Brief of the Case
Calcutta High Court held In the case of Hutchison Telecom East Ltd. vs. CIT that the discount allowed to the distributors in respect of starter packs and recharge coupons for its prepaid services will be covered under commission or brokerage, liable to TDS u/s 194H. The terms and conditions of the agreement between the parties leave no manner of doubt that the relationship between Poddar Communications and the assessee is that of an agent and principal. Matter has already settled in case of In Bharati Cellular Limited Vs. Assistant Commissioner of Income-Tax and Another reported in (2013) 354 ITR 507 wherein it was decided that there had been indirect payment by the assessee to the franchisee of the commission and the commission would attract tax deduction at source under section 194H.
Facts of the Case
The service provider has been appointed by HTEL on the terms and conditions contained therein which include (a) that the service provider shall keep the premises open for the purpose of rendering and performing services during the office hours; (b) he shall maintain at least one telephone line and email connectivity; (c) he shall maintain minimum support staff; (d) he shall not correct, amend or remove any signets from the products of the assessee; (e) he shall keep the assessee informed as regards any infringement or violation of the intellectual property rights of the assessee; (f) he shall maintain the branch image of HTEL and shall not do anything which may tarnish or spoil or reduce the value of the assessee; (g) he shall keep the assessee informed as regards feed back received from the customers and shall also keep the assessee informed as regards the purchases and inventory; (h) he shall pay the service tax to the assessee as may be assessed and levied from time to time; (i) he shall not enter into any agreement with any third party which may be considered to be in competition of the business of the assessee; (j) he shall comply with all instructions and directions of the assessee; and (k) he shall not transfer or assign or sub-licence any of its rights and obligations.
The following questions were raised in appeal:
“1.Whether the Tribunal was justified in law in holding that the discount allowed by the appellant to the distributors in respect of starter packs and recharge coupons for its prepaid service amounted to payment by the appellant of commission or brokerage within the meaning of section 194H of the Income Tax Act, 1961 and its purported findings in that behalf are arbitrary, unreasonable and perverse?
Whether and in any event and having regard to the fact that in respect of sale of starter packs and recharge coupons for prepaid service, the appellant did not make any payment to or credit the accounts of the distributors, the appellant was not a person “responsible for paying” within the meaning of section 194H and could not be proceeded against under section 201 and the Tribunal was justified in law in rejecting the said contention of the appellant?”
Contention of the Assessee
The learned counsel for the assessee submitted that there is no relationship of principal and agent between the assessee and his buyers, the goods were sold on principal to principal basis. In support of his submission he referred to the obligation undertaken by the buyer under various clauses of the agreement entered into between the assessee and its buyers. He relied on a judgement of the Bombay High Court in the case of Daruvala Bros.(P)Ltd. v. CIT reported in (1971) 80 ITR 213 in which it was held that finding made by the Tribunal that the above agreement was an agency agreement was not correct. The true fact is that the agreement made between the assessee-firm and the importers mentioned above was not an agreement of agency as was necessary for levying income-tax on the assess-firm in respect of the sum of Rs.50,000 mentioned in the question under section 10(5A) of the Act.
He also relied on various judgments. In the case of The Bhopal Sugar Industries Ltd. Vs. Sales Tax Officer Bhopal reported in 1977(3) SCC 147 wherein it was held that the question, as to whether there was a sale, was required to be determined having regard to the terms and the recitals in the agreement. The intention of the parties might to be spelt out from the terms of the documents and the surrounding circumstances and also from the course of dealings between the parties. Also in the case of Moped India Limited Vs Assistant Collector of Central Excise reported in 1986(1) SCC 125 wherein it was held that The relationship between the appellants and the dealers was clearly on principal to principal basis and in the circumstances, it is difficult to see how the amount of Rs.110, Rs.145 and Rs.165 allowed to the dealers in respect of different varieties of mopeds could be regarded as anything other than trade discount. The appellants charged to the dealers the price of the mopeds sold to them less the amount of Rs.110, Rs.145 and Rs.165 in respect of different varieties of mopeds. These amounts allowed to the dealers were clearly trade discount liable to be deducted from the price charged to the dealers for the purpose of arriving at the excisable value of the mopeds.
