TaxTMI 
TaxTMI 
2017 (11) TMI 115
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....opra and Shri Mansvini Bajpaai, Ld. Advocate appeared on behalf of assessee and Md. Usman Ld. Departmental Representative appeared on behalf of Revenue. 2. At the outset it was observed the issues in all the appeals are common except the amount involved. Therefore, we heard them together and deem it appropriate to dispose of them by way of this common order for the sake of convenience by taking the ITA 1501/Kol/2015 (A.Y. 2010-11) as lead case. First we take up ITA No.1501/Kol/2015 relating to A.Y. 2010-11. 3. The assessee has taken the following grounds in the appeal filed by assessee:- "The Appellant respectfully submits that: On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax Appeals - 24, Kolkata ['learned CIT(A)'] has erred in passing the order under section 250 of the Income Tax Act, 1961 ('Act'), partially confirming the allegations of the Deputy Commissioner of Income Tax, Circle-59 (TDS) Kolkata (Teamed TDS officer') in relation to requirement of TDS on discount extended to prepaid distributors by the Appellant. Each of the ground is referred to separately, which may kindly be considered independent....
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....llant is not income in the hands of its pre-paid distributors and that income, if any, arises only when the right to pre-paid service is further distributed/transferred. by the distributors. 2.5. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that there is no flow of monies from the Appellant to its pre-paid distributor but rather from the distributor to the Appellant, and hence, the provisions of section 194H of the Act fail to apply. 2.6. (a) On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the facts of the case and the submissions made by the Appellant distinguishing its facts with those considered by the Calcutta High Court in the case of Bharti Cellular Ltd Vs ACIT and the Kerala High Court in the case of Vodafone Cellular Limited. (b) On the facts and circumstances of the case and in law, the learned CIT(A) has failed to consider the recent judicial precedents in the case of Vodafone South Limited reported as Bharti Airtel Limited vs. DCIT (373 ITR 33 (Karnataka High Court) thereafter followed in the cases of Tata Teleservices [2013 (29 taxmann.corn....
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....k and pre paid talk time by way of recharge coupons, electronic top up, Internet or any other mode. Thus, the assessee for the purpose of providing the SIM / starter pack and pre paid talk time to its subscribers has created a distribution network by appointing the distributors exclusively for its pre-paid connections. In the case on hand the disputes relates to discount provided by the assessee on the sale of pre-paid talk time. The assessee was selling the recharge coupon / vouchers and starter pack to the customers through the net of distributors. During the course of assessment proceedings, AO observed that assessee was providing discount to its distributors from the Maximum Retail Price (MRP for short) on the sale of prepaid talk time through them which was in nature of commission. Therefore, assessee was liable for deduction of Tax Deducted at Source (TDS) u/s. 194H of the Act on the discount offered to its distributors. The AO further observed that assessee was deducting TDS on the commission paid to its distributors under the scheme of post-paid connections. But the assessee failed to deduct TDS on the discount offered to its distributors on the sale of recharge coupon for....
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.... its responsibilities with regard to e Topup as detailed in the Annexure-II; (iv) to strictly adhere to and comply with the Brand-image Guidelines set out in the Annexure-III; ... [clause 7 of the agreement] * The parties agree that upon termination of this Agreement for any reason the Distributor will return all equipment and furniture supplied by VESL forthwith upon request and remove all VESL signage and all other items indicating that the Premises were operated as an VESL Distributor. The Distributor hereby agrees to grant an irrecoverable license to VESL and its designated employees to enter the premises and remove all VESL signage if the Distributor has not done so itself to the satisfaction of VESL within 7 days of termination of the Agreement. [clause 10.1 of the agreement]. The Distributor shall not be entitled to any compensation or indemnity (whether for loss of distribution rights, goodwill or otherwise) as a result of the termination of this Agreement in accordance with its terms. [clause 10.2 of the agreement] * VESL shall not be responsible for any post delivery defect in the Service Tickets. However, VESL may at its sole discretion and after making verif....
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.... the customer including properly completed Customer agreement Form/s, Enrollment Form/s [clause II(a) to annexure III] * Bill collection and acceptance of payments on behalf of VESL for bills for charges in respect of cellular services and the Service Tickets on the following basis: Any payments by cheque will be payable to VESL and held for daily collection by VESL. [Clause II(d) to annexure III] * Demonstration and sales of value-added service of VESL. [Clause II(f) to annexure III] * Maintain such records and provide VESL with such reports as may be required for evaluation of performance from time to time. [Clause III(b) to annexure III]] 4. The transaction between the assessee and distributor in relation to SIM/ starter pack and recharge coupon is not sale & purchase transaction but actually it represents services provided by the distributors. Such services can neither be sold nor purchased but these can only be rendered. 5. The assessee is always remains the owner of the SIM which is device used to access the mobile network. Thus, the AO in view of above held that discount offered by the assessee is nothing but the commission in terms of provision of Sec. 194H o....
