Income Tax Appellate Tribunal - Chennai
Vodafone Essar Cellular Ltd., ... vs Department Of Income Tax on 16 June, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH 'A', CHENNAI Before Shri U.B.S. Bedi, J.M. & Shri B. Ramakotaiah, A.M. I.TA. Nos.1415 and 1416/Mds/2009 Assessment years: 2007-07 and 2008-09 The Income Tax Officer, Vs M/s. Vodafone Essar Cellular Ltd., TDS Ward I (3), . Near Anna Statue, Balasundaram Coimbatore. Road, Coimbatore.
[PAN: AAACB8614L]
(Appellant) (Respondent)
Revenue by : Shri Shaji P. Jacob
Assessee by : S/Shri S.E. Dastur & Niraj Sheth
O R DE R
PER BENCH
These two appeals of the Revenue are directed against the consolidated order passed by the ld. CIT(A) II, Coimbatore dated 16.06.2009 for the assessment year 2007-08 and 2008-09, whereby deletion of demand created under section 201(1) of `.67,51,439/- and `.4,16,11,639/- in default for not deducting tax at source as per provision under section 194H and `.19,74,375/- and `.34,67,636/- being interest under section 201(1A) of the Income Tax Act for the assessment years 2007-08 and 2008-09 respectively has been challenged by the revenue.
2. Facts indicate that the assessee company is engaged in the business of Cellular Mobile Phone Services in India. This Company with its Principal Office situated at Coimbatore, carried on the business of dealing with the branded products of the Company viz. mainly Starter Packs and Rechargeable coupons viz. SIM Cards and Prepaid coupons. The assessee i.e. M/s Vodafone Essar Cellular Limited dealing with the products of the Company within the territorial regions assigned to them. Its nature of operation of business is mainly to identify 2 ITA No.1415 & 1416/Mds/09 and appoint Distributors for the sale of the above mentioned products. The assessee company identified the Distributors at different places in the region and entered into written agreements with them wherein various terms and conditions are stipulated. Once, both the assessee company and the Distributors agree to all the terms and conditions stipulated, such Distributor is appointed as a Dealer to deal with the products. The assessee raises commercial invoices in respect of each and every sale of product to the Distributor. While the MRP value of the products are fixed at the time of raising invoices the products are priced at the discounted price agreed to between the assessee and the Distributor. The Distributor, however, is free to sell the products to retailer at any price (but not exceeding the MRP) and retain the margin with them as their share of profit. In order to evidence the above fact, the account copy of the Distributors was produced. In such circumstances, the Assessing Officer i.e. the Income-tax Officer, TDS Ward, considered the terms and conditions of the agreement and also going by the nature of services provided, concluded that the actual relationship in regard to this transaction between the assessee and the Distributor is that of Principal and Agent. He also concluded that the difference between the price fixed (i.e. MRP) and the price charged for them by the assessee, constitutes only Commission payment. Therefore, the stand of the Assessing Officer is that the difference denotes deemed payment of Commission which falls under the realm of the provisions of Section 194H. The assessee on the other hand took the stand that on the basis of the terms and conditions entered into with the Distributors, the relationship was not that of Principal and Agent as has been held 3 ITA No.1415 & 1416/Mds/09 by the Assessing Officer. It was the stand of the assessee that the difference between the invoiced price and the MRP is only in the nature of sales / trade discount. The relationship between the assessee and Distributor is nothing but Principal to Principal. Hence, when there is no payment of commission involved. The Assessing Officer was not convinced. He held that the assessee having failed to deduct tax as required under Sec. 194H is a defaulter within the meaning of Sec. 201(1) of the Act and created demand of `.67,51,439/- and `.4,16,11,639/- and also levied interest under Sec. 201 (1A) amounting to `.19,74,375/- and `.34,67,636/- for Asst. Years 2007-08 and 2008-09 respectively for the defaults. The Assessing Officer in his order passed under Sec. 201 (1) read with Sec. 201 (1A) has stated the following facts in the order by holding that the relationship between the assessee and the Distributor is that of Principal and Agent and by further holding that the payment partakes the character of commission :-
"1. The person who sell the starter packs and re-chargeable coupons needs to get them appointed by the Cellular Company) through a series of formalities imposed upon then. Sometimes they are not allowed to sell such coupons of rival Cellular Companies. Moreover) the intermediate selling organizations are given the authority to verify the credentials of the Consumers .
2 That it is a proven situation that there remain principal agent relationship between the Cellular company and the organizations selling starter packs on which they enjoy financial benefits.
3. That the benefit allowed to the agents in the name of discount may be treated as commission.
4. That the commission is recompense of reward of an agent) factor) broker of bailee, when the same is calculated as a percentage of the amount of the transaction or on the profit to the principal - Sunderland V Day (145 N E 2d.39) 41 12111 2d 50)
5. That commission is compensation paid to another for services rendered in the handling of another business or property and based proportionately upon the 4 ITA No.1415 & 1416/Mds/09 amount of the value thereof - Robindstein. Vs Rubinsterin (109 N.Y.S 2d, 725,
734).
6. That commission is a word without technical meaning but used to express compensation for the services rendered) it usually denotes a percentage of the amount of the moneys paid or received - Purify v Godfrey.
The franchisee's price and pay for the services will be specified by VODAFONE ESSAR CELLULAR LIMITED from time to time. The rates are subjected to variation during the time of agreement al the sale discretion of Vodafone Essar Cellular Limited and shall be intimated to the distributors from time to time.
It is understood that the relationship between the parties solely on the principal to principal basis. The franchisee shall not acquire, by virtue of any provision of the agreement or otherwise any rate, an agent or commercial representative of Vodafone for any purpose whatsoever.
The distributor shall not assign any of its rights or obligations to any third party without the prior written consent of Vodafone Essar Cellular Limited. The Distributor shall not be entitled to any compensation or indemnify (whether for loss of distribution rights, goodwill or otherwise) as a result of the termination of the agreement in accordance with the terms. Obligation of the parties relating to confidentiality and indemnity has contained in the agreement which shall survive the expiration or termination of the agreement. All intellectual property rights relating to service tickets and shall remain the property of Vodafone Essar Cellular Limited and its licensors. Coming to the case law relied on by the assessee, I find that the assessee has placed reliance in the case of Ahmedabad Stamp Vendors Association (2002) 257 ITR 2002 but the same is not identical to the facts involved in the present case as the restrictions involved in the stamp vendors are placed by the law of land and therefore are mandatory. Whereas the present case, restrictions has been imposed by the assessee itself on the franchisee before being sold ultimately to the retailers / customers and therefore, the above case is not of help to the assessee.
The ITAT, Kolkatta Bench held the same view in the case of Asst. Commissioner of Income-tax Vs Bharti Cellular Ltd. Vide 294 ITR (AT) Kolkatta (2007 dt. 04.04.2006 - page No. 283)."
3. The assessee took up the matter in appeal and filed its written submissions as under:
i. The Assessing Officer ought to have found from the terms and conditions 5 ITA No.1415 & 1416/Mds/09 laid down in the agreement that nowhere was there any mention that the relationship is that of a franchisee or an agency. In the case of a franchisee or an agency, the persons (i.e. the franchisee or the agent) are required to act on behalf of the principal and they would be under the control and supervision of the principal. All the transactions carried out by these persons would actually relate to the principal. The sale effected by these people would represents the sale of the principal who will always retain the ownership of the goods. The franchisee or an agent shall be entitled to a fixed rate of remuneration or a fixed rate of commission. The details of sale effected by these people are communicated to the principal who alone shall account for the same. On the other hand, the relationship with the Appellant's distributor is that of principal to principal basis only and the transaction involved is a clear transaction of sale. Clause 17-2 of the Agreement affirms this position. From the MRP price fixed, sale discount is allowed to the distributor. After sale products that are sold becomes of the property of the distributor. After the deduction of the discount, the balance sale is accounted for by the principal.
ii. Section 194H defines Commission and brokerage as payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered' (not being professional services) or for any service in the course of buying or selling of goods or in relation to any transactions relating to any asset, valuable article or thing, not being securities. The recipient will credit his profit and loss account, the gross commission received or receivable which alone would attract the provisions of Sec. 194H. But, in the case of the Appellant the transaction is that of sale only and there is no operation of provisions of Section 194H. The goods or products owned by the Appellant are straight away sold to the distributor and that from the MRP a fixed sale discount is allowed. Once the sale is effected, then the property shall be the property of the distributor and principal shall have no right over them. In the case of the Appellant, the activity involved is selling of SIM cards and Prepaid Cards as per Invoice. There is no element of either brokerage or commission.6 ITA No.1415 & 1416/Mds/09
iii. For Sales-tax purposes, discount is treated as an abatement of cost, so that sales tax is leviable only on the net amount. The position as regards the Central Excise Act is also similar. The decisions of the Supreme Court in the case of DCST Vs Advani Orlikon (P) Ltd. (1980) (45 STC 32 (SC) and DCST Vs Kerala Rubber and Allied Products (1993) 90 STC 170 (SC) support the stand. The Assessing Officer has erred in overlooking the principles established by the judiciary.
