TaxTMI 
TaxTMI 
2014 (12) TMI 642
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....ement 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 conditions stipulated in the agreement entered into....
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.... 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-distributor or to the retailer, he may earn income, which is charg....
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....r. 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 assesees. 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 the price of the sim-cards/pre-paid/e-coupon/e-topups is Rs. 100/-,....
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.... 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 cards to the State Government or service tax is payable to the Central Government. After remand, before....
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....al 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 here makes the payment to telecom company post usage of telecom services, hence the model is called postpaid service. &nbs....
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....age, 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: Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their pu....
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....ur 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 at any rate between the fixed minimum commercial price and the published price and it would be impracticable and unreasonable to expect the assessee to get a feed back from their numerous agents in respect of each ticket sold. Further, if the airlines have dis....
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....pany 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 before the Apex Court. The Apex Court dismissed the appeal holding that they are satisfied that 0.50% to 4% 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 i....
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....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 taking delivery of the same from the Dairy. He thus purchased the milk and the products from the Dairy and sold them at the MRP. The difference between the MRP and the price which he pays to the Dairy is his income from business. It cannot be categorized as commission. The loss and gain is of ....
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....m 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 assessee-airline through the medium of the travel agent from the passenger which is also one of the facets of the services offered by the travel agent. The price or value of the Traffic Document received by the travel agent for and on behalf of the assessee-airline is held in trust. Thus the money retained by th....
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.... 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 assesseecompany, 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 distributor to the ultimate consumer. The distributors are acting only as a link in the chain of service providers. The assessee-company is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant for public at large. In between providing of that service, it is necessary for....
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....ing 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 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 (supra) in the context of sales tax in the case of BPL Cellular Ltd....
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....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 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 ....
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....rgeable 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 deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Incometax form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the Income-Tax Act. . ... ... section 192 imposes statutory obligation on the payer to deduct TAS when he pays any inco....
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....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 is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. ... ..." 37. The Constitution Bench of the Apex Court in the case of Padma Sundara Rao (Dead) And Others v State Of T.N. And Others [(2002) 3 SCC 533] dealing with the question how the Court should understand the decision of the Court as precedents held as under : - "9. Courts should not place ....
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....r. 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 conferred. While interpreting the terms of the agreement, the Court has to look to the substance rather than the form of it. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended to treat a buyer as a buyer and not as an agent. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the concessionaire at the time of the delivery then he i....
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....ated 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 sell the same to the customer. This will include Handsets, SIM Cards/recharge cards and any other products. The sales tax liability on the products sold by the Distributor from its premises shall solely vest with the Distributor. That the insurance liability for the entire stock in trade in the premises at the address under reference will be of the Distributor and the liability for any loss or damage due to any fire, burglary, theft, etc., will be of the Distributor. 46. Clause 23 ....
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....ch 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 attached to the agreement. Clause 10.4 provides that Channel Partner shall be solely liable for any state and local taxes including sales tax, in relation to this agreement. TTSL shall have no liability or obligation for any state or local income tax liability of Channel Partner or any person assigned/appointed by Channel Partner. Clause 15.2 provides that TTSL shall have no obligation to take back any Products sold to Channel Partner. Clause 21.1 stipulates that Channel Partner shall alone be responsible fo....
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....vities 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 concessionaire can sell the milk. Under the agreement the concessionaire cannot return the milk under any circumstance, which is another clear indication that the relationship was that of principal to principal. Even if the milk gets spoiled for any reason after delivery is taken, that is to the account of the concessionaire and the dairy is not responsible for the same. The concessionaire becomes the owner of the milk and the products on taking delivery of the same from the Dairy. He thus purchased the milk and the product....
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.... 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 the distributor for the assessee. In that context it was held 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. 58. In both the aforesaid cases, the Court proceeded on the basis that service cannot be sold. It has to be rendered. But, they did not go into the question whether right to service can be sold. 59. The telephone service is nothing but service. SIM cards, have no intrinsi....
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.... 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 Rs. 80/- is the second account and the third account is Rs. 20/-. It shows that the sales is for Rs. 100/-, commission is given at Rs. 20/- to the distributors and net value is Rs. 80/-. The assessee's sale is accounted at the gross value of Rs. 100/- and thereafter, the commission paid at Rs. 20/- is accounted. Therefore, in those circumstances of the case, the essence of the contract of the assessee and distributor is that of service and therefore, Section 194H of the Act is attracted. 61. However, in the first insta....
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....ore, 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 deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. 63. It was contended by the revenue that, in the event of the assessee deducting the amount and paying into the department,....