Vodafone Idea Ltd. Vs ITO (ITAT Delhi)
At the outset, we find merit in the contention of the Ld. Counsel of the Assessee that in the absence of any adverse judgment by the Hon’ble Jurisdictional High Court, i.e., the Hon’ble High Court of Punjab & Haryana, there being divergence of judicial opinion on the subject matter, a view in favour of the Assessee has to be taken. It has already been brought to our attention that a Coordinate Bench of this Tribunal in the case of Idea Cellular itself in ITA No. 852/Delhi/2015 vide order dated 01.05.2018, has decided the issue in favour of the Assessee noting that in the absence of any judgment of the Jurisdictional High Court, i.e., the Hon’ble High Court of Punjab & Haryana, a view in favour of the Assessee have to be taken. The relevant portion of the Coordinate Bench’s Judgment is reproduced as under:
“We have heard both the parties and perused all the records. The first issue on which assessee was held by the Revenue as ‘assessee-in-default’ is for discount/commission on sale of prepaid sim cards. The issue contested herein was decided against the assessee by the Hon’ble Delhi High Court in case of the assessee’s own case in CIT vs. Idea Cellular Ltd. for A.Ys 2003-04 and 200405. But, in case of Bharati Airtel Limited vs. DCIT (2014) (372 ITR 33), Hon’ble Karnataka High Court and in assessee’s own case (87 taxmann.com 295) Hon’ble Rajasthan High Court decided this issue in favour of the assessee. As per Ld. AR, the order u/s 201 of the Act was passed by ITO TDS, Rohtak and thus, the Hon’ble Punjab and Haryana High Court which has necessary jurisdiction. After looking into the address of the assessee, the assessee’s address is at Noida, Uttar Pradesh. Thus, in both these circumstances the jurisdictional High Court will not be the Hon’ble Delhi High Court. The Ld. AR relied upon the decision of the Hon’ble Supreme Court in case of CIT vs. Vegetable Products Ltd. 88 ITR 192 wherein it is held that if two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted. In absence of any decision of the Hon’ble Punjab and Haryana High Court as well as the Hon’ble Allahabad High Court on this issue and in view of conflicting decisions of other High Courts, following the ratio of the Hon’ble Apex Court, the view favourable to assessee is upheld. Hence assessee cannot be deemed to be an ‘assessee-in-default’ on discount/commission of sale of prepaid sim cards. Therefore, Ground No. 2 of the assessee’s appeal is allowed.”
While coming to the above conclusion Coordinate Bench has noted that the issue was decided in favour of the Assessee by Karnataka High Court and since the orders under Section 201 of the Income Tax Act were passed by the ITO TDS Rohtak the Hon’ble Punjab & Haryana High Court had the necessary jurisdiction. In paras 7 & 8 of their order the Coordinate Bench while relying on the Judgment of the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products Limited (88 ITR 192) decided the issue in favour of the Assessee. We find that the above decision was rendered in the case of Idea Cellular Limited itself for the Haryana Circle in-spite of the contrary decision of the Delhi High Court in the case of that Assessee. It is a settled position in law that where two contrary decisions of the High Courts are available, the view taken in favour of the Assessee is to be adopted and applied. Based on the above and on this short ground itself the appeal of the Assessee is capable of being allowed.
Even otherwise, on merits we find that the commercial arrangement between the Assessee and its distributors had undergone a change with effect from 01.01.2007 and under the new commercial arrangement the relationship between the Assessee and the distributor’s is clearly based on principal to principal basis and hence, the earlier judgments would not apply. Having carefully considered the written submissions of the Ld. DR dated 28.3.2019, 16.7.2019 and 24.9.2019 and the rejoinder made by the Ld. Counsel of the Assessee, we find that the commercial arrangements between the Assessee and distributors had significantly changed w.e.f. 2007. The new arrangements between the Assessee and the distributors were in fact in the nature of principal to principal given that all risk in the services tickets, once having sold to the distributors, passed to the distributors. Under the new arrangement, Vodafone Essar Digilink Limited, Haryana circle, transferred its prepaid talk time to the distributors at a discount and the distributors in turn distributed the same to the retailers, the retailers thereafter transfer the same to the ultimate subscribers. At each level of the distribution, the party distributing the prepaid talk time retains a margin for its risk and efforts, while Vodafone Essar Digilink Limited, Haryana circle assumed the responsibility for the provision of services to the subscribers. Accordingly, post January 2007, the assessee also accounted for revenues on the basis of consideration received from the distributors, i.e., the price on which the prepaid talk time was transferred to the distributor. From the terms of condition mentioned in the new agreement the gist of which has been dealt with in para 20 herein fore it is quite evident that the relationship is no longer agent – principal relationship. The comparison and the differences between earlier agreements have been highlighted above which clearly shows the changes and how it has transformed to principal to principal relationship.
We also find support from the decision of the Kolkata Bench of Tribunal in the Assessee’s case where the Bench has taken into note that change of commercial arrangement and had decided issue in favour of the Assessee, while holding that the discount offered on some of the prepaid services did not partake the character of commission under Section 194H of the Act and hence there is no obligation to withhold tax on such discounts on prepaid services. The relevant para’s read as follows:
“We have heard rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. From the foregoing discussion, we find that the AO has treated the discount given by the assessee to its distributors on the sale of recharge coupons/ starter pack as commission expenses. Therefore the AO was of the view that the assessee was liable to deduct the TDS under section 194H of the Act. On the contrary the assessee treated the aforesaid transaction as sale at a price net of discount in the books of accounts. The ld. CIT (A) also confirmed the order of AO after having reliance in the case of Bharati Cellular Limited (supra).