4. After considering such written submissions, the ld. CIT(A) afforded an opportunity to the Assessing Officer to give his comments on some of the points put forth by the ld. AR in the course of appeal proceeding and concerned ITO (TDS) filed report, wherein in respect of various clauses of agreement entered into between the assessee and the distributors, he has raised following points:
" 1) Sub-clause (v) below the subheading "Responsibilities of the Distributor in respect of e-stock (Page 12) "The Distributor shall appoint at its own, in consultation with VECL, retailers for the e.stock to such merchants who shall obtain a valid access card from the Distributor after authentification from VECL."
The sub-clause amply shows that the relationship the Appellant has with the Distributor's is Principal-Agent relationship as claimed by the Appellant. If it is Principal-Principal Relationship as claimed, there need not be approval from the Appellant for appointment Of retailers by the Distributor.
2) Further, under (Annexure III) Brand image guidelines (Page 13 of the agreement) sub- clause (i) states as under:
"not during the continuance of the 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 service of any service tickets which are similar to or competitive with any of the service tickets or perform the same or similar functions.
From the above it is quite clear that the Distributor is barred from trading/'distributing any other service tickets of any other company even after termination of the agreement with the Appellant Company and there is an obligation to that effect with the Distributor. Hence, it can be rightly inferred that the distributor is not the person who merely buys Service tickets from the Appellant even after the termination of the agreement.7 ITA No.1415 & 1416/Mds/09
3. Besides this} sub-clauses (n)} (v) )( w) and (y) of Annexure III amply shows that the distributors has principal-Agent relationship. Sub clause (n) state as under;--
a) The distributor shall ((use VECL's trade marks and trade names relating to the service tickets only in the registered or agreed style in connection with the marketing and sales of the service tickets and shall not use such trade marks or trade names in connection with any other products or services or as part of the corporate or any trade name of the distributor".
By this sub clause) the distributor is banned from marketing/ distributing/ sale of the service tickets of any other trade name. This also point to the fact that the distributor is an agent of the appellant.
b) Sub clause (v) states that the distributor shall "co-operate with VECL in the recall of any of the service tickets for safety checks or modification".
From this it is obvious that the distributor has no control over the service tickets he had purchased from the appellant. Distributor is under obligation to re submit the service tickets as and when the appellant demands. Had it been an out right purchase he would' be under no circumstances obliged to return the service tickets to the appellant. This clearly indicates that there is a principal- agent relationship.
c) Sub clause (w) states that the distributor shall "Provide FECL with quarterly stocks reports showing the distributors stock of each of the service tickets at beginning and end of each quarter and the movement of stocks during the quarter As per this sub clause, the distributor is supposed to give quarterly reports of stocks of each of the tickets to the appellants. If the stock of service tickets had been purchased as in the "Buyer-Seller" style, reports on stock of the same need not be given to the seller i.e, appellant.
•
d) Sub clause (y) of annexure In states that that the distributor shall "Permit VECL and its authorized agents at all responsible times to enter any of the distribution premises for the purpose of ascertaining that the distributor is complying with its obligations under this agreement.
e) The following are also brought to kind attention of CIT(Appeals):
The Appellant's contention is that the favorable decision of the Income Tax Appellate Tribunal Delhi in the case of Idea Cellular Limited Vs. DCIT would apply to their case. In Para 4 of the Tribunal's order, in ITA No. 30311 Dell 2006 dated 28-03-2008 the following observation has been made.8 ITA No.1415 & 1416/Mds/09
"PMAs (Distributors) appointed the retailers without approval of the Idea Cellular and hence the Idea Cellular did not have any control on the appointment of retailers by the distributors. Therefore, it could not be said that there exist principal-agent relationship between the assessee and the distributor. In contrast, the relevant portion of agreement in the case appellant reads as follows in para 13, in page of 6/16 of the agreement dated 28'l2'2007 under the head "assignment" it is stated that "The distributor shall not assign any right or obligation to any third party without the prior written consent of VECL. "
Annexure II Para(v) of Responsibilities of the Distributor in respect of e stock reads (i.e.) Page 12 of 16 of the agreement dated 28th December, 2007) "The Distributors shall appoint at its own consultation with VECL retailers for the e stock to such merchants who shall obtain a valid access card from the Distributor after authentication from VECL. However VECL shall not be liable for any act or omission of the merchant or distributor"
The sub clause amply shows that the relationship the appellant has with the distributor is that of principal agent only. Otherwise there need not be necessity for approval In consultation with the appellant for appointment of retailers by the distributor.
The very concept of appointing the distributor by M/ s VECL, at its own terms & conditions negates the tenets of principal to principal relationship as claimed.
2. Though the appellant claims in para 4 of page 2 of the representation before the commissioner in ITA no: 39-C of 08-09 that, clause 17.2 of the agreement clearly refers to the term 'Seller & Buyer' then the necessity of having a condition as referred to in Para 17.1 (Page 7/16 of the agreement dated 28.12.2007), under the heading 'No creation of third party obligation does not appear to be clear. The relevant condition is reproduced below.
"Notwithstanding anything contrary contained herein, the Distributor shall not, without VECL's prior specific approval consent in writing, assume or create any obligations on VECL's behalf or incur any liability on behalf of VECL or in any way pledge or purport to pledge VECL's credit or accept any contract binding upon VECL"
Also 18.2(a) of the agreement page 8/16 reads as follows:
" All intellectual Property rights in or relating to the Service Tickets are and shall remain the property of VEC,L or its licensors."
Activation of the prepaid SIM card is in the domain of the Appellant Hence, the distributor does not have principal to principal relation vis.a.vis applicant. 9 ITA No.1415 & 1416/Mds/09 Clause 10.1l under "effect of termination in page 6/16 of the agreement contains the following:-
The Distributor hereby agrees to grant an irrevocable license to VECL and its designated Employees to enter the premises and remove all VECL signage's if the distributor has not done so itself to the satisfaction of VECL within 7 days of termination of the Agreement."
From the above it is quite evident that the Distributor is under the obligation to allow the Appellant or its authorized agents to enter any of the Distributors premises for ensuring that the distributor is complying with his obligations. If the service tickets purchased by the distributors is in accordance with the common commercial parlor of purchase and sale no such compliance is to .be observed by the purchaser.
CBDT in its clarification to query by INS (Indian News Service) observed thus, "A discount is given on sale or purchase of an article in which there is no agreement between the seller and the buyer."
"The Board examined the contentions of the INS that such payment is in the nature of a discount. The discount is given on sale of purchase of an article in which there is no agreement between Seller and Buyer. The Board found that the INS granted accreditation to the Advertising agency and usually the newspapers would enter into an agreement with agencies. Hence, the newspapers and agencies were not acting independently and the agency was in fact an agent of the newspaper and was being paid a commission for the services rendered."
