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TMI Blog2022 (12) TMI 692X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, under Segment Reporting which is part of its Annual Report at point 16 on page 77, service revenue on prepaid products on the 'Income From Services" at Rs. 10695,60,00,000/- was shown. On this, the assessee company was incurring expenditure on account of discount to prepaid distributors and franchises. The assessee company had shown this figure after netting off the discounted amount. It was asked to provide the details of discount given to distributors/franchisee but the same were not provided. As details of discount given to the distributors/franchisers were not provided, the discount given was estimated @ 5% i.e. Rs. 534,78,00,000/-. After detailed enquiry and verification of records, it was ascertained that the discounts given by the assessee to its distributors and franchisee was of the nature of commission and was liable to TDS u/s 194H for the allow-ability of the same as revenue expenditure. Reliance on the decision of Delhi High court in the case of Idea Cellular was placed wherein the relationship between the assessee, who was also a telecom service provided like the assessee in the present case, and the distributors was held to be one of principal to agent. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from prepaid services at a net figure after reducing a discount given by it to the distributors / franchisees of its prepaid Sim Card and Recharge Vouchers. During course of reassessment Ld. AO directed the appellant to submit as to why said discount should not be treated as a commission paid to distributors / franchisees on which tax was deductible as per provisions of section 194H of the Act. In reply it was submitted by the appellant that the distributor margin is in nature of "discount" and not "commission" which would triger applicability of section 194H. It was further submitted that the relationship between BSNL and Distributors / Franchisees was on principal to principal basis and hence TDS was not deductible. In support of its claim the appellant relied upon the decision of Karnataka High Court in the case of Bharti Airtel Ltd. reported in 372 ITR 33 (Kar). The Ld. AO, however, was not convinced by the submissions made by the appellant and in his order of assessment he rejected the claim of the assessee by, observing as under:- "The submissions of the assessee have been considered and are discussed here under :- The assessee's contention that that distributor margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of the amounts from which taxes have not been withheld. The provisions regarding interest in delay in depositing the taxes are set out in Section 201 (1). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned these provisions are set out in Section 201 (1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deduction. However the question of making the loss of revenue arise only when there is indeed a loss of reveue can be there only when recipient of income has not paid tax." to the effect The ITAT observed that there is no finding by the AO to the effect that the embedded in the amounts in question. It held that for raising demand u/s. 201 / 201 (A) r.w.s 194H, the AO had to prove that the principal liability (of payment of tax by the distributor/ franchisees) remained undischarged and therefore sent the matter back to the file to the AO for reconsideration. Perusal of the above shows that, in fact, the wrong ITAT's order reaffirms that the assessee was under an obligation to deduct tax at source u/s. 194H in respect of the discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 185 (Cal) and Vodafone Esaar Cellular Ltd. vs. ACIT (2009) 317 ITR (AT) 234 (Cochin), I hold that the discounts allowed and incentives given by the appellant to its Franchisees on sale of its products is in nature of commission and the same attracts the provision of section 194H of the Act. During appellate proceedings the Id. AR has quoted the judgment of Karnataka High Court which is in favour of appellant It would be pertinent to state that the said judgment has not been accepted by Revenue and the judicial pronouncement has been contended before the Supreme Court The SLP proposed by Revenue has been admitted by the Apex Court which proves that the issue is alive and debatable. Considering all these facts, Ground No.3 is dismissed." 9. Aggrieved, the appellant is now in appeal before us. At the outset, it was submitted by the Id.AR that the decision of Hon'ble Delhi High Court in Idea Cellular (supra) is distinguishable both on facts and in law. In this regard, it was submitted by Ld. AR that a true and correct appreciation of relationship between appellant and its distributors in the instant case demonstrates that the said relationship is principal to principal and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated between the subscriber and the assessee that too by entering into specific agreement between these, two parties. ... 