TaxTMI 
TaxTMI 
2011 (4) TMI 882
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Company viz. mainly Starter Packs and Rechargeable coupons viz. SIM Cards and Prepaid coupons. The assessee i.e. M/s Vodafone Essar Cellular Limited dealing with the products of the Company within the territorial regions assigned to them. Its nature of operation of business is mainly to identify and appoint Distributors for the sale of the above mentioned products. The assessee company identified the Distributors at different places in the region and entered into written agreements with them wherein various terms and conditions are stipulated. Once, both the assessee company and the Distributors agree to all the terms and conditions stipulated, such Distributor is appointed as a Dealer to deal with the products. The assessee raises commercial invoices in respect of each and every sale of product to the Distributor. While the MRP value of the products are fixed at the time of raising invoices the products are priced at the discounted price agreed to between the assessee and the Distributor. The Distributor, however, is free to sell the products to retailer at any price (but not exceeding the MRP) and retain the margin with them as their share of profit. In order to evidence the ab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elationship between the Cellular company and the organizations selling starter packs on which they enjoy financial benefits. 3. That the benefit allowed to the agents in the name of discount may be treated as commission. 4. That the commission is recompense of reward of an agent) factor) broker of bailee, when the same is calculated as a percentage of the amount of the transaction or on the profit to the principal - Sunderland V Day (145 N E 2d.39) 41 12111 2d 50) 5. That commission is compensation paid to another for services rendered in the handling of another business or property and based proportionately upon the amount of the value thereof - Robindstein. vs Rubinsterin (109 N.Y.S 2d, 725, 734). 6. That commission is a word without technical meaning but used to express compensation for the services rendered) it usually denotes a percentage of the amount of the moneys paid or received - Purify v Godfrey. The franchisee's price and pay for the services will be specified by VODAFONE ESSAR CELLULAR LIMITED from time to time. The rates are subjected to variation during the time of agreement al the sale discretion of Vodafone Essar Ce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld actually relate to the principal. The sale effected by these people would represents the sale of the principal who will always retain the ownership of the goods. The franchisee or an agent shall be entitled to a fixed rate of remuneration or a fixed rate of commission. The details of sale effected by these people are communicated to the principal who alone shall account for the same. On the other hand, the relationship with the Appellant's distributor is that of principal to principal basis only and the transaction involved is a clear transaction of sale. Clause 17-2 of the Agreement affirms this position. From the MRP price fixed, sale discount is allowed to the distributor. After sale products that are sold becomes of the property of the distributor. After the deduction of the discount, the balance sale is accounted for by the principal. ii. Section 194H defines Commission and brokerage as payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered' (not being professional services) or for any service in the course of buying or selling of goods or in relation to any transactions relating to any asset, val....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clause (i) states as under:- "not during the continuance of the agreement (and for the period of 1 year after its termination (whether alone or jointly and whether directly or indirectly) be concerned or interested in marketing, distribution or service of any service tickets which are similar to or competitive with any of the service tickets or perform the same or similar functions." From the above it is quite clear that the Distributor is barred from trading/'distributing any other service tickets of any other company even after termination of the agreement with the Appellant Company and there is an obligation to that effect with the Distributor. Hence, it can be rightly inferred that the distributor is not the person who merely buys Service tickets from the Appellant even after the termination of the agreement. 3. Besides this sub-clauses (n) (v) (w) and (y) of Annexure III amply shows that the distributors has principal-Agent relationship. Sub clause (n) state as under:- a) The distributor shall "use VECL's trade marks and trade names relating to the service tickets only in the registered or agreed style in connection with the marketing an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of retailers by the distributors. Therefore, it could not be said that there exist principal-agent relationship between the assessee and the distributor. In contrast, the relevant portion of agreement in the case appellant reads as follows in para 13, in page of 6/16 of the agreement dated 28'l2'2007 under the head "assignment" it is stated that "The distributor shall not assign any right or obligation to any third party without the prior written consent of VECL." Annexure II Para (v) of Responsibilities of the Distributor in respect of e stock reads (i.e.) Page 12 of 16 of the agreement dated 28th December, 2007) "The Distributors shall appoint at its own consultation with VECL retailers for the e stock to such merchants who shall obtain a valid access card from the Distributor after authentication from VECL. However VECL shall not be liable for any act or omission of the merchant or distributor." The sub clause amply shows that the relationship the appellant has with the distributor is that of principal agent only. Otherwise there need not be necessity for approval In consultation with the appellant for appointment of retailers by the