On the basis of above circular, the nature of the Appellant transactions cannot be treated as Principal to Principal basis. Under the heading 'Training' under para 6.1 of the Distributorship Agreement, it is stated as under:
"VECL shall provide training in the use of installation and rendering of after sale services in respect of the service tickets to the distributor and its personnel whenever required.
Sub clause (m) says that the Distributor shall supply to VECL such reports, returns, other information relating to orders and projected order for the service tickets as VECL may from time to time reasonably require. Commission paid to Cellular companies to sellers of the starter packs and recharged coupons for Cell phones is one of the areas recommended for TDS as per action plan for F Y 2008-09.
From the above facts, it is crystal clear the distributor has only agent principal relationship. The decision of the Delhi Tribunal in the case of DCIT Vs Idea 10 ITA No.1415 & 1416/Mds/09 Cellular Limited does not apply to the facts of the Appellant's case."
4.1 The ld. CIT(A) gave a copy of such report filed by the ITO to the assessee, whose AR submitted his reply as under:
4.1 As regards the first issue, it is submitted that by the very nature of the product such necessity of getting authentication becomes necessary. Further, VECL has earned national and international reputation. Its product has a name and value. Therefore, the retailers who sell the product have an important role to play in preserving and maintaining the image of the product. They should be capable of displaying effectively the value and quality of the product. They are also required to possess the necessary infrastructure, furniture and place for the sale of the product. Any grievance or complaint of the customer would create an adverse impact on the image as well as market of the product. Only with the aim and intention of ensuring that the retailers are capable of dealing with these products and in order to satisfy that the retailers are capable of selling the products, the clause necessitating the approval has been inserted. While sum and substance of the whole term of the Agreement clearly means that the goods are transferred to the Distributors raising invoices, there is no justification on the part of the Assessing Officer to say that because of the approval clause only it could be assumed that the VECL has control over the distributors and for this reason the relationship will be that of Principal and Agent. This sort of procedure can always be found in the case of manufacturing companies who deal with reputed products in the country, like Car, Electronic Equipments and Computers. Unless, they verify the ability of the retailer to display and sell the products effectively, their image may suffer.
4.2 In regard to the second point raised by the Assessing Officer, it was contended that that such exclusivity of the distribution of the products of VECL is required for the effective maintenance of the revenues of VECL. The Distributors with their influence and relationship that they have gained with the clients in the 11 ITA No.1415 & 1416/Mds/09 course of their distributionship with VECL and with their experience and ability may terminate this agreement and immediately commence the sale of rival companies products. Along with the products of VECL they may also deal with the other company products. If such an act is done, it would adversely affect the interest of VECL and will have adverse impact of the marketing of VECL's products in India. In India, the VECL has to face stiff competition along with equally reputed companies. Only with a view to safeguard the interests of the marketing revenues of VECL, this clause has been found necessary. It could be found that such exclusivity of the sale of products by the retailers or distributors could be found in respect of any other branded products, like TVs, Refrigerators, Cars, Petroleum products etc. Even after termination of the agency, such safeguard is necessary. The Assessing officer has erred in stating that even after termination of the agreement, the relationship would continue. Legally, it is not possible. In the circumstances, merely because of the fact that there is a stipulation that the Distributor is barred from marketing other products during the continuance of the agreement and for the period of one year after termination, cannot make the relationship as Principal and Agent., when otherwise there is a clear transfer of goods by VECL to the Distributor by way of Sale.
4.3 As regards the third point, it is submitted that the clauses have not been properly understood. What is required in this clause is that the Distributors are required to use VECL's trade names relating the Service Tickets in the registered agreed style and they are prohibited from using such trade names for marketing and sale/of Service Tickets of any other products. This clause has naturally been inserted in order to avoid any misuse of VECL's brand name by the Distributors.
This has no impact on the relationship as viewed by the Assessing Officer. 4.4 Citing Clause (v), the Assessing Officer states that it is obviously known that the Distributor has no control over the Service tickets purchased from the Appellant as he is under obligation to re-submit them as and when the Appellant demands. Had it been an outright purchase, under no circumstances, the 12 ITA No.1415 & 1416/Mds/09 Distributor is obligated to return the Service Tickets. This clause clearly relates that the relationship is that of Principal to agent one only. Here also it is submitted what Clause (v) requires is that the Distributors are required to cooperate with VECL in the matter of recall of Service tickets for safety Checks or modifications. This clause exists only for the limited purpose to ensure the safeguard of the product. Further, if VECL has decided to modify its products and has advertised such modifications, naturally the products that are to be sold ought to be modified or else the customers may insist on such modified product. The Assessing Officer is not justified in concluding that this clause means that VECL has right to recall each and every Service Tickets sold and hence is exercising a control over the Distributors. Because of this factor, it is not correct to hold that there is only a Principal - Agent relationship on account of existence of this clause. Requiring the co-operation of the Distributor for the limited purpose of making safety check or modification does not mean that VECL is exercising complete control of the products sold to the Distributors. Pointing Clause (w), the Assessing Officer states that because of the Distributor is required to furnish quarterly reports of Stocks of each of the Service tickets to the Appellant, there is no Principal to Principal relationship. He is of the view that if the stock of Service Tickets had been purchased, then, the reports on the stock of the Sale need not be given to the Seller. In regard to the arguments, it is submitted that this clause has been introduced only with an aim of the compilation of the statistics with a view to study the market conditions and the movement of the goods on day-to-day basis. Depending upon the stocks held by the Distributors VECL will be able to monitor and maintain the supply of goods. A reputed company like VECL would naturally be interested in collecting Statistics regarding the supply and demand of the goods and extent of stock held at any point of time. This would also enable VECL to compare the sale and movement of its products with other competitors. If there is stagnation of unsold goods, then VECL has to necessarily to take remedial measure to improve the movement of its goods. Therefore, on account of this clause, the Assessing Officer has no justification to conclude that the relationship would be that of 13 ITA No.1415 & 1416/Mds/09 Principal to Agent as VECL would require the Distributors to submit information regarding quarterly stocks held. Clause (y) only requires the Distributors to permit VECL or its Authorized Agents at all reasonable times to enter the Distributors' premises for the purpose of ascertaining that the Distributor is complying with its obligations under the Agreement. This clause only enables the VECL to enter the Distributors' premises for the limited purpose of ensuring whether the Distributors abide by the obligations. This clause is inserted only for safeguarding the business interests and this will not in any way have an impact on the relationship. 4.5 As regards the Assessing Officer's citing Clause 17 (1), it was submitted that this clause only means that Distributor is not empowered to assume or create any obligation on VECL's behalf or incur any liability on behalf of VECL or in any way pledge, or create any credit or accept any contract binding upon VECL. This clause all the more explains that the relationship is limited and Distributor is barred from acting on behalf of VECL. Therefore, it is not correct to cite this clause for holding that the relationship is that of Principal and Agent. The Assessing Officer points out Clause 18 (2 a) of the Agreement in Page 8 /16 which says as follows: "All intellectual Property rights in or relating to the Service Tickets are and shall remain the Property of VECL or its licensors" It is stated that the activation of the Prepaid Sim Card is in the domine of the Appellant and hence its Distributors does not have Principal to Principal relationship vis-a-vis Appellant. It is submitted that this view is erroneous. What is reiterated in Clause 18 (2) is regarding the preservation of reservation of intellectual right of VECL. This is for the limited purpose of protecting the Intellectual rights of the VECL'S manufactured products. This clause will not in any way come in the way of deciding the relationship between and seller. , In regard to the high technical value of the product like SIM card the manufacture of the product is the intellectual right of VECL. This right is intended to be protected by inserting this clause. 