TaxTMI 
TaxTMI 
2009 (2) TMI 246
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....llowed to the distributors in the form of discount/commission on the market price. The prepaid cards as well as the recharge coupons were in the form of pre-defined information enabling the ultimate user to have access to the service centres for availing telephony services. There was no consumable product in the physical form passing from the assessee company to the ultimate user in such arrangement. The AO was of the view that the margin allowed to the distributors on bulk sales of such prepaid cards/recharge coupons was nothing but "commission" paid to them which attracted deduction of tax at source under s. 194H of the Act. Since the assessee had not deducted any tax at source, a show-cause notice was issued asking the assessee to explain as to why it should not be treated as an assessee in default under s. 201(1) of the Act and also as to why an appropriate demand under s. 201(1) r/w s. 201(1A) of the Act should not be raised. The AO, in this regard, relied on the terms and conditions of the standard agreement entered into between the assessee company and the distributors according to which, the assessee was supposed to pay "commission" to the distributors appointed for "market....
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....erage to make TDS at the time of crediting the account of the payee or at the time of actual payment, whichever is earlier. In the present case, the assessee company was not making any payment at all but was actually receiving discounted payments from the distributors. It was further submitted that the assessee did not reverse the entries relating to the discount allowed to the distributors in prepaid segment since it does not permit return of prepaid cards after they are invoiced. The invoiced amount received on delivery of prepaid cards/coupons were nothing but trading receipts of the company and the accounting of the same, initially as an advance, has no relevance for the purpose of determining the true nature of the transaction. The company received full consideration from the distributors on delivery of the prepaid cards. Relying on the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. J.D. Italia (1983) 32 CTR (AP) 124 : (1983) 141 ITR 948 (AP), the assessee contended that the discount allowed on prepaid cards cannot be termed as commission paid and consequently the question of making TDS under s. 194H in such circumstances would not arise. However, the....
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....tch vouchers etc. This means that the principal continued to exercise right over the product even after sale to the distributor. Therefore, there was no principal to principal relationship. (iv) Records and accounts were to be properly maintained by the distributor for a period of ten years which meant that the principal was still exercising control over the distributor as to how he should maintain the accounts which is not necessary in a principal to principal transaction. (v) As per the agreement, the distributor was an Authorised Representative as different from another principal. Besides, such representative is expected to seize marketing, promoting and selling the services provided by the assessee. This means, there was no principal to principal relationship between the assessee company and the distributors. Accordingly, the AO determined the total amount of commission paid without deduction of tax at source in respect of sale of prepaid cards at Rs. 9,25,58,338 on which tax was to be deducted under s. 194H for an amount of Rs. 48,59,311. 5. Being aggrieved, the assessee preferred appeal before the learned CIT(A). Before the learned CIT(A) it was contended by the assessee ....
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....ilizers Ltd. (1988) 73 CTR (MP) 180 : (1989) 176 ITR 282 (MP), (2000) 242 ITR (St) 187, CBDT Circular No. 275/20/2002-II(B), dt. 20th Jan., 2003 r/w Circular No. 275/201/1995-IT(B). It was further contended that distributors appointed further sub-dealers for selling SIM cards to the ultimate users. They allow discount to the sub-dealers who in turn would sell the cards at a price not higher than the MRP fixed by the assessee. On the issue of "any other modes" envisaged under s. 194H it was contended by the assessee that the principle of "ejusdem generis" requires that general words following particular words should not be construed in their widest meaning but to be held as applying to objects, persons or things in the same nature as or class as those specifically enumerated. Accordingly, the expression "any other mode" should be construed in relation to specific modes such as cheques and demand drafts. The expression cannot be construed to mean debiting of accounts. The assessee while relying on certain other decisions including the decision of Hon'ble apex Court in the case of Gordon Woodroffe & Co. vs. Sheikh M.A. Majid & Co. AIR 1967 SC 181 submits that the assessee's case squar....
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....n nature and ensured that the distributor is tied to the distribution channel of the assessee, has adequate infrastructure, is committed to further the sales, maintains highest standard of quality service, supports the marketing initiatives of the assessee to penetrate at the market and does not deal with the competitors. Just because there is a connection between the assessee and the end customer/subscriber, the distributor in between does not become an agent. The distributor decides upon his internal network as well as the terms for dealing with the retailer network. The marketing and distributing tasks carried out by the distributor at his choice and in terms of the agreement. Therefore, when such a distributor pays the invoice amount from the distributor for the sale of prepaid cards and the contract is as between a principal and a principal. (iv) The Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. vs. STO 40 STC 42 (SC) explained the contract of agency to mean: "A contract of agency, however, differs essentially from contract of sale in as much as an agent after taking delivery of the property of the principal does not sell it as his own property but sells ....
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.... State of Bombay vs. Automobile & Agricultural Industries Corporation 12 STC 122 (SC) has held that a taxing provision should be interpreted strictly. Sec. 194H provides that every person who is responsible for paying on or after 1st day of June, 2001, to a resident any income by way of commission (not being insurance commission referred to s. 194D or brokerage, shall, at the time of credit of such income to 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........." Therefore, the section is applicable only in case of payments made by a person. In the present case, the assessee does not make any payments to the distributor. On the contrary, it is the distributor who makes payment to the assessee. Since there is no payment by the assessee to the distributor, there is no question for the deduction of tax. (ix) The AO himself is convinced that the assessee received only the net amount i.e., the list price net of discount from the distributor. Consequently, the debit towards discount made by the assessee cannot be treated as a payment to the distributor. It ha....
