee had entered into D .....

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e assessment proceedings noted that, the assessee had claimed an amount of ₹ 196,91,67,889/- as amount paid to distributors as adjustment on sale of pre-paid vouchers and other pre-paid services and therefore, such an amount paid is in the nature of commission on which assessee was liable to deduct TDS under section 194H. The failure to deduct TDS by the assessee, entails disallowance under section 40(a)(ia). In response to the show cause notice by the AO, as to why disallowance under sect .....

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s, the assessee recovers the whole cost upfront and whether the Distributors are able to sale at a higher prices or a lower price, the assessee has no role at all. The margin retained by the Distributors, that is, the profit earned by them is the difference between the price paid to the company and the price at which they decide to provide to the ultimate buyer or subscribers. The margin retained by the Distributor cannot be subjected to the TDS, which has been treated as discount by the assesse .....

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nclusion, the AO has strongly referred to the decision of Delhi High Court in the case of CIT vs Idea Cellular Ltd, reported in [2010] 325 ITR 148 and ITAT Kolkata decision in the case of ACIT vs Bharati Cellular Ltd, reported in [2007] 290 ITR (AT) 283 (Kolkata). 5. Before the CIT(A), it was brought to the notice that, in the proceedings under section 201(1) for the same assessment year the Ld. CIT(A) vide order dated 28.02.2011 has held that the trade discount given by the assessee to the dist .....

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this regard in the impugned order is reproduced hereunder:- The ld. Authorized Representative also admitted written submissions & pointed out that question of disallowance u/s 40(a)(ia) of the Act by considering Discount to Distributors as Commission is not warranted as the issue as regards nondeduction of tax u/s 194H came up before the Ld. CIT(A) 14 who in the case of Appellant vide Order dated 28/02/11 has held that Appellant cannot be held to be in default u/s 201(1) of the Act by holdi .....

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be a defaulter u/s 201(1) of the Act and the demand raised on this count stands deleted. Therefore, this ground of appeal is allowed. Following the orders of CIT(A)-14 and to maintain judicial consistency - disallowance u/s 40(a)(ia) of the Act made by the AO is deleted . 6. At the outset, the Ld. Counsel for the assessee, Shri Yogesh Thar, submitted that, the decision of Ld. CIT(A) in 201(1) proceedings has been accepted by the Department specifically on this issue as the Department has not pr .....

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he order of the CIT(A) and the grounds of appeal raised by the Department in Form No.36 before the Tribunal against the said order. 7. The Ld. CIT DR Shri A K Srivastava, admitted that, Department has accepted the order of the CIT(A) holding that assessee was not liable to deduct TDS on such a payment and no grounds were raised on this score before the Tribunal. 8. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material placed on record. .....

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milar ground assessee was treated as assessee-in-default for nondeduction of TDS on similar payments by the AO, the Ld. CIT(A) after detailed discussion has held that, the trade discount given by the assessee is not in the nature of commission, therefore, it was not liable for deduction of TDS under section 194H and assessee accordingly was not treated to be defaulter under section 201(1). Operating portion of the Ld. CIT(A) s order dated 28.02.2011 reads as under:- In short, a commission paymen .....

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to the distributors liable for TDS u/s 194H of the Act. Thus, the Appellant cannot be held to be a defaulter u/s 201(1) of the Act and the demand raised on this count stands deleted. Therefore, this ground of appeal is, allowed . It is an admitted position by the parties that, the said order of the CIT(A) had attained finality and no appeal was preferred by the revenue against the said finding, even though on other issues, the Department had preferred appeal before the Tribunal. Once in assessee .....

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the distributors; and on the other hand, a disallowance of expenditure under section 40(a)(ia) is being made on the same amount by holding that that assessee should have deducted TDS. Thus, we do not find any infirmity in the order of the CIT(A) in deleting the said disallowance. Accordingly, the issue is allowed on this ground alone. 9. However, by way of a academic discussion, we find that, the revenue in the grounds of appeal has relied upon following decisions in favour of making the disall .....

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avour of the assessee holding that, the condition precedent for deduction of tax at source is that income should have accrued to the distributors from such discount and on sale of pre-paid Sim Cards. The relevant observation and the finding of the CIT(A) after discussing various provisions of the Act and catena of decisions including that of decisions referred by the Department in their grounds of appeal, the High Court has concluded in the following manner:- The provisions for deduction of tax .....

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r to deduct tax at source the amount being paid out must necessarily be ascertainable as income chargeable to tax in the hands of the payee. Tax deduction at source is a vicarious liability and it presupposes existence of primary liability. Therefore, the provisions have to be read in conformity with the charging provisions, i.e., section 4, 5 and 9. Section 194H deals with deduction of tax at source in respect of any income by way of commission or brokerage. The following three conditions are t .....

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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 Explanation (i) to section 194H. The mere fact that the word "agent" or "agency" is used or the words "buyer" and "seller" are use .....

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y in the goods is transferred and gets vested in the concessionaire at the time of the delivery then he is thereafter liable for them and would be dealing with them in his own right as a principal and not as an agent. For section 194H to be attracted, the income being paid out by the assessee must be in the nature of commission or brokerage. The element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to section 194H. The word "discount" .....

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oncepts are wholly distinct and separate. Cash discount is allowed when the purchaser makes payment promptly or within the period of credit allowed. It is discount granted in consideration of expeditious payment. A trade discount is a deduction from the catalogue price of goods allowed by wholesalers to retailers engaged in the trade. The allowance enables the retailer to sell the goods at the catalogue price and yet make a reasonable margin of profit after taking into account his business expen .....

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butors to purchase starter packs (SIM cards), refill packs (refill/re-charge slips, refill/recharge cards, e-top-up, etc., in bulk and then sell them to sub-dealers or retailers. After going through the agreement entered into between the assessee and its dealers, the assessing authority was of the view that the agreement established a principal and agent relationship between the two parties and, therefore, any discount or commission paid to such parties was liable for deduction of tax at under s .....

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d and it was treated as sale consideration. There was a clause, which specifically stated that after such sale of products, the distributor or channel partner could not return the goods to the assessee for whatever reason. What was given by the assessee to its distributor or channel partner was a trade discount. It was not commission. (ii) That the assessee sold pre-paid cards and vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the di .....

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the assessee to the distributor did not arise. Section 194H was not applicable . Since the aforesaid decision of the High Court is a later decision considering all the decisions on this subject then, such a decision has a great persuasive value and following the same, we are inclined to follow the same conclusion. Accordingly, following the aforesaid decision and ratio laid down by the Hon ble High Court, we hold even otherwise also the assessee was not liable to deduct TDS on such discount the .....

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llocate certain expenditure for making such investment, which are capable of earning exempt income. Accordingly, he calculated the indirect expenditure by taking 0.5% of the average value of investment and in accordance with the Rule 8D even though in AY 2007-08, Rule 8D was not applicable and, therefore, such a disallowance could not have been made at least under Rule 8D. 11. The Ld. CIT(A) held that since AO has not pointed out any default in the matter of apportionment or allocation of expens .....

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exempt income in future, therefore, it cannot be held that no disallowance should be made and this was not the intention of the Legislature. On the other hand, Ld. Counsel relied upon the decision of Delhi High Court in the case Cheminvest Ltd vs CIT, reported in 378 ITR 33 (Delhi). 13. After considering the rival submissions and on perusal of the impugned orders, we find that, it is an admitted fact that, assessee has not earned any exempt income during the year. This fact has been noted by the .....

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