distributo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "The Board examined the contentions of the INS that such payment is in the nature of a discount. The discount is given on sale of purchase of an article in which there is no agreement between Seller and Buyer. The Board found that the INS granted accreditation to the Advertising agency and usually the newspapers would enter into an agreement with agencies. Hence, the newspapers and agencies were not acting independently and the agency was in fact an agent of the newspaper and was being paid a commission for the services rendered." On the basis of above circular, the nature of the Appellant transactions cannot be treated as Principal to Principal basis. Under the heading 'Training' under para 6.1 of the Distributorship Agreement, it is stated as under:- "VECL shall provide training in the use of installation and rendering of after sale services in respect of the service tickets to the distributor and its personnel whenever required. Sub clause (m) says that the Distributor shall supply to VECL such reports, returns, other information relating to orders and projected order for the service tickets as VECL may from time to time reasonably require. Comm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the revenues of VECL. The Distributors with their influence and relationship that they have gained with the clients in the course of their distribution ship with VECL and with their experience and ability may terminate this agreement and immediately commence the sale of rival companies products. Along with the products of VECL they may also deal with the other company products. If such an act is done, it would adversely affect the interest of VECL and will have adverse impact of the marketing of VECL's products in India. In India, the VECL has to face stiff competition along with equally reputed companies. Only with a view to safeguard the interests of the marketing revenues of VECL, this clause has been found necessary. It could be found that such exclusivity of the sale of products by the retailers or distributors could be found in respect of any other branded products, like TVs, Refrigerators, Cars, Petroleum products etc. Even after termination of the agency, such safeguard is necessary. The Assessing officer has erred in stating that even after termination of the agreement, the relationship would continue. Legally, it is not possible. In the circumstances, merely because of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tributors. Pointing Clause (w), the Assessing Officer states that because of the Distributor is required to furnish quarterly reports of Stocks of each of the Service tickets to the Appellant, there is no Principal to Principal relationship. He is of the view that if the stock of Service Tickets had been purchased, then, the reports on the stock of the Sale need not be given to the Seller. In regard to the arguments, it is submitted that this clause has been introduced only with an aim of the compilation of the statistics with a view to study the market conditions and the movement of the goods on day-to-day basis. Depending upon the stocks held by the Distributors VECL will be able to monitor and maintain the supply of goods. A reputed company like VECL would naturally be interested in collecting Statistics regarding the supply and demand of the goods and extent of stock held at any point of time. This would also enable VECL to compare the sale and movement of its products with other competitors. If there is stagnation of unsold goods, then VECL has to necessarily to take remedial measure to improve the movement of its goods. Therefore, on account of this clause, the Assessing Offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Agreement, it is contended that this clause has been wrongly understood by the ITO. This term only stipulates that after termination of the Agreement, the Distributor is required to remove all the VECL sign boards and other display materials. Only if such a thing is not done, then, the VECL gets the irrevocable license to enter the premise and remove signages. This clause will operate only after the termination of agreement and not during the course of the existence of the agreement. Therefore, this clause is quite in tune with the commercial parlours. Even after the termination of the agreement, the Distributor continues to have the infrastructure, then, it should be viewed as an unfair trade practice. Only to nullify such illegal acts, this clause has been inserted. 4.7 As regards the Assessing Officer's citing the Board's circular and comparing the same to the Appellant's case, it is submitted that since the activity of the Appellant is buying and selling of products after raising invoices, the above circular has no application. The above circular which deals with services in regard to advertising agency cannot be applied to the facts of this case. The Assessing' Offic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant's case, no such clause exists. Certain clauses recall of goods sold are existing with the limited aim of monitoring the quality or safety checks or quality modification otherwise there is no such restriction on the rights of goods transferred or sold to VECL on the basis of Sale invoices. 4.9 It is also contended that it is not fair to pick up a few clauses of the agreement here and there to argue that there is relationship of Principal Agency. But, if the agreement is read as a whole the effect of transactions and the nature of relationship would emerge clearly. When the reputed products and branded goods are sold to the distributors generally these clauses have to exist in order to keep the tempo of sales to meet the demand of the market, to face competition and to maintain the brand image name and qualify of the products. 