Discount to distributors by Telecom Company is not in the nature of commission/brokerage and the roaming charges paid to other telecom operators are not in the nature of fee for technical services.
Brief Facts of the case:
The assessee is engaged in the business of providing cellular mobile telephone services in Rajasthan under the brand name “Airtel”. The assessee had marketed its product through the distributor network under two categories namely post- paid products and prepaid products.
The assessee treats them as agents and has deducted TDS respect of the amount of commission paid to these distributors. In the case of prepaid products, the distributors distribute Airtel’s retail package products like prepaid SIM card, recharge coupons and mobile products.
These SIM cards and recharge coupons are purchased by the distributors appointed by the assessee at a fixed rate which is below the market price of such SIM card and the same are further sold to the retailers by whom it is ultimately sold to the customers (telecom subscribers).
In this regard, the assessee enters into an agreement with them. After examining the terms and, conditions of the agreement between the assessee and the distributor, it was observed by the Assessing Officer that there is principal agent relationship between them. Therefore, the assessee was liable to deduct tax at source as per the provisions of Section 194H of the Act on commission paid to these distributors in the form of discount allowed from MRP.
But the assessee had not deducted any tax at source on the plea that there is principal to principal relationship between them and also prepaid product and services were sold to the distributor at a discounted price and as such no commission was paid to them.
The ITO (TDS) observed that the assessee had paid roaming charges to other mobile operators. The assessee is providing GSM mobile services to its subscribers. The mobile subscribers of the company have been given the facilities of getting uninterrupted telecommunication facility, when they are not in the home circle of the telecom service provider (assessee company), through other mobile operators. To avail such services, the assessee company makes payment to other mobile operators, which is called roaming charges. During the financial year 2008-09, the assessee company paid roaming charges at Rs. 92,16,60,531/-. As per ITO(TDS), these services are liable to TDS u/s 194J as fees for technical services.
A show cause notice was issued to the assessee asking to show cause why the assessee should not be deemed as assessee in default and interest & penalty under Sec 201(1) & 201(1A) not be levied. Subsequently, he raised the demand as :Rs. 55,00,794 & 10,18,92,350(penalty for issue 1 &2 respectively) and Rs. 4,41,020 &68,75,375 (as interest for issue 1 & 2 respectively).
Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned CIT (A), who upheld the additions by the AO.
Being aggrieved by the order of CIT (A), assessee approached to this tribunal for seeking relief. b
Contention of the Assessee:
The AR of the assessee has argued that the assessee is a telecommunication service provider. It sells its products to distributors in bulk such as prepaid start up packs and recharge coupon vouchers which has “right to use airtime” embedded on it. These are sold to various distributors on principal to principal basis at a discounted price as compared to MRP. There are different distributors who in turn sell on out right basis to retailers.
The prepaid product is delivered on payment being received in advance from distributor or is received simultaneously with the supply of product. The risks and reward are that of the distributor and in case there is any loss, pilferage or damage the distributor would be responsible for such loss, pilferage or damage. This proves that the property in this case stands
transferred.. The AR further argued that the provisions of Section 194H is not applicable under this situation because firstly no income accrued to the distributors at the time when prepaid product is sold to distributors and secondly no commission has been paid or credited. He relied on the judgment of Hon’ble Cochin Bench of ITAT which held that the sale of prepaid products from the company to the distributor is actually a sale of right to service , and since the right to service is being sold the relationship between telecom co. and distributor is principal to principal. Thus, the provisions of Section 194H of the Act do not apply.
The AR contended that the whole roaming process is automatic and there is no human intervention in it. The human intervention is required to maintain the robust network only to ensure break down free service to the subscriber. The network owner has to maintain for itself, its network in robust condition. The technical support of the staff is required to maintain the equipment and gazettes but it is not a service for roaming facility provided to the subscriber.