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....cipal to principal. From cls. 16, 16.1, 16.2 and 16.3 of agreement, it emerges though nomenclature has been used franchisee the agreement is essentially that of the principal and agent albeit the stipulation in cl. 16.2. In real sense the franchisee acts on behalf of the assessee for selling start up pack, prepaid recharge coupons to the customers of assessee and it will be clear from cls. 4.1, 4.3, 4.4 & 8.1 of the agreement. (Paras 12 & 21) It appears from the records in this case that the transaction in case of prepaid SIM cards, and rechargeable coupons, sufficient stocks are to be kept by franchisee, and then the same are to be sold to the retailers at a rate stipulated by the assessee, say at Rs. 324 and the retailer is allowed to sell it to the ultimate customer at the maximum price again fixed by the assessee, say at Rs. 330. The assessee is to realize lesser rate say at Rs. 317 per SIM card from franchisee. Thus discount of Rs. 7 is given. Therefore after selling all the SIM cards and prepaid coupons to the retailers the franchisee is to make payment of sale proceeds to the assessee after deducting a discount of Rs. 7 per SIM card. Thus this receipt of discount @ Rs. ....
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.... THE due under this Agreement are tendered in a timely manner; (c) comply with in reasonable time frames as determined by HTEL for completion of any of its obligations hereunder; (d) immediately advise HTEL as soon as it comes to know that any person is infringing or violating or is attempting or planning to infringe or violate any intellectual property rights owned or used by HTEL and its services and, if requested, forward promptly, a written report setting forth all the relevant information in its knowledge. (e) Comply with all of HTEL's requirements in respect of invoicing and accounts; (f) Unless otherwise agreed in writing, be solely responsible for all costs and expenses for all operating expenses incurred in connection therewith; (g) Maintain HTEL's brand image and comply with all directions and guidelines issued in respect of the brand and not do anything to tarnish, spoil or reduce the value of the same; (h) Provide reports on customers, expenses, purchases, inventory, compliance and any other relevant details in the format and as required by HTEL; (i) Make payment to HTEL for any amounts due under this Agreement by way of Account Payee cheque or Bank....
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....e various activities pertaining to the setting up and operation of the services and to provide continuing assistance in providing the Services using the latest techniques and skills available to HTEL; (b) Provide assistance (on request form the service provider) to its staff on service knowledge and updates; (c) Provide and maintain an up-to-date list of services and/or suppliers form which the Service provider may purchase stock services or accessories; (d) Ensure that all payments due to the service provider in accordance with this Agreement are paid within the agreed period. 7) PAYMENT In consideration of the service provider fulfilling its obligations herein HTEL will pay the service Provider the following: Commission at the rates as per HTEL's policy from time to time and subject to applicable taxes and laws as may be in force at the relevant time and on payment terms as may be communicated to the Service Provider by HTEL form time to time. The above agreement clearly shows that there was an agency agreement between the erstwhile assessee and its distributor. Therefore there was no ambiguity to the applicability of the provisions of TDS under section 194H of the ....
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....soon as possible all technical queries raised by the Distributor or its customers concerning the use or application of the Service Tickets; (c) Provide the Distributor with adequate quantities of instruction manuals, technical and promotional literature and other information relating to the Service Tickets; (d) Provide the Distributor with all information and assistance necessary to enable the Distributor to perform its obligations hereunder in respect of any modified or enhanced versions of the Service Tickets. (e) Provide it expertise and to guide and assist the Distributor in the various activities pertaining to the Service Tickets using the latest techniques and skills available to VESL; (f) Provide assistance (on request from the Distributor) to its staff on service knowledge and updates. (g) Provide and maintain an up-to-date list of the Service Tickets and/or suppliers from which the Distributor may purchase Stock and/or accessories; 6.TRAINING 6.1 VESL shall provide training in the use, installation and rendering of after-sale-services in respect of the Service Tickets to the Distributor and its personnel, wherever required. 6.2 Any additional traini....
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....ESL to the Distributor. (d) Time of Delivery: All deliveries will be made only during working days (Monday to Friday except public holidays) during the working hours (i.e 10.00 a.m. to 5.00 p.m.) subject to availability of the stock. (e) Return & Replacement: VESL shall not be responsible for any post delivery defect in the Service Tickets. However, VESL may, at its sole discretion and after making verification as it may deem fit, replace any unused nonworking refill slips (physical or electronic Stock) No request of refund of any money shall be entertained by VESL in any circumstance. (f) Warranty/ Guarantee: VESL does not give any warranty or guarantee (express or implied) in respect of any of the Service Tickets unless otherwise expressly mentioned on the Service Tickets. ANNEXURE-II Responsibilities of the Distributor in respect of e-stock: The Distributor hereby agrees and confirms as follows: (i) The e-Stock shall be purchased by the Distributor form VDSL as per the standard terms and conditions of sale of VESL as set out in the Annexure-I. (ii) VESL shall, on receipt of a valid purse order accompanied with the payment in full for such order, transfer th....
