S. 194H Discount by BSNL to its franchisee on recharge coupon is not commission

Brief of the case

In the Case of ITO-TDS vs. BSNL, the Hyderabad Tribunal observed that the relationship between the BSNL and the franchisee was recognised by the CBDT by inserting third proviso to S.194H. The assessee being public sector undertaking stands on a different footing and the view taken by Delhi High Court in the case of idea Cellular Ltd. (325 ITR 148) cannot be applied.

Facts of the Case

The assessee sold SIM/recharge cards and top-up cards to the franchisees at a concessional price, treating the differential price as trade discount. The A.O. was of the view that the differential amount has the attribute of commission payment falling within the meaning of section 194H of the Act, in which event, the assessee is liable to deduct tax at source and for the failure to do so, the provisions of S.201(1) and S.201(1A) get attracted. Aggrieved, assessee contended before the CIT(A) that the Revenue generated by BSNL, on sale of prepaid recharge coupons, etc., is taken into account net of discount given to the franchisees. In this regard, a circular issued by the Corporate Office of the BSNL dated 13.12.2007 and another Circular No.131 dated 15.4.2008 were referred to wherein it was clearly mentioned that the transaction on the recharge coupons shall be done on a “principal to principal” basis and that the incentive given to the franchisee shall be treated or categorized as trade discount as per AS-9. He also furnished a copy of the franchise agreement and copy of the invoice raised on one of the franchisees to highlight that the discount on the face value of the discount coupon has been deducted resulting in net amount receivable, for which the franchisee has paid by demand draft in favour of BSNL.

Held by CIT(A)

The learned CIT(A) examined the facts placed before him and came to the conclusion that the transaction between the parties is on principal to principal basis and therefore, the concession given to the franchisees cannot be treated as commission, but trade discount. This was also supported by the clause of the franchisee agreement as laid down in the clause No.11.1.2 as extracted below:-

“11.1.2. Basic Fixed Discount Commission:

Discount on Recharge Coupons: There will be uniform discount allowed for Recharge Coupons in BSNL license area. The Discount allowed to sub-franchisees and retailers by franchisee will be from their own discount. Discount to be given by franchisee to sub- franchisee Retailer will be decided.”

Thus, it was very clearly mentioned that the franchisee will be allowed discount on recharge coupons. The franchisee has made the payment for the cards he is indenting which clearly establishes that the property, risk and rewards have been transferred to the franchisee. The existence of Implied Warranties, that is, assurance of the BSNL to provide service to the ultimate buyer of the recharge coupon does not take away the character of the sale in this instance.

Contention of Revenue

A.O. observed that nomenclature adopted by the BSNL in the agreement would not decide the relationship between the BSNL and the franchisees, and the nature of the transaction has to be taken into consideration. The recharge/top up cards do not represent physical goods and they only provide access to the mobile phone service rendered by the assessee and consequently the franchisees act as an agent of the assessee in facilitating the access to such services of the assessee by distributing the cards to the customers. The Ld. DR relied upon the decisions of the ITAT Kolkata Bench in the case of Bharti Cellular Ltd. (2007) 108 TTJ (Kol) 38 and Delhi High Court in the case of idea Cellular Ltd. (325 ITR 148). and the Kochin Tribunal in the case of Vodafone Essar Cellular Limited Vs. ACIT in ITA os. 106 to 113/Coch/2009 to hold that the discount allowed to the franchisees is in the nature of commission liable for u/s. 194H of the I.T. Act.

Contention of Assessee

It was contended that the relationship between BSNL and the franchisee is on ‘principal to principal basis’ and the revenue on prepaid recharge coupons etc. is net of discount given to franchisee by BSNL. Further in selling the prepaid coupons the assessee fully passes on the risk and rewards to franchisee along with the property therein and accordingly an invoice is raised to collect the consideration.

Held by Tribunal

The Tribunal held that it was not in dispute that the assessee has not deducted tax at source. Further, as per third proviso to S.194H which is inserted by the Finance Act, 2007, no deduction need to be made on any commission or brokerage paid by BSNL to its Public Call Office franchisee, and this proviso was held to be clarificatory in nature by the Hon’ble Punjab and Haryana High Court in the case of CIT V/s. Bharat Sanchar Nigam Ltd. (265 CTR 212). In fact, the decision of Hon’ble Delhi High Court and other High courts, on this point were considered by Hon’ble Karnataka High Court in the case Bharti Airtel Ltd. V/s. Dy. CIT and others (372 ITR 33) while holding that Section 194H is not applicable.

Since no jurisdictional High Court decision was available as on date, the latest decision of Karnataka High Court, which considered and distinguished earlier rulings of other High Courts, deserves to be followed. In fact, the first appellate authority has taken into consideration the circular issued by the corporate office of the BSNL dated 13.12.2007 and another circular dated 15.4.2008 while coming to the conclusion that the nature of the payment made by the assessee to its franchisee is trade discount only. Since the view taken by the learned CIT(A) was mainly based on the factual matrix of the case, the tribunal was of the view that the order passed by the learned CIT(A) does not call for any interference. In the result, appeal filed by the Revenue dismissed.