TaxTMI 
TaxTMI 
2017 (1) TMI 1393
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....ent circle office at Shivajinagar, Pune. The assessee company is engaged in the business of providing cellular mobile phone services for Maharashtra and Goa Circle excluding Mumbai. The company provides prepaid and postpaid services. The prepaid services are in the form of recharge coupons and SIM cards. In postpaid connection, the SIM card is given free of cost and activated later on and the bill is charged as per usage of the customer. The prepaid services are provided through distributors and franchises. 3. A survey action u/s.133A of the I.T. Act was conducted on 23-04-2008 in the case of the above company for verification of the compliance of the TDS provisions. During the course of the survey, the statement of Mr. R. Narayanan, Manager (Accounts) was recorded on oath and several other documents were also submitted by the assessee. During the said survey, it was submitted that the assessee company was paying commission to all dealers except distributors. It was explained that the sale is made to the distributors at MRP less trade margin and target based incentives are given to them in the form of top-up. The trade margin in respect of prepaid SIM cards and coupons was 20%, re....
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....as not possible to quantify the exact amount of income in the hands of distributors. Relying on the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. reported in 293 ITR 226 it was submitted that no tax u/s.201(1) can be charged when the tax has been paid by the distributors. 5. However, the DCIT (TDS-1), Pune did not accept the arguments advanced by the assessee. Relying on the decision of Hon'ble Delhi High Court in the case of Idea Cellular Ltd. vide order dated 19-02-2010 he came to the conclusion that supply and delivery of SIM cards did not constitute sale and purchase but provision of services. He also relied on the decision of Hon'ble Kerala High Court in the case of BPL Mobile Cellular Ltd. The DCIT(TDS-1) accordingly passed a combined order for A.Yrs. 2007-08 and 2008-09 by raising the following demand : F.Y. TDS demand u/s.201(1) Interest u/s.201(1A) Total 2006-07 68,81,311/- 41,28,787/- 1,10,10,098/- 2007-08 2,71,24,546/- 1,30,19,782/- 4,04,11,328/- Total 3,40,05,857/- 1,71,48,569/- 5,11,54,426/- Similar demands u/s.201(1) and 201(1A) have been raised by the TDS Officer for A.Yrs. 2009-10 to 2012-13. 6. Before C....
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....imit or revalidate an action which is already barred by limitation. 9. It was further argued that since there was no show cause notice issued for F.Y. 2006-07, therefore, the order passed for F.Y. 2006-07 was against the principles of natural justice and therefore void. It was accordingly argued that since the proceedings u/s.201 of the Act were initiated on 23-04-2008, i.e. the date of survey and the submissions were duly filed during F.Y. 2008-09, therefore, the order should have been passed within a reasonable time and the insertion of section 201(3) of the Act, w.e.f., 01-04-2010 will not come to the rescue of the Department. 10. Based on the arguments advanced by the assessee the Ld.CIT(A) called for a remand report from the Assessing Officer. After considering such remand report and the submission of the assessee to such remand report he dismissed the additional ground raised by the assessee by observing as under : "14. I have carefully considered the facts of the case as well as reply of the appellant. It is seen that the concept of time barring in respect of TDS order u/s.201(1) of Income-tax Act was brought into the statute through Finance (No.2) Act, 2009 by insertion....
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....which gets completed after verification is completed at the premises and survey team leaves the premises. In post-survey enquiry also, certain information is called for which the appellant is not able to furnish during the course of survey action. This information is analysed and based upon the above information, the TDS Officer proceeds to pass order u/s.201(1) of Income-tax Act. Before doing so, as per principles of natural justice due opportunity is given to the appellant for which show cause notice u/s.201(1) is issued to the appellant. This show cause notice unlike notice u/s.143(1) of Income-tax Act is not statutory and it is issued to the appellant only for the purpose of giving opportunity to explain its position. Therefore, proceedings u/s.201(1) of the Income-tax Act starts with show cause notice u/s.201(1)/201(1A) of Income-tax Act was issued for F.Y. 2007-08 for the first time on 2101-2010. It is true that in the show cause notice there is no mention of F.Y. 2006-07, but this will not make much difference in the sense that the appellant was made aware of the default for F.Y. 2006-07 and accordingly, details of discount was provided by the appellant for F.Y. 2006-07. The....
