TMI Blog2010 (2) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... provided. The operational features explained by the assessee-company are necessary in running a mammoth system of providing mobile telephone services over a large geographical area. The distributors provide essential services to the assessee-company in running such a huge operational system. The distributors are linking agents in the chain of delivery of services to consumers. Therefore, the relationship is not of a principal to principal – Assessee is liable to deduct TDS – Decision in favor of revenue – against the assessee - 145 of 2009 with 784 of 2009 - - - Dated:- 19-2-2010 - Mr. Justice A.K. Sikri and Mr. Justice Siddharth Mridul, JJ. Appellant through: Ms. Rashmi Chopra, Advocate. Respondent through: Mr. Farookh Irani with Mr. Satyen Sethi and Mr. Johnson Bara, Advocates. A.K. SIKRI, J. 1. These appeals were admitted on the following question of law: "Whether on a true and correct appreciation of the relationship between the assessee and its distributors, the learned Income Tax Appellate Tribunal erred in holding that the payments paid by the assessee is not commission as envisaged under Section 194H of the Act?" This question has arisen for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales reports return and other information relating to business. ICL representative could inspect the things or material of the business which were the subject matter of the agreement. Further, Minimum Performance Targets for the distributors were also set by the company and reserved the right to terminate the agreement unilaterally. On the basis of these facts and the types of control exercised by ICL on its prepaid distributors, the Assessing Officer came to the conclusion that transaction with ICL and prepaid distributors were that of Principal and Agent at all times and prepaid distributors were selling a prepaid SIM Card/recharge coupon on behalf of the ICL. Consequently, amount of discount offered to prepaid distributor was in nature of commission and liable to tax deduction at source under Section 194H of the Income-tax Act. He accordingly treated the assessee as defaulter Under Section 201(1) and charged interest under Section 201(1 A) on amount of commission so paid by the assessee. 3. The assessee preferred appeals before the CIT (A), but was unsuccessful, as its appeals were dismissed. However, it has succeeded in further appeals preferred before the Income Tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ownership on prepaid simcard/recharge coupons remains with the assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of principal and agent, there was no need for recovery of processing fee for replacement of cards destroyed or become unusable. In case of a contract of agency the agents acts on behalf of the principle and no question arises for seeking the compensation from the agent in case of loss of property due to natural calamity or occurrence or circumstances beyond the reasonable control of the agent. The agent is required to protect the interest of his principal as a man of ordinary prudence. Another contention of Revenue that Clause 8 of the agreement debars the PMA to enter into agreement with other parties for similar telephony services and therefore he is not to act independently. In our view the restrictions prescribed in Clause 8 deals with the competitors of the assessee. Such terms and conditions are generally found in commercial agreements. Clause 9 provides for appointment of retailer by PMA. Further Clause 10 deals with the price at which PMA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 ten per cent. (2) The provisions of sub-section (1) shall not apply - (a) To such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue, by notification in the Official Gazette 1747e , specify in this behalf; (b) Where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees. Explanation : For the purposes of this section, - (i) "Commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices provided by the assessee to its ultimate consumers through the medium of these distributors called "Prepaid Marketing Associates (PMA)". It was clear that these distributors were only agent and link between the assessee and the ultimate consumers. She highlighted the nature of the transaction by pointing out that a subscriber uses the cellular telephone network through a card called Subscriber Identification Module (SIM Card). Prepaid or postpaid connections are provided to the subscriber. In this case, the prepaid services are termed as Idea Chitchat Prepaid. For rendering its services to the subscriber, the company appoints distributors called "PRE PAID MARKET ASSOCIATES (PMAs)". ICL also appoints I-CAPs to promote its chitchat prepaid services. The main duty of I-CAP is to obtain subscribers of SIM cards and activate them. In short, sometimes I-CAPs are directly appointed by the company and not through its PMAs. The assessee company offers discounts on prepaid calling services to its distributors. No breakup, however, has been given for the discounts offered on prepaid calling services to PMAs and I-CAPs. The break-up is, however, available for discounts offered on Starter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M cards. The discounts were, therefore, in the nature of "commission" or "brokerage" to the PMAs by the assessee. 