24. In contrast, the legal position when the goods are sold by principal to its distributors creating 'principal and principal of relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. v. Union of India AIR 2006 SC 1383, the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof Sales Tax Act is not attracted, though the decision was rendered in the context of liability of sales tax." The vital fact which Hon'ble juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to the distributor or from the distributor to the. ultimate consumer.. Therefore, the SIM card, on its own but without service would hardly have any value. A customer, who wants to have its service initially, has to purchase a sim- card. When he pays for the sim-card, he gets the mobile service activated. 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 subdistributors who in turn may sell it to retailers. It is a wellsettled proposition that if the property in the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H. 12. The above finding given by us would however, not automatically act as an accomplished fact vis a vis the issue of disallowance u/s. 40 (a) (ia). There is however another aspect of the matter before us. Ld. AR argued that benefit of bonafitie cause be granted to the appellant since provisions of section 40(a)(ia) are penal in consequences. We find substantial merit in this alternative claim made by the appellant. We find that appellant deserves benefit of bonafide belief premised on the following facts; (i) As is apparent this is an issue on which divergent views have been expressed by two different High Courts in our country. We have been apprised that the issue is also currently pending disposal before Hon'ble Apex Court. (ii) In case of appellant itself for AY 2009-10 i.e the assessment year under consideration, Hyderabad Bench of ITAT (supra) has held as under: "8. The Learned Departmental Representative relied upon the decision of the ITAT Kolkata Bench in the case of Asstt. CIT v. Bharti Cellular Ltd. 12007] 105 ITD 129 and Delhi High Court in the case of CIT v. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118. Whereas this decision was already considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque, or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent: Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees." We find merit in the submissions made by Ld AR that third proviso to section 194H will get attracted only when the nature of payment is "commission or brokerage", Parties before us agree that majorly the distribution of products by BSNL and MTNL takes place through public Call Office franshisees since this was an infrastructure existing with an infrastructure existing with them even before mobile telephone services became popular. Moreover, as upheld by Hon'ble Punjab & Haryana High Court in the case of appellant itself (supra) that "...... the above extracts from the Board Circular woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nai, which shall carry the call upto the limits of the Chennai telecom services area and at the point, shall hand over the call to the national long distance ('NLD) service provider. * The NLD services provider carries the call upto ILD gateway of BSNL and hands over the call to BSNL * The call is then carried by BSNL on its ILD network upto its ILD gatesway outside India (say US), where the call is handed over to a Non-resident Telecom Operator (NTO)for carriage of the call beyond the ILD gateway of BSNL outside India and termination of the same at the destination location outside India (last leg of the communication channel). In many cases, local services provider and NLD provider could be BSNL only. " xxxxx "17. We have carefully considered the facts of the case and the material available on record and we find that the issue in dispute is directly covered by the decision of ITAT in case of Bharti Airtel Limited (supra), in that case coordinate bench of this court after deep 'examination of the issue i.e after considering and going through the process of providing roaming services; examination of technical experts and its cross examination and also opinion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Inter-connected Usage Charges(lUC) to Foreign Telecom Operators (FTOs) in connection with its ILD telecom service business - Payment in question did not accrue or arise to 'FTOs' in India - Entire business operations were carried out outside India by FTOs - FTOs also did not have any Permanent Establishment in India - Whether thus no income could be deemed to accrue or arise to ETO's in India and hence under article 7 also income could not be brought to tax in India -Held, yes - Whether further in absence of permanent establishment of FTOs in India, payment of 'IUC' to FTO could not be deemed to accrue or arise in India payment of 'IUC' to FTO could not be deemed to accrue or arise in India under any of clause of section 9 (1) read with section 5(2) - ' Held yes {paras 74 & 78} in favour of the assessee. To the similar effect are other decisions cited by Ld. AR. The CIT (DR) has not been able to controvert the fact that the issue in dispute is no more resintegra considering the above binding precedents. Moreover, a perusal of sample agreement for payment of IUC charges between BSNL and Cable & Wireless UK in the instant case also clearly shows that a standard fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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