AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2022 (12) TMI 692
X X X X Extracts X X X X
X X X X Extracts X X X X
....as observed that as per the Annual Report of the assessee, under Segment Reporting which is part of its Annual Report at point 16 on page 77, service revenue on prepaid products on the 'Income From Services" at Rs. 10695,60,00,000/- was shown. On this, the assessee company was incurring expenditure on account of discount to prepaid distributors and franchises. The assessee company had shown this figure after netting off the discounted amount. It was asked to provide the details of discount given to distributors/franchisee but the same were not provided. As details of discount given to the distributors/franchisers were not provided, the discount given was estimated @ 5% i.e. Rs. 534,78,00,000/-. After detailed enquiry and verification of records, it was ascertained that the discounts given by the assessee to its distributors and franchisee was of the nature of commission and was liable to TDS u/s 194H for the allow-ability of the same as revenue expenditure. Reliance on the decision of Delhi High court in the case of Idea Cellular was placed wherein the relationship between the assessee, who was also a telecom service provided like the assessee in the present case, and the distr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ideration in the profits and loss account appellant has shown income from prepaid services at a net figure after reducing a discount given by it to the distributors / franchisees of its prepaid Sim Card and Recharge Vouchers. During course of reassessment Ld. AO directed the appellant to submit as to why said discount should not be treated as a commission paid to distributors / franchisees on which tax was deductible as per provisions of section 194H of the Act. In reply it was submitted by the appellant that the distributor margin is in nature of "discount" and not "commission" which would triger applicability of section 194H. It was further submitted that the relationship between BSNL and Distributors / Franchisees was on principal to principal basis and hence TDS was not deductible. In support of its claim the appellant relied upon the decision of Karnataka High Court in the case of Bharti Airtel Ltd. reported in 372 ITR 33 (Kar). The Ld. AO, however, was not convinced by the submissions made by the appellant and in his order of assessment he rejected the claim of the assessee by, observing as under:- "The submissions of the assessee have been considered and are discuss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the income tax authorities to ascertain whether or not taxes have been paid by the persons in receipt of the amounts from which taxes have not been withheld. The provisions regarding interest in delay in depositing the taxes are set out in Section 201 (1). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned these provisions are set out in Section 201 (1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deduction. However the question of making the loss of revenue arise only when there is indeed a loss of reveue can be there only when recipient of income has not paid tax." to the effect The ITAT observed that there is no finding by the AO to the effect that the embedded in the amounts in question. It held that for raising demand u/s. 201 / 201 (A) r.w.s 194H, the AO had to prove that the principal liability (of payment of tax by the distributor/ franchisees) remained undischarged and therefore sent the matter back to the file to the AO for reconsideration. Perusal of the above shows that, in fact, the wrong ITAT's order reaffirm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidered the judgment of Delhi, Kolkata & Kerala High Court in the case of Idea Cellular Ltd. 325 ITR 148 (Del), Bharti Cellular Ltd. vs. ACIT 244 CTR 185 (Cal) and Vodafone Esaar Cellular Ltd. vs. ACIT (2009) 317 ITR (AT) 234 (Cochin), I hold that the discounts allowed and incentives given by the appellant to its Franchisees on sale of its products is in nature of commission and the same attracts the provision of section 194H of the Act. During appellate proceedings the Id. AR has quoted the judgment of Karnataka High Court which is in favour of appellant It would be pertinent to state that the said judgment has not been accepted by Revenue and the judicial pronouncement has been contended before the Supreme Court The SLP proposed by Revenue has been admitted by the Apex Court which proves that the issue is alive and debatable. Considering all these facts, Ground No.3 is dismissed." 9. Aggrieved, the appellant is now in appeal before us. At the outset, it was submitted by the Id.AR that the decision of Hon'ble Delhi High Court in Idea Cellular (supra) is distinguishable both on facts and in law. In this regard, it was submitted by Ld. AR that a true and correct appreci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee and the subscriber and the subscriber is sent hill periodically depending upon the user of the SIM card for the period in question, in both the cases, legal relationship is created between the subscriber and the assessee that too by entering into specific agreement between these, two parties. ... 