Discount by Cellular companies to distributors on SIM Cards and Recharge Coupons sales is commission’ and TDs is deductible

Court :Kerala High Court

Citation :Vodafone Essar Cellular Limited Vs. ACIT [2010-TIOL-655-HC-Kerala-IT]

Brief  – 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 under section 194H of the Act.

Recently, the Kerala High Court in the case of Vodafone Essar Cellular Limited v. ACIT [2010-TIOL-655-HC-Kerala-IT] held that the discount given by the taxpayer at the time of sale of SIM Cards or Recharge coupons to the distributors is commission for the services rendered to the taxpayer. Accordingly, the taxpayer was liable to deduct tax at source on the commission under Section 194H of the Income-tax Act, 1961 (the Act).

Facts of the case

• The taxpayer, a mobile cellular operator, carries on business of rendering mobile telephone services to the customers through appointment of distributors in the State.

• Under the distribution agreement, the distributor gets customers for the taxpayer and all work in relation to collection of document of identity of the customer, delivery of SIM Cards for giving connection to the customer, collection of charges, etc. are done by the distributor. Under the prepaid scheme, the taxpayer was selling SIM Cards and Recharge coupons, etc. at a discounted price to the distributors.

• The Assessing Officer (AO) examined the agreements entered by the taxpayer with distributors and held that though the transaction was treated as discount the taxpayer had paid commission to the distributor in regard to procurement and enlistment of customers and other services.

• The AO held that the taxpayer paid commission to the distributors as per section 1 94H of the Act and had committed default in deduction and remittance of tax at source and therefore treated the taxpayer as assessee in default and demanded tax under section 201(1) of the Act.

Taxpayer’s contentions

• The taxpayer contended that it was selling SIM Cards and Recharge coupons at discounted price against the advance payment made by the distributors and therefore, the relation between the taxpayer and the distributors is that of principal to principal.

• Other than the discount given, the taxpayer was neither paying any commission or charges to the distributors nor crediting commission or charges in the account of the distributors and therefore it was not liable to deduct tax at source as per provisions of Section 194H of the Act.

• The taxpayer relied on the Delhi Tribunal’s decision in the case of IDEA Cellular Limited v. DCIT [2008] 121 TTJ 352 (Del).

Tax department’s contentions

• The tax department contended that taxpayer had paid commission to the distributor in regard to procurement and enlistment of customers and other services and had failed to deduct tax at source under section 1 94H of the Act

• The tax department relied on the Calcutta Tribunal’s decision in the case of ACIT v. Bharti Cellular Ltd. [2006] 294 ITR 283 (Cal) in which it was held that the margin or discount allowed to the franchises was commission, which was liable for deduction of tax at source under section 1 94H of the Act.

Issue before the High Court

Whether discount given by the taxpayer to the distributors for the various services rendered for getting connections and serving the subscribers of mobile phones amounts to “commission” within the meaning of Section 1 94H of the Act?

High Court’s ruling

• The High Court discussed its own judgment rendered under the Karnataka VAT laws in the case of BPL Mobile Cellular Limited v. State of Kerala [2009-TIOL-555-HC-Kerala-VAT], whose business in Kerala was ultimately taken over by the taxpayer-company. The High Court held that there was no sale involved in SIM Cards or Recharge coupons and therefore sales tax was not attracted. Further, through the SIM Cards the customer can avail the mobile services from the taxpayer and therefore the transactions were for rendering mobile services. Accordingly the High Court held that there is no sale of any goods involved as claimed by the taxpayer and the entire charges collected by the taxpayer at the time of delivery of SIM Cards or Recharge coupons is only for rendering services to ultimate subscribers.

• The decision in the case of Idea Cellular Limited was overruled by the Delhi High Court in the case of CIT v. IDEA Cellular Limited [2010] 230 CTR 43 (Del) where it was held that supply and delivery of SIM Cards and Recharge coupons do not amount to sale or purchase of goods, but are only for rendering services and therefore Section 1 94H of the Act is applicable.

• The essence of a contract of agency is the agent’s authority to commit the principal. In this case the distributors canvass business for the taxpayer and taxpayers gets subscribers for the mobile service only through distributors and retailers appointed. The taxpayer is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the taxpayer. Accordingly, the distributor only acts on behalf of the taxpayer for procuring and retaining customers.

• The discount given at the time of sale of SIM Cards or Recharge coupons by the taxpayer to the distributors is a payment received or receivable by the distributor for the services to be rendered to the taxpayer and, therefore, the discount given is commission within the meaning of Explanation (i) to section 194H of the Act on which tax is deductible.

Our comments

This is an important ruling from the Kerala High Court which reiterates that discount offered by Cellular companies to distributors on SIM Cards and Recharge Coupons is in the nature of ‘commission’ on which tax is deductible at source.

The ruling once again reiterates the principle that it is substance of the transaction and not its form that is to be regarded in determining tax ability.

NF