Vodafone Idea Ltd. Vs ITO (ITAT Delhi)
Conclusion: Discount offered on some of the prepaid mobile services did not partake the character of commission under Section 194H and hence there was no obligation to withhold tax on such discounts on prepaid services.
Held: Assessee-company did deduct tax at source on discount extended to its pre-paid distributors on distribution of pre-paid services. As per TDS officer the relationship between assessee and the pre-paid distributors was not that of ‘Principal to Principal’ and the discount allowed to them was in nature of commission liable for tax deduction at source as envisaged under section 194H. Following the decision in case of Tata Teleservices Ltd. Vs. ACIT (ITA 2043/Mum/2014 – decision dated 27.5.2016) and ACIT Vs. Reliance Communications Infrastructure Ltd. (ITA 4677/Mum/2012 – decision dated 23.3.2016) it was held that the discount offered on some of the prepaid services did not partake the character of commission under Section 194H and hence there was no obligation to withhold tax on such discounts on pre-paid services.
FULL TEXT OF THE ORDER OF ITAT DELHI
The aforesaid appeals have been filed by the assessee company M/s Vodafone Idea Limited as a successor of M/s Vodafone Digilink Limited (which got merged with M/s Vodafone Mobile Services Limited which again got subsequently merged with M/s Idea Cellular Limited and now known as Vodafone Idea Limited) (hereinafter referred to as ‘Assessee’) against the consolidated Order dated 23.10.2018, passed by the Commissioner of Income Tax (Appeals) for Assessment Years (‘AY’) 2007-08, 2008-09 and 2009-10 and the order dated 21.01.2019 for assessment years 2010-11 and 2011-12. Since the issue involved in all the appeals are by and large common arising out of identical set of facts, therefore, were heard together and being disposed of by way of this consolidated order. For the sake of reference, the main issues raised in all the appeals by the assessee are reproduced as under:
ASSESSMENT YEAR 2007-08 to 2011-12 (common grounds)
1. Ground No.1-The Appellant is not liable to deduct tax at source on discount extended to its pre-paid distributors on distribution of pre-paid services.
1.1 On the facts and circumstances of the case and in law, the learned CIT (A) has erred in upholding the order of the learned TDS Officer in treating the Appellant as ‘assessee in default’ for non-deduction of tax at source under section 194H of the Act on discount extended of INR 2,10,56,933 by the Appellant to the distributors of its pre-paid services. (for AY 2008-09 the amount is INR 17,18,06,175, for AY 2009-10 amount is INR 19,15,95,051, AY 2010-11 – INR 30,37,20,165 and 2011-12 – INR 29,33,40,558).
1.2 On the facts and circumstances of the case and in law, the learned CIT (A) has erred in upholding the contention of the learned TDS Officer that the relationship between the Appellant and the pre-paid distributors is not that of ‘Principal to Principal’ and the discount allowed to them is in nature of commission liable for tax deduction at source as envisaged under section 194H of the Act.
1.3 On the facts and circumstances of the case and in law, the learned CIT (A)/TDS Officer have erred in not appreciating the fact that there is no payment/credit to the account of distributors by the Appellant towards the discount extended to them and therefore, provisions of section 194H of the Act do not apply on such discount.
1.4 On the facts and circumstances of the case and in law, the learned CIT (A)/TDS Officer have erred in not appreciating that the 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 services are further distributed by the distributors.
1.5 On the facts and circumstances of the case and in law, the learned CIT (A)/TDS Officer have erred in not appreciating the fact that there is no flow of monies from the Appellant to the distributor of pre-paid services but rather from the distributor to the Appellant, and hence, the provisions of section 194H of the Act fail to apply.
1.6 On the facts and circumstances of the case and in law, the learned CIT (A)/TDS Officer has erred in placing reliance on the decision of Delhi High Court in the case of Idea Cellular and Kolkata Tribunal in the case of Bharti Cellular Limited, without appreciating that the facts in those cases were different from the facts of the Appellant’s case.
2. Ground No.2-No TDS demand can be raised under section 201(1) of the Act 2.1 On the facts and circumstances of the case and in law, the order of the learned TDS Officer, as upheld by learned CIT(A), is bad in law in so far as it seeks to recover tax demand under section 201 of the Act in contradiction to the settled principle that the payer cannot be held liable for payment of the tax demand in cases involving non-deduction of tax at source and only interest liability under section 201(1A) of the Act, if any, can be levied in such cases.
3. Ground No.3 – No interest under section 201(1A) of the Act can be charged
3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned TDS Officer in charging interest under section 201(1A) of the Act.
ASSESSMENT YEAR’s 2010-11 and 2011-12.
Ground No.1 – The Appellant is not liable to deduct tax at source on discount extended to its pre-paid distributors on distribution of pre-paid services.
1.1 On the facts and circumstances of the case and in law, the learned CIT (A)/TDS Officer has erred in treating the Appellant to be an ‘assessee in default’ for non-deduction of tax at source under section 194H of the Act on discount extended of INR 30,37,20,165 by the Appellant to the distributors of its pre-paid services (for AY2011-12 – INR 29,33,40,558).
1.2 On the facts and circumstances of the case and in law, the learned CIT(A)/TDS Officer has erred in upholding that the relationship between the Appellant and the pre-paid distributors is not that of ‘Principal to Principal’ and the discount allowed to them is in nature of commission liable for tax deduction at source as envisaged under section 194H of the Act.
