2008 (3) TMI 355 - AT - Income Tax

Tribunal Rules Discount to PMAs Not Commission; Interconnect Charges Not Technical Services, Sections 194H & 194J N/A.

Idea Cellular Limited. Versus Deputy Commissioner Of Income-Tax.

The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeal. It determined that the discount given to Prepaid Market Associates (PMAs) ... Deduction of tax at source under s. 194H - business of providing cellular mobile telephone services to subscribers - offers discount for prepaid calling services to its distributors - relationship of principal and agent between the assessee and PMA - HELD THAT:- It is clear that discount allowed on transactions resulting in outright purchases cannot be treated as brokerages or commission. There should be in existence the relationship of principal and agent in order to bring the discount in the ambit of commission or brokerage. Sec. 182 of Indian Contract Act, 1872, defines the terms 'agent' and 'principal'. An agent is a person employed to do any act for another or to represent another in dealing with third person. The person for whom such act is done or who is so represented is called the principal. An agent in whom the principal places trust and confidence stands in a fiduciary position in relation to the principal. Whether the PMAs were acting as agents of the assessee or were outright purchasers of goods supplied by the assessee - In the case before the goods are sold to the PMA who in turn transfers goods to retailer to be sold to the end users. The retailers are appointed by the PMA though with the approval of the assessee but they are working under the instructions of PMAs. Termination of the retailers is coterminus with the termination of the agreement with PMA. In our considered view the legal relationship between the assessee and PMA is that of seller and purchaser. We do not find any condition in the agreement from which it can be inferred that PMA stands in a fiduciary position in relation to the assessee. It is admitted by the Revenue that the agreement in substance is the agreements entered into between the assessee and the PMA is in the nature of contract to sale and not contract of the agency. Therefore, the discount allowed by the assessee to PMA will not fall in the definition of commission or brokerage. The legal issue arising out of additional ground raised relates to the issue whether tax can be collected from the assessee when PMAs have paid tax on their income. It is a settled law as held by several Courts that same income cannot be subject to tax twice. Therefore, the additional ground of appeal raised by assessee is admitted being a question of law in view of decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT [1996 (12) TMI 7 - SUPREME COURT]. However, since we have held that the discount allowed by the assessee to PMAs is not visited by the provisions of s. 194H, the issue becomes of mere academic interest and hence we do not consider it necessary to decide the same. Levy of interest under s. 201(1A) - Since we have held that discount paid by the assessee to PMA is not in a nature of commission or brokerage the provisions of s. 194H will not be applicable. Consequently, the assessee was not liable to deduct tax at source. Therefore, interest under s. 201(1A) cannot be levied on the amount of discount on which the tax was not deducted at source. The AO is directed to delete levy of interest under s. 201 (1A) of the Act. Non-deduction of tax at source under s. 194J - payment of interconnect/port and toll charges by one mobile telephone service provider to another service provider - We find that issue is covered in favour of assessee by the order of Tribunal relied upon by the learned Authorised Representative of the assessee. In the case of HFCL Infotel Ltd.[2005 (12) TMI 217 - ITAT CHANDIGARH-B], payments of interconnect charges to BSNL for providing telephone communicating services to its subscribers were made by the assessee. Since the decision is squarely covered by the decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd. [2001 (2) TMI 57 - MADRAS HIGH COURT], and also by the decision of Tribunal Chandigarh and Delhi Benches, and no decision to the contrary relied upon by the assessee and learned CIT(A) have been cited by the Department, respectfully following the precedent it is held that payment made for interconnect services cannot be treated as payment for technical services as provided under s. 194J of the Act. Accordingly, it is held that learned CIT(A) was justified in deleting the addition. In the result, appeals filed by assessee are allowed and appeal filed by the Revenue is dismissed. Issues Involved:1. Deduction of tax at source under Section 194H of the Income-tax Act.2. Levy of interest under Section 201(1A) of the Income-tax Act.3. Non-deduction of tax at source under Section 194J on payment of interconnect/port and toll charges.Issue-wise Detailed Analysis:1. Deduction of tax at source under Section 194H:The primary issue was whether the discount offered by the assessee to its Prepaid Market Associates (PMAs) should be treated as commission, thereby attracting the provisions of Section 194H. The Assessing Officer concluded that the relationship between the assessee and the PMAs was that of principal and agent, thus the discount was in the nature of commission. The CIT(A) upheld this view, emphasizing the control exercised by the assessee over the PMAs. However, the Tribunal found that the relationship was more akin to a principal-to-principal relationship. The Tribunal noted that the PMAs purchased SIM cards at a discount and sold them independently, bearing their own business risks. The Tribunal concluded that the discount did not constitute commission and thus Section 194H was not applicable.2. Levy of interest under Section 201(1A):Since the Tribunal held that the discount allowed by the assessee was not in the nature of commission, the provisions of Section 194H were not applicable. Consequently, the assessee was not liable to deduct tax at source, and therefore, interest under Section 201(1A) could not be levied. The assessing officer was directed to delete the levy of interest.3. Non-deduction of tax at source under Section 194J on payment of interconnect/port and toll charges:The issue was whether the payment of interconnect/port charges by the assessee to other service providers was in the nature of technical services, thereby attracting the provisions of Section 194J. The Assessing Officer had held that these payments were for techno-managerial support services and thus constituted technical services. However, the CIT(A) and the Tribunal disagreed, relying on the precedent set by the Hon'ble Madras High Court in the case of Sky Cell Communications Ltd. The Tribunal concluded that the interconnect charges were part of a revenue-sharing arrangement and did not constitute technical services. Therefore, the provisions of Section 194J were not applicable.Conclusion:The Tribunal allowed the appeals filed by the assessee and dismissed the appeal filed by the Revenue. It was held that the discount given to PMAs did not constitute commission, thus Section 194H was not applicable, and consequently, interest under Section 201(1A) could not be levied. Additionally, the payment of interconnect/port charges was not considered as payment for technical services under Section 194J.