4.6 As regards the view of the Assessing officer's interpretation of agreement in clause 10(1) in Page 6 of the Agreement, it is contended that this clause has been wrongly understood by the ITO. This term only stipulates that after termination of 14 ITA No.1415 & 1416/Mds/09 the Agreement, the Distributor is required to remove all the VECL sign boards and other display materials. Only if such a thing is not done, then, the VECL gets the irrevocable license to enter the premise and remove signages. This clause will operate only after the termination of agreement and not during the course of the existence of the agreement. Therefore, this clause is quite in tune with the commercial parlours. Even after the termination of the agreement, the Distributor continues to have the infrastructure, then, it should be viewed as an unfair trade practice. Only to nullify such illegal acts, this clause has been inserted. 4.7 As regards the Assessing Officer's citing the Board's circular and comparing the same to the Appellant's case, it is submitted that since the activity of the Appellant is buying and selling of products after raising invoices, the above circular has no application. The above circular which deals with services in regard to advertising agency cannot be applied to the facts of this case. The Assessing' Officer further argues pointing out the term appearing under the head Training in Para 6.1 (Page 4) which states as follows: "VECL shall provide training in the use of installation and rendering of after sale and service and in respect of Service Tickets to the Distributors and Personnel whenever require" On the assumption that there is element of rendering some service it is presumed by the Assessing Officer that there is element of service and hence, there is applicability of Sec. 194 H. It is submitted that this assumption is not correct. The products sold by VECL are of highly technical nature wherein the handling of such products requires skill and training. Unless the Sellers are aware of the entire knowledge, they cannot effectively sell these products. While the Sellers or the Distributors cannot afford to employ Technicians, the VECL has got under its employment such technicians. Therefore, in order to maintain quality of service to the customers who buy the products, VECL undertakes to provide training in use of installation and to render after sale services in respect of service tickets to the Distributors and its personnel whenever required. Therefore, the installation and services happen only after the product is sold. Therefore, what VECL means by the term is to provide necessary technical training to the Distributors' personnel to effectively handle the products 15 ITA No.1415 & 1416/Mds/09 and render after sales service. These clauses are common in all the cases of branded goods sold at the country, for example, Refrigerator, Washing Machines, or Computers. When these equipments are sold by the respective retailers, the manufacturing company always undertakes to train personnel for taking after sales care and also provide necessary training to the people installed these equipments. In the circumstances, this clause does not convey the meaning that there is an element of service at the time of or in the course of buying and selling goods. VECL does not provide this service at the time of transfer of goods. This is what is covered by Section 194 H. 4.8 It is submitted that in Bharti Cellular's case they have been initially deducting Tax on the discount and later discontinued as is evident from the ITAT's decision. Further as per Term 4.8 of Agreement of Bharti Cellular (as cited by ITAT) there is a denial of right or title of prepaid cards to the distributor. In the Appellant's case, no such clause exists. Certain clauses recall of goods sold are existing with the limited aim of monitoring the quality or safety checks or quality modification otherwise there is no such restriction on the rights of goods transferred or sold to VECL on the basis of Sale invoices.
4.9 It is also contended that it is not fair to pick up a few clauses of the agreement here and there to argue that there is relationship of Principal Agency. But, if the agreement is read as a whole the effect of transactions and the nature of relationship would emerge clearly. When the reputed products and branded goods are sold to the distributors generally these clauses have to exist in order to keep the tempo of sales to meet the demand of the market, to face competition and to maintain the brand image name and qualify of the products.
4.10 As regards the point raised regarding the retention of intellectual property, it was submitted that the intellectual property rights, trade marks, are always the property of VECL or for that matter any company manufacturing the highly branded product would only follow this method. Irrespective of the fact there is such a mention in the agreement or not the distributors shall always have no right in such brand name etc. Therefore, raising this point against this issue is unfair. 16 ITA No.1415 & 1416/Mds/09 4.11 It was submitted that by the Id that the decision of ITAT in Bharti Cellular is based on the decision in the case of C I T Vs Hindustan Coca Cola Company Cold Beverages (Jaipur Bench in 97 ITO 105). But, it is seen from this decision that the Hon'ble Tribunal drew adverse view on account of the fact that there was no written agreement and that there was a restriction that Coca Cola insisted at what price the seller should sell the product, Further in the course of survey, the department found certain materials to point out that the discount is in the form of commission only. It was also found that the company Coca Cola undertook to reimburse the expenses of the Agents on Diesel, Petrol, Vehicle, Salary of Salesmen and leakage breakage claim. The Company also gave an undertaking that loss incurred by the Sellers on account of selling the product at the price stipulated by Coca Cola would be reimbursed. Only on account of these clauses, it was held that there was Principal to Agency relationship. Therefore, there is no comparison of facts of Hindustan Coca Cola case to the case of the Appellant. There is no comparison of Bharti Cellular's case to the facts of the case. The Appellant submits that the above facts have been considered in detail by the Delhi "A" Bench of the IT AT Tribunal in the case of M/s Idea Cellular Limited Vs DCIT, and on identical facts it was held that provisions of section 194H are not applicable. A copy of the decision of Hon'ble ITAT Pune Bench in ITA NO.957 to 960/ Pune/2006 dated 28.04.2008 in the case of Foster India (P) Ltd. Vs I T O. is submitted. In this case, the ITAT has considered both the decision rendered in the case of ACIT Vs Bharti Cellular Limited and in the case of C IT Vs Hindustan Coca Cola Beverages. The ITAT took into the consideration the binding nature of Apex Court in the case of Bhopal Sugar Industries Limited Vs S T 0 AIR 1977 of SC 1279 and was cited by the learned IT AT as under:
" The essence of the matter is that in a contract of sale, title and the property passes on to the buyer on the delivery of goods for a price paid or promised. Once this happens, buyer becomes the owner of the property and buyer has no vestige left in the property. The concept of sale, however, has undergone revolutionary change, having regard to the complexities of the modern times and expanding 17 ITA No.1415 & 1416/Mds/09 needs of society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may, by virtue of agreement, imposes a number of conditions on the buyer e.g. fixation of price, submission of accounts, selling in a particular area of territory and so on. These restrictions per se would not convert a contract of sales into a contract of agency, because in spite of these restrictions, the transaction would still be a sale and subject to all the incidents of sale."
4.12 On the basis of the above observation of the Hon'ble Supreme Court cited, the Hon'ble Tribunal concluded that the normative effect of the judgment of Hon'ble Supreme Court is obviously far greater than that of the judgment of the co- ordinate Benches. On the basis of conclusion, the Hon'ble Tribunal decided that once on the basis of the principles decided by the Supreme Court, if the nature of relationship between the Appellant and the distributor is that of Principal and Principal, then the nature of discount deducted from the Sale invoices at the time of sale of goods will not be in the nature of Commission falling within the definition of Section 194H.
4.2 The ld. AR of the assessee, on the basis of the above submissions has pleaded that the order of the ITO under sections 201 and 201(1A) be vacated.
5. The ld. CIT(A), while considering and accepting the plea of the assessee has concluded to hold that the transaction of sale and purchase of goods between the assessee and its distributor was that of principle to principle basis and provisions of section 194H are not applicable, while referring and discussing decisions in the case of Kerala State Stamp Vendors Association v. Office of the Accountant General and Others 282 ITR 7, Bhopal Sugar Industries Ltd. v. STO [1977] 40 STC 42(SC), ACIT vs. Bharti Cellular Limited (I.T.A. No. 1678 and 1679 18 ITA No.1415 & 1416/Mds/09 (Kol) dated 04.04.2006, Idea Cellular (I.T.A. No. 3031/Del/2005 and Delhi bencn decision in ITA No1875/Del/2006 dated 28.03.2008.
6. Aggrieved by such order of the ld. CIT(A), the Department has come up in appeal for both the years by raising following identical common grounds No. 2 to 2.8, when ground No.1 is general and ground No. 3 is prayer part. So the effective common grounds 2 to 2.8 are as under:
"2. The Ld. CIT(A) erred in holding that the nature of transaction between M/s Vodafone Essar Cellular Ltd(VECL) and its distributors is on principal to principal only and that the provisions of section 194H of the IT Act are not applicable.
2.1 The Ld. C!T(A) having referred to the Hon'ble Apex Court decision in the case of Bhopal Sugar Industries 40 STC ought to have appreciated that the alleged sale of SIM card, service coupons etc. by M/s VECL to the distributor does not by itself any transfer of property at that point of time but it only reflects commitment to rendering service to the customers.