4.10 As regards the point raised regarding the retention of intellectual property, it was submitted that the intellectual property rights, trade marks, are always the property of VECL or for that matter any company manufacturing the highly branded product would only follow this method. Irrespective of the fact there is such a mentio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... concept of sale, however, has undergone revolutionary change, having regard to the complexities of the modern times and expanding needs of society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may, by virtue of agreement, imposes a number of conditions on the buyer e.g. fixation of price, submission of accounts, selling in a particular area of territory and so on. These restrictions per se would not convert a contract of sales into a contract of agency, because in spite of these restrictions, the transaction would still be a sale and subject to all the incidents of sale." 4.12 On the basis of the above observation of the Hon'ble Supreme Court cited, the Hon'ble Tribunal concluded that the normative effect of the judgment of Hon'ble Supreme Court is obviously far greater than that of the judgment of the coordinate Benches. On the basis of conclusion, the Hon'ble Tribunal decided that once on the basis of the principles decided by the Supreme Court, if the nature of relationship between the Appellant and the distributor is that of Principal and Principal, then the nature of discoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansactions between M/s. VECL and the distributors as against principal to principal relationship. 2.3 The learned CIT{A) ought to have followed the decision of Hon'ble Tribunal of Cochin in the assessee's own case in ITA no. 106 to 113/Cochln/2009 and SP nos. 11 to 18/Cochln/2009 dt: 30/04/2009 where in it was held that 'the distributors are linking agents in the chain of delivery of services to consumers and as such the relationship is not of a principal to principal'. 2.4 The learned C.I.T. {A) having referred to clause 17.2 (erroneously quoted as 17.3 instead of 17.2) of the agreement has failed to appreciate that role played by the distributor only that of an Intermediary Without any absolute hold on the products dealt by him and no express clause in the written agreement would reverse the factual position. 2.5 The Ld. C.I.T. (A) ought to have appreciated M/s. VECL not only retains the ownership of the services but also as per the clauses of distributorship agreement, authorizes the distributor to collect cheques/payments In favour of them for the said services and as such by act of parties M/s. VECL has assigned the role of agency. 2.6 T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... No. 1742 of 2009 dated 17.08.2010 [2010] 194 TAXMAN 518 (Ker.) so it is covered matter which needs to be decided in favour of the department. That apart, the Hon'ble Delhi High Court in the case of CIT v. Idea Cellular Ltd. [2010] 189 TAXMAN 118 (Delhi) has also decided similar issue with regard to application of 194H in relation to offering discount to the prepaid calling service to its distributors and taken similar view vide order dated 19.02.2010 by discussing and applying Cochin Bench of Tribunal's decision in the case of Vodafone Essar Cellular Ltd. dated 30.04.2009. While referring various clauses of the agreement entered into by the assessee with the distributors, it was pleaded for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer because there are two High Court's decisions, one of Kerala and other of Delhi High Court with respect to implementation of 194H in relation to providing commission/discounts to the distributors by the principals and non deduction of tax at source, which are direct on the point, so orders of the ld. CIT(A) be reversed. 7. The ld. Counsel for the assessee while relying upon the order passed by the ld.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e SLP filed by the Department against the Hon'ble Kerala High Court judgment has already been dismissed on 03.12.2010. So relying upon such decision of the Kerala High Court and making special reference to page 530, it was pleaded that when two non-jurisdictional High Court decisions are there on the same point, the decision favourable to the assessee is to be applied and as regards such decision, the Department's SLP has also been dismissed with the remarks "we see no reason to interfere", it was thus pleaded that since it is not simple dismissal of the SLP, but reasoned order has been passed by observing that the Hon'ble Supreme Court did not see any reason to interfere with the order of the Hon'ble High Court. Further, it was submitted that accounting entries are not determinative to ascertain whether item is taxable or not and reliance was placed on 227 ITR 172 in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd so accounting procedure adopted will not effect real nature of transaction. The assessee's counsel has strongly placed reliance on CIT (TDS) v. Qatar Airways, which is almost directly on the point, and has pleaded that, if two views are possible favourable to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case of M.S. Hameed (supra), which is almost on similar facts, though in relation to 194G, this Bench should follow the said decision to confirm the order of the ld. CIT(A) and dismiss the appeals of the Department for both the years. 8. The ld. DR in order to counter the submissions of the ld. Counsel for the assessee has pleaded that even in the absence of any payment having been made to the distributors and only discounts having been allowed, which is payment and reliance was placed on 240 ITR 740 (Mad), Hon'ble Supreme Court's decision in the case of 223 ITR 271 (SC) and 189 TAXMAN 315. It was also submitted that the Hon'ble Delhi High Court despite having referred to M.S. Hameed's case and the Cochin Bench of the Tribunal's decision in the case of the assessee, has taken an independent view by considering the entire transaction. Further reliance was placed on 103 ITR 66 (SC) and Hon'ble Delhi High Court and so far as not treating an accounting entries as recorded in the books of accounts, reliance was placed on 116 ITR 1 (SC). Since it is a commission as ITAT Cochin Bench has held, which view has been upheld by the Hon'ble Kerala High Court and so far as Qutar Air....