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....ner of the other. Nothing in this Agreement shall be construed to render the Distributor a partner or agent of VDSL." In view of above the ld. AR submitted that the case law i.e. Bharati Cellular Limited (Supra) relied by the ld. CIT(A) are based on distinguishable facts and therefore the same cannot be applied in the instant facts of the case. The judgment was based on the old business model of the assessee for its prepaid recharge coupons. The earlier agreement is on the basis of which the erstwhile assessee i.e. Hutchison Telecom East Limited carried on the business and which was considered by the Hon'ble High Court is placed on pages 1 to 13 of the paper book. The relevant clauses of the agreement have already been discussed in the preceding paragraphs and the same are not reproduced herewith for the sake of brevity. 8.4 Further, Ld. AR submitted that the Hon'ble Karnataka High Court in the case of Bharati Airtel Limited Vs. CIT & ANR reported in 372 ITR 0033 for the AYs 2005-06 to 2008-09 where the Vodafone Essar South Limited was also a party to the judgment has decided the issue in favour of assessee after considering the new agreement as discussed above by observing as....
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....nds of the distributor and he was 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 was no primary responsibility, the Assessee had no obligation to deduct TDS. Once it was 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 was that of principal to principal." The ld. AR also drew attention by submitting that the Hon'ble Rajasthan High Court in the case of various assessee's where the assessee was also a party has decided the issue in favour of assessee on the identical facts & circumstances in ITA No. 1/2014 & ITA No. 4/2014 vide order 11/07/2017. The Hon'ble Court also considered the judgment in the case of Hutchison Telecom East Limited (Supra). The relevant extract is reproduced below:- "42. He has also relied upon the decision of Calcutta High Court in the case ....
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.... Act. The Tribunal has travelled beyond the provisions of Section 194H where the condition precedent is that the payment is to be made by the assessee and thereafter he is to make payment. In spite of our specific query to the counsel for the department, it was not pointed out that any amount was paid by the assessee company. It was only the arrangement by which the amount which was to be received was reduced and no amount was paid as commission. 46. In that view of the matter, if we look at the provisions of Section 194H and even if explanation is taken into consideration, there is no occasion of invoking provisions of Section 194H, since the amount is not paid by the assessee. 47. Taking into account the conclusion which has been arrived at by the Tribunal is misdirected in view of the arrangement which has been arrived at between the company and the Distributor. Assuming without admitting, if the contention which has been raised before the Tribunal is accepted, the same can be at the most expenses which are not allowable under the Income Tax Act, if at all claimed without proper basis but to conclude that they are covered under Section 194H and the income tax or the TDS is....
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....i) Regarding supervision, s always for the manufacturer and the company to look into the matter that his Distributor or Sub- Distributor or Retailer will not induct in mal practice. (viii) Regarding goods sold to the Distributor, it is always a matter of contract how further goods will be distributed. Restriction on sub-distributor will not change the transaction from principal to Principal. (ix) Regarding expenses which are described by the Tribunal and one of the reason is that it is always for the se to allow any special allowance or expenses to promote the sale. In a competitive world to promote the sale, if the Distributor is not given any encouragement, the business will not grow. In that view of the mate, in view of the observations of the Supreme Court, the Income Tax Officer cannot enter into the shoes of the assessee. (S.A. Builder Vs. Commissioner of Income Tax- (2007) 288 ITR 1 (SC) (x) Regarding providing a vehicle it was very clear that by providing vehicle and getting list of expenses will not decide the relation-ship of Principal and Agent. 48. In our considered opinion, Section 194H pre-supposes the payment to be made to the third party namely, Distribu....
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.... the commission to the distributors. The distributor was authorized to sale the prepaid recharge coupons at a price of its/ his choice but not exceeding MRP determined by the assessee. We also find that all the risks & rewards attached with the product were shifted to the distributor. Thus we hold that there was no agreement between the assessee and the distributor as of principal and agent. 9.2 We also find that the business model of the assessee for the prepaid mobile connections and post paid mobile connections are different. In case of post paid connections the assessee is paying commission to the distributors against certain services rendered by them and therefore the TDS was being deducted. Thus according to the AO the TDS provisions should have also been applied to the discount offered by the assessee to the distributor of the prepaid connections which in our considered view was based on wrong assumptions of facts. In this connection, we find that under the post-paid connection there are certain services rendered by the assessee such as collection of documents for proof of identity, delivery of SIM cards, collection of charges etc. Against these services the distributors a....