TMI Blog2020 (1) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 194H of the Act is not attracted. - Decided in favour of assessee. - ITA No. 3785/Mum/2016 - - - Dated:- 13-11-2019 - Shri Pawan Singh, Judicial Member And Shri Rajesh Kumar, Accountant Member For the Appellant : Shri Ronak Doshi with Shri C.D. Joshi (AR) For the Respondent : Shri S. Padmaja CIT-DR with Shri V.K. Agarwal (Sr DR) ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of ld. Commissioner of Income-Tax (Appeals)-59 [for short the ld. CIT(A)], Mumbai dated 22.03.2016 for Assessment Year 2012-13. The assessee has raised the following grounds of appeal: GROUND NO. I: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the TDS Officer of treating the Appellant as an assessee in default u/s.201 r. w.s 194H of the Act on the discount all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and failure of the TDS Officer to ascertain whether the recipient Prepaid Distributor have paid tax on the income, if any, from the Appellant, the order passed by the TDS Officer be quashed/set aside. WITHOUT PREJUDICE TO ABOVE GROUNDS: GROUND NO. III: LEVY OF INTEREST UNDER SECTION 201(1A) OF THE ACT. 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the order of the TDS Officer in holding the Appellant as assessee in default under section 201(1) of the Act and thereby levying the interest under section 201(1A) of the Act. 2. The Appellant prays that the interest levied under section 201(1A) of the Act be deleted or be appropriately reduced. 2. The facts of the case in brief are that assessee is a company engaged in providing Cellular telephone services for prepaid and post paid to its customers. A survey under section 133A of Income tax Act (Act) was conducted at the premises of the assessee on 09-09-2011 at Santaruz (E), Mumbai. During the course of survey, it was found that assessee; in the course of its business the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny retailers which are appointed by distributors at their own discretion and no control is exercised by the assessee. The terms and conditions between the distributor and retailer are decided between them. The distribution network is not different from the normal trade practice where the manufacturers appoint distributor or wholesaler and gives them an attractive discount on maximum retail price. The wholesaler would then sell goods to the retailer and the retailer to the consumers accordingly just like discount given by manufacturer in the course of their business and ultimately the same cannot be considered as commission. Similarly in assessee s case, the discount given to distributor which is on the same footing cannot be considered as commission. The agreement entered into by assessee with distributor, does not make the distributor its employee, agent, associate of the assessee for any purpose. The Ld.AR of the assessee submits that on similar set of facts, various Tribunals and High Courts held that where assessee, in the business of providing mobile telephone services, sold prepaid vouchers to its distributors at the rate lower than the face value, the differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Ltd vs ACIT- 60 taxmann.com 214, Bharti Hexacom Ltd vs ITO (TDS) in ITA No.656/JP/2010 order dt June 12, 2015, ACIT vs Bharti Hexacom Ltd in ITAs No.830 to 833/JP/15, order dt April 18,2016 8. The ld.AR in all fairness submitted that the Delhi High Court in CIT vs Idea Cellular Ltd 325 ITR 148 (Del), Kerala High Court in Vodafone Essar Cellular Ltd vs ACIT 232 ITR 255(Ker) and Calcutta High Court in Bharti Cellular Ltd vs ACIT decided the issue against the assessee. The Ld.AR submits that there is no decision of jurisdictional High Court on the similar issue. It was further submitted that Karnataka and Rajasthan High Courts, after considering the decision, which are against the assessee held the issue in favour of the assessee in Bharti Airtel 372 ITR 33 (Kar), Idea Cellular 402 ITR 439 (Raj). 9. The Ld.AR finally submits that since no decision of jurisdictional High Court is available on the issue so far, the decision favourable to assessee must be considered as per the decision of Hon ble Supreme Court in CIT vs Vegetable Products 88 ITR 192(SC). 10. On the other, the Ld. DR for the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 (Kar), has observed as follows:- 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that what is sold by the assessee is air time, whether through the physical vouchers or through the electronic transfer of refill/recharge value, to its distributors. It is this transaction which is subject-matter of different perceptions, so far as tax withholding obligations of the seller are concerned, of the parties before us. As a matter of fact, the assessment order itself states that the assessee has sold the prepaid vouchers, of various 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 I94H will come into play in respect of the difference between the price at which the air time is thus sold to the distributors and its recommended retail price to the end consumers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may sell the SIM cards to the retailer and it is the retailer who sells it to the customer. The profit 86 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 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 insofar 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 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' r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 issue has been decided against the assessee by, amongst others, Hon'ble Kerala High Court, in the case of Vodafone Essar Cellular Ltd \. Asstt- CIT [2010] 332 ITR 255/194 Taxman 518. The same approach has been adopted by some various other Hon'ble non-jurisdictional High Courts as well, such as in the cases of Bharli Cellular Ltd. \. Asstt. CIT [2013] 354 ITR 507/[2000] 200 Taxman 254/12 taxmann.com 30 (Cal) and CITv. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118 (Delhi!. In the case of Vodafone Essar Cellular Ltd (supra) Their Lordships have, inter alia, 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 Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mobile subscribers to the service provider namely, the assessee. Even though the assessee has contended that the relationship between the assessee and the distributors is principal 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 assessee and only through distributors and retailers appointed by them assessee gets subscribers for the mobile service. Assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed 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. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he higher tiers of judicial hierarchy. In the case of Assistant Collector of Central Excise v. Dunlop India Ltd, ( 1985) 154 ITR 172 (SC), Supreme Court has observed, quoting the House of Lords, as follows; 'We desire to add and as was said in Cassell Co. Ltd. v. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that in the hierarchical system of Courts which exists in our country, it is necessary for lower tier , including the High Court, to accept loyally the decisions of the higher tiers . It is inevitable in a hierarchical system of Courts that there 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 v. 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 question whether the non-jurisdictiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that for that reason, the Tribunal was not right in following the judgment 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 CfT 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 such . 5. In our opinion, the Tribunal of another State would be justified in proceeding on the basis that the provision has ceased to exist because it has been declared as ultra vires by the High Court only when there is some material to show that the said decision has been accepted by the Department........ (Emphasis supplied) 14. A little later, however, while dealing with a materially similar situation, in the case of CIT v. Maganlal Mohanlal Panchal (HUF) [1994] 210 ITR 580 (Guj). vide judgment dated 1st September, 1994, Their Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment over the views of the Hon'ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. Of course, when the matter travels to Hon'ble jurisdictional High Court, Their Lordships, being unfettered by the views of a non-jurisdictional High Court, can take such a call on merits. That exercise, as we understand, should not be carried out by us. 18. The choice of which of Hon'ble High Court to follow must, therefore, be made on some objective criterion. We have to, with our highest respect of all the Hon'ble High Courts, adopt an objective criterion for deciding as to which of the Hon'ble High Court should be followed by us. We find guidance from the judgment of Supreme Court in the matter of CIT v. Vegetable Products lid. [1973] 88 1TR 192. 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 Lordships specifically stated so in so many words, it has been consistently followed for the interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interpretations of the related legal and factual situation. Viewed thus, when there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted by us. In other words, Hon'ble non-jurisdictional High Court's judgment in favour of the assessee. in the light of this legal principle laid down by Supreme Court, is to be preferred over the Hon'ble non-jurisdictional High Court not favourable to the assessee. In our humble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr.No. Disclosure in the Agreement as highlighted in the Hon ble Karnataka High Court s judgement relevant extracts Corresponding clause in the agreement of the assessee with its prepaid distributors 1. The agreement stipulates that the distributors have to represent to the customers that the distributor s agreement with the customers / its dealers is on Principal to Principal basis and assessee is no way concerned or liable to the customers / dealers of the Distributor 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 guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the service tickets. No request of refund of any money shall be entertained by the assessee in any circumstances (Clause e-Annexure I). 7. Distributors are even prevented from making any representation to the retailers unless authorized by the assessee . The distributor shall not make any promises or representations or give any warranties or guarantees in respect of the products (i.e. SIM card and prepaid vouchers)(Clause 1 i.e. Annexure III). 24. In the light of the above discussions, and particularly as there is no dispute that 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 Airtel'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 basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the transaction value, this aspect of the matter is to be verified by the Assessing Officer, and in case the sales is accounted for at the face value, to that extent, the tax withholding liability is to be sustained, 25. Ground No. 1 is thus allowed in the terms indicated above. 13.In view of the aforesaid discussions, we find that the facts and circumstances in the present case are pari materia with the case decided by the Ahmedabad Tribunal. Therefore, respectfully we have no hesitation in following the decision of the Ahmedabad Bench of the Tribunal in Vodafone Essar Gujarat Ltd vs ACIT, TDS Circle, Ahmedabad (supra). We have also noted that the coordinate bench of Ahmedabad Tribunal has considered the distributor agreement executed between the assessee and its distributors. We have further noted that there is no decision of jurisdictional High Court available on the issue, nor it is brought to our notice by ld. DR for the revenue, therefore, as per law laid down by Hon ble Supreme Court in CIT Vs Vegetable Products 88 ITR 192(SC), that in view of conflicting decision of non-jurisdictional High Court, the view favourable to the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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