1.3 On the facts and circumstances of the case and in law, the learned CIT(A)/TDS Officer have erred in not appreciating the fact that there is no payment/credit to the account of distributors by the Appellant towards the discount extended to them and therefore, provisions of section 194H of the Act do not apply on such discount.
1.4 On the facts and circumstances of the case and in law, the learned CIT(A)/TDS Officer have erred in not appreciating that the discount allowed by the Appellant is not the income in the hands of its distributors and that income, if any, arises only when the pre-paid services are further distributed by the distributors.
1.5 On the facts and circumstances of the case and in law, the learned CIT(A)/TDS Officer have erred in not appreciating the fact that there is no flow of monies from the Appellant to the distributor of pre-paid services but rather from the distributor to the Appellant, and hence, the provisions of section 194H of the Act fail to apply.
1.6 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in not following the judgment rendered by the Hon’ble Rajasthan High Court in the Appellant’s own case as well as other latest favourable orders/judgment.
Ground No.2-Disallowance under section 194J of the Act on account of non-deduction of tax at source on domestic roaming charges paid to other telecom operators.
2.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in summarily rejecting the grounds on the issue of applicability of section 194J of the Act on the roaming charges, without even adjudicating on the same.
Without prejudice to Ground 2.1
2.2 On the facts and in the circumstances of the case and in law, the learned CIT(A)/TDS Officer have erred in not appreciating the fact that roaming services are standard automated services requiring no human intervention which is sine qua non for a service to qualify as a technical service for the purposes of section 194J of the Act.
2.3 On the facts and in the circumstances of the case and in law, the learned CIT(A) have erred in not appreciating that even as per the statement of technical experts, the carriage of calls is an automatic activity and human intervention, if any, is required only at the stage of inter-connect set-up, capacity enhancement, monitoring, maintenance, fault identification, repair, etc.
2.4 On the facts and in the circumstances of the case and in law, the learned CIT(A) have erred in ignoring the statement of technical experts recorded by the income-tax authorities in case of Vodafone Cellular Limited (now merged with Appellant itself), in the context of roaming services, wherein it has been clearly observed that roaming services are automated services requiring no human intervention.
2.5 On the facts and in the circumstances of the case and in law, the learned CIT(A)/TDS Officer has erred in not holding that characterization of a payment must be done having regard to the dominant purpose/intention of the payment.
2.6 On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not following the principles laid down in judicial precedents cited by the Appellant and also ignoring the binding Apex Court judgment in the case of CIT vs. Delhi Transco Limited 68 taxmann.com 231 and CIT vs. Kotak Securities Limited 67 taxmann.com 356.
Ground No.3 – No TDS demand can be raised under section 201(1) of the Act.
3.1 On the facts and circumstances of the case and in law, the order of the learned TDS Officer, as upheld by learned CIT(A), is bad in law in so far as it seeks to recover tax demand under section 201 of the Act in contradiction to the settled principle that the payer cannot be held liable for payment of the tax demand in cases involving non-deduction of tax at source and only interest liability under section 201(1A) of the Act, if any, can be levied in such cases.
Ground No.4 – No interest under section 201(1A) of the Act can be charged.
4.1 On the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned TDS Officer in charging interest under section 201(1A) of the Act.
2. The key issues formulating in all these appeals relating to the assessee being held as an ‘assessee in default’ within the meaning of Section 201 read with Section 194H of the Income Tax Act, 1961 (‘the Act’) on account of discount extended to its prepaid distributors (common for assessment years 2007-08, 2008-2009, 2009-10, 2010-11 and 2011-12); and being treated as an ‘assessee in default’ in terms of Section 201 read with Section 194J of the Act on account of non-deduction of tax at source on domestic roaming charges paid to other telecom operators (for assessment years 2010-11 and 2011-12). Before proceeding to decide the issue as challenged in various appeals, it would be relevant to capture the background and the facts of the case as culled out from records produced before.
3. That a survey was carried out on the premises of the assessee (Vodafone Essar Digilink Limited, Haryana Circle, Karnal) on 14.01.209. During the course of the survey, it was found that M/s Vodafone Essar Digilink Limited, Haryana Circle was providing services of post-paid mobile connections as well as prepaid mobile connections through its distributors. It was found during the survey that in respect of post-paid mobile services, the assessee was deducting tax at source under Section 194H of the Act while making payments of discount/commission to its distributors. However, the assessee was not deducting any tax in respect of the monetary transactions arising out of providing prepaid mobile services to the consumers. The prepaid mobile services were provided by the assessee by distributing prepaid cards, service tickets, refill slips, SIM cards etc. to the consumers through its distribution network.
4. On the basis of the survey carried out, show cause notices were issued to the Assessee to show cause as to why it should not be treated as an ‘assessee in default’ in terms of Section 201(1) of the Act for failure to deduct tax at source under Section 194H in respect of the discount/commission allowed to the prepaid distributors. The period under consideration in the show cause notice was from 01.01.2007 to 31.07.2007 and Financial Years 2007-08 and 2008-09. By virtue of the Show Cause Notice in respect of the defaults under Section 194H, the amounts of discount/commission were under:
Financial Year Amount (INR)