X X X X Extracts X X X X
X X X X Extracts X X X X
....butors as the assessee has charged the amount less than the MRP, therefore, it amounts to commission/brokerage and tax is liable to be deducted at source in terms of section 194H, which was not deducted, so the demand created by AO is proper and justified. Whereas, the ld. AR has mainly contended that the assessee has not paid any commission to the distributors, so there is no question of making deduction of tax at source. Therefore, the demand raised by the Assessing Officer is not sustainable which has correctly been deleted by the ld. CIT(A). Rival sides have referred to various clauses of agreement with the distributors and different case law also, details of which has been given in earlier paragraphs to support their respective arguments and ld. Counsel for the assessee has strongly pleaded that since the Hon'ble Kerala High Court's decision in assessee's own case, main plea about not considering the fact that there is no payment or credit of the amount by the assessee, therefore, it cannot be held to be precedent to decide the issue against the assessee and the Hon'ble Delhi High Court has also not considered this vital aspect, while referring to ITAT Cochin Bench's decision ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the mobile network, the Sim Card has no value or use for the subscriber. In other words, Sim Card is what links the mobile subscriber to the assessee's network. Therefore, supply of Sim Card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the Sim Card purchased by him from assessee's distributor. The position is same so far as Recharge coupons or E Topups are concerned which are only air time charges collected from the subscribers in advance. We have to necessarily hold that our findings based on the observations of the Supreme Court in BSNL's case in the context of sales tax in the case of BPL Cellular Ltd. squarely apply to the assessee which is nothing but the successor company which has taken over the business of BPL Cellular Ltd. in Kerala. So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rend....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee. In this case there can be no dispute that discount is nothing but a margin given by the assessee to the distributor at the time of delivery of Sim Cards or Recharge coupons against advance payment made by the distributor. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot charge anything more than the MRP shown in the product namely, Sim Card or Recharge coupon. Distributor directly or indirectly gets customers for the assessee and Sim Cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but commission within the meaning of Explanation (i) on which tax is deductible under Section 194H of the Act. The contention of the assessee that discount is not paid by the assessee to the distributor but is reduced from the price and so much so, deduction und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd of Rs.100/-, assessee is adjusting the payment of commission through accounts and invoice. In the first instance sale is accounted for Rs.100/-; the second cash is accounted for Rs.80/-; and the third commission is accounted for Rs.20/-. It shows that as far as the sale is concerned, it is Rs.100/- and the assessee has given a commission of Rs.20/- to the distributor and the net cash proceeds is Rs.80/-. Instead of treating the sale at the net value of Rs.80/-, the assessee is accounting the sales at the gross value of Rs.100/- and thereafter debiting an expenses account for commission paid of Rs.20/-. Therefore, in the facts and circumstances of the case and in the light of the finding of the Hon'ble jurisdictional High Court in the case of M/s.BPL Mobile Cellular Ltd. (Writ Petition No.29202 of 2005) that the essence of the contract between the assessee and the distributor is that of service, we find that the distributors are acting as agents of the assessee company and the margin enjoyed by the distributors are the commission/brokerage allowed by the assessee company." "Counsel for the assessee sought to substantiate the position contrary to the above finding of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....EDABAD STAMP VENDORS ASSOCIATION V. UNION OF INDIA reported in (2002) 124 TAXMAN 628 (GUJ.), and the decision of the Bombay High Court in COMMISSIONER OF INCOME TAX V. QUTAR AIRWAYS in I.T.A. No.99 of 2009 dated 26.3.2009. The first decision of this court pertains to sale of lottery tickets wherein