TaxTMI 
TaxTMI 
2014 (12) TMI 642
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....connection. The assessee has entered into agreement with its Channel Partners. The second respondent conducted a survey under Section 133A of the Income Tax Act, 1961 (for short hereinafter referred to as 'the Act') on 29.2.2008. After hearing the explanation of the assessee, the second respondent opined that the Channel Partners are the Commission Agents of the assessee acting on fixed margins and fixed responsibilities, the difference between MRP and the selling price constitutes commission payment. Therefore, the assessee failed to deduct tax at source under Section 194H of the Act. Accordingly, an order came to be passed on 24.11.2008 under Section 201 (1) of the Act treating the assessee as assessee in default. Interest was also levied under Section 201 (1A) of the Act. 3. In ITA Nos. 637-644/2013 the assessee is M/s Bharti Airtel Limited. The assessee is a Public Limited Company engaged in the business of telecom operations. A survey was conducted by the respondent in the business premises of the assessee to verify the compliance of TDS provisions by the assessee for the assessment years 2005-06 to 2008-09 on 27.2.2008. Here also after considering the terms and con....
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....services it is a case of out and out sale. No relationship of principal and agent exists. The assessee has not paid any amount to the Channel Partner and, therefore, Section 194H of the Act is not attracted. The reliance of the judgment of the Kerala High Court as well as the Delhi High Court has no application to the facts of this case. 8. Sri Chythanya, learned counsel appearing for Bharti Airtel Limited submitted that the terms of the agreement between the parties had not created any relationship of principal and agent. On the contrary, it makes it clear that there is a relationship between principal and principal. What is sold by the assessee to the distributor is the right to receive the services. In the invoice raised, the MRP and the amount of discount are mentioned. M.R.P minus the discount is the sale price. In the accounts, there is no reference to this discount portion at all. Under the terms of the agreement, there is no liability on the part of the assessee to make any payment to the distributor. On the date of sale, no income has accrued to the distributor. It is only if and when the distributor sells the sim-cards/prepaid/e-coupon/e-topups either to the sub-distri....
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....ash amount with Rs. 80/- though by paying cash to the distributor. The assessee was paying a commission amount of Rs. 20/-. This is the commission enjoyed by the distributor. In the said case, it was held that there existed a relationship of principal and agent. That is Rs. 20/- represented the commission. Therefore, he submitted that in the instant case, the assessee being the same, the contention of the assessee that there is no relationship of principal and agent is factually incorrect and therefore, he submits that the authorities were justified in passing the impugned order. Consequently, he contended that the terms and contents of the agreement between the parties clearly demonstrate that neither these channel partners nor the distributors had any freedom in the matter of selling the products, which is supplied to them by the assessees. There was a complete control, which will clearly establish that it is not in a relationship of principal and principal but it is a relationship of principal and agent. When three fact finding authorities have recorded a question of fact, no case for interference is made out. He also submitted that as is clear from the invoice raised, though th....
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.... para 82 of the said judgment, it was held that telephone service is nothing but a service. There is no sales element apart from the obvious one related to the hand set, if any. Dealing with the question whether a sim card was "goods" within the definition of the word in the Sales Tax Act it was held that what a simcard represents is ultimately a question of fact. In determining the issue, the Assessing Authorities will have to keep in mind the following principles: "If the SIM card is not sold by the assessee to the subscribers, but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the Sales Tax Authorities to levy sales tax thereon." 14. As there was no sufficient material on the basis of which they could reach a decision, the matter was remitted back to the respective High Court to record a finding of fact and then decide the case on merits. The dispute before the Supreme Court was whether sales tax is payable on the value of the SIM ca....
