Discount offered by cellular companies to distributors on SIM cards and recharge coupons is in the nature of ‘commission’ on which tax is required to be withheld

Bharti Cellular Ltd. v. Assistant Commissioner of Income-tax

HIGH COURT OF CALCUTTA

IT APPEAL NO. 222 OF 2006

MAY 19, 2011

JUDGMENT

K.J. Sengupta, J. –

The above appeal was decided to be heard by an order dated 17-8-2006 passed by the Division Bench of this Court against the judgment and order dated 4-4-2006 passed by the Income‑tax Appellate Tribunal, “B” Bench in two appeals being ITA 1678 and 1679 of 2005 relating to assessment years 2003-04 and 2004-05. At the time of admission though no substantial questions of law was formulated at the hearing of the appeal this Court formulated the following substantial question of law :

“Whether on the facts and in the circumstances of the case and on a true and proper construction of the agreement between the assessee and the franchisee, the learned Tribunal was justified in law in holding that there exists relation of the principal and agent between assessee and franchisee and that the discount which is allowed by the assessee is a commission and section 1 94H of Income-tax Act, 1961 is attracted to such payment?”

2. The facts of this case leading to preferring the present appeal is summarized as follows:

The appellant-assessee is engaged in the business of providing cellular mobile telephone services in Kolkata under the brand name “Airtel”. The assessee provides such services through its distributors by selling to them Starter Pack and Rechargeable Coupons which is commonly known as Subscriber Identification Mobile Card (hereinafter in short ‘SIM Card’ and pre-paid card). These Sim cards and rechargeable coupons were purchased by the distributors/franchisees engaged by the assessee at a rate below the market price on such Sim card and the same are sold to the retailers by whom the same are ultimately sold to the customers. The Assessing Officer while going through the records namely the TDS return filed by the assessee-appellant found that assessee had paid commission on starter pack and rechargeable coupons to 16 parties herein called “Franchisees” and though the assessee had deducted TDS on commission and deposited the same during the period from April 2002 to July 2002, such deduction of tax at source however was discontinued by the assessee treating such payment to the franchisee not as commission but discount which was outside the ambit of TDS under section 1 94H.