By TIOL News Service

NEW DELHI, APRIL 10, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether discount on prepaid recharge vouchers extended by the cellular companies to their distributors, is in nature of "commission" which attract rigors of section 194H. YES IS THE ANSWER.

Facts of the case:

The Assessee company is engaged in the business of providing post-paid and pre-paid telecommunication services through various channel partners under the agreements entered between them. According to the assessee, the starter kits and the recharge coupon vouchers were sold to its various distributors as per the terms of business agreements on principal to principal basis at a discounted price than MRP with the agreed rider that no product shall be sold at a price more than MRP and thus, such transactions were not liable for TDS u/s 194H. According to AO however, the discount, i.e., the difference between the MRP and the selling price, to the distributor amounted to payment of commission to the distributors which was liable to TDS u/s 194H. He therefore following the similar stand taken in case of assessee for F.Y 2004-05 and 2009-10, held the discounts allowed on Starter Kits liable to TDS and since the assessee had failed to deduct the tax at source, he held the assessee as in default on this count, determining the total liability and interest thereon at Rs.2,15,45,233/- u/s. 194H.

Tribunal held that,

++ as far as payment to distributors is concerned, the stand of assessee is mainly based on the decision of Karnataka High Court in the case of (1) Bharti Airtel Ltd. (2) Vodafone Essar South Ltd. vs. DCIT and Tata Teleservices Ltd. vs. CIT - 2014-TIOL-2113-HC-KAR-IT whereas the stand of the Revenue is based on the decision of jurisdictional High Court in the case of Idea Cellular Ltd. As seen, the AO has treated the assessee as assessee in default alleging non–deduction of tax at source u/s 194H, on the reasoning that it has paid commission to the distributors for selling the starter Kits /pre–paid sim card/ recharge vouchers. It is an admitted fact that the MRP decided by the assessee of its products is more than the amount alleged to have been received from the channel partners (distributors). What is to be adjudicated is whether the impugned transactions of starter kits/pre-paid recharge vouchers were the transactions of purchase and sale on principal– to–principal basis or on principal-to-agent basis. It is an admitted position of law that in the former case, the assessee shall not be liable for TDS, but in latter situation, the provisions of section 194H would come into play. The answer to the two situations would decide whether the discount given to the distributor was in the nature of commission or not;

++ the Jurisdictional High Court in case of Idea Cellular, has concluded that the relationship between parties in that case was principal to agent observing that: "....the 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 PMAs with the consent of 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 postpaid, 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....Another important feature is that the SIM cards stocked by the distributors are still the property of the service provider. The permissive right to use SIM cards to get access to the phone network of the assessee company is given only to the ultimate consumer who activates the connection by using the secret number provided in the SIM card. It is only for the ultimate consumer or the assessee company who has the authority to uncover the secret number and bring the card into activation....";

++ in view of the decision in case of Idea Cellular, it is seen that the vital feature which Jurisdictional High Court has found relevant is that a legal relationship is established between the telephone service provider and the consumer i.e the subscriber to its products. The Jurisdictional High Court has also followed the dictum of Apex Court in the case of BSNL vs UOI (AIR 2006 SC 1383) to hold that this is not a case for sale of goods but a case of providing telephone services and hence there can be no sale of goods from the service provider to its distributor so as to create a principal to principal relationship. The jurisdictional High Court further observed that the assessee could not be able to differentiate the nature of services provided on post-paid services on which the assessee has admitted to have paid commission to the distributors and prepaid services, on which the assessee admitted to have given discount to the distributors. This Tribunal is therefore bound to hold that the discount on prepaid products offered by the assessee is in nature of "commission" which does attract rigors of section 194H. From the perusal of business agreement entered between the assessee and its channel Partner M/s. Goel Agencies, it is apparent that the transaction relating to commission is agreed between the assessee and the channel partner/distributor, but the assessee has not been able to address as to for which segment of business, both the parties agreed to pay and receive commission. Hence, in view of what has been discussed and respectfully following the decision of Hon'ble jurisdictional High Court in the case of Idea Cellular Ltd., this issue is decided against the assessee and in favour of the Revenue thereby confirming the decision reached by the FAA on this count.

(See 2018-TIOL-515-ITAT-DEL)