TMI Blog2017 (1) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... d R. K. Panda (Accountant Member) For the Appellant : Salil Kapoor, Rohit Verma, Rajat Soni For the Respondent : D. S. Benupani, CIT ORDER R. K. Panda (Accountant Member) The above batch of appeals filed by the assessee are directed against the separate orders of the CIT(A)-V, Pune relating to Assessment Years 2007-08 to 2012-13 respectively. Since common issues are involved in all these appeals, therefore, these were heard together and are being disposed of by this common order. ITA Nos. 817 818/PUN/2013 (A.Y. 2007-08 and 2008-09) : 2. First we take up ITA No.817/PUN/2013 for A.Y. 2007-08 as the lead case. 2.1 Facts of the case, in brief, are that the assessee company, is a subsidiary of Vodafone India Ltd. (Formerly known as Vodafone Essar Cellular Ltd.) and was incorporated on 30-03-1995 under the Companies Act, 1956 having its registered office at Coimbatore and its present circle office at Shivajinagar, Pune. The assessee company is engaged in the business of providing cellular mobile phone services for Maharashtra and Goa Circle excluding Mumbai. The company provides prepaid and postpaid services. The prepaid services are in the form of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale transaction in which no services was rendered by the distributors to the assessee company. Referring to the provisions of Indian Contract Act, 1872 the assessee tried to explain its position from the definition of terms Agent , Commission and Discount . The assessee also relied on the following decisions: 1. Gordon Woodroffe Co. Vs. M.A. Majid reported in AIR 1967 SC 181 2. Bhopal Sugar Industries Vs. STO reported in 1977 AIR 1275 3. Ahmedabad Stamp Vendors Agency Vs. UOI reported in 257 ITR 202 (Guj.) 4. Foster s India Pvt. Ltd. Vs. ITO reported in 117 TTJ 346 4.1 Alternatively, it was submitted that the assessee receives the purchase order from distributors and the distributors are liable to pay the assessee the discounted price immediately in advance upon the delivery of the products to them. Thus, there was no case of the assessee either paying or grouping the account of distributors. Further, it was not possible to quantify the exact amount of income in the hands of distributors. Relying on the decision of Hon ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. reported in 293 ITR 226 it was submitted that no tax u/s.201(1) can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow cause notice u/s.201(1) and 201(1A) were issued on 21-01-2010 by the Addl.CIT (TDS), Pune for F.Y. 2007-08 for which detailed reply was filed on 25-02-2010. Even then no order was passed by the TDS Officer before 31-3-2010. Referring to the decision of the Special Bench of the Tribunal in the case of Mahindra Mahindra Ltd. Vs. DCIT reported in 122 TTJ (M)(SB) 577 it was argued that the proceedings u/s.201 of the Act are required to be completed within one year from the end of the financial year in which such proceedings are initiated. Similar show cause notice was also issued on 10-09-2010 for A.Y. 2008-09 to which similar reply was filed and the Assessing Officer has passed a combined order on 22-03-2011. It was accordingly submitted that since the proceedings were initiated in F.Y. 2007-08 the TDS Officer was supposed to pass the order u/s.201(1)/201(1A) by 31-03-2010 in view of the decision of the Special Bench of the Tribunal in the case of Mahindra and Mahindra Limited (supra). Since, the same has not been passed, therefore, the order passed by the Addl.CIT (TDS) being barred by limitation should be quashed. 8. It was also submitted that proviso to section 201(3) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 16a Submitted for four by the Finance Act, 2012 w.e.f. 01-04-2010. 15. Before insertion of sec.201(3), there was no time limit for passing order u/s.201(1) of Income-tax Act, 1961 which resulted into controversies on the issue. The issue was addressed was addressed by the Hon ble Special Bench of Mumbai Tribunal in the case of Mahindra Mahindra Ltd. reported in 122 TTJ (Mumbai) Special Bench) 577. In that case, the Hon ble Special Bench in its order dated 09-04-2009 held that proceedings u/s.201(1) can be initiated within a period of six years from the end of the relevant Assessment Year if the income chargeable to tax in the hands of payee by virtue of sum paid within TDS is equal to or more than ₹ 1 lac, and four years if such amount is less than ₹ 1 lac and order u/s.201(1) has to be passed within one year from the end of the Financial Year in which proceedings u/s.201(1) are initiated. 16. In this case, the appellant claims that due to survey action in April, 2008, the proceedings were initiated in F.Y. 2008-09 and therefore as per the ratio of Hon ble Special Bench decision in the case of Mahindra Mahindra Ltd. (Supra), the TDS Officer was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conformity with sec.201(3) of Income-tax Act. Therefore, I don t find any substance in the argument of the appellant in this regard. Thus, additional ground is dismissed. 