24. In contrast, the legal position when the goods are sold by principal to its distributors creating 'principal and principal of relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. v. Union of India AIR 2006 SC 1383, the Supreme Court held that electromagnetic waves or radio of fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id not go into the question whether right to service can be sold. 59. The telephone service is nothing but service. SIM cards, have no intrinsic sale value, ft is supplied to the customers for providing mobile services to them. 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.. Therefore, the SIM card, on its own but without service would hardly have any 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt which is the jurisdictional High Court is against the appellant. We are therefore compelled to hold that the discount on prepaid products offered by the appellant is in nature of "commission" which does attract rigors of section 194H. 12. The above finding given by us would however, not automatically act as an accomplished fact vis a vis the issue of disallowance u/s. 40 (a) (ia). There is however another aspect of the matter before us. Ld. AR argued that benefit of bonafitie cause be granted to the appellant since provisions of section 40(a)(ia) are penal in consequences. We find substantial merit in this alternative claim made by the appellant. We find that appellant deserves benefit of bonafide belief premised on the following facts; (i) As is apparent this is an issue on which divergent views have been expressed by two different High Courts in our country. We have been apprised that the issue is also currently pending disposal before Hon'ble Apex Court. (ii) In case of appellant itself for AY 2009-10 i.e the assessment year under consideration, Hyderabad Bench of ITAT (supra) has held as under: "8. The Learned Departmental Representative....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant also merits benefit of bonafide belief considering third proviso to section 194H which states as under: "Commission or brokerage 194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, 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 five per cent: 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 public call office franchisees." We find merit in the submissions made by Ld AR that third proviso to section 194H will get attracted only when the nature of payment is "commission or brokerage", Parties before us agree that majorly the distribution of products by BSNL and MTNL takes place through public Call Office fransh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or providing connectivity to and fro from locations where BSNL has no reach. The AO notes a sample sequence of carriage of international call from India to a location outside India as under :- * A mobile subscriber in Chennai makes a call to a person in US, The call originates' on the network of the local telecom services provider in Chennai, which shall carry the call upto the limits of the Chennai telecom services area and at the point, shall hand over the call to the national long distance ('NLD) service provider. * The NLD services provider carries the call upto ILD gateway of BSNL and hands over the call to BSNL * The call is then carried by BSNL on its ILD network upto its ILD gatesway outside India (say US), where the call is handed over to a Non-resident Telecom Operator (NTO)for carriage of the call beyond the ILD gateway of BSNL outside India and termination of the same at the destination location outside India (last leg of the communication channel). In many cases, local services provider and NLD provider could be BSNL only. " xxxxx "17. We have carefully considered the facts of the case and the material available on r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... insertion of Explanations 5 & 6 to section 9(1)(vi) also could not have altered this position - Held, yes [Paras 33, 44, 55, 56& 72][In favour of assessee] Section 9 of the Income-tax Act, 1961, read with section 5 and article 7 of Model OECD Convention - Income - Deemed to accrue or arise in India (Business Profits) - Assessment years 2008-09 to 2011- 2012 - Assessee made payment of Inter-connected Usage Charges(lUC) to Foreign Telecom Operators (FTOs) in connection with its ILD telecom service business - Payment in question did not accrue or arise to 'FTOs' in India - Entire business operations were carried out outside India by FTOs - FTOs also did not have any Permanent Establishment in India - Whether thus no income could be deemed to accrue or arise to ETO's in India and hence under article 7 also income could not be brought to tax in India -Held, yes - Whether further in absence of permanent establishment of FTOs in India, payment of 'IUC' to FTO could not be deemed to accrue or arise in India payment of 'IUC' to FTO could not be deemed to accrue or arise in India under any of clause of section 9 (1) read with section 5(2) - ' Held yes {paras 74 & 78} in fav....