2013 (9) TMI 263 - AT - Income Tax

Tribunal rules on tax issues: Commission subject to TDS, roaming charges, outsourcing payments

M/s BHARTI AIRTEL LTD Versus ASSTT COMMISSIONER OF INCOME TAX

The Tribunal ruled in favor of the revenue on the first issue, confirming that the margin allowed to distributors was commission subject to TDS under ... TDS u/s 194H – Tax deduction at source in relation of the margin money allowed by the assessee to the distributors on supply of pre paid Sim cards and recharge coupons - The assessee is rendering mobile telephone services to the customers through appointment of distributors – Held that:- Margin allowed by the assessee to the distributors was of the nature of commission which was liable for deduction of tax at source u/s 194H and the transaction between assessee and distributors is not in the nature of sale of sim card – Decided against the Assessee. As per the telecom regulation, connection could be given to customer only after production of identity, proof of address etc. and this job has been entrusted by the assessee to the distributors. In the post paid scheme, the assessee pays certain charges to the distributors for all these services such as enrollment of subscribers with proper verification and documentation on behalf of the assessee. The assessee treats such payment made to the distributors in post paid scheme as commission for services rendered on which tax has been deducted at source. However, in case of pre paid scheme, the assessee allows certain margin to the distributors while supplying the Sim cards and recharge coupons and this margin is treated by assessee as discount on which no tax has been deducted at source. The assessee’s claim is that it was a case of sale of Sim cards and recharge coupons to the distributors at discount and therefore the payment were not for rendering any services and thus could not be considered as commission – Held that:- Relying upon the decision of Hon’ble High Court of Kerala in case of Vodafone Essar Cellular Ltd. [2010 (8) TMI 691 - KERALA HIGH COURT], it has been held that transaction of the assessee, with the distributor for supply of Sim cards and recharge coupons under the pre paid scheme is not sale – In a similar case Hon’ble Supreme Court in case of BSNL and another Vs. Union of India reported [2006 (3) TMI 1 - Supreme court] upheld the contention of the assessee that there was no sale involved. Applicability of provision of section 194J regarding deduction of tax at source in relation to roaming charges and inter-connect usage charges paid by the assessee to other cellular operators - Payments were for technical services rendered and therefore provisions of section 194 J were attracted as per which tax was required to be deducted, which had not been done by the assessee and, accordingly the AO treated the assessee in default u/s 201(1) of the IT Act – Held that:- Reliance has been placed upon the judgment passed by Hon’ble Supreme Court of India in Bharti Cellular Ltd [2010 (8) TMI 332 - Supreme Court of India], wherein it was held that for applicability of section 194 J, it was necessary to find out if human intervention was involved at any stage including the stage where the existing capacity was exhausted and additional capacity was required. The Hon’ble Supreme Court directed the CBDT to issue directions to all its officers that in such cases the department need not proceed only by the contracts placed before the officers and the matter should be examined with the help of technical experts – Accordingly, in the present case it was held the issue should receive fresh consideration at the hands of the AO – Matter restored to the file of A.O. for fresh adjudication. Applicability of provisions of section 194 J to the payments made by the assessee for outsourcing of manpower from the sister concern – A.O. contended the applicability of section 194 J as per which tax was required to be deducted at the rate of 10% in place of tax deducted at the rate of 2% by the assessee u/s 194 C of the IT Act - The claim of the assessee is that it did not want to keep on its roll the employees rendering clerical services in the back office and accordingly such staff were outsourced from the sister concerned. However, the payments were made for reimbursement of actual expenses incurred by the sister concern plus a sum of Rs. 350 per employee per month – Held that:- As regards the payment for reimbursement, there is no profit element involved and therefore TDS provisions could not be applied - Payment of Rs. 350 per employee was for supply of manpower and not for any professional and technical services - CIT (A) has also given a finding that the persons supplied by the sister concern were just graduate and under graduate and had been assigned the work at the clerical level or had been given routine