TaxTMI 
TaxTMI 
2009 (4) TMI 209
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....(1) and 201(1A) of the Income-tax Act, 1961. 3. Section 201 of the Income-tax Act, 1961, provides for the consequence of failure to deduct tax at source or fails to pay the tax deducted at source. Section 201(1) provides that where any person, including the Principal Officer of a Company does not deduct, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax. Section 201(1A) further provides that without prejudice to the provisions of Sub-section (1) as stated above, if any such person, Principal Officer of Company as is referred to in Sub-section (1) does not deduct (the whole or any part of the tax) or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at the prescribed rate for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. 4. The assessee-company VECL is engaged in the business of providing cellular mobil....
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....e-tax Act provides that any person, not being an Individual or a Hindu undivided family, who is responsible for paying, on or after the 1-6-2001, to a resident, any income by way of commission (not being insurance commission referred to in Section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the prescribed rate. 9. The TDS Officer held the view that the assessee-company is bound to deduct tax at source under Section 194H while making the commission payments to its distributors along with the delivery of SIM Cards and other products for rendering pre-paid mobile services to the consumers. On an examination of the trial balance for the financial year 2007 -08, TDS Officer found that the assessee has debited its accounts with "Pre-paid dealer commission". The assessee explained to the TDS Officer that the assessee company is not paying any commission or brokerage to its distributors but the remuneration to the distributors are paid by way of discount given on pre-paid cards at th....
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....stributorship Agreement is a principal-to-principal relationship. Therefore, the distributors' earnings do not qualify to be commission and, therefore, no tax is deductible. (ii) The margin enjoyed by the bulk distributors is in the nature of a discount given on SIM Cards and Recharge coupons which is classified as discount on Airtime. No TDS is required to be made on such payments as it is different from the commission due to postpaid distributors where the assessee is making deduction of tax at source. (iii) As per the terms of the agreement entered into between the assessee and the bulk distributors, the distributors are enjoying freedom of pricing inasmuch as they can sell the SIM Cards and Recharge coupons at any price they fix but not exceeding the MRP. This freedom of pricing is reflected only in a principal-to-principal relationship. (iv) The remuneration earned by the distributors is the difference between the price paid to the assessee and the price at which items are sold by the distributors to the retailers. Such difference is purely attributed to the business of the distributor and it is a business profit of the distributors. The assessee....
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....cidences of a sale. The Court further held that a Stamp Vendor under the provisions of Gujarat Stamps Supply and Sales Rules, 1987 does not fall within the expression "Commission" or "Brokerage" under Section 194H of the Income-tax Act. (ii) Asstt. CIT v. Samaj [2007] 77 ITD 358 (Cuttack): It has been held in that case that commission paid to the agents, by way of deduction from the gross amount in the relevant periodic bills was in the nature of trade discount. The fact that the agent had to make payment for the entire quantity of newspaper lifted irrespective of the papers actually sold, abundantly disproved the Assessing Officer's contention that the sale proceeds were collected by the agents through the hawkers from the customers and then passed on to the publisher. The Tribunal held that mere use of the word 'commission' as envisaged in the contract does not convert a relationship of the vendor and the purchaser into one of agency. (iii) Singapore Airlines v. Asstt. CIT (TDS) [IT Appeal No. 58 (Delhi) of 2003]: Relying on the decision of the Kerala High Court in the case of M.S. Hammed & Co v. Director of State Lotteries....
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....ll-in. This peculiar fact should not have any bearing on deciding whether there is a 'principal to principal' relationship. It is to remember that the agreement of warranty is always between the end user and the manufacturer but the warranty agreement would not alter a 'principal to principal' arrangement between the manufacturer and distributor to that of an agency. 12. The assessee concluded before the TDS authority that the relationship between the assessee and the distributors is 'principal to principal' basis and, therefore, the assessee is not required to deduct tax at source under Section 194Hand the assessee cannot be considered as an assessee in default under Section 201(1) of the Income-tax Act. 13. The TDS Officer did not agree with the assessee-company. He held that the assessee is bound by law to deduct tax at source under Section 194H even in respect of the so-called discounts provided by the assessee-company to its distributors in the business of pre-paid cellular telephone services. The TDS Officer has come to the above conclusion on the basis of the following propositions: (i) The distributors are appointed for distributing th....
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.... such as access to the cellular network and e-Top-up . Therefore, the distributors are acting all the times on behalf of the assessee. The distributors are exclusively marketing the goods and services in connection with mobile telephony of assessee's brand conforming to the display guidelines, sale guidelines and stock maintenance as well as customer identification, verification and documentation. 16. The TDS Officer further distinguished the case laws relied on by the assessee-company and placed more reliance on the decision of the Income-tax Appellate Tribunal, Kolkata in the case of Asstt. CIT v. Bharati Cellular Ltd. [2007] 105 ITD 129. The Tribunal in the said case has held that in a normal principal to principal situation one cannot control the other. Assessee was not only holding ownership but also regulating the manner of the business operations of the distributor. Therefore, the Tribunal held that the margins enjoyed by the distributors are to be treated as commission, which is liable for TDS under Section 194H. 17. The Assessing Officer further reiterated as follows: (i) The property in the SIM Cards and Recharge Coupons do not pass from the assessee-co....