2.2. The Ld. CIT{A) ought to have appreciated that clause 22 of the customer agreement which state that 'SIM Card and Mobile Phones service numbers shall always be the sole property of M/s. VECL and shall be returned by you(customer) upon termination and/or de- activation or temporary suspension of services. You shall have no right to the same at any point in time, for any reason whatsoever clearly Indicates that the essence- of the agency only exists in the above transactions between M/s. VECL and the distributors as against principal to principal relationship.
2.3. The learned CIT{A) ought to have followed the decision of Hon'ble Tribunal of Cochin in the assessee's own case in ITA no. 106 to 113/Cochln/2009 & SP nos. 11 to 18/Cochln/2009 dt: 30/04/2009 where In it was held that "the distributors are linking agents in the chain of delivery of services to consumers and as such the relationship is not of a principal to principal'.
2.4 The learned C.I.T{A) having referred to clause 17.2 (erroneously quoted as 17.3 instead of 17.2) of the agreement has failed to appreciate that role played by the distributor only that of an Intermediary Without any absolute hold on the products dealt by him and no express clause in the written agreement would reverse the factual position.19 ITA No.1415 & 1416/Mds/09
2.5 The Ld. C.I.T(A) ought to have appreciated M/s. VECL not only retains the ownership of the services but also as per the clauses of distributorship agreement, authorizes the distributor to collect cheques/ payments In favour of them for the said services and as such by act of parties M/s.. VECL has assigned the role of agency.
2.6. The Ld. CIT(A) having drown support from the books of account that no amount as commission or brokerage is debited to P&L account ought to have appreciated the provisions of explanation (1) to the section 194H which states that the term 'Commission or Brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered:
2.7. The Ld. CIT(A) has failed to appreciate the Board's Circular No. 619 dated 22/11/1991 which discusses the applicability of section 194 vide para 4 that the retained commission by a consignee/agent, amounts to constructive payment and that provisions of 194H would apply inspite of the fact that no payment is being made. 2.8. The Ld. CIT(A) having observed in the case of ACIT Vs. Bharati Cellular Ltd. in ITA No. 1678 and 1679 of Kolkatta Bench, the Ld. ITAT, Kolkata was swayed away primarily from the fact that' as per the clause 4.5 of the agreement, even after the sale, all rights, title, ownership and property rights in respect of the sim cards remained vest with the company at all times and no such agreement in this case, has failed to consider the fact that the said clause is identically contained in clause 22 of the customer agreement as discussed elsewhere."
6.1 The ld. DR, while relying upon the order of the Assessing Officer and repeating the grounds raised in the appeal has pleaded that the assessee was allowed commission or discount on which it had not deducted tax at source, which is required under section 194H for both the years. Therefore, the Assessing Officer is very much justified in raising the demands under section 201(1) and interest under section 201(1A), since it was payment to the agent, from the amount of payments towards Pre-paid card and Sim cards, therefore, the assessee was bound to deduct tax at source as per section 194H,moreover ,the assessee itself is deducting and paying the tax on post paid card on the amount of 20 ITA No.1415 & 1416/Mds/09 commission/brokerage and there is no material difference between two transactions, thus it was further pleaded that the issue in the case of the assessee has been decided in favour of the Revenue by Cochin Bench of the Tribunal in I.T.A. No. 106 to 113/Cochin/2009 & SP Nos. 11 to 18/Cochin/2009 dated 30.04.2009 which decision has further been upheld by the Hon'ble Kerala High Court in 2010-TIOL-655-HC-Kerala-IT in I.T.A. No. 1742 of 2009 dated 17.08.2010 [2010] 194 TAXMAN 518 (Ker.) so it is covered matter which needs to be decided in favour of the department. That apart, the Hon'ble Delhi High Court in the case of CIT v. Idea Cellular Ltd. [2010] 189 TAXMAN 118 (Delhi) has also decided similar issue with regard to application of 194H in relation to offering discount to the pre- paid calling service to its distributors and taken similar view vide order dated 19.02.2010 by discussing and applying Cochin Bench of Tribunal's decision in the case of Vodafone Essar Cellular Ltd. dated 30.04.2009. While referring various clauses of the agreement entered into by the assessee with the distributors, it was pleaded for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer because there are two High Court's decisions, one of Kerala and other of Delhi High Court with respect to implementation of 194H in relation to providing commission/discounts to the distributors by the principals and non deduction of tax at source, which are direct on the point, so orders of the ld. CIT(A) be reversed.
7. The ld. Counsel for the assessee while relying upon the order passed by the ld. CIT(A) has strongly pleaded that first requirement of section 194H is that there should be payment made of commission or brokerage by any person other 21 ITA No.1415 & 1416/Mds/09 than individual or HUF to a resident, any income by way of commission, not being insurance commission, (Refer to 194-D) or brokerage, but in this case, the assessee is receiving the amount from the distributor below the MRP amount of Sim cards and Pre-paid cards and is free to fix the price to be charged which should be below the MRP, so, there is no payment of any amount to the distributor by the assessee. No refund is permissible and there is lot of difference between pre paid cards and post paid transactions. Therefore, provisions of section 194H are not applicable in this case and the Assessing Officer is not justified in treating the discounts allowed as payment made to the distributors and in this case the distributor is required to return sim cards, the assessee has only recorded the amount received/receivable in the books. Since it is a case of receipt of payment and not of payment made, so, it is not understood as to how the assessee has to deduct when no payment or credit of any amount or so called discount is allowed except in papers only and as to how do the assessee implement such provision and it is also not a case where methodology of the collection of the tax at source can be worked out/applicable. Since amount cannot be exchanged from which tax is to be deducted and the Hon'ble High Courts of Kerala as well as Delhi has not considered this vital aspect. So, the High Courts judgments relied upon by the ld. DR are distinguishable and are not applicable in this case. That apart, these decisions are of non-jurisdictional High Courts, whereas, there is another decision of the Hon'ble Kerala High Court in the case of M.S. Hameed v. Director of State Lotteries [2001] 114 TAXMAN 394 (Ker.), wherein in relation to provisions of section 194G with regard to lottery tickets, view has been taken in favour of the 22 ITA No.1415 & 1416/Mds/09 assessee to the effect that where there is no income, there should not be TDS when income or earning is only taxable. If the clause of the agreement of the assessee company with distributors are looked into, there is a clear provision that once Sim cards and pre-paid cards are given to the distributors, no refund is permissible and as regards case of M.S. Hameed and others (supra) is concerned, the SLP filed by the Department against the Hon'ble Kerala High Court judgment has already been dismissed on 03.12.2010. So relying upon such decision of the Kerala High Court and making special reference to page 530, it was pleaded that when two non-jurisdictional High Court decisions are there on the same point, the decision favourable to the assessee is to be applied and as regards such decision, the Department's SLP has also been dismissed with the remarks "we see no reason to interfere", it was thus pleaded that since it is not simple dismissal of the SLP, but reasoned order has been passed by observing that the Hon'ble Supreme Court did not see any reason to interfere with the order of the Hon'ble High Court. Further, it was submitted that accounting entries are not determinative to ascertain whether item is taxable or not and reliance was placed on 227 ITR 172 in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd so accounting procedure adopted will not effect real nature of transaction. The assessee's counsel has strongly placed reliance on CIT (TDS) v. Qutar Airways 2009-TIOL-182-HC-MUM-IT, which is almost directly on the point, and has pleaded that, if two views are possible favourable to the assessee is to be applied and reliance was placed on 143 ITR 120 (BOM) in the case of Siemens India Ltd. & Anr. Vs. ITO, further submitted that when different High Court decisions are there and no jurisdictional High Court 23 ITA No.1415 & 1416/Mds/09 decision is available on a particular point, the decision favourable to the assessee has to be and should be followed. Reliance was also placed on 121 ITD 596 in the case of Kanel Oil & Export Inds. Ltd. vs. JCIT [(2009) 126 TTJ (Ahd)(TM) 158]. Further reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT v. Thana Electricity Supply Ltd. 206 ITR 727. The ld. Counsel for the assessee categorically admitted that supplying of Sim cards and pre-paid cards to the distributors, it is of service and not of sale and while making reference to para 4 of page 529 of Hon'ble Kerala High Court's decision in J.B. Boda vs CBDT, when there was entirely opposite views taken, favourable to the assessee to be applied and as far as J.B. Boda's case is concerned, discount is paid to the assessee and commission for services rendered. The language if worded than only in that manner tax can be paid. The payment made is the prime requirement and in this case, payment was not made by the assessee at all and less amount has been received from the distributor by the assessee, so no deduction is required. Reliance was placed on 128 ITR 294 (SC) in the case of CIT v. Srinivasa Setty (B.C.), Hon'ble Delhi High Court's decision in the case of Daruvala Bros. (P) Ltd. 80 ITR 213. Reliance was also placed in the case of CIT vs. Arun Dua 186 ITR 494 (Cal). In order to explain further, the ld. Counsel for the assessee Shri S.E. Dastur strongly placed reliance on CIT (TDS) vs. Qutar Airways (supra). It was further submitted that even if some decisions have been pronounced incorrectly, without considering the same, the Hon'ble High Court's decision already pronounced in which SLP filed by the Department has also been dismissed by the Hon'ble Supreme Court, so, this Bench can take a different view 24 ITA No.1415 & 1416/Mds/09 in the light of Hon'ble Supreme Court's decision in the case of Distributors (Baroda) P. Ltd. v. Union of India and Others 155 ITR 120 in which it has categorically been held that to perpetuate an error is not a heroism and to correct it ,is the compulsion of law. Therefore, it was strongly pleaded that the Hon'ble Kerala High Court's decision in the case of M.S. Hameed (supra), which is almost on similar facts, though in relation to 194G, this Bench should follow the said decision to confirm the order of the ld. CIT(A) and dismiss the appeals of the Department for both the years.