this court held that the commission given by way of discount at the time of sale of lottery tickets is not a commission on which tax is deductible under Section 194G of the Act. The second decision of this court pertains to sale of stamp paper by the licensed stamp vendors wherein also the finding of this court following the decision of the Gujarat High Court in AHMEDABAD STAMP VENDORS' case is that the transaction is sale of goods and so much so, no deduction of tax is called for under Section 194G of the Act. So far as the lottery ticket is concerned, the transaction is different and the Supreme Court has held that the transaction is sale of goods and so much so, the decision rendered by this court has no application in regard to commission paid by the assessee to the distributors in the form of discount which we have found to be in essence and substance for rendering services. The nex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ERAL ASSURANCE SOCIETY reported in (1948) 16 ITR 101 and another decision in REVENUE COMMISSIONERS V. DUKE OF WESTMINSTER reported in (1936) A.C. 1.However, on going through these judgments we do not find any of the judgment has any direct application to the facts of this case. The very scheme of deduction of tax at source under the Income Tax Act is to trace recipients of income and their accountability to the department for payment of tax on various transactions. In fact, major portion of the income tax collection is through recovery of tax at source and but for the mechanism, there would have been massive evasion of tax by the recipients of various kinds of income. The trend in legislation is to increase coverage for recovery of tax at source and on a steady basis various services are brought under the TDS scheme so that tax evasion is avoided. We have already taken note of the provision under Section 197 of the Act which mitigates against hardship if any in recovery of tax in as much as a payee is entitled to approach the department and apply for certificate to receive any amount which would be otherwise subject to deduction of tax at source without recovery of any tax or on re....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., it does not amount to 'sale' of goods in as much as unsold SIM cards are to be returned to the assessee and it is required to make payment against them - This is an antithesis of 'sale'- Therefore, the discount offered by the assessee to the distributors on payments made by the latter for the SIM cards/recharge coupons which are eventually sold to the subscribers at the listed price is commission and it is subject to TDS under s. 194H - Contention of the assessee that 5. 194H is not applicable as there is no 'payment or credit' by the assessee to the distributor cannot be accepted. Held:- The argument of the counsel that s. 194H is not applicable, as there is no 'payment or credit' by the assessee to its distributor is to be rejected. Likewise, the argument that the amount must be shown to be the income of the respondent also does not hold good. The legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further appointed by the PMAs with the consent of the assessee. It is created by:- (a) activation of the said SIM card by the assessee in the name of the consumer/subscriber.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l. 25(f) lays down that on termination of agreement, PMA or its authorized retailer appointed by it, is not entitled to any compensation for cost or expenses incurred by it in either setting up or promotion of its business, etc. No such clause was required in case of sale". Thus, the Tribunal erred in holding that the payments paid by the assessee are not commission as envisaged under s. 194H. - CIT vs. Singapore Airlines Ltd. and Ors. (2009) 224 CTR (Del) 168 : (2009) 22 DTR (Del) 129 followed; Bharat Sanchar Nigam Ltd. and Anr. vs. Union of India and Ors. (2006) 201 CTR (SC) 346 : AIR 2006 SC 1383 relied on; Vodafone Essar Cellular Ltd. vs. Asstt. CIT (2010) 35 DTR (Coch)(Trib) 393 and Asstt. CIT vs. Bharti Cellular Ltd. (2007) 108 TTJ (Kol) 38 approved; Vijay Traders vs. Bajaj Auto Ltd. (1995) 6 SCC 566, Ahmedabad Stamp Vendors Association vs. Union of India (2002) 176 CTR (Guj) 193 : (2002) 257 ITR 202 (Guj) and Bhopal Sugar Industries Ltd. vs. STO 1977 CTR (SC) 284 : (1977) 40 STC 42 distinguished; Idea Cellular Ltd. vs. Dy. CIT (2009) 18 DTR (Del)(Trib) 475 : (2009) 121 TIJ (Del) 352 set aside. (Paras 22 to 26) Conclusion:- Transaction between the assessee....