THE issue before the Bench is - Whether when the assessee sells SIM cards to distributor, he is not paying any commission and in that case no income accrues or arises in the hands of the distributor. YES is the verdict.
Facts of the Case
The assessee, engaged in the business of providing mobile telephone services, was subjected to a survey operation on its business premises, during which it was noted that the assessee sells "pre-paid vouchers, of various face value, to its distributors, at a rate lower than its face value". It was noted that the "the difference was nothing but commission on which no TDS was made. It was also noted "the relationship between the assessee and the distributor was on principal and agent basis, and, therefore, any amount paid to the agent by way of the margin was commission". It was also noted that u/s 194H, a person making payment for commission had the obligation to deduct TDS, but the assessee had not complied with this statutory obligation. Thus, the assessee was treated as an assessee in default. It was explained by the assessee that there was no principal agent relationship between the assessee and its distributors, and that the assessee sold the products, on the outright sale basis though at a discounted price, to its distributors who, in turn, were free to sell the same to the retailer at such price, as they may deem expedient, within the MRP. It was also explained that the distributors were making advance payments to the assessee, that the distributors were free to decide their terms and conditions of doing business with the retailers. As per specific provisions in the agreement entered into by the assessee and the distributors, the assessee was not responsible for created by the distributor. The relationship between the assessee and the distributors, was thus highlighted, which was on principal to principal basis. It was submitted that since distributor does not render any service to the assessee, the difference between the sale price and the MRP cannot be treated as discount for the purposes of Section 194H. However, AO proceeded to reject assessee's submissions and held the assessee as an assessee in default, for not deducting tax at source from commission on sale of prepaid airtime, u/s 201.
AO observed that deductor was doing the business of selling prepaid sim vouchers. Therefore, it was not possible to hold that sim card and recharge coupon delivered by the company to distributors were goods because the relationship between the company and distributors was to provide service to customers through distributors. It was quite apparent that service can only be rendered and not sold. This was because the company had right to operate of cellular telephone service provided and ultimate service was provided by the company to every customers. The distributors were acting and link in the chain of providing Mobile service. Ultimate service were provided by company to the public at large. Therefore, essence of service rendered by the distributors were not sale of any product or goods. Since it was not possible for the company to provide all these services directly to the customers, the deductor had made out business solution to appoint distributors to take care of operational activity of the company to provide service and the distributor was important link in that chain of service. Moreover, the essence of prepaid card and postpaid card, sim card etc were same to provide service to customers and difference was of billing. In prepaid card amount were received in advance whereas, in postpaid card bills were being raised after providing the service. Therefore, if postpaid card was subject to section 194H, it was quite unlikely that prepaid system would be outside the purview of section 194H. It had decided that deductor was liable to deduct TDS u/s.194H on amount of difference between MRP and sale price paid by the distributors. Therefore, the deductor was treated as deemed defaulter u/s,201(1) and also liable to charge interest u/s.201(1A). On appeal, CIT(A) also confirmed the findings of AO.
Having heard the matter, the Tribunal held that,
++ in the case of Bharti Airtel Limited vs. DCIT 2014-TIOL-2113-HC-KAR-IT, HC has observed that the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Only after the resale of those prepaid cards, distributors would derive income. At the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. The condition precedent for attracting Section 194H is that there should be an income payable by the assessee to the distributor. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor. In this context it is pertinent to mention that the assessee sells SIM cards to the distributor and allows a discount of Rs.20/-, that Rs.20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer. The profit earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share Rs.20/- which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. Thus, we are of the view that the order passed by the authorities holding that Section 194H is attracted to the facts of the case is unsustainable;
++ the question whether the non- jurisdictional High Court binds the Tribunal benches or not came up for consideration before Bombay High Court in the case of CIT Vs Godavaridevi Saraf [(1978) 113 ITR 589 (Bom)]. That was a case in which Their Lordships were in seisin of the question as to "whether, on the facts and circumstances of the case, and in view of decision in the case of A.M. Sali Maricar & Anr. vs. ITO & Anr. [(1973) 90 ITR 116 (Mad)] the penalty imposed on the assessee u/s 140A(3) was legal ? The specific question before Their Lordships thus was whether the Tribunal, while sitting in Bombay, was justified in following the Madras High Court decision, where it was held that it should not be overlooked that IT Act is an all India statute, and if a Tribunal in Madras has to proceed on the footing that s. 140A(3) was non-existent, the order of penalty under that section cannot be imposed by any authority under the Act. Until a contrary decision is given by any other competent High Court, which is binding on the Tribunal in the State of Bombay (as it then was), it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land…………..an authority like Tribunal has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision on that issue by any other High Court. It is clear that, except on the issue of legality of the statutory provision itself, the decisions of even the non-jurisdictional High Courts are binding on the lower tiers of judicial hierarchy such as this Tribunal. There can be no dispute on the proposition that irrespective of whether or not the judgments of non jurisdictional High Courts are binding on us, these judgments deserve utmost respect which implies that, at the minimum, these judgments are to be considered reasonable interpretations of the related legal and factual situation. Viewed thus, when there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted by us. In other words, non jurisdictional High Court’s judgment in favour of the assessee, in the light of this legal principle laid down by Supreme Court, is to be preferred over the non jurisdictional High Court not favourable to the assessee. In our humble understanding, it is only on this basis, without sitting in value judgment on the views expressed by a higher tier of judicial hierarchy, that the conflicting views of non jurisdictional High Courts can be resolved by us in a transparent, objective and predictable manner. It is very tempting to believe, or pretend to believe, that, in the absence of direct decision on the issue by the jurisdictional High Court, we have unfettered discretions in exercise of our judicial powers but then such an approach will not only be contrary to settled legal position, as set out above, but also, in a way, an exercise in impropriety;
++ in conformity with the esteemed views of Karnataka HC in Bharti Airtlel’s case, it is held that the assessee was not responsible for any post-delivery defects in the services, it was specifically agreed that "no request of refund of any money shall be entertained by assessee under any circumstances. The fact that there are certain conditions and stipulations attached to the sale of this right of service by the assessee to his distributors does not affect the character of sale on principal to principal basis. Since at the time of the assessee selling these rights for a consideration to the distributor, the distributor does not earn any income, the provisions of Section 194 H do not come into play on the transaction of sale of the right to service by the assessee to his distributors. The condition precedent for attracting Section 194H is that there should be an income payable by the assessee to the distributor. So far as the transaction of sale of ‘right to service’ by the assessee to his distributor is concerned, while it has income potential at a future points of time (i.e. when this right to service is sold at a profit by the distributor), rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Therefore, at the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor . Accordingly, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. In a situation in which the assessee has credited the sale proceeds at the transaction value (in contrast with the transaction being shown at face value and the difference between face value and the transaction value credited to the distributor), the tax deduction liability u/s 194H does not arise. While counsel for the assessee has stated at the bar that the sale proceeds are credited at the transaction value, this aspect of the matter is to be verified by AO, and in case the sales is accounted for at the face value, to that extent, the tax withholding liability is to be sustained. This ground of assessee is thus allowed;
Applicability of section 194J on national roaming charges
++ CIT(A) has erred in not holding that in the facts and circumstances of the case, the providing of roaming facilities to the appellant by the other telecom operators are not in the nature of technical services and hence the provisions of Section 194 J are not applicable to the payments made towards national roaming charges. We have noted that this issue has been remitted by the CIT(A) to the file of AO for the purposes of re deciding the issue in the light of Supreme Court’s judgment in the case of CIT Vs Bharti Cellular Limited 2010-TIOL-65-SC-IT. As held by Supreme Court, in a situation in which no human intervention is involved, these services cannot be considered to be technical services in nature. That aspect, however, is to be examined by the AO, as was directed by Supreme Court in the said case as well. We, therefore, see no infirmity in the order of the CIT(A). We confirm his findings and decline to interfere in the matter. This ground is thus allowed;
++ in ground no. 3, the assessee has raised grievance against CIT(A)’s directions for certain verifications in respect of payments of taxes by the distributors, but, as we have upheld the grievance of the assessee against the very applicability of Section 194 H on the facts of this case, that aspect of the matter is rendered wholly academic and infructuous. We, therefore, see no need to deal with that aspect of the matter at this stage. Ground no. 3 is dismissed as infructuous. In the result, the appeal is partly allowed in the terms indicated above.