8. The ld. DR in order to counter the submissions of the ld. Counsel for the assessee has pleaded that even in the absence of any payment having been made to the distributors and only discounts having been allowed, which is payment and reliance was placed on 240 ITR 740 (Mad), Hon'ble Supreme Court's decision in the case of 223 ITR 271 (SC) and 189 TAXMAN 315. It was also submitted that the Hon'ble Delhi High Court despite having referred to M.S. Hameed's case and the Cochin Bench of the Tribunal's decision in the case of the assessee, has taken an independent view by considering the entire transaction. Further reliance was placed on 103 ITR 66 (SC) and Hon'ble Delhi High Court and so far as not treating an accounting entries as recorded in the books of accounts, reliance was placed on 116 ITR 1 (SC). Since it is a commission as ITAT Cochin Bench has held, which view has been upheld by the Hon'ble Kerala High Court and so far as Qutar Airways relied upon by the ld. Counsel for the assessee, the same is in relation to different issue as nature of transaction is not the same as in the case of the assessee, whether, it is discount or commission, it has clearly been 25 ITA No.1415 & 1416/Mds/09 held to be liable to TDS by the Hon'ble Kerala and Delhi High Courts and as per Kanel Oil & Export Inds. Ltd.'s case, in the Third Member's case, it has clearly been held that if two views are there, one of special or same bench and other of non jurisdictional High court, the High Court's decision to be followed and Hon'ble Bombay High court has held that coordinate Bench later decision is to be followed and further reliance has been placed on 238 ITR 113 (Delhi), 113 ITR 598 (Bom) and 53 ITD 1 (Ahd).
8.1 So far as dismissal of the SLP is concerned, the ld. DR submitted that the Hon'ble Supreme Court has held in the case of 231 ITR 50 and 222ITR523 (All) that such dismissal of SLP does not lay down law and so far as Daruvala Bros. (P) Ltd.'s case is concerned, the same is in relation to the salary payment, which is one way payment and it is altogether in relation to a different issue. It was, thus pleaded for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer.
9. The ld. Counsel for the assessee tried to distinguish all the decisions cited by the ld. DR and has also argued and pleaded for confirmation of the impugned order.
10. We have heard both the sides, considered the material on record, relevant provisions of law as well as precedents relied upon by rival sides and find that the assessee has provided Sim cards and Pre-paid cards to various distributors below the MRP prescribed for such cards and the Assessing Officer after obtaining necessary details from the assessee has concluded to hold that the amount below MRP allowed by the assessee to various distributor is discount/commission and as 26 ITA No.1415 & 1416/Mds/09 the assessee has failed to deduct any tax at source on such less amount, so he worked out the TDS as payable by the assessee under section 194H and raised demand under section 201(1) and 201(1A) as detailed in para 2 above. The assessee filed appeal and same was allowed by the first appellate authority, against which the Department has come up in appeal before us and it is the main argument of the ld. DR that since amount has been allowed as discount/ commission to the distributors as the assessee has charged the amount less than the MRP, therefore, it amounts to commission/brokerage and tax is liable to be deducted at source in terms of section 194H, which was not deducted, so the demand created by A O is proper and justified. Whereas, the ld. AR has mainly contended that the assessee has not paid any commission to the distributors, so there is no question of making deduction of tax at source. Therefore, the demand raised by the Assessing Officer is not sustainable which has correctly been deleted by the ld.CIT(A). Rival sides have referred to various clauses of agreement with the distributors and different case law also, details of which has been given in earlier paragraphs to support their respective arguments and ld. Counsel for the assessee has strongly pleaded that since the Hon'ble Kerala High Court's decision in assessee's own case, main plea about not considering the fact that there is no payment or credit of the amount by the assessee, therefore, it cannot be held to be precedent to decide the issue against the assessee and the Hon'ble Delhi High Court has also not considered this vital aspect, while referring to ITAT Cochin Bench's decision in the case of the assessee. Therefore, both these decisions of being non-jurisdictional High Court's are not applicable when 27 ITA No.1415 & 1416/Mds/09 other earlier decisions one of Hon'ble Kerala High Court and other that of Bombay High Court favourable to the assessee are to be considered and applied in view of various precedents, therefore, the order of the ld. CIT(A) should be confirmed.
10.1 After considering the relevant material in the light of provisions of law and precedents, we find that 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 which is extracted hereunder for easy reference:
"S.194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, 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 ten per cent:
........
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) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;
........"
28 ITA No.1415 & 1416/Mds/09What appears from Explanation (i) of the definition clause above is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case above referred that a customer can have access to mobile phone service only by inserting Sim Card in his hand set (mobile phone) and on assessee activating it. Besides getting connection to the mobile network, the Sim Card has no value or use for the subscriber. In other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far as Recharge coupons or E Topups are concerned which are only air time charges collected from the subscribers in advance. We have to necessarily hold that our findings based on the observations of the Supreme Court in BSNL's case in the context of sales tax in the case of BPL Cellular Ltd. squarely apply to the assessee which is nothing but the successor company which has taken over the business of BPL Cellular Ltd. in Kerala. So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rendering services to ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee. The 29 ITA No.1415 & 1416/Mds/09 terms of distribution agreement clearly indicate that it is for the distributor to enroll the subscribers with proper identification and documentation which responsibility is entrusted by the assessee on the distributors under the agreement. It is pertinent to note that besides the discount given at the time of supply of Sim Cards and Recharge coupons, the assessee is not paying any amount to the distributors for the services rendered by them like getting the subscribers identified, doing the documentation work and enrolling them 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 substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment 30 ITA No.1415 & 1416/Mds/09 received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute 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. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot charge anything more than the MRP shown in the product namely, Sim Card or Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but commission within the meaning of Explanation (i) on which tax is deductible under Section 194H of the Act. The contention of the assessee that discount is not paid by the assessee to the distributor but is reduced from the price and so much so, deduction under Section 194H is not possible also does not apply because it was the duty of the assessee to deduct tax at source at the time of passing on the discount benefit to the distributors and the assessee could have given discount net 31 ITA No.1415 & 1416/Mds/09 of the tax amount or given full discount and recovered tax amount thereon from the distributors to remit the same in terms of Section 194H of the Act. This proposition is supported by the decision of the Supreme Court cited by Standing Counsel for the respondent in J.B.BODA AND CO. PVT. LTD. V. CENTRAL BOARD OF DIRECT TAXES reported in (1997) 223 ITR 271 wherein the Supreme Court has held as follows. "A two-way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case." We, therefore, do not find any merit in the contention of the assessee that recovery of tax is not permissible at the time of giving discount on the delivery of products to the distributors.