Also in the case of Bharti Airtel Ltd. Vs. Deputy Commissioner of Income-Tax reported in (2015) 372 ITR 33 (Karnataka) in which it was held that as at the time of sale of pre-paid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorised as commission. The sale is subject to conditions and stipulations. This by itself does not show and establish the principal and agent relationship. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the sim cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income-tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrates that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal.
He also added that there are judgments wherein a contrary view has been taken.
Contention of the Revenue
The ld counsel of the revenue submitted that in the case of C.I.T. Vs. Idea Cellular Ltd. reported in (2010) 325 ITR 148(Delhi) it was held that the nature of service provided by the assessee to the ultimate consumers/subscribers, whether it was pre-paid or post-paid SIM card remained the same. The SIM cards were prepaid which were sold by the assessee to the consumers through the medium of PMAs. In the case of post-paid SIM cards, the transaction is entered into directly between the assessee and the subscriber and the subscriber was sent a bill periodically depending upon the user of the SIM card for the period in question. In both the cases, the legal relationship was created between the subscriber and the assessee that too by entering into specific agreement between these two parties. This was an antithesis of “sale”. There could not be any such obligation to receive back the unsold stocks. The payment by the assessee constituted commission and tax had to be deducted at source on such payment.
Also the Delhi High Court had considered the above judgment in the case of C.I.T Vs. Director, Prasar Bharti reported in (2010) 325 ITR 205 (Kerala).
Also Kerala High Court in the case of Vodafone ESSAR Cellular Ltd. Vs. Assistant Commissioner of Income- Tax (TDS) (Kerala) reported in (2011) 332 ITR 255 held that the distributor acted on behalf of the assessee for procuring and retaining customers and, therefore, the discount given was commission within the meaning of Explanation (i) on which tax was deductible under section 194H.
In Bharati Cellular Limited Vs. Assistant Commissioner of Income-Tax and Another reported in (2013) 354 ITR 507, it was decided that there had been indirect payment by the assessee to the franchisee of the commission and the commission would attract tax deduction at source under section 194H.
Held by High Court
The terms and conditions of the agreements between the parties leave no manner of doubt that the relationship between Poddar Communications and the assessee is that of an agent and principal. Poddar Communications appears to have been employed to act on behalf of the assessee for the purpose of feeding the retailers and through them to sell the services to the consumers. The judgments cited by ld counsel of the assessee do not really provide any assistance to him in deciding the matter in one way or the other.
In the case of Daruvala Bros. (P) Ltd. (1971) 80 ITR 213 , the question for consideration was whether the compensation received by the assessee was a revenue receipt or a capital receipt The contention was that the compensation had been received by the assessee because the agency was surrendered for some of the territories. In lieu of such surrender, the compensation was paid by the principal. It is in that context, the question was considered and it was held that the sum paid to the assessee did not partake the character of compensation at all. We do not find any applicability of this judgment to the issue before us. The second judgment is in the case of The Bhopal Sugar Industries Limited 1977(3) SCC 147. The proposition laid down in the aforesaid judgment would militate against the case of the appellant before us rather than helping him. The clauses of the contract highlighted above would go to show that the service provider of the assessee in this case was not selling services on its own behalf. He was selling services on behalf of the assessee. The question for consideration in the case of Moped India Limited 1986(1) SCC 125 was whether the discount granted amounted to commission. In that case, it would not be difficult to hold that what was given by the assessee was a discount and not a commission. But that unfortunately is not possible. The assessee could have possibly run a case that the transactions were de hors the agreement entered into between the assessee and the service provider. If that were the case possibly one could say that these were dealings and transactions on principal to principal basis. But when the case is that the dealings and transactions were pursuant to the contract indicated above it is difficult to hold that the dealing were between principal to principal. The judgment cited in the case of Bharti Airtel (2015) 372 ITR 33 (Karnataka) is of no assistance because we have not been able to persuade ourselves that the dealings and transactions between the assessee and service provider were on the principal to principal basis. The Karnataka High Court held in favour of the assessee only on that basis.
Otherwise, a full-fledged hearing could have been avoided because matter is already covered by an earlier judgment of this Court in the case of Bharat Cellular Limited vs. Assistant Commissioner of Income-Tax & Anr. reported in (2013) 354 ITR 507.
Accordingly appeal of the assessee dismissed.
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