TMI Blog2017 (11) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... e prepaid recharge coupons at a price of its/ his choice but not exceeding MRP determined by the assessee. We also find that all the risks & rewards attached with the product were shifted to the distributor. Thus we hold that there was no agreement between the assessee and the distributor as of principal and agent. under the post-paid connection there are certain services rendered by the assessee such as collection of documents for proof of identity, delivery of SIM cards, collection of charges etc. Against these services the distributors are paid the amount of agreed commission by the assessee after deducting TDS u/s 194H of the Act. As we find that in case of prepaid connection the recharge coupons are sold to the distributors on outright sale basis at a discounted price. The amount of discount is not recorded in the books of accounts. Therefore we hold the transaction between the assessee and prepaid distributor for recharge coupons is nature of sale & purchase. Thus amount of discount cannot be equated with the commission as envisaged under section 194H of the Act. the provisions of TDS under section 194H of the Act are not attracted on the sale of recharge coupons for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Income Tax Officer ('TDS officer') is bad in law 1.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating the ground of appeal that the Appellant cannot be held as an ' assessee in default ' in view of the provisions of section 201(1) read with section 191 of the Act and the judgment of Jagran Prakashan Limited Vs DCIT (TDS) (21 Taxmann.com 489) (All HC), as there is no finding by the learned TDS officer with respect to the failure of the pre-paid distributors to pay tax directly, which is a jurisdictional pre-requisite. 2. Ground No. 2 - Without prejudice to Ground 1, the Appellant is not liable to deduct tax on discount extended to its pre-paid distributors on transfer of right to pre-paid service 2.1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the contention of the learned TDS officer that the Appellant is to be treated as an assessee in default ' for nondeduction of tax at source under section 194H of the Act on discount extended by the Appellant to its pre-paid distributors on transfer of right to pre-paid service during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exacom Ltd [2013] (33 taxmann.co n 210) (Delhi IT A T) and Idea Cellular Limited (ITA Nos. 356, 357, 358, 359/JP/2012, 326, 327,328 329/JP/2012) (Jaipur ITAT), where on similar facts the issue of non-applicability of withholding tax provisions under section 194H of the Act on discount extended to pre-paid distributors has been decided in favour of the Appellant. Hereinafter all the grounds are without prejudice to Grounds 1 and 2. 3. Ground No. 3 - No interest under section 201(lA) of the Act can be charged 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding interest under section 201(1)(1A) of the Act for Quarters I, 2 and 3 of the subject year even though the tax demand under section 201(I) of the Act for these quarters has been deleted by him on the basis that the same is time barred and hence the Appellant is not an assessee in default in respect of these quarters. 3.2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding levy of interest under section 201(1A) of the Act. 4. Ground No. 4 - Levy of penalty under section 221 of the Act 4.1. On the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connections. 5.1 In this regard the assessee took the stand that the act of selling the recharge coupon to the subscribers is a transaction of sale. Such transaction between the assessee and the distributors was on principal to principal basis. The distributor was authorized to sale the recharge coupon to its retailers at any price not exceeding the MRP. Similarly, the retailers were authorized to sale the recharge coupons at any price but not exceeding the MRP as evident from clause 7 of the agreement between the assessee and distributors. Therefore, the transaction of sale of the recharge coupons through the distribution network was outside purview of TDS provision. It is because the act of selling the coupons through the distributors is merely a contract of sale. However, AO further observed certain facts as enumerated below : 1. The definition of commission provided u/s 194H of the Act is inclusive which may be received directly or indirectly. Thus in the present case the distributors on the purchase of prepaid talk time immediately gets the discount from the MRP amount which is nothing but commission. The distributor on further sale of the recharge coupons realizes the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and after making verification as it may deem fit, replace any unused non-working refill slips ( physical or electronic Stock). [clause e to annexure I] * Promptly inform the company of any facts or opinions of which the Distributor becomes aware likely to be relevant in relation to the commercial exploitation of the Service Tickets and which are advantageous or disadvantageous to the interests of VESL . [clause I )f) to annexure III] * Not during the continuance of this Agreement [and for the period of 1 year after its termination] (whether alone or jointly and whether directly or indirectly) be concerned or interested in marketing, distribution or sale of any products which are similar to or competitive with any of the Service Ticket or which perform the same or similar functions; [clause 1 (i) to annexure III] * Use VESL s trademarks and trade names relating the Service Tickets only in the registered or agreed style in connection with the marketing and sale of the Service Tickets and shall not use such trademarks or trade names in connection with any other products or services or as part of the corporate or any trade name of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in view of above held that discount offered by the assessee is nothing but the commission in terms of provision of Sec. 194H of the Act. Accordingly, the AO treated the assessee as defaulter for not deducting TDS for an amount of ₹ 5,79,82,781.00 being 10% of ₹ 57,98,27,810.00 u/s 194H of the Act. 6. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the relationship between assessee and its distributors are based on principle-to-principle basis and but there was no payment made by assessee to its distributors in the name of commission rather, the distributors were making payment to assessee for the purchase of prepaid talk time coupons. As such, there was no element in the impugned transaction attracting the provision of sec. 194H of the Act. The impugned transaction between assessee and its distributors were in the nature of sale of goods. The distributors were not agent of assessee. However, Ld. CIT(A) disregarded the claim of assessee after having reliance on the judgment Hon ble jurisdictional High Court in the case of Bharati Cellular Limited Vs ACIT reported in 354 ITR 507 (Cal) by observing as under:- 6.2 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prepaid coupons to the retailers the franchisee is to make payment of sale proceeds to the assessee after deducting a discount of ₹ 7 per SIM card. Thus this receipt of discount @ ₹ 7 is in real sense commission paid to the franchisees. Hence all the trappings of liability as agent, of the franchisee towards assessee subsists. There has been indirect payment by the assessee to the franchisee of the commission and the same is attractable under s. 194H.-CIT vs. Idea Cellular Ltd. (2010) 230 CTR (Del) 43 : (2010) 35 DTR (Del) 219 : (2010) 325 ITR 148 (Del) and Vodafone Essar Cellular Ltd. vs. Asstt. CIT (2010) 235 CTR (Ker) 393 : (2010) 45 DTR (Ker) 217 : (2010) 194 Taxman 518 (Ker) concurred with; Ahmedabad Stamp Vendor Association vs. Union of India (2002) 176 CTR (Guj) 193 : (2002) 257 ITR 202 (Guj) distinguished. (Paras 25 26) The ld. AR further fairly agreed that the Hon ble jurisdictional High Court in the case of Hutchison Telecom East Limited Vs. CIT reported in 375 ITR 0566 (Cal) has decided the issue against the assessee by observing as under:- The terms and conditions noticed above leave no manner of doubt that the relationship between Podd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide reports on customers, expenses, purchases, inventory, compliance and any other relevant details in the format and as required by HTEL; ( i) Make payment to HTEL for any amounts due under this Agreement by way of Account Payee cheque or Banker s Draft or in such other manner as HTEL may agree; ( j) Pay all license fees, taxes, duties, service tax and any other charges, assessments or penalties whether statutory or otherwise levied by any authority in connection with providing the Services; ( k) Pay the Service tax to HTEL as may be assessed and levied from time to time. ( l) While this Agreement is in force, not enter into agreement with any other party where such party could be considered to be a competitor to the Business; ( m) Ensure that all its staff deal with the customers in a friendly and courteous manner and comply with all guidelines issued by the Service provider or HTEL; and ( n) Comply with all other instructions and directions to be issued by HTEL from time to time as considered necessary to further the sprit and objects of this Agreement. ( o) Comply with requirement of the law, in forces at the relevant time incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant time and on payment terms as may be communicated to the Service Provider by HTEL form time to time. The above agreement clearly shows that there was an agency agreement between the erstwhile assessee and its distributor. Therefore there was no ambiguity to the applicability of the provisions of TDS under section 194H of the Act. 8.2 However the present assessee has modified the agreement with its distributors and its relevant clauses of the agreement with M/s Rajsikha Communication, one of the distributors, for prepaid business model w.e.f. 21st April 2009 on sample basis are reproduced below:- 2. APPOINTMENT VESL hereby appoints the Distributor, and the Distributor hereby agrees to operate as distributor in accordance with the terms and conditions contained herein. The parties acknowledge that such appointment is non-exclusive and that VESL may, in its sole discretion, establish other Distributor/associates an appoint such other persons in this behalf. 3.SALE AND PURCHASE OF THE SERVICE TICKETS 3.1 The sale and purchase of the Service Tickets a between VESL and the Distributor shall be governed by VESL s standard terms and conditions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taff on service knowledge and updates. ( g) Provide and maintain an up-to-date list of the Service Tickets and/or suppliers from which the Distributor may purchase Stock and/or accessories; 6 .TRAINING 6.1 VESL shall provide training in the use, installation and rendering of after-sale-services in respect of the Service Tickets to the Distributor and its personnel, wherever required. 6.2 Any additional training required by the Distributor shall be provided by VESL in accordance with is standard scale of charges in force from time to time. 6.3 The Distributor shall offer training in the use of the Service Tickets to all its customers on commercially reasonable terms. 7. C ONSIDERATION 7.1 In consideration of the Distributor fulfilling its obligations contemplated under this Agreement, VESL shall sell to the Distributor, the Service Tickets at rate ( Distributor Price ) as may be communicated to the Distributor by VESL from time to time. Distributor Price here means the price of the Service Tickets offered by VSL to the Distributor, from, time to time. 7.2 VESL shall, from time to time, declare the Maximum Retail Price of the Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nty or guarantee (express or implied) in respect of any of the Service Tickets unless otherwise expressly mentioned on the Service Tickets. ANNEXURE-II Responsibilities of the Distributor in respect of e-stock: The Distributor hereby agrees and confirms as follows: ( i) The e-Stock shall be purchased by the Distributor form VDSL as per the standard terms and conditions of sale of VESL as set out in the Annexure-I . ( ii) VESL shall, on receipt of a valid purse order accompanied with the payment in full for such order, transfer the e-Stock to the Distributor s account, of such denomination s and such quantity as specified by the Distributor in the purchase order. ( iii)The Distributor shall confirm the receipt of the e-Stock and verify the specifications of denominations and quantity of e-Stock. In case of any variation in the e-Stock and in the specifications of the purchase order, the Distributor shall forthwith inform VESL in writing by facsimile about such variations. ( iv) Once VESL receives confirmation from the Distributor acknowledging receipt of thee-Stock to its account as per the purchase order of the Distributor, VESL sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the Hon ble High Court is placed on pages 1 to 13 of the paper book. The relevant clauses of the agreement have already been discussed in the preceding paragraphs and the same are not reproduced herewith for the sake of brevity. 