10. She further submitted that since the expression "commission" or "brokerage" was not given in statutory definition under the Act, one had to take into account the expression as judicially defined. She referred to these definitions, which are even taken note of by the AO. She also argued that after the purchase of SIM card by the ultimate consumers, legal relationship between the said consumer/subscriber and the assessee, is created in the entire deal. She also heavily relied upon the decisions rendered by the Cochin Bench of the Tribunal in the case of Vodafone Essar Cellular Ltd. Vs. Assistant Commissioner of Income Tax [(2009) TIOL-630-ITAT-Cochin, decided on 30.04.2009] in addition to more judgments of other Benches of the Tribunal. 11. Mr. Farookh Irani, learned counsel who appeared on behalf of the assessee, countered the aforesaid submissions by making a passionate plea that the approach of the Tribunal is perfectly justified and it was permissible for the Tribunal not to take myopic view of the matter on the basis of trivial aspects of the agreement poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal (Section 213 of the Indian Contract Act). The agent is obliged to pay to his principal the sale price of the goods, which he sells on behalf of his principal (Section 218 of the Indian Contract Act). 14. The learned counsel argued that on the contrary, following factors indicated that the relationship between the assessee and its distributors was one of the "principal and principal" in view of the following factors emerging on record: (i) The transaction between the respondent and its distributor is one of sale. (Clauses 10, 19 and 25(d) of the PMA Agreement) (ii) The distributor makes payment to the respondent upfront. (Clause 6(a) of the PMA Agreement. (iii) There is a specification of the price t which goods are transferred by the respondent to its distributors. (Clause 10 of the PMA Agreement) (iv) The distributor has freedom to sell at his own price. (Clause 10 of the PMA Agreement) (v) The distributor is not liable to account to the respondent for the price at which he effects the sale to the retailer/subscriber. (Clause 10 of the PMA Agreement) (vi) The distributor is not liable to pay to the respondent the price at which he effects the sale to the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred." Section 182 of the Indian Contract Act reads as under: "An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom said act is done, or who is so represented, is called the principal." 17. The legal position is explained by the AO in his order reproducing the definition of "commission" in various law disctionary, about which there cannot be any quarrel, is as under: " "Commission" has been judicially defined by Davey L. Jas as follows :- "Commission is prima facie the payment made to an agent for agency work, usually according to a scale, it may be on ad valorem scale, but not necessarily on ad valorem scale. It is the most general word that can be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and renders himself, that is, the principal, liable to be sued directly by the third parties. - Varsha Engg. (P.) Ltd. v. Vijay Traders AIR 1983 Guj. 168 at pages 168-169, para 5. (ii) The person who purports to enter into a transaction on behalf of the principal would have the power to create, modify or terminate contractual relationship between his principal, that is, the person whom he represents, and the third parties. - P. Krishna Bhatta v. Mundila Ganapathi Bhatta AIR 1955 Mad. 648 at page 651, para 36. (iii) An agent, though bound by instructions given to him by the principal does not work under the direct control and supervision of the principal. The agent thus uses his own discretion to act on behalf of the principal subject to the limits to his authority prescribed by the principal - Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad : [1954]25ITR449(SC) . This cited with the approval in Qamar Shaffi Tyabji v. Commissioner of Excess Profits Tax : [1960]39ITR611(SC) . (iv) There is no necessity of a formal contract of agency, it can be implied which could arise from the act of parties or situations in which parties are put. 20. At this stage itself, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n within the meaning of Section 194H read with Explanation (i) to the said section. The assessee-airlines were thus obliged to deduct tax at source at the rate prescribed during the relevant period. The assessee-airline having not deducted the tax at source, they are liable to be held, within the terms of Section 201 (1) as assessee(s)-in-default and also liable for payment of interest in terms of Section 201 (1A) of the Act. In view of the fact that the Tribunal having coming to the conclusion that Section 194H of the Act was not applicable and hence did not examine any other contention of the assessee-airline, as also, the quantum and the period for which assessee-airline would be entitled to pay interest or to what extent the benefit of the certificate issued to them, if any, under Section 197 of the Act would be available. We allow the following appeals and set aside the impugned judgments passed by the Tribunal in each of these appeals and remand the matter to the Tribunal for examining all other aspects of the matter as also the consequences which would flow therefrom." 