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....e distributors. However, in respect of postpaid cards, dealers were appointed, commission was paid and TDS was made therefrom. (xvi) The accounting practice followed by the assessee is that the amount received is credited in the accounts as prepaid card advance, prepaid recharge fees and service-tax collected. The account of the distributor is debited net of discount. (xvii) Territorial jurisdiction of distributors are not restricted in urban areas, though such restriction is there in case of rural distributors. (xviii) Though provisions of TDS refer to gross sum in respect of ss. 194C and 194J unlike 194H, where the term used is income. Since the distributor does not earn any "income" from the purchasing of cards, it cannot be a subject to deduction of tax at source under s. 194H. In absence of any payment by the assessee to the distributor, there could not be any deduction from such payment as far as the assessee is concerned. (xix) That the distributors were not agents is also evident from the fact that it paid in advance, whereas a commission agent does not pay any advance against goods. Similarly, a commission agent does not take any risk, he does not make any upfront paym....
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.... the distributor as commission; even though an amount was shown as commission, it was only a discount for the sale of coupons, it cannot be accepted for the following reasons (point Nos. 1 to 5 of written submissions by learned Departmental Representative): 1. There was no principal to principal concept because there was no product which had, in fact, been transferred from one principal to other principal. The first so-called principal i.e., the assessee had still had control over the product till the ultimate consumer establishes the connectivity, the assessee had control over providing the connectivity services. Further, the assessee had options to modify the terms and conditions of the services. Even, the card which is claimed to be the product is not a product in reality. The card has no utility value except to find the inscription code to be used while establishing the connectivity. The cards containing information code as products have no physical utilities as in the case of products calling for principal to other principal concept. 2. Regarding the treatment in the invoices and accounts, the gross value was shown as a receipt for the sale of each 100 cards pack. In the inv....
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....e impugned order, and who in turn sells the SIM cards etc., to the retailers, who sells the same to the ultimate users and submits that the amount was charged by the company from the distributor as principal to principal and not as principal and agent, therefore the provisions of s. 194H are not applicable to the assessee's case. The learned counsel for the assessee after referring to the provisions of s. 194H of the Act, submits that it is a simple case of principal to principal as the assessee as per bill supra, received the amount from the distributor and not from agent or ultimate user. The learned counsel for the assessee while relying on the decision of the Hon'ble Supreme Court in Gordon Woodroffe & Co. vs. Sheikhk M.A. Majid & Co. AIR 1967 SC 181 further submits that it is well established that even an agent can become purchaser when an agent pays the price to the principal on his own responsibility. Since the distributor has paid the price as per the bills issued suggests that the relationship between the assessee and the distributor is that of principal to principal and not principal and agent. The learned counsel for the assessee while strongly relying on the decision of....
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....ved or receivable directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course or buying or selling of goods or in relation to any transaction relating to any asset, valuable article or a thing not being securities. Definition of expression 'commission or brokerage' as contained in cl. (i) of Explanation to s. 194H, is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods. To fall within the said Explanation, the payment received or receivable, directly or indirectly, by a person acting on behalf of another person (i) for services rendered (not being professional), or (ii) for any services in the course of buying or selling goods (iii) in relation to any transaction relating to any asset, valuable article or thing, the element of agency is to be there in case of all services or transactions contemplated by Expln. (i) to s. 194H of the Act. 13. Before proceeding further, it is apt to consider decisions relied on by the parties which are as under: (i) In Gordon Woodroffe & Co. vs. Sheikh M.A. Majid & ....
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....he relationship created by the agreement is that of independent contracting parties and is not, and shall not deem to be any relationship inter alia employer/employee principal and agent. Clause 6(b) provides that full legal equitable title and interest in all and any of the prepaid SIM card/recharge coupons delivered to PMAs shall remain in ICI and shall not pass to PMAs. However, in case the prepaid SIM cards/recharge coupons with PMAs become unusable, substandard or are destroyed due to natural calamities or occurrences or circumstances beyond the reasonable control of either party or due to negligence of PMA in storage, the assessee shall replace the prepaid SIM cards/recharge coupons subject to payment of processing fees for such replaced cards. On cursory look on this condition of agreement it appears that ownership on prepaid SIM card/recharge coupons remains with the assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of principal and agent, there was no need for recovery of processing fee for replacement of cards, destroyed or become unusable in case of ....
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....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 of brokerage." (iii) In Foster's India (P) Ltd. vs. ITO, the Tribunal after relying on the decision in Ahmedabad Stamp Vendors Association vs. Union of India, Bhopal Sugar Industries Lid. vs. STO and distinguishing the decisions in Asstt. CIT vs. Bharti Cellular Ltd. and Hindustan Coca Cola Beverages (P) Ltd., has held that distributors incentive, early payment discount and bond expenses do not constitute commission so as to attract TDS under s. 194H as there is no principal-agent relationship between assessee and its distributors. (iv) In Singapore Airlines Ltd. vs. Asstt. CIT, it has been held that the amount realized by the travel agent in excess of net fare cannot be considered as commission liable to TDS by airlines. (v) In Asstt. CIT vs. Bharti Cellular Ltd., it has be....