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....ued that the assessee company was not an assessee in default and demand u/s.201(1) and 201(1A) of the Income Tax Act was not justified. 12. However, the Ld.CIT(A) was not satisfied with the explanation given by the assessee. Rejecting the arguments advanced by the assessee and following the decision of Hon'ble Delhi High Court in the case of CIT Vs. Idea Cellular Ltd. reported in 325 ITR 148 the decision of Hon'ble Kerala High Court in the case of Vodafone Essar Cellular Ltd. Vs. ACIT reported in 332 ITR 255 and the decision of Hon'ble Kolkata High Court in the case of Bharti Cellular Ltd. reported in 244 CTR 185 where it has been held that discount allowed by the assessee company to the distributors for selling the prepaid SIM cards constituted Commission and the assessee was liable to deduct tax at source for such payments u/s.194H of the I.T. Act he upheld the action of the Assessing Officer. 13. Aggrieved with such order of the CIT(A) the assessee is in appeal before us with the following grounds : "On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax Appeals - V, Pune ('learned CIT (A)') has erred in passing the order under ....
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....e discount extended to them and responsibility/obligation to make payment is a condition precedent for application of section 194H of the Act, which is absent in the present case. 2.4. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not holding that discount allowed by the Appellant is not income in the hands of its distributors and that income, if any, arises only when the pre-paid SIM cards/talktime is further distributed by the distributors. 2.5. On the facts and circumstances of the case and in law, the learned TDS Officer has erred in not appreciating the fact that there is no flow of monies from the Appellant to the distributor of pre-paid SIM card/talktime but rather from the distributor to the Appellant, and hence, the provisions of section 194H of the Act fail to apply. Hereinafter all the grounds are without prejudice to Ground No.1 and 2 above. 3. Ground No. 3 - Appellant has discharged its onus by submitting sufficient information to enable the learned TDS officer to verify whether the taxes have been paid by the payee on discount 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in n....
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....ilar is the situation in respect of transaction whatsoever may be with the franchise as you have stated that no separate and different agreement is made with the franchise with whom you are dealing as per you sale with trade margin. Considering the circumstances distributor is getting nothing from this activities except trade margin and therefore the said distributors or the franchise to the extent of recharge coupons are your agents and therefore trade margin is nothing but a sort of commission eligible for deduction of tax under section 194H of I.T. Act, 1961. Accordingly the trade margin which you have stated amount to Rs. 26,11,89,668/- is eligible for deduction of tax for 07-08. Please explain your say in this behalf and also for F.Y.06-07. Ans. The agreement with distributors is on principal to principal basis, it has been clearly set out in clause 2.1 in the agreement. Service tax as applicable is recovered from the ultimate subscribers who receive the service of the company. The service tax collected from Distributor is ultimately borne by the subscriber. Hence the trade margin is not in the nature of commission. Distributors are entitled to target based incentive on achi....
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....ect of years which were over when the amending Act began, are not to be construed as authorizing action in respect of the year for which action was already time-barred at the date when the amending Act came into force. 19. He submitted that the TDS officer has passed the order u/s.201 of the Act thereby raising significant demand against the assessee without giving any finding whatsoever on failure of the recipient distributors to pay taxes on the income earned by them from distribution of prepaid talk time/connections transferred by the assessee. 20. Referring to the decision of Hon'ble Allahabad High Court in the case of DCIT (TDS) Vs. Vs. Jagran Prakashan Limited reported in 251 ITR 65 he submitted that the Hon'ble High Court in the said decision has not only held that no demand u/s.201 of the Act can be raised where the recipient has paid the taxes, but also has held that the deductor cannot be treated as assessee in default till it is found that the recipient has also failed to pay such tax directly. He submitted that the above proposition has been followed by the Kolkata Bench of the Tribunal in the case of Ramakrishna Vedanta Math Vs. ITO reported in 55 SOT 417. 21. So fa....
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....stributors is not commission and therefore not liable to TDS u/s.194H. He submitted that the TDS officer as well as the CIT(A) have relied on the decision of Hon'ble Delhi High Court in the case of Idea Cellular Ltd. (supra) the decision of the Hon'ble Kerala High Court in the case of Vodafone Essar Cellular Ltd.(supra) and the decision of the Hon'ble Calcutta High Court in the case of Bharti Cellular Ltd. Vs. ACIT (supra) and held that the supply and delivery of prepaid SIM cards/vouchers did not constitute sales but provision of services. He submitted that the Hon'ble Karnataka High Court has distinguished the above judgments and has held that what is being sold by the Telecom operators to the distributors of prepaid talktime is the "right to service" on a "principal to principal basis" and hence the question of applicability of section 194H of the Act does not arise. 24. Without prejudice to the above, he submitted that explanation to section 191 of the Act clearly provides that an assessee cannot be treated as an assessee in default u/s.201(1) of the Act where although taxes were not deducted at source as required but has been paid directly by the recipient. For the above prop....
