2025 (2) TMI 913 - AT - Income Tax

TDS Section 194H not applicable to prepaid distributor discounts, year-end accruals with next-day TDS reversal allowed

M/s. Vodafone Mobile Services Ltd., (formerly known as Vodafone Cellular Ltd which now stands amalgamated with Vodafone Mobile Services Ltd.) Versus The Dy. Commissioner of Income Tax, Corporate Circle-1, Coimbatore.

The ITAT Chennai allowed the assessee's appeal on three grounds. First, following the SC decision in Bharti Cellular Ltd, TDS under Section 194H was not ... TDS u/s 194H - disallowance of discount extended to prepaid distributors u/s. 40(a)(i) - assessee has paid sum to its various distributors of prepaid SIM cards/recharge coupons as amount represents the difference between MRP of the talk time and prepaid connections and the price at which these are transferred to pre-paid distributors and discount in nature - HELD THAT:- Whether TDS is to be deducted by the cellular mobile services company on the discount given to distributor has now been settled by the decision of Bharti Cellular Ltd [2024 (3) TMI 41 - SUPREME COURT] wherein as held that Section 194H of the Act is not applicable in respect of payment made by the distributor/franchise - Thus, disallowances made by AO is not sustainable. The ground of appeal is accordingly allowed. Disallowance of year-end accruals u/s. 40(a)(ia) - AO has disallowed the year end provision debited on the last day of accounting - HELD THAT:- Provision has been reversed and credited back on the next day and such expenditure has been debited on the basis of actual bill and TDS deducted, wherever applicable in the next financial year. We find that the issue whether TDS is to be deducted on year-end provisions which is reversed on the first day of the subsequent year has been decided in the case of Subex Ltd. [2023 (1) TMI 778 - KARNATAKA HIGH COURT] held if no income is attributable to the payee there is no liability to deduct tax at source in the hands of the tax deductor. The existence or absence of entries in the books of accounts is not decisive or conclusive factor in deciding the right of the assessee claiming deduction. See KEDARNATH JUTE MANUFACTURING COMPANY LIMITED [1971 (8) TMI 10 - SUPREME COURT] - Decided in favour of assessee. Nature of expenses - Disallowance of club expenses - AO has made disallowance of entry fee/subscription charges paid by the assessee on the ground that the said expenditure is capital expenditure - HELD THAT:- The assessee has incurred club expenses and claimed as revenue expenditure. The A.O without examining the nature of expenditure has held it capital expenditure. As decided in the case Ingersoll-Rand India Ltd. [2020 (4) TMI 550 - KARNATAKA HIGH COURT] has held that expenditure spend on club expenses are revenue in nature. Respectfully following the decision of Hon’ble Karnataka High Court, supra, the addition made on disallowance of club expenses is deleted. The ground of appeal is accordingly deleted. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessment challenged on limitation ground required adjudication by the Tribunal where the ground was general in nature. 2. Whether discounts/price differences paid to prepaid distributors are subject to tax deduction at source and thereby liable to disallowance under section 40(a)(ia) for failure to deduct TDS. 3. Whether year-end provisions/accruals (made on a best-estimate basis and reversed at the start of the next year) attract obligation to deduct TDS such that corresponding amounts are disallowable under section 40(a)(ia). 4. Whether club entrance fees/subscription charges are capital expenditure (and therefore disallowable) or revenue expenditure deductible for the year. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation challenge to assessment (Ground No.1) Legal framework: The taxpayer pleaded that the assessment order was void-ab-initio as being passed after the limitation under section 153(2). Precedent treatment: The Tribunal observed the ground was general in nature and did not require adjudication. Interpretation and reasoning: The Court treated the limitation plea as a non-adjudicated, general ground raised but not specifically pursued or substantiated before the Tribunal. No factual or legal analysis on the limitation point was undertaken because the ground lacked particulars warranting separate determination. Ratio vs. Obiter: Obiter to the extent that no determination on merits was made; procedural ratio that a general/unspecified limitation plea need not be adjudicated absent particulars. Conclusion: No adjudication required on the limitation ground as pleaded; the Tribunal proceeded to decide the appeal on other substantive grounds. Issue 2 - Disallowance under section 40(a)(ia) for discounts to prepaid distributors (Ground No.2) Legal framework: Section 40(a)(ia) permits disallowance of expenditure where tax is required to be deducted at source under Chapter XVII-B but was not. The question is whether TDS (section 194H or other provision) applies to discounts given to distributors. Precedent treatment (followed/distinguished/overruled): The