work - Nothing produced before us to controvert the finding of CIT (A) - No infirmity in the order of CIT (A) holding that the payments were not for any technical services or for any professional or managerial services – No applicability of section 194J – Decided in favor of Assessee Issues Involved:1. Applicability of provisions of Section 194H on transactions with distributors for prepaid SIM cards and e-recharge vouchers.2. Applicability of provisions of Section 194J on roaming charges and inter-connect usage charges.3. Applicability of provisions of Section 194J on payments made for outsourcing manpower supply.Detailed Analysis:1. Applicability of Provisions of Section 194H on Transactions with Distributors for Prepaid SIM Cards and E-Recharge Vouchers:The primary issue is whether the margin allowed to distributors on prepaid SIM cards and e-recharge vouchers constitutes a commission under Section 194H, necessitating TDS deduction. The assessee, a cellular operator, argued that the margin was a discount, not commission, and thus not subject to TDS. The AO disagreed, considering the distributor as a middleman, and the margin as commission.The AO referred to the definition of 'commission or brokerage' under Section 194H and noted that the distributor acted on behalf of the mobile company. The AO cited the Delhi High Court's judgment in IDEA Cellular Ltd., which held that the relationship between the assessee and the distributor was that of principal and agent, making the margin a commission.CIT(A) upheld the AO's decision, referencing judgments from the Delhi and Kerala High Courts, which stated that the margin allowed to distributors for prepaid SIM cards and e-recharge vouchers was commission. The High Courts emphasized that the distributor's role was to enroll subscribers and manage documentation, acting as a middleman.The assessee argued that their case was similar to the Ahmedabad Stamp Vendors Association, where the margin was considered a discount. However, the High Courts had distinguished this case, noting that the property in SIM cards did not pass to the distributor, unlike stamp papers.The Tribunal confirmed the CIT(A)'s decision, holding that the margin allowed was indeed commission, requiring TDS under Section 194H.2. Applicability of Provisions of Section 194J on Roaming Charges and Inter-Connect Usage Charges:The second issue pertains to whether roaming charges and inter-connect usage charges paid to third-party service providers are for technical services, thereby attracting TDS under Section 194J. The AO treated these payments as fees for technical services, subject to TDS.CIT(A) referenced the Supreme Court's judgment in Bharti Cellular Ltd., which required examining if human intervention was involved in the technical operations. The Supreme Court directed the CBDT to issue guidelines for such cases and remanded the matter for fresh consideration.CIT(A) set aside the AO's order, instructing a re-examination in light of the Supreme Court's directions. Both parties appealed, with the assessee disputing the applicability of Section 194J and the department challenging CIT(A)'s power to set aside the issue.The Tribunal upheld CIT(A)'s decision to remand the matter for fresh consideration, noting that a fresh assessment had already been framed by the AO.3. Applicability of Provisions of Section 194J on Payments Made for Outsourcing Manpower Supply:The third issue, relevant only to the department's appeal for the assessment year 2009-10, concerns whether payments for outsourcing manpower supply are subject to TDS under Section 194J. The AO noted payments for outsourcing expenses and held that these were for technical services, requiring TDS at a higher rate.The assessee argued that the outsourced manpower was for clerical support, not professional or technical services. CIT(A) accepted the assessee's explanation, noting that the manpower supplied was for routine clerical work, not professional services.The Tribunal upheld CIT(A)'s decision, finding no evidence to support the AO's conclusion that the payments were for technical services. The Tribunal agreed that the payments were for supply of manpower, not technical services, and thus not subject to Section 194J.Conclusion:The Tribunal ruled in favor of the revenue on the first issue, confirming that the margin allowed to distributors was commission subject to TDS under Section 194H. On the second issue, the Tribunal upheld CIT(A)'s decision to remand the matter for fresh consideration regarding the applicability of Section 194J to roaming and inter-connect usage charges. On the third issue, the Tribunal agreed with CIT(A) that payments for outsourcing manpower were not for technical services and thus not subject to Section 194J. The assessee's appeal was partly allowed, and the revenue's appeal was dismissed.