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....tion 194H while giving margin to the bulk distributors on pre-paid mobile service products. 18. Accordingly, the TDS Officer passed orders under Section 201(1) and under Section 201(1A) and demanded the amount of tax involved and interest thereon. 19. The order of the TDS Officer has been taken before CIT (Appeals)-III at Kochi. He considered the grounds and disposed of the appeals through a common order. The CIT (Appeals) reiterating the facts of the case and after examining the reasons made out by the Assessing Officer and the explanations of the assessee-company held that the TDS Officer was right in law in passing orders under Section 201(1) and 201(1A) against the assessee demanding the tax amount and the interest thereon. The first appeals filed by the assessee were thus dismissed. Therefore, these second appeals before us. 20. The common grounds raised by the assessee-company in these appeals read as follows: (1) That the CIT (Appeals) has erred in upholding the action of the Assessing Officer in treating the discount offered by the assessee to the distributors as "Commission" within the meaning of Section 194H of the Act and accordingly erred in holding th....
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....see is not liable to take back the stock on termination of the agreement. The distributors are free to appoint sub-dealers/retailers and the assessee is not accountable for the actions of those sub-dealers/retailers in any manner whatsoever. (iii) In the case of a relation of agency vis-a-vis principal, the principal is always liable for the loss on account of damage, stock, or of that sorts. Further, the principal shall be bound by the acts and omissions of the agents. In the present case, there is no such binding relation between the assessee and the distributors. (iv) The relationship of principal vis-a-vis agent cannot be imposed on the assessee only on the ground that the distributors are bound by certain conditions imposed by the assessee in terms of the agreement regarding fixation of price, submission of accounts, territorial jurisdiction, brand image, access to the stock and accounts, and sales promotion, etc. All these restrictions are functional restrictions necessary to maintain die standard of the business carried on by the assessee and in no way create any relationship of principal and agent. Even in the case of a pure and simple sale on the basis of....
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....e name of distributors for the income earned by them, in the books of account of the assessee. Regarding the expression "any other mode", it is necessary to follow the rule of interpretation ejusdem generis thereby the said expression has to be read in the company of words like cash, cheque and draft. (vii) In the present case there was no payment from the assessee to the distributors and no credit of income in the books of account of the assessee in favour of the distributors and, therefore, no occasion ever arises to deduct any tax on account of the distributors. 22. Shri C. Karthikeyan Nair, the learned Additional Commissioner of Income-tax, appeared for the revenue and argued that the assessee is liable under the provisions of law to deduct tax at source on the benefits earned by the distributors which is essentially in the nature of commission and, therefore, the orders of the authorities below are very much sustainable in law. The learned Addl. CIT referred to the decision of the Income-tax Appellate Tribunal, Kolkata Bench in the case of Bharati Cellular Ltd. (supra) where the Tribunal has considered exactly the very same issue. He submitted that in that case the....
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....e assessee and its distributors. The assessee-company, by virtue of the licence issued by the Department of Telecommunications, Government of India, is engaged in providing Mobile telephone services to the public at large. The Government of India is allotting the licence to various parties in the field on the basis of geographical specifications. The assessee is operating on all India level and, therefore, provides services in various States. The services provided by the assessee-company in the State of Kerala is treated as a unit, under the name and style of Kerala Circle for the purpose of sales, administration and control. The assessee-company either of its own or through outsourcing establishes the infrastructure facilities for providing Cellular services. 26. The assessee is offering two types of services to the public. The first of its kind is post-paid mobile services whereby the customers are opening account with the assessee-company and makes the payment on monthly basis or so against the bills issued by the assessee-company. In that case, the assessee-company provides services to its customers at the first instance and thereafter issues bills and realizes the proceeds.....
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.... assessee-company is delivering the necessary products to the distributors. The Maximum Retail Price (MRP) is mentioned on every product. Distributors/Retailers are not permitted to sell the products to the ultimate consumers beyond the MRP. The assessee-company is delivering these products to the distributors for a specified margin. For example, if the MRP is Rs. 100, the assessee-company may deliver the same to its distributors at Rs. 80. This is the invoice price of the assessee-company. The assessee-company collects this invoice price in advance from the distributors. The distributors are permitted to deliver these products to the ultimate consumers at a price of their choice but not exceeding Rs. 100 per unit, which is the MRP. The margin earned by the distributors being the difference between the sale price and the invoice price is the remuneration of the distributors in this chain of transactions. Therefore, the basic question to be decided in these appeals is whether this margin of the distributors is commission or brokerage coming within the purview of Section 194H of the Income-tax Act, 1961 or the margin is a discount as claimed by the assessee-company which is outside t....
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....ributors are free to determine the ultimate sale price subject to MRP. 34. We do not think that this so-called pricing freedom is so crucial in examining the exact nature of the business relation between the assessee-company and its distributors. The pricing factor is also a matter of mutual consent between the parties. Even in the case of an agency, there can be a clause by which an agent is authorized to sell the goods for a price less than the MRP. Even in a case of principal-to-principal, there may be a clause that the distributor cannot sell a product for a price less than the MRP unless a consent is given by the manufacturer. The matter of pricing in both the cases, i.e., principal-to-principal and principal to agents can be a matter of mutual consent between the parties and even a matter of negotiation after the execution of the agreement. There are no hard and fast rules of any legal proposition as far as these matters are concerned. 35. In both circumstances either in the case of agency or in the case of principal-to-principal relationship, if the distributor is deciding for his own best reasons to sell the goods even below the cost price, he can do so, so long as he....