10.2 So far as other case law with respect to deduction of tax at source on the amount of discount/commission is concerned, we find that the Hon'ble Kerala High Court while dealing with this issue in the case of the assessee in ITA No. 1742 of 2009 dated 17.08.2010, after incorporating the relevant findings of the Tribunal on accounting entries in para 3 and reproducing section 194H in first part of para 4 has concluded to decide the issue in favour of the Revenue and relevant portion of para 3, and para 6 of the judgment are given as under:
"3. .................
"The assessee company is crediting the sales account by the gross amount and not by net proceeds. For example, the MRP of a pre-paid card is `100/-; margin availed by the distributor is `.20/-. The net proceeds available to the assessee is `.80/-. Let us see how the assessee is accounting for the above. When the SIM Card is given to the distributor, the assessee company is crediting the sales account for an amount of `.100/-. Assessee is debiting the cash account with `.80/- being the cash paid by the distributor. Assessee 32 ITA No.1415 & 1416/Mds/09 company is debiting the commission account for `.20/-.This is the margin enjoyed by the distributor. As far as the assessee company is concerned, it has given a commission of `20/-. On delivery of a pre-paid card of `.100/-, assessee is adjusting the payment of commission through accounts and invoice. In the first instance sale is accounted for `. 100/-; the second cash is accounted for `.80/-; and the third commission is accounted for `.20/-. It shows that as far as the sale is concerned, it is `.100/- and the assessee has given a commission of `.20/- to the distributor and the net cash proceeds is `.80/-. Instead of treating the sale at the net value of `.80/-, the assessee is accounting the sales at the gross value of `.100/- and thereafter debiting an expenses account for commission paid of `.20/-. Therefore, in the facts and circumstances of the case and in the light of the finding of the Hon'ble jurisdictional High Court in the case of M/s.BPL Mobile Cellular Ltd. (Writ Petition No.29202 of 2005) that the essence of the contract between the assessee and the distributor is that of service, we find that the distributors are acting as agents of the assessee company and the margin enjoyed by the distributors are the commission/brokerage allowed by the assessee company.
Counsel for the assessee sought to substantiate the position contrary to the above finding of the Tribunal by reference to the distribution agreement which assessee has with the distributors. It is stated in the agreement that distributors are free to charge any amount from the subscribers or retailers below the MRP. In other words, distributors are not bound to sell the goods namely, Sim Cards or Recharge coupons at the MRP to treat the discount as charges or commission received or receivable by the distributors. Relying on this clause in the agreement, the contention of the Senior counsel is that even if tax is recovered at source on the discount amount, it may be on an amount that may not ultimately be realised by the distributor at the time of their sales to consumers or to retailers wherein they are free to pass on part of the discount received by them i.e. by selling the products at below the MRP. In this context Standing Counsel for the Department referred to Section 197 of the Act where under the payee is entitled to apply to the department for obtaining payment without deduction of tax or with deduction at rates lower than what is provided in the statute. We are in full agreement with this contention of the department because if it is commission on which TDS is payable under Section 194H, the distributors can approach the department and get certificates to receive discount or commission without deduction or with deduction at lower rates. Therefore, we are unable to accept the contention of the Senior counsel that the possibility of distributors selling the products at below MRP leading to higher recovery of tax will stand in the way of assessee recovering tax at source or collecting tax from the distributors on the discount passed on to them at the time of sale of the 33 ITA No.1415 & 1416/Mds/09 products, if the transaction is subject to deduction at source under Section 194H of the Act. Further, it is common knowledge that recovery of tax at source is not the actual tax payable by the recipient who is free to claim refund of TDS amount with interest, if excess tax is recovered under TDS Scheme".
"6. Senior counsel appearing for the assessee has relied on several judgments, particularly two decisions of this court in M.S.HAMEED V. DIRECTOR OF STATE LOTTERIES reported in (2001) 114 TAXMAN 394 (KER.) and KERALA STATE STAMP VENDORS ASSOCIATION V. OFFICE OF THE ACCOUNTANT GENERAL reported in (2006) 150 TAXMAN 30(KER.), the decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS ASSOCIATION V. UNION OF INDIA reported in (2002) 124 TAXMAN 628 (GUJ.), and the decision of the Bombay High Court in COMMISSIONER OF INCOME TAX V. QUTAR AIRWAYS in I.T.A. No.99 of 2009 dated 26.3.2009. The first decision of this court pertains to sale of lottery tickets wherein this court held that the commission given by way of discount at the time of sale of lottery tickets is not a commission on which tax is deductible under Section 194G of the Act. The second decision of this court pertains to sale of stamp paper by the licensed stamp vendors wherein also the finding of this court following the decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS' case is that the transaction is sale of goods and so much so, no deduction of tax is called for under Section 194G of the Act. So far as the lottery ticket is concerned, the transaction is different and the Supreme Court has held that the transaction is sale of goods and so much so, the decision rendered by this court has no application in regard to commission paid by the assessee to the distributors in the form of discount which we have found to be in essence and substance for rendering services. The next judgment relied on by the petitioner which is in KERALA STAMP VENDORS ASSOCIATION case rendered by one of us (C.N.Ramachandran Nair, J.), relates to sale of stamp paper by the licensed vendors. Here again, this court by relying on decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS case held that the transaction is a sale. On a reconsideration of this judgment, we feel this court's judgment may require reconsideration because consideration received by the stamp vendors for the stamp paper does not really represent it's value but is nothing but stamp duty. Value of each stamp paper may be fifty paise or even a rupee, whatever be it's quality, but what is collected depends on the amount stamped thereon which is nothing but stamp duty recovered by the State from the ultimate user in terms of the Stamp Act. Rightly or wrongly this court held that the transaction is sale because loss of stamp paper is to the account of the stamp vendors, if it is lost in their custody. The Government also treats the transaction as sale of goods and specific exemption is granted from payment of sales tax in terms of provisions of the Sales Tax Act. Therefore, the finding that Section 194H is not applicable is on the specific finding 34 ITA No.1415 & 1416/Mds/09 in that case that the transaction is sale of goods, whereas in this case following the Division Bench judgment of this court we have found that the distributor is paid commission in the form of discount for services rendered to the assessee. Therefore, none of these decisions relied on by the assessee applies to the facts of this case which is payment of commission by way of discount for services rendered by the distributor. Senior counsel for the assessee has in support of his contentions relied on the following decisions of the Supreme Court also, ADDITIONAL COMMISSIOENR OF INCOME TAX V. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION reported in (1980) 121 ITR 1, KEDARNATH JUTE MANUFACTURING CO. V. COMMISSIONER OF INCOME TAX reported in 82 ITR 363, COMMISSIONER OF INCOME TAX V. MOTORS 7 GENERAL STORES (P) LTD. (1967) 66 ITR 692, COMMISSIONER OF INCOME TAX V. AJAX PRODUCTS LTD. (1965) 55 ITR 741, COMMISSIONER OF INCOME TAX V. B.C.SRINIVASA SETTY (1981) 128 ITR 294, TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V. COMMISSIONER OF INCOME TAX (1997) 227 ITR 172 and decisions of House of Lords in INLAND REVNUE COMMISSIONERS V. WESLEYAN GENERAL ASSURANCE SOCIETY reported in (1948) 16 ITR 101 and another decision in REVENUE COMMISSIONERS V. DUKE OF WESTMINSTER reported in (1936) A.C. 1.However, on going through these judgments we do not find any of the judgment has any direct application to the facts of this case. The very scheme of deduction of tax at source under the Income Tax Act is to trace recipients of income and their accountability to the department for payment of tax on various transactions. In fact, major portion of the income tax collection is through recovery of tax at source and but for the mechanism, there would have been massive evasion of tax by the recipients of various kinds of income. The trend in legislation is to increase coverage for recovery of tax at source and on a steady basis various services are brought under the TDS scheme so that tax evasion is avoided. We have already taken note of the provision under Section 197 of the Act which mitigates against hardship if any in recovery of tax in as much as a payee is entitled to approach the department and apply for certificate to receive any amount which would be otherwise subject to deduction of tax at source without recovery of any tax or on recovery at lesser rates. We are of the view that the grievance if any against recovery of tax by the assessee is on the distributors, and they are already on the roles of the department because assessee is making deduction of tax at source for payment of commission made under the post paid scheme. As already pointed out, if distributors have any grievance against assessee recovering tax for the commission paid in the form of discount in respect of prepaid services, any such distributor is free to approach the department for getting his grievance redressed by filing an application under Section 197 of the Income Tax Act. However, we make it clear that this is not the ground on which we have held the assessee liable for recovery of tax at source under Section 194H which is only because we have clearly found that the discount paid to the 35 ITA No.1415 & 1416/Mds/09 distributors is for service rendered by them and the same amounts to "commission"
within the meaning of that term contained under Explanation (i) to Section 194H of the Act. The impugned orders issued under Section 201(1) and 201(1A) of the Act are only consequential orders passed on account of default committed by the assessee under Section 194H and, therefore, those orders were rightly upheld by the Tribunal. We, therefore, dismiss all the appeals filed by the assessee." 10.3. Similarly, the Hon'ble Delhi High Court in the case of CIT v. Idea Cellular Ltd. (supra), same issue has been decided in favour of the Revenue with respect to appeals for the assessment years 2003-04 and 04-05 and relevant held portion of the said judgment is reproduced as under:
"TDS - Under s. 194H--Commission or discount to distributors of SIM cards/recharge coupons--Assessee, a cellular operator, provides prepaid connections to the subscribers through distributors called prepaid market associates (PMAs) appointed by it--It offers discount for prepaid calling services to its distributors--Legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further appointed by the PMA5 with the consent of the assessee-- Fact that the PMA is supposed to make the payment in advance as per the agreement does not make any difference to the nature of the transaction in view of the other terms of the agreement--Even though advance payment is made by the PMA qua SIM cards, it does not amount to 'sale' of goods in as much as unsold SIM cards are to be returned to the assessee and it is required to make payment against them--This is an antithesis of 'sale'-- Therefore, the discount offered by the assessee to the distributors on payments made by the latter for the SIM cards/recharge coupons which are eventually sold to the subscribers at the listed price is commission and it is subject to TDS under s. 194H--Contention of the assessee that 5. 194H is not applicable as there is no 'payment or credit' by the assessee to the distributor cannot be accepted.
Held The argument of the counsel that s. 194H is not applicable, as there is no "payment or credit' by the assessee to its distributor is to be rejected. Likewise, the argument that the amount must be shown to be the income of the respondent also does not hold good. The legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further 36 ITA No.1415 & 1416/Mds/09 appointed by the PMAs with the consent of the assessee. It is created by : (a) activation of the said SIM card by the assessee in the name of the consumer/subscriber. (b) service provided by the assessee to the subscriber. Further, dealings between the subscribers and the assessee in relation to the said SIM card including any complaint, etc. for improper service/defect in service. (c) entering into the ultimate agreement between the subscriber and the assessee. It is to be borne in mind that the nature of service provided by the assessee to the ultimate consumers/subscribers, whether it is prepaid or post-paid SIM card remains the same. In the instant case, the SIM cards are prepaid, which are sold by the assessee to the consumers through the medium of PMAs. In the case of post- paid, SIM card transaction is entered into directly between the assessee and the subscriber and the subscriber is sent bill periodically depending upon the user of the SIM card for the period in question. In both, the cases, legal relationship is created between the subscriber and the assessee that too by entering into specific agreement between these two parties. In contrast, the legal position when the goods are sold by principal to its distributors creating "principal and principal"
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. No doubt, as per cl. 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 cI. 25(d) of the agreement. 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 payment is received in respect of those SIM cards, which are ultimately sold to the subscribers in as much as unsold SIM cards are to be returned to the assessee and the assessee is required to make payment against them. This is an antithesis of "sale". There cannot be any such obligation to receive back the unsold stocks. Further, cl. 25(f) lays down that on termination of agreement, PMA or its authorized retailer appointed by it, is not entitled to any compensation for cost or expenses incurred by it in either setting up or promotion of its business, etc. No such clause was required in case of sale". Thus, the Tribunal erred in holding that the payments paid by the assessee are not commission as envisaged under s. 194H.--CIT vs. Singapore Airlines Ltd. & Ors. (2009) 224 CTR (Del) 168 : (2009) 22 DTR (Del) 129 : 2009-ITOL-183-HC-DEL-IT followed; Bharat Sanchar Nigam Ltd. & Anr. vs. Union of India & Ors. (2006) 201 CTR (SC) 346 : AIR 2006 SC 1383 relied on; Vodafone Essar Cellular Ltd. vs. Asstt. CIT (2010) 35 DTR (Coch)(Trib) 393 and Asstt. CIT vs. Bharti Cellular Ltd. (2007) 108 TT] (Kol) 38 approved; Vijay Traders vs. Bajaj Auto Ltd. (1995) 6 SCC 566, 37 ITA No.1415 & 1416/Mds/09 Ahmedabad Stamp Vendors Association vs. Union of India (2002) 176 CTR (Guj) 193 : (2002) 257 ITR 202 (Guj) and Bhopal Sugar Industries Ltd. vs. STO 1977 CTR (SC) 284 : (1977) 40 STC 42 distinguished; Idea Cellular Ltd. vs. Dy. CIT (2009) 18 DTR (Del)(Trib) 475 : (2009) 121 TI] (Del) 352 set aside.
(Paras 22 to 26) Conclusion Transaction between the assessee, a cellular operator, and the prepaid market associates (PMAs) appointed by it whereby SIM cards/recharge coupons are ultimately sold to the subscribers through the latter does not amount to 'sale' of goods and, therefore, the discount offered by the assessee to the distributors on payments made by the latter for the SIM cards/recharge coupons which are eventually sold to the subscribers at the listed price is commission and it is subject to TDS under s. 194H.
11. So far as the plea of the ld. Counsel not to follow Kerala High Court's and Delhi High Court's decision in the case of the assessee and in the case of CIT v. Idea Cellular Ltd. respectively is concerned, we, after careful consideration of rival submissions and precedents, find that these two decisions are direct on the point relatable to interpretation of section 194H in relation to commission / discount allowed to the distributors on SIM cards and recharge coupons and no similar decision with regard to interpretation of same provision has been cited by the ld. Counsel for the assessee, therefore, considering these decisions and facts of the case, we hold that the plea of the assessee in this regard is not tenable and as such cannot be accepted.
12. Considering the entirety of facts, circumstances and material on record in the light of relevant provisions, precedents and discussion held above, we hold that the assessee is liable to deduct tax at source on the amount of commission/discount allowed to the distributors under section 194H for both the 38 ITA No.1415 & 1416/Mds/09 years under consideration and since it has failed to do so, therefore, the Assessing Officer has correctly created demands under sections 201(1) and 201(1A) of the Income Tax Act and the ld. CIT(A) is not justified at all to delete such demands. As such, while accepting the appeals of the Revenue, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer in this regard
13. As a result, appeals of the Department are accepted.
Order pronounced on 01.04.2011.
Sd/- Sd/- (B. RAMAKOTAIAH) (U.B.S. BEDI) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 01.04.2011 Vm/- Copy to : Appellant/Respondent/CIT(A)- /CIT, /DR