Tribunal applied the binding principle established by the Supreme Court decision (cited in the judgment) which held that section 194H was not applicable to payments made by distributors/franchisees in comparable circumstances. The Tribunal also noted subsequent ITAT decisions relying on the Supreme Court ruling that deleted similar disallowances. Interpretation and reasoning: The Tribunal accepted the assessee's submission that the controlling precedent of the Supreme Court resolves the issue in favour of the taxpayer by negating applicability of section 194H to the transaction in question. The Assessing Officer's view that the relationship was principal-agent and that section 194H required deduction on discounts was displaced by the higher judicial pronouncement. The Department did not successfully controvert the applicability of the Supreme Court ruling. Ratio vs. Obiter: Ratio - where higher court has held that the TDS provision in question does not apply to analogous distributor/franchise payments, AO's disallowance under section 40(a)(ia) cannot be sustained. This is treated as binding on the Tribunal. Conclusion: Disallowance of Rs. 1,633,352,748 under section 40(a)(ia) for discounts to prepaid distributors is not sustainable and is deleted; ground allowed. Issue 3 - Disallowance under section 40(a)(ia) for year-end accruals/provisions (Ground No.3) Legal framework: Chapter XVII-B requires deduction of tax in specified cases when sums are credited; section 40(a)(ia) disallows expenditure where tax deduction required was not made. The accounting practice of making provisions to match expense to the relevant year is at issue. Precedent treatment (followed/distinguished/overruled): The Tribunal followed the Karnataka High Court decision (Subex Ltd. v. DCIT) and other authorities which hold that provisions reversed at the beginning of the next year, where payees are unidentified and the amounts are not attributable to identifiable payees, do not attract TDS liability. The Tribunal also noted supporting observations from other High Court authorities emphasizing that mere book entries are not decisive of TDS obligation where no income has accrued to a payee. Interpretation and reasoning: The Tribunal found that the provisions were made as year-end accruals on a best-estimate basis, subsequently reversed on the opening day of the next year and actual invoices were recorded and taxed (with TDS, where applicable) in the subsequent year. No payees were identifiable at the time of the provision; therefore no income could be said to have accrued to a payee that would trigger TDS obligation. Reliance on matching-principle accounting and the reversal process supported the conclusion that these entries were not in substance payments or credits attracting Chapter XVII-B. The Assessing Officer's reliance on the rule that sums credited to any account may attract TDS was rejected in the light of binding High Court authority distinguishing cases where payees are not identified and amounts are uncertain. Ratio vs. Obiter: Ratio - year-end provisions reversed immediately in the next accounting period, with no identifiable payee and no accrual of income to a payee, do not impose a TDS obligation such that section 40(a)(ia) disallowance is warranted. This is applied as binding precedent. Conclusion: Disallowance of Rs. 158,186,618 as year-end accruals under section 40(a)(ia) is unsustainable and deleted; ground allowed. Issue 4 - Nature of club entrance fee/subscription charges (Ground No.4) Legal framework: Deductibility depends on whether an outlay is capital (non-deductible) or revenue (deductible) in nature; factual and legal analysis of the nature and purpose of expenditure governs classification. Precedent treatment (followed/distinguished/overruled): The Tribunal respectfully followed the Karnataka High Court decision which held that club expenses of the character presented are revenue in nature, distinguishing the Kerala High Court authority relied upon by the lower authorities. Interpretation and reasoning: The Assessing Officer disallowed the small club fee without adequate examination of the expenditure's nature; the Tribunal examined higher court authority (Ingersoll-Rand decision) holding similar club expenses revenue in nature. Applying that precedent to the facts - modest fees incurred for club membership/activities and claimed as business expenditure - the Tribunal concluded the amounts were revenue and allowable. Ratio vs. Obiter: Ratio - modest club entrance/subscription expenses of the type incurred are revenue in nature and deductible; the earlier contrary view was not followed in view of higher court precedent. Conclusion: Disallowance of Rs. 58,337 as club entrance fees/subscription charges is deleted; ground allowed. Result The Tribunal allowed the appeal in respect of the substantive disallowances under section 40(a)(ia) for discounts and year-end accruals and deleted the club expense disallowance, applying controlling High Court and Supreme Court authority; the limitation ground required no adjudication as pleaded.