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....a proper functioning of a SIM card and the value of the taxable service was calculated on the gross total amount received by the operator from the subscribers. Therefore, the judgment of the Kerala High Court was upheld. 16. It is in this background we have to understand the telecommunication services provided to the customers by the assessee. It is in two models. (1) Prepaid: Under the prepaid model, the subscriber is required to take a mobile telephone connection, through a distributor, from a telecom operator. Under this model, the subscriber pays for the talk time in advance (paid through a distributor) and its balance depletes as and when he uses it. When the prepaid amount is used fully, the subscriber is required to get his 'service/talk time' re-charged, for which he buys recharge voucher for a chosen amount/validity. He pays for the talk time purchased in advance. This is called prepaid model. (2) Postpaid: In the postpaid model, the subscriber signs up an agreement with the telecom operator seeking a telephone connection. He uses the connection and is subsequently billed for the usage on monthly basis (per his billing cycle). The subscriber he....
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....on or after the 1st day of June, 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 rate of ten per cent : Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed five thousand rupees : Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section: Provi....
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.... this Act." JUDGMENTS 21. Section 194 H of the Act, has been the subject matter of interpretation by various High Courts across the Country. We have two streams of judgments delivered in favour of and against the revenue. The judgments in favour of the assessee are as under: 22. The High Court of Bombay in the case of COMMISSIONER OF INCOME TAX vs QATAR AIRWAYS [(2011) 332 ITR 253 dealing with Section 194H of the Act held as under : - "3. ..... Be that as it may, for section 194H to be attracted, the income being paid out by the assessee must be in the nature of commission or brokerage. Counsel for the Revenue contended that it was not the case of the Revenue that this difference between the principal price of the tickets and the minimum fixed commercial price amounted to payment of brokerage. We find however, that in order to deduct tax at source the income being paid out must necessarily be ascertainable in the hands of the assessee. In the facts of the present case, it is seen that the airlines would have no information about the exact rate at which the tickets were ultimately sold by their agents since the agents had been given discretion to sell the tickets a....
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....eriod, with the customer (purchaser of the car) on behalf of the company. However, such services rendered by the dealer in the course of selling cars does not make the activity of selling cars itself an act of agent of the manufacturer when the dealings between the company and the dealer in the matter of sale of cars are on "principal to principal" basis. This is just an illustration to clarify that a service in the course of buying or selling of goods has to be something more than the act of buying or selling of goods. When the licensed stamp vendors took delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the two activities (buying from the Government and selling to the customers) can be termed as the service in the course of buying or selling of goods. 19. In view of the above discussion, we uphold the contention urged on behalf of the petitioner's association that the discount made available to the licensed stamp vendors under the provisions of the Rules, does not fall within the expression "commission" or "brokerage" under Section 194H." 24. This judgment was challenged by the revenue b....
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....lationship between the assessee and the concessionaire. Further, the fact that the Dairy can inspect the booths and check the records maintained by the concessionaire is also not decisive. As rightly pointed out by the tribunal the Dairy having given space, machinery and equipment to the concessionaire would naturally like to incorporate clauses in the agreement to ensure that its property is properly maintained by the concessionaire, particularly because milk and the other products are consumed in large quantities by the general public and any defect in the storage facilities which remains unattended can cause serious health hazards. These are only terms included in the agreement to ensure that the system operates safely and smoothly. From the mere existence of these clauses it cannot be said that the relationship between the assessee and the concessionaire is that of a principal and an agent. That question must be decided, as has been rightly decided by the Tribunal, on the basis of the fact as to when and at what point of time the property in the goods passed to the concessionaire. In the cases before us, the concessionaire becomes the owner of the milk and the products on takin....
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....eives from the passenger by virtue of the sale of the Traffic Documents/Air Tickets of which the assessee is the proprietor at a point till the transaction is made would clearly establish that it is a commission as against the discount. The word 'discount' is normally used to describe a deduction from the full amount or value of something, especially a price (see Black's Law Dictionary VIIth Edition page 477) whereas a commission is defined in Explanation (1) to Section 194H as any payment received or receivable, directly or indirectly by an agent for services rendered acting on behalf of the assessee-airline. In view of the fact that the payment retained by the travel agent is inextricably linked to the sale of the traffic document/air ticket, it cannot but lead to a conclusion that the payment retained which is the supplementary commission, is a commission within the meaning of Section 194H of the Act. This is especially so, as indicated above, at no point in time the travel agent obtains proprietary rights to the Traffic Documents/Air Tickets. There is no value or price paid by him on which the travel agent gets a deduction. The price or value is received by the asse....