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....the assessee has not deducted TDS from the discount offered by the assessee to their distributors the Assessing Officer treated such discount offered by the assessee to their distributors as "commission" and treated the assessee as an assessee in default u/s.201(1) r.w.s. 194H of the I.T. Act. While doing so, the Assessing Officer rejected the contention of the assessee that the relationship between the assessee and the distributors was principle to principal and not that of principal to agent. We find before the CIT(A) the assessee apart from arguing the case on merit for all the years also took an additional ground for A.Y. 2007-08 that the order passed by the TDS officer is barred by limitation. We find the Ld.CIT(A) dismissed the additional ground raised by the assessee on the ground that the order u/s.201(1) was passed on 22-03-2011 is within one year since the show cause notice was issued on 21-01-2010. 29. So far as the merit of the case is concerned the Ld.CIT(A) following the decision of the Hon'ble Kerala High Court in the case of Vodafone Essar Cellular Ltd. reported in 332 ITR 255 the decision of Hon'ble Delhi High Court in the case of CIT Vs. Idea Cellular Ltd. report....
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....e requisite details on 0805-2008. We find the Special Bench of the Tribunal in the case of Mahindra and Mahindra Ltd. (supra) has held that the maximum time limit for passing the order u/s.201(1) or 201(1A) is the same as prescribed u/s.153(2), i.e. one year from the end of the financial year in which proceedings u/s.201(1) are initiated. The decision of the Special Bench of the Tribunal has been upheld by the Hon'ble High Court reported in 365 ITR 560. Therefore, we are of the considered opinion that the order for A.Y. 2007-08 has got barred by limitation. Therefore, due to non issue of statutory notice for passing the order u/s.201(1) and 201(1A) and due to bar by limitation, the order passed by the Assessing Officer for A.Y. 2007-08 has become illegal and void. We hold accordingly. 33. Now coming to the merit of the case, we find the Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd. Vs. DCIT reported in 372 ITR 33 has held that sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS u/s.194H. While holding so, the Hon'ble High Court has distinguished the decision of the Hon'ble Kerala High Court in the....
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....value. A customer, who wants to have its service initially, has to purchase a sim-card. When he pays for the sim-card, he gets the mobile service activated. Service can only be rendered and cannot be sold. However, right to service can be sold. What is sold by the service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may use it by himself. He may also sell the right to sub-distributors who in turn may sell into retailers. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the distributor at the time of the delivery then he is thereafter liable for the same and would be dealing with them in his own right as a principal and not as an agent. The seller may have fixed the MRP and the price at which they sell the products to the distributors but the products are sold and ownership vests and is transferred to the distributors. However, who ever ultimately sells the said right to customers is not entitled to charge more than t....
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....ideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors: incur expenditure for the purchase of prepaid cards. Only after the resale of those prepaid cards, distributors would derive income. At the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor. In other words the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor. In this context it is pertinent to mention that the assessee sells SIM cards to the distributor and allows a discount of Rs. 20/-, that Rs. 20/- does not represent the income at the hands of the distributor because the distributor in turn....
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....e payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. As held by the Apex Court in Bhavani Cotton Mills Limited's case, if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage will not make the original levy valid. 64. In the case of Vodafone Essar Celluar Ltd., (supra) it is necessary to look into the accounts before granting any relief to them as set out above. They have accounted the entire price of the prepaid card at Rs. 100/- in their books of accounts and showing the discount of Rs. 20/- to the dealer. Only if they are showing Rs. 80/- as the sale price and not reflecting in their accounts a credit of Rs. 20/- to the distributor, then there is no liability to deduct tax under Section 194H of the Act. This exercise has to be done by the assessing authority before granting any relief. The same exercise can be done even in respect of other assessees also. " 65. In the light of the aforesaid discussions, we are of the view that the order passed by the authorities holding that Section 194H of the Act ....