There is a commercial arrangement to connect the technical networks basically to be able to do business. In fact Department of Telecommunication (DOT) mandates that it should be so connected. There is no payment made for connecting the networks. Payments are made for calls which the roaming subscriber makes. If no calls are made no payment is made in spite of the fact that the networks are inter connected. He further relied on the decision in the case of Jaipur Vidyut Vitran Limited Vs. DCIT (2009) 123 TTJ 888 (ITAT Jaipur) wherein it was held that rendering of services by allowing use of technical system is different from charging fees for tendering technical services. The applicability of Section 194J would come into effect only when by making payment of fee for technical services, assessee acquires certain skill/knowledge/intellect which can be further used by him for its own purpose/research. Where facility is provided by use of machine/robot or where sophisticated equipments are installed. and operated with a view to earn income by allowing the customers to avail of the benefit by user of such equipment, the same does not result in the provision of technical service to the customer for a fee.
Therefore, he argued that in roaming charges paid by the assessee to the other operators are not fees for technical services. Thus, no liability to deduct TDS u/s 194J on roaming charges.
Contention of the Revenue:
The Assessing officer studied the agreement between the telecom company and distributors and pointed out that that there was a principal and agent relationship between them and the assessee was paying fixed commission to these distributors in garb of discount. The entire ownership relying to such new SIM card and prepaid card always vests with the assessee as evident from different clauses of such agreement.
In the present case, the assessee company has got all the right to regularly monitor the operations of distributor, monitor or investigate the manner in which business operations are carried on by such distributor, which is absent in the case of sale on discount. The assessee company can direct the distributors about the manner in which such product would be sold in the market.
All this indicate the principal-agent relationship between the assessee company and the distributors and merely nomenclature given by the assessee as discount is nothing but commission paid by the assessee to distributor for service rendered by them which is subject to tax deduction u/s 194H.
The Assessing Officer contended that:
i) It is a legal technical arrangement between the two telecom service providers to connect their equipments, network and services to enable their customers to have access of telecom network wherever they move.
ii) Roaming services is a highly technical service which is possible with the use of equipment such as MSC, VLR, Radio Network, Tower, BTS, BSS and highly advanced technology
iii) The entire system is to be monitored/managed by the highly skilled technical. A small technical problem can disturb the connectivity of entire region. To avoid such eventuality the entire process is being monitored by skilled persons.
All these above clearly shows that the service provider of another circle to whom roaming charges are paid is not providing services directly to ultimate customer but it is providing services which is technical in nature to another telecom operator in order to facilitate its customers.
Thus, the home service provider takes technical services of other telecom service provider to facilitate the subscriber to access telephone wherever he visits and therefore it is required to deduct TDS from the payments made to obtain these services u/s 194J.
Decision of the ITAT:
The ITAT concurred with the arguments of the assesseee and held that the consideration received by assessee is sale price simpliciter and is actually a sale of right to service, and since the right to service is being sold the relationship between telecom co. and distributor is principal to principal. Looking at the transaction being of Sale/Purchase and relationship being of principal to principal the discount does not amount to commission in terms of sec. 194H, the same is not applicable to these transactions. Therefore, assessee cannot be held in default; impugned demand raised applying sec. 194H is quashed.
The ITAT after considering the rival contentions observed that installation/setting up/repairing/servicing/maintenance capacity augmentation require human intervention but after completing this process mere interconnection between the operators is automatic and does not require any human intervention.
We place reliance on the decision of Hon’ble Supreme Court in case of Bharti Cellular Ltd. wherein it was held by the court that Data Link transfer does not require any human intervention and charges received or paid on account of this is not fees for technical services as envisaged in Section 194J read with Section 9(1)(vii) read with Explanation-2 of the Act.
Applying the ratio of the above case to interconnection charges (roaming charges) the same are not charges for technical services.
Thus, no liability to withhold tax u/s 194J. Appeal of assessee is allowed and the demands raised are hereby quashed.