Now the issue before us arises for our adjudication so as to whether the discount given by the assessee is in the nature of commission in the given facts & circumstances. From the submission of the Ld. AR for the assessee, we find that the transaction of recharge coupons was treated as sale in the books of accounts which was shown net of discounts in the books of accounts. In this connection we find that the agreement made between the assessee and the distributor was for the sale of recharge coupons and not the agreement for the commission. The relevant portion of agreement has already been discussed in the preceding paragraph and the same is not reproduced here for the sake of brevity. On perusal of the agreement it can be inferred that the transaction between the assessee and the distributor was based on principal to principal basis and which is in the nature of purchase and sale transaction. There was no clause in the agreement suggesting that the assessee is liable for the payment of 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.
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 are paid the amount of agreed commission by the assessee after deducting TDS u/s 194H of the Act. However, we find that in case of prepaid connection the recharge coupons are sold to the distributors on outright sale basis at a discounted price. The amount of discount is not recorded in the books of accounts. Therefore we hold the transaction between the assessee and prepaid distributor for recharge coupons is nature of sale & purchase. Thus amount of discount cannot be equated with the commission as envisaged under section 194H of the Act. Similarly we find that the ownership of the recharge coupons gets transferred to the distributor on the sale of recharge coupons. In this connection, we also rely in the case of Bharti Airtel Limited Vs. CIT & ANR. reported in 372 ITR 33 (Kar) (supra) where the Hon’ble Karnataka High Court has decided the issue in favour of assessee. Similarly Hon’ble Rajasthan High Court in the case of various parties 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 (supra). The ld DR has not brought anything contrary to the arguments of ld AR. Therefore we have no alternate except to follow respectfully the ratio laid down by the Hon’ble Karnataka High Court and Rajasthan High Court in the case of Bharti Airtel Limited Vs. CIT (supra) and in the case of various assessee’s where the assessee was also a party i.e. Vodafone Mobile Services Limited (supra). Hence, we have no hesitation in reversing the order of authorities below. Hence this ground of appeal of the assessee is allowed.
As we have already held that the provisions of TDS under section 194H of the Act are not attracted on the sale of recharge coupons for the prepaid talk time to the distributors and accordingly the assessee cannot be treated as assessee in default for non deduction of TDS u/s 201 of the Act. Thus, other grounds raised by the assessee become academic in nature and therefore do not require separate adjudication. Hence, these grounds become infructuous and accordingly being dismissed.”
We find that the facts of the present case are identical to that considered by the Kolkata Bench of the Tribunal in the Assessee’s own case. We do not find any merit in the Revenue’s plea that the decision of Delhi High Court is applicable in the present case. The Hon’ble Punjab & Haryana High Court has already settled this issue of jurisdiction in the decision of CIT Vs. Motorola India Limited (326 ITR Page 156), where the Hon’ble High Court held that it is the situs of AO at the time when Assessment was framed which would be determinative of deciding the issue of the High Court’s appellate jurisdiction. On the facts of the present case it is not in dispute that the impugned orders were passed by the Income Tax Officer (TDS) Karnal. The Ld. DR had also pleaded that since the Assessee had merged with Idea Cellular, the decision of the Delhi High Court should be applied. However, we find no merit in this contention since the way the position stands today the resulting company is Vodafone Idea Ltd. having jurisdiction in Mumbai. On that count also, the issue is covered in favour of the Assessee by the decision of the Coordinate bench of the Mumbai Tribunal in the 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).
Be that as it may, since the orders u/s 201 were passed by the ITO Karnal, it is clear that the Jurisdictional High Court being the Hon’ble Punjab & Haryana High Court would have the appellate jurisdiction over the matter. Thus, while respectfully following the decision of the Coordinate Bench in case of DCIT Vs. Idea Cellular Limited (decision dated 01/05/2018 in ITA No. 852/Delhi/2018) this issue is decided favour of the Assessee and grounds are accordingly allowed.
43. Accordingly, we hold that there was no requirement for the Assessee to withhold taxes on the amount of discounts offered by it on pre-paid services under section 194H of the IT Act and consequentially the Assessee could not be treated as an assessee-in-default in terms of section 201 of the IT Act.
The other issue, which is relevant for the Assessment Order 2010-11 and 2011-12 is whether the Assessee was in default in respect of the roaming charges and consequentially whether the Assessee was required to withhold tax under Section 194J of the Act. We find that this issue has already decided in favour of the Assessee in the Assessee own case by the Kolkata Tribunal in the case of Vodafone East Limited vs. ACIT (2015) (43) ITR (Trib.) 551). We also find that this issue was also considered by the Coordinate Bench in the case of DCIT Vs. Idea Cellular (ITA 852/Delhi/2015) and the issue has been decided in favour of the tax payer to the extent that payments for roaming charges do not partake the character of fees for technical services and hence there is no obligation to withhold tax on such payment under Section 194J of the Act. No contrary decision has been brought to our attention by DR and respectfully following the Coordinate Bench decision as noted above, the issue is also decided in favour of the Assessee.
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)