22. In view thereof, the argument of the learned counsel that Section 194H is not applicable, as there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. Another Vs. Union of India and Others [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. 25. No doubt, as per Clause 6(a) of the Agreement, PMA is supposed to make the payment in advance. That would not make any difference to the nature of transaction in view of Clause 25(d) of the Agreement, which stipulates as under: "25(d) Upon the termination or expiration of this Agreement for any reason, PMA shall discontinue the marketing/distributing/offering for sale, IDEA CHITCHAT PREPAID SERVICES, and shall forthwith return to ICL the entire stock of PREPAID SIM CARDS/RECHARGE COUPONS remaining with him and/or his Authorized Retailer. ICL shall pay to PMA for such PREPAID SIM CARDS/RECHARGE COUPONS received by it from THE DISTRIBUTOR." 26. Thus, even if advance payment is made by the PMA on receipt of the SIM cards, qua those SIM cards, it does not amount to "sale" of goods. The purpose is to ensure that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and principal to agents can be a matter of mutual consent between the parties and even a matter of negotiation after the execution of the agreement. There are no hard and fast rules of any legal proposition as far as these matters are concerned. 51. It is obvious that a service can only be rendered and cannot be sold. The owner of the SIM Cards and recharge coupons is the assessee-company, M/s. Vodafone Essar Cellular Ltd. This is because the assessee-company is operating under the right of a licence agreement entered into with the Government of India. Nobody else can be given the right to operate as Cellular telephone service providers. The ultimate service is provided by the assessee-company to everyone and everywhere. 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 titled of the goods from the assessee-company to the distributor or from the distributor to the ultimate consumer. The distributors are acting only as a link in the chain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the distributors. No, this is a mis-conception. 56. In the case of post-paid scheme, the assessee-company is treating the benefits enjoyed by a distributor as commission and deducting tax at source. Where the assessee-company itself admits that it is liable to deduct tax at source under section 194H in respect of post-paid services rendered through its distributors, it is the duty of the assessee to prove that the services rendered by the assessee through the distributors on pre-paid package is different from the post-paid package so as to qualify the former for exemption from operation of section 194H. 57. It is beyond any dispute that the essence of service rendered to the pre-paid and post-paid consumers are one and the same. There is no difference. The only difference is technical. The difference exists only in billing system and revenue collection, etc. In both the cases assessee-company is providing the service. Distributors are helping to reach such services to the ultimate consumers. In both the systems, there is documentation. In both the systems, the distributors render similar types of services to the assessee-company. Of course accounting the revenue collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods. But, in the present case, there is no failure of any procedural provisions as apprehended by the assessee-company. 65. We have come to the above conclusion specifically on the following grounds: (1) In the judgment of the Hon'ble High court of Kerala in the case of BPL Mobile Cellular Ltd. (supra) it has been held that in the supply and delivery of SIM Cards and other recharge coupons, there is no sale and purchase of goods, but only of providing services; (2) The Hon'ble Kerala High court in the case of Kerala Stamp Vendors Association(supra) have treated the subject transactions as transaction of purchase and sale of goods; (3) The assessee-company as a service provider is always the owner of the above products which is meant only as devices to have access to the Mobile phone network system maintained and operated by the assessee-company; (4) The services provided by the assessee-company through various distributors is regulated by law. Carrying on the business of providing service is subject to so many statutory compliance requirements, like verification of the identity of the consumer and the related documentation, etc. The assessee-company is having all lawful ..... X X X X Extracts X X X X X X X X Extracts X X X X
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