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....transaction. 28. Reliance is placed on the judgment of the Delhi High Court in the case of Commissioner of Income Tax v. Idea Cellular Limited reported in (2010) 325 ITR 148, while dealing with the commission / brokerage to the distributor on the sim cards / recharge coupons under Section 194 H of the Act, it was held as under: "51. It is obvious that a service can only be rendered and cannot be sold. The owner of the SIM Cards and recharge coupons is the assessee-company, M/s. Vodafone Essar Cellular Ltd. This is because the assessee-company is operating under the right of a licence agreement entered into with the Government of India. Nobody else can be given the right to operate as Cellular telephone service providers. The ultimate service is provided by the assessee-company to everyone and everywhere. The SIM card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to the distributor or from the d....
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....payment received from the distributors. We have to necessarily examine this contention with reference to the statutory provisions namely, Section 194H .... "What is clear from Explanation (i) of the definition clause is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case (supra) abovereferred that a customer can have access to mobile phone service only by inserting Sim Card in his hand set (mobile phone) and on assessee activating it. Besides getting connection 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 d....
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....y the distributor for the assessee. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in substance the discount given at the time of sale of Sim Cards or Recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of Section 194H of the Act. The test to be applied to find out whether Explanation (i) of Section 194H is applicable or not is to see whether assessee has made any payment and if so, whether it is for services rendered by the payee to 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 c....
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....hey can never be taken into account at any stage for the purpose of calculating or arriving at the taxable turnover and for levying tax." 33. The Apex Court in the case of Ge India Technology Cen. (P) Limited v. Commissioner of Income Tax [(2010) 327 ITR 456] in para 9 has held as under:- "9...... the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO (TDS). It is a provision requiring tax to be deducted at source to be paid to the revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., section 4, 5 and 9. ... ... ... While interpreting the provisions of the Income-tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery." 34. The Apex Court in the case of Commissioner of Income Tax, New Delhi v. Eli Lilly And Company (India) (P.) Limited [(2009) 312 ITR 225] has held as under:- "...... the provisions for deducti....
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.... one contract between the parties, the contract being that the goods will be sold by the dealer to the retailer at the aforesaid sale price. 36. The Apex Court in the case of Bhopal Sugar Industries Limited v. Sales Tax Officer [(1977) 6 CTR (SC) 284] answering the question whether contract between the assessee and Caltex India was one of agency or sale held as under : - "5. This question, therefore, will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the documents and the surrounding circumstances and having regard to the course of dealings between the parties. ... ... 6. ...... while interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'seller' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or buyer ....
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....tions are to be fulfilled for attracting the said provision. They are: (1) The assessee should be responsible for paying an income by way of commission or brokerage to the distributor. (2) There should be a payment either by cash or by issue of a cheque or draft or any other mode or credit of such income to the distributor in the accounts of the assessee. (3) Tax is to be deducted at the time of payment or credit thereof, whichever is earlier. 41. The word income has been defined under Section 2(24) of the Act. Income includes profits and gains. A commission is defined in Explanation (i) to Section 194H as any payment received or receivable, directly or indirectly by an agent for services rendered acting on behalf of the principal. The element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to Section 194H. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'seller' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be c....