8.4 Further, Ld. AR submitted that the Hon ble Karnataka High Court in the case of Bharati Airtel Limited Vs. CIT ANR reported in 372 ITR 0033 for the AYs 2005-06 to 2008-09 where the Vodafone Essar South Limited was also a party to the judgment has decided the issue in favour of assessee after considering the new agreement as discussed above by observing as under:- Assessee 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 was not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee and the distributor is not that of principal and agent but it was that of principal to principal. The ld. AR also drew attention by submitting that the Hon ble Rajasthan High Court in the case of various assessee s where the assessee was also a party has decided the issue in favour of assessee on the identical facts circumstances in ITA No. 1/2014 ITA No. 4/2014 vide order 11/07/2017. The Hon ble Court also considered the judgment in the case of Hutchison Telecom East Limited (Supra). The relevant extract is reproduced below:- 42. He has also relied upon the decision of Calcutta High Court in the case of Hutchison Telecom East Ltd. Vs. Commissioner of Income-Tax- (2015) 375 ITR 566 (Cal) 2. In consideration of the service to be rendered by him, he shall get a commission at the rates as per the policy to be adopted by the assessee from time to time. 13. The terms and conditions noticed above leave no manner of doubt that the relationship between Poddar Communications and the assessee appearing from the agreement relied upon by Mr. Khaitan is that of an agent and principal. Poddar Communications appears to have been employed to act on behalf of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation is taken into consideration, there is no occasion of invoking provisions of Section 194H, since the amount is not paid by the assessee. 47. Taking into account the conclusion which has been arrived at by the Tribunal is misdirected in view of the arrangement which has been arrived at between the company and the Distributor. Assuming without admitting, if the contention which has been raised before the Tribunal is accepted, the same can be at the most expenses which are not allowable under the Income Tax Act, if at all claimed without proper basis but to conclude that they are covered under Section 194H and the income tax or the TDS is required to be deducted is not correct and accordingly disallowance on that basis is not correct in our considered opinion, from which amount of tax is to be deducted is a doubtful proposition inasmuch a the Management Information Scheme which has been sought to be relied upon for alleging that expenditure has been claimed could not have been relied upon by the Tribunal or the authorities under the Income Tax Act. ( i) The findings which are given by the Tribunal regarding Distributor being Agent in view of the discussion made h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is always for the se to allow any special allowance or expenses to promote the sale. In a competitive world to promote the sale, if the Distributor is not given any encouragement, the business will not grow. In that view of the mate, in view of the observations of the Supreme Court, the Income Tax Officer cannot enter into the shoes of the assessee. (S.A. Builder Vs. Commissioner of Income Tax- (2007) 288 ITR 1 (SC) ( x) Regarding providing a vehicle it was very clear that by providing vehicle and getting list of expenses will not decide the relation-ship of Principal and Agent. 48. In our considered opinion, Section 194H pre-supposes the payment to be made to the third party namely, Distributor or the Agency and if on a close scrutiny of Section 182, Distributor is not an agent, therefore in our considered opinion, the provisions of Section 194H have wrongly been invoked, and therefore, the first issue is answered in favour of assessee and against the Department. In view of above the ld. AR prayed that the provisions of section 194H are not applicable to the present case and therefore there is no default committed by the assessee for non deduction of TDS. The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bile connections and post paid mobile connections are different. In case of post paid connections the assessee is paying commission to the distributors against certain services rendered by them and therefore the TDS was being deducted. Thus according to the AO the TDS provisions should have also been applied to the discount offered by the assessee to the distributor of the prepaid connections which in our considered view was based on wrong assumptions of facts. In this connection, we find that under the post-paid connection there are certain services rendered by the assessee such as collection of documents for proof of identity, delivery of SIM cards, collection of charges etc. Against these services the distributors are paid the amount of agreed commission by the assessee after deducting TDS u/s 194H of the Act. However, we find that in case of prepaid connection the recharge coupons are sold to the distributors on outright sale basis at a discounted price. The amount of discount is not recorded in the books of accounts. Therefore we hold the transaction between the assessee and prepaid distributor for recharge coupons is nature of sale purchase. Thus amount of discount ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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