11. So far as the action of the TDS Officer in treating the discount offered by the assessee to their distributors as Commission and accordingly treating the assessee as an assessee in default u/s.201(1) r.w.s. 194H of the I.T. Act is concerned it was argued that discount allowed to the distributors by the assessee company is on account of principal to principal basis and not that of principal to agent. It was argued that under this arrangement, the transaction in all substantial respects is akin to sale and purchase of goods as it happens in FMCG sector. The discount extended represents the difference between the MRP of the talk time and prepaid connections and the price at which these are transferred to the prepaid distributors. Since no payment is made by the assessee to its prepaid distributors, the discount extended to the prepaid distributors is in the nature of trade margin and such discount cannot be termed as commission so as to attract the provisions of section 194H of the Income Tax Act. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 201 (1 )/20 1 (1 A) of the Act for the subject financial year is void-ab-initio- and bad in law since no show cause notice under section 201 of the Act was issued to the Appellant. Ground No.2 - Without prejudice to Ground No.1, the Appellant is not liable to deduct tax on discount extended to its pre-paid distributors on distribution of pre-paid SIM cards/talktime. 2.1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding the Appellant to be an 'assessee in default' for non deduction of tax at source on discount extended by the Appellant to the distributors of its pre-paid SIM cards/talktime and thus, holding the Appellant to be liable to pay tax under section 201 (1) and interest under section 201(1A) of the Act. 2.2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the relationship between the Appellant and the distributors of pre-paid SIM cards/talk time is not that of 'Principal to Principal' and the discount allowed to the distributors is in nature of commission liable for deduction of tax as envisaged under section 194H of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the survey was conducted for the purpose of TDS payment. At that time no time limit was prescribed for completion of the TDS assessment. Referring to the decision of the Special Bench of the Tribunal in the case of Mahindra and Mahindra Ltd. Vs. DCIT reported in 122 ITD 216 (Mum.) (SB) he submitted that the Special Bench of the Tribunal in the said decision has held that the maximum time limit for passing the order u/s.201(1) or 201(1A) is the same as prescribed u/s.153(2) being one year from the end of the financial year in which proceedings u/s.201(1) are initiated. Referring to the decision of the Hon ble Bombay High Court in the case of Director of Income Tax (IT) Vs. Mahindra and Mahindra reported in 365 ITR 560 he submitted that the Hon ble High Court has upheld the order of the Special Bench of the Tribunal and dismissed the appeal filed by the revenue. Therefore, the orders passed by the TDS Officer for the A.Y. 2007-08 is barred by limitation. 15. Referring to the statement of R. Narayanan, Manager (Accounts) of Vodafone Essar Cellular Ltd. recorded during the course of survey u/s.133A of the I.T. Act. on 23-04-2008, the Ld. Counsel for the assessee drew the attenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e initiated due to survey for both the years. The survey was conducted for the very same purpose. Specific questions were asked and notices u/s.131 were issued. The assessee furnished relevant details by May 2008. Therefore, when no show cause notice was issued for A.Y. 2007-08 and the order was not passed within the specified time of one year from the end of the financial year in which the proceeding u/s.201(1) is initiated, therefore, the order should be held as void ab-initio. 17. He submitted that for applicability of section 201(3) of the I.T. Act as inserted by the Finance Act, 2009 w.e.f. 01-04-2010, the law as on date of issue of notice has to be applied and in case the proceedings have become barred by limitation before 01-04-2010 then the proviso cannot come to the rescue of the Assessing Officer to save such limitation. For the above proposition the Ld. Counsel for the assessee relied on the decision of the Delhi Bench of the Tribunal in the case of ACIT Vs. M/s. Catholic Relief Services vide ITA No. 2742 and 2744/Del/2011 order dated 13-01-2012. He submitted that where no time limit is provided for passing/completion of the order then such order should be passed/comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts prepaid talktime/connections is on 'Principal to Principal' basis. Hence discount extended to the prepaid distributors constitutes trade margin and not 'commission or brokerage' to attract the provisions of section 194H of the Act. The margin is earned by the distributors in their independent capacity and not for acting for and on behalf of the assessee. He submitted that the discount allowed by the assessee is not income in the hands of its distributors and that income, if any, arises only when the prepaid talktime/connections are further distributed by the distributors. Therefore, provisions of section 194H of the Act which require tax deduction at source from any income by way of commission, cannot be held applicable to the facts of the case. 22. The Ld. Counsel for the assessee further submitted that the entire discount allowed by the assessee to the distributor cannot be considered as an income in the hands of the distributor since a part of discount is always passed down at each level of the distribution chain and hence the whole of the discount amount does not automatically become the income of the prepaid distributors. Therefore, tax deduction at sourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of payment of taxes by the payee/recipient of such discount. 26. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A) both on the issue of limitation as well as on merit. He submitted that survey is a different proceeding from assessment proceeding. Any survey u/s.133A is to collect evidence. Therefore, merely filing of the details cannot be considered as filing of all the details for all the years. He submitted that the Ld.CIT(A) has categorically observed that show cause notice u/s.201(1) and 201(1A) of the Act was issued for F.Y. 2007-08 for the first time on 20-01-2010. Although in the said show cause notice there is no mention of F.Y. 2006-07 but this will not make much difference in the sense that the assessee was made aware of the default in F.Y. 2006-07. Therefore, opportunity was provided by the TDS officer for A.Y. 2006-07 before passing the order for A.Y. 2007-08. 27. So far as the merit of the issue is concerned the Ld. Departmental Representative heavily relied on the order of the CIT(A). 28. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discounted rates to distributors is not commission and therefore not liable to TDS u/s.194H of the Act, therefore, the same should be followed. 31. We find merit in the arguments of the assessee. So far as A.Y. 2007-08 is concerned, we find it is an undisputed fact that show cause notice has not been issued to the assessee for the F.Y. 2006-07 relevant to A.Y. 2007-08. The finding given by the Ld.CIT(A) at page 14 of the order itself clarifies the same. The relevant observation of the CIT(A) reads as under : 16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In this case, it is seen that show cause notice u/s.201(1)/201(1A) of income-tax Act was issued for F.Y. 2007-08 for the first time on 21-01-2010. It is true that in the show cause notice there is no mention of F.Y. 2006-07, but this will not make much difference in the sense that the appellant was made aware of the default for F.Y. 2006-07 and accordingly, details of discount was provided by the appellant for F.Y. 2006-07. . . . . . . . . . . 32. Merely because the assessee has filed certain details for A.Y. 2006-07 it cannot be said that non issue of such notice will not make any differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butor 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 Ltd s case (Supra), where it was held 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. In that context it was held that, discount is nothing but a margin given by the assessee to the distributor at the time of delivery of SIM Cards or Recharge Coupons against advance payment made by the distributor. 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence 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 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 ₹ 20/- to the distributors and net value is ₹ 80/-. The assessee's sale is accounted at the gross value of ₹ 100/- and thereafter, the commission paid at ₹ 20/- is accounted. Therefore, in those circumstances of the case, the essence of the contract of the assessee and distributor is that of service and therefore, Section 194H of the Act is attracted. 61. However, in the first instance, if the assessee accounted for only ₹ 80/- and on payment of ₹ 80/-, he hands over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee sells the SIM cards 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. 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 and paying into the department, ultimately if the dealer is not liable to tax it is always open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. No decision of the jurisdictional High Court on this issue was brought to our notice. Since the facts of the instant case are identical to the case before Hon ble Karnataka High Court, therefore, respectfully, following the decision of Hon ble Karnataka High Court we hold that sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS u/s.194H of the I.T. Act. However, the Hon ble High Court while holding so has remitted the matter back to the assessing authority only to find out how the books are maintained and how the sale price and the sale discount is treated and whether the sale discount is reflected in their books. If the accounts are not reflected as set out above in para 60 of the order, section 194H is not attracted. Therefore, in line of the above observation of the Hon ble High Court we restore the matter to the file of the Assessing Officer for necessary verification. The grounds raised by the assessee are accordingly allowed for statistical purposes. 35. Identical grounds have been raised by the assessee for the remaining years wherein the assessee has challenged the order of the CIT(A) in upholding the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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