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....ies and the statutory provisions and the interpretation placed by Courts in the judgments on the point. AGREEMENTS 44. The distribution agreement between Bharti Mobile Limited and its Distributors, discloses that for the promotion of Marketing and Distribution of the products/services of the assessee and also other related services/products, the assessee has desired to avail services of Distributor for marketing and distribution of Cellular Phone Connections and other related products. The Distributor has to provide services mentioned in the agreement at paras 1, 2, 3 and 4. Further the agreement stipulates that the Distributors have to represent to the customers that the Distributor's agreement with the customers/its dealers is on Principal-to-Principal basis and the assessee is in no way concerned or liable to the customer/dealers of the Distributor. Further it provides that Distributor shall not make any promise, representation or to give any warranty or guarantee with respect to services and products, who are not authorized by the assessee. 45. Clause 9 of the agreement makes it abundantly clear that the Distributor shall purchase material from the assessee and sel....
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....ent Channel Partner on a principal to principal basis, authorized and permitted to market the Products and Services under the agreement. None of the employees of Channel Partner shall be construed or deemed to be the employees of TTSL at any time the Channel Partner shall indemnify and keep indemnified TTSL, its directors and officers against any claim, demand, loss or whatsoever in this connection. 49. Clause 8.5 of the agreement stipulates that the Channel Partner be liable to pay all the taxes such as sales tax, service tax applicable and payable in respect of the subject matter of this agreement and any statutory increase in respect thereof. Clause 8.9 provides that Channel Partner shall procure the Products from TTSL or such person/s authorized by TTSL. Channel Partner shall ensure that there is no sale of spurious and unauthorized Products from Channel Partner outlet(s) and/or the retails outlets under the control of Channel Partner. Clause 10.1 provides that in consideration of the Channel Partner duly performing the duties and obligations as contemplated in the agreement, the Channel Partner shall be entitled to the consideration as set forth in the Schedule being attach....
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.... tickets would ultimately be sold by their agents since the agents had been given discretion to sell the tickets at any rate between the fixed minimum commercial price and the published price. The question of deducting any tax at source would not arise. 53. In the Ahmedabad Stamp Vendors' Association case also, it was held that, when the licensed stamp vendors took delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the two activities can be termed as the service in the course of buying or selling of goods. Discount given to the Stamp Vendors is for purchasing the stamps in bulk quantity and the said amount is in the nature of cash discount and, therefore, such a transaction is a sale. Therefore, the discount made available to the licensed stamp vendors does not fall within the expression "commission" or "brokerage" under Section 194H of the Act. 54. In the Mother Dairy's case referred to supra, it was held that, the concessionaire purchases the milk from the dairy which raises a bill on the concessionaire and the amount he has paid for. The dairy merely fixed the MRP at which the concessionai....
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....elling the traffic documents/air tickets to a third party who is a passenger and, therefore, the second leg of the transaction cannot be different from the first leg of the transaction. 56. In the Idea Cellular Limited's case, the Delhi High Court proceeded on the footing that the assessee is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant for public at large. They had appointed distributors to make available the pre-paid products to the public and look after the documentation and other statutory requirements regarding the mobile phone connection and, therefore, the essence of service rendered by the distributor is not the sale of any product or goods and, therefore, it was held that all the distributors are always acting for and on behalf of the assessee company. 57. Similar is the view expressed by the Kerala High Court in the Vodafone Essar Cellular Limited's case, where it was held that, the distributor is only rendering services to the assessee and the distributor commits the assessee to the subscribers to whom assessee is accountable under the service contract which is the subscriber connection arranged by....
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....hey have to share as per the agreement between them. The said income accrues to them only when they sell this right to service and not when they purchase this right to service. The assessee is not concerned with quantum and time of accrual of income to the distributors by reselling the prepaid cards to the sub-distributors/retailers. As at the time of sale of prepaid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the Distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorized as commission. The sale is subject to conditions, and stipulations. This by itself does not show and establish principal and agent relationship. 60. The following illustration makes the point clear: On delivery of the prepaid card, the assessee raises invoices and updates the accounts. In the first instance, sale is accounted for Rs. 100/-, which is the first account and ....
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....it is the retailer who sells it to the customer. The profit earned by the distributor, sub-distributor and the retailer would be dependant on the agreement between them and all of them have to share Rs. 20/- which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduc....