By TIOL News Service

NEW DELHI, OCT 05, 2018: THE ISSUE IS - Whether the nature of payment in the form of incentive given to various sub-dealers, can be equated with commission paid to wholesale dealers by the telecom companies as stipulated u/s 194H. NO IS THE ANSWER.

Facts of the case:

The assessee, an individual, is engaged in the business of wholesale dealer of recharge vouchers/ coupons and SIM of Idea Cellular & Tata Teleservices Ltd. Consequent to filing of his return, the case was selected for scrutiny and an assessment was completed u/s 143(3) after making addition of Rs.1,23,000/- on account of disallowance of expenses debited under the head 'incentive/commission' on adhoc basis of 10% on the ground that some of the expenses under these heads were passed through book entries which were not verifiable. Later on, the CIT in his revisionary jurisdiction u/s 263, observed that assessee had debited sum of Rs.12,31,580/- on account of commission payment on which he had not deducted TDS u/s 194H, and therefore, prima facie the assessment order was erroneous and prejudicial to the interest of Revenue. In response to the show cause notice, the assessee submitted that the sale transactions with the dealers/sub-dealers were direct and were made at arm's length basis and the relationship was between principal to principal basis and there was no agency agreement. The property of goods, i.e., SIM cards including all risks and liabilities were transferred to the dealers/sub-dealers upon the delivery of goods by the assessee and any further dealing with the goods was on the risk and at the expense of concerned dealers. Thus, such transactions were not covered u/s 194H.

The CIT after considering the entire material on record, first of all observed that in case where a distributor was transferring a goods to its dealers and sub-dealers, then undisputedly the transaction was in the nature of principal to principal basis and discount by the former to the latter could not be treated to be in the nature of commission. However, in the case of the assessee, the nature of transaction was different because the transaction involved recharge vouchers/prepaid vouchers/ SIM cards, etc. which products did not have any intrinsic value but were only in the nature of prepayment/commitment for payment for entitlement to avail the services which were being provided exclusively by the telecom entities. The franchisees could be considered as an intermediary between the service providers, the assessee and the ultimate consumer, and therefore, assessee becomes an agent of the telecom entity. He also took note of distributorship agreement entered by the assessee with various telecom entities and noted that the distributor had to exercise substantial control over its retailers. He further noted that assessee himself labeled the payment as incentive/commission while debiting the amount in the P&L account, and therefore, provision of Section 194H was clearly applicable and since assessee had not deducted TDS, the disallowance had to be made u/s 40(a)(ia).

Tribunal held that,

++ it is not in dispute that assessee is a wholesale dealer of recharge vouchers, coupons, SIM cards for telecom entities, like, Idea Cellular Ltd. and Tata Teleservices. He has debited a sum of Rs.12,31,580/- under the head 'incentive/commission' which in the original assessment order passed u/s.143(3), AO has made ad hoc disallowance of 10% on the ground that entire expenditure are not subject to full verification and it appears to be excessive and unreasonable. The CIT has exercised his revisionary jurisdiction u/s 263 to hold that the commission/incentive paid to the dealers/sub-dealers amounting to Rs.12,31,580/- is arising out of a transaction wherein there is a principal-agent relationship and there is no sale of goods. Since there is a principal-agent relationship between the assessee and the telecom entity, therefore, there is a similar agency relationship between the assessee who is a wholesale dealer with dealers/sub-dealers. A cellular operator provides prepaid connection through recharge vouchers or prepaid SIM cards to the subscribers through distributors. A discount is offered by the cellular operators to its distributors who sell the SIM cards to the customers/ultimate consumers. The Delhi High Court in the case of Idea Cellular while interpreting the transaction between the cellular operator and the distributor have held that the nature of transaction does not amount to sale of goods inasmuch as unsold SIM cards which is returned to the assessee, i.e., the cellular operator, who is required to make payment against them. This transaction cannot be treated as sale and therefore, the discount offered by the cellular entities/cellular operators to the distributors on the payments made for the SIM cards /recharge vouchers/ coupons which are eventually sold to the subscribers at the listed price is commission and hence it is subjected to TDS u/s.194H. The principal-agent relationship of the transaction between the cellular operator and dealers has been treated to be commission. Nowhere has it been held that similar relationship exists between the wholesale dealer, dealers and sub-dealers;

++ the assessee who is a wholesale dealer gives incentives to his sub-dealers depending upon the advance and the promptness of the payment of the sale consideration received for selling the prepaid vouchers/SIM cards to the customers. There is no agency agreement between the assessee and his dealers/sub-dealers. The agency relationship between the assessee and the cellular operators cannot be inferred or presumed in the transaction between the assessee and his sub-dealers. The reason being the SIM cards, vouchers belonged to the cellular operators/cellular entities and these cellular operators/telecom entities ensure that payment is received in respect of those prepaid vouchers and SIM cards which are sold to the subscribers and unsold SIM cards are returned back to them and even if such SIM cards are returned, then these cellular/telecom entities are required to be made payment against them and the SIM card stocked with the distributors are the property of service provider, i.e., the telecom/cellular entities. The permissive right to use the SIM cards to get access to the phone network of the telecom companies is given only to the ultimate customers who have activated the connections. Thus, in the case of the telecom company, it is the owner of the prepaid voucher/SIM card and not the wholesale dealer. It is the telecom companies who are providing the services to the distributors on prepaid package. If at all, there is an agency relationship on which TDS is required to be deducted on the commission paid to the dealers is qua the cellular operator and the wholesale dealer. The same agency relationship cannot be inferred between the assessee being a wholesale dealer and sub-dealers. In the case, before Delhi High Court, one important fact which weighed heavily their Lordships that in the postpaid SIMs the telecom company was deducting TDS u/s.194H and Court found that there is no difference in the case of prepaid SIM card also and therefore, all the essential feature of agency relationship exists between the dealer and the telecom operator. Thus, here in this case, it cannot be held that similar relationship exists between the assessee and his sub-dealers; therefore, we hold that nature of payment in the form of incentive to various sub-dealers cannot be equated with commission as stipulated u/s.194H. Accordingly, there is no requirement for deducting TDS.

(See 2018-TIOL-1702-ITAT-DEL)