IN THE ITAT CUTTACK BENCH
Assistant Commissioner of Income-tax
IT Appeal No. 354 (Ctk.) of 2012
[Assessment year 2008-09]
September 28, 2012
K.K. Gupta, Accountant Member –
This appeal by the assessee mainly raises the issues dealt with by the learned CIT(A) being disallowance of expenditures claimed in computing the profits of the assessee, the assessee being a franchisee of BSNL (a Government of India Undertaking) selling its products viz., SIM cards, recharge coupons etc. The Assessing Officer during the course of scrutiny proceedings had disallowed a claim of expenditure being the discount allowed to the sub-franchisees on the ground that the assessee failed to deduct tax at source under the provisions of Section 194H on the discount of Rs. 1,74,00,814 on sales made to sub-franchisees. Similarly it did not deduct tax at source u/s.194-I when shop and godown were let out on a yearly rent of Rs. 1,92,000 to a Senior citizen being a lady.
2. The learned Counsel for the assessee initiating his arguments submitted that the assessee appellant is a partnership firm engaged in trading business of electrical goods including the business of recharge vouchers, SIM cards & mobile phone handsets and various services like cellular phone service, basic telephone service, data service, booking connection and other BSNL products, the firm has executed Franchiseeship Agreement with Bharat Sanchar Nigam Ltd. (BSNL) on dt.08-02-2007, dt.13-07-2007 and dt.28-01-2008. The assessee firm has its five branches in the State of Odisha at Berhampur, Keonjhar, Phulbani, Kendrapara, Rajgangpur (Rourkela). The assessee firm filed the Audited accounts by taking all the transactions of all the branches along with Head Office in to consideration. The assessee during the Assessment Year under consideration allowed discount to its Sub-Franchise/retailers at all the branches. The learned Counsel for the assessee submitted that the assessee firm, basing on the agreement, is duty bound to carry on the business of the products and services offered by the BSNL within the frame work of the Agreements. It is a matter of record that the assessee’s business has been restricted as per the Franchiseship Agreement for the area which has clearly revealed in the said agreement. The assessee firm distributed the BSNL products and services by depositing security amount in shape of unconditional bank guarantee reflected in Para-C of the agreement dt.08-02-2007 and also making payment in advance prior to lifting of the products of BSNL. The appellant firm is an agent of BSNL and the BSNL is the principal who has supplied the products to the appellant firm. The appellant firm has also appointed sub-franchise/retailers for the selling of products of BSNL as per the MRP fixed by the BSNL as principal to principal. As a matter of fact, the assessee firm has never sold any materials to the customer directly, whatever business has done by the assessee firm is only through sub-dealers/franchisee and retailers. There is no clause in the said Franchiseeship agreement to provide/allow any discount to sub-franchisee/retailers. However, at Clause-26.11 of the Franchiseeship agreement it has clearly been reflected that “the franchisee will distribute the services and products at a rate fixed by the BSNL to all its associated, its franchisee and/or retailers.” The learned Counsel for the assessee submitted that from the above, it is abundantly clear that in the aforesaid clause the MRP has been fixed by the BSNL (Principal) and the assessee firm can in no circumstances sale any products more than MRP, thereby the profit margin is only limited to the commission provided by the BSNL @ 6.5%. But, to compete in the market the assessee firm has given trade discount to the retailers/sub-franchisee. Therefore, the assessee firm has forgone its profit to the extent allowing the trade discount. It is an undisputed fact on record that the assessee firm has received commission @ 6.5% from the gross value of the purchase as revealed from the purchase invoices and on the said commission the BSNL has deducted tax (TDS) U/s. 194H of the IT Act.
2.1 The learned Counsel for the assessee further submitted it is a matter of fact that the assessee firm has given discount on sale of SIM Cards and other BSNL products raising from 3.5% to 4.5% keeping in view the market potentialities, situations and circumstances so as to compete in the market with the other competitors. The discretion is with the assessee firm in respect of allowing discounts to the sub-dealers/retailers for which the BSNL has nothing to say. It is also a matter on record that the assessee firm out of his own commission @6.5% received from the Principal, has paid discount on Bills raising from @ 4.5% to @5.5% as and where applicable, as per the market potentialities in order to compete in the market. The BSNL has already deducted TDS on the Commission given to the assessee firm U/s.194H of the IT Act as clearly revealed from the TDS Certificates issued by BSNL. In view of this, the learned Counsel for the assessee argued that due to such TDS deduction, there is no scope at all for non-disclosure of any turnover/business with BSNL to the IT Department. Once the TDS has been deducted from the commission, there should not be further deduction from any portion of same said commission by the assessee firm from the payment received from the sub-franchisee/retailers due to selling of the products and as such Sec. 40(a)(ia) of the IT Act does not attract as the nature of deduction is nothing but trade discount not necessarily construed as commission, thereby there is no scope of applicability of Sec-194H of the IT Act. He contended that the very meaning of commission and discount are not same as both are distinct and different in their respective way. Discount in general sense, an allowance or deduction made from a gross sum of an account whatever; WHEREAS, the commission is the recompense, compensation or reward of an agent, sales man, executor, trustee, receiver, factor, broker or bailee. He pointed out that there is no such agreement with the sub-franchisee/retailer for payment of discount on a certain specified percentage of the billing amount. Besides this, the assessee firm on the face of the Bill has allowed discount on the spot at the time of issuing the bill as a Trade Discount not necessarily construed as Commission. BSNL has never spelt anything so far as parted with the commission granted to the assessee firm to the Sub-dealer/ Retailer out of its own commission which is nothing but the profit of the assessee firm. In order to compete in the market the assessee firm has allowed trade discount thereby by reducing its income. The reduction of income out of @6.5% to any other lower percentage due to grant of discount to the retailers should not be amenable to TDS U/s. 40(a)(ia) of the IT Act as the commission which the assessee firm has received from the principal has already subjected to TDS U/s. 194H by the principal. The learned Counsel for the assessee vehemently argued that in view of the aforesaid facts and circumstances of the case, the applicability of the Sec. 40(a)(ia) of the IT Act is not at all attracted. The assessee firm has booked the purchases in the Trading Account after deduction of commission and disclose sales in addition of the commission, thereafter crediting the discounts in the P & L Account, which is less than @ 6.5% in the P & L Account, thereby the accounting method is a correct one being free from any irregularities. Besides this, any TDS made by the assessee firm has duly deposited in the Income Tax Department as there is no adversity so far as the deposit of TDS is concerned as per the order of assessment as well as the order of the learned CIT(A).
2.2 The learned AR of the assessee further submitted that the Assessing Officer that Assessing Officer has misdirected itself by way of misinterpreting the trade discount given by the Assessee firm to sub-franchisee/retailer as commission by placing reliance on the decision of Hon’ble High Court of Kerala in Vodafone Essar Cellular Ltd. v. Asstt. CIT  194 Taxman 518, Kerala. It is trite law that each case has its fate and fragrance. Therefore, time and again it has been held by the Hon’ble Apex Court that without examining the fact and issues of a case no reliance can be placed thereon. Hence Assessing Officer committed grave error both on fact and law in reaching into the conclusion by placing reliance on the decision which has no application to the facts and issues in the instant case. The learned AR of the assessee distinguished the facts in the case of Vodafone ESSAR Cellular Ltd., with that of the present assessee as under :
|VODAFONE||M/S. PAREEK ELECTRICALS (assessee)|
|Assessee was VODAFONE who provides cellular Service to customers.||Assessee M/s. PAREEK ELECTRICALS is not providing any Cellular Service of his own.|
(Rather BSNL is cellular service provider)It is the SIM Card that links the subscriber to the assessee i.e. Vodafone network. Hence, Vodafone is the principle.Assessee does not have any cellular Service Network and Assessee is not the principal.
(Rather BSNL is having own network and BSNL is principal)Assessee is accountable under the service contract which is arranged the distributor for the Assessee.Assessee is not all accountable for any service contract with customer. (BSNL is accountable)Enrollment of customers is for the assessee i.e. VodafoneEnrollment of Customer is not for the Assessee i.e. Pareek Electricals (But enrollment is for BSNL)Conclusion: Discount given by the cellular phone operator to the distributor at the time of delivery of SIM Cards or recharge coupons is only for rendering services to the ultimate subscribers and there is no sale of any goods and, therefore, such discount falls within the definition of commission or brokerage within the meaning of cl.(i) of Explanation to s.194h from which tax is deductible at source.Assessee is neither a Cellular phone operator nor he wants customer for his network.
The ratio of judgment in case of Vodafone is equitable to BSNL in the present arrangement and BSNL has duly deducted TDS without any default.
The learned AR of the assessee submitted that such distinctions on fact in both the cases though pleaded before the first appellate authority, the learned CIT(A) upheld the view of the Assessing Officer without applying his judicious mind, in so far as the basic facts are concerned as the TDS has already been deducted, U/s. 194H, on the commission given by the BSNL. Therefore, there should not be any further TDS on the same said amount while forgoing certain percentage of the original commission by allowing discount to the sub-franchisee/retailer. By this process the assessee firm has reduced its own profit to certain extent. When entire part of the commission has already suffered TDS, further TDS on the some portion of the profit of the assessee firm is not at all justified. Thus, both the authorities below have erred in fact and law by applying Sec.40(a)(ia) on the trade discount allowed by the assessee firm to its sub-dealers/sub-franchisee/retailers. Hence, the decision taken in disallowing Rs. 1,74,00,814 by the Assessing Officer and upheld by the learned CIT(A) is completely illegal arbitrary, without due application of mind and as such the same is liable to deleted.
2.3 As regards the next issue relating to rent paid to the lady, a senior citizen, the learned Counsel for the assessee submitted the assessee firm has paid rent of its show room and go-down to Smt. Pramila Kumar Ratha and the land lady is a Senior citizen, her age being more than 65 years as on dt.01.04.2008, where the basic limit is Rs. 1,95,000. But, the rent paid to the land lady is at Rs. 1,92,000 which is below the prescribed limit for which the assessee firm has not deducted any TDS U/s. 194-I of the IT Act as the land lady requested not to deduct TDS by giving Form 15-G which is not disputed by the authorities below. In view of the above, the learned AR of the assessee submitted that the authorities below have erred on facts as well as law in not taking note of the fact that the age of the land lady for the Assessment Year 2008-09 was more than 65 years, thereby the income in her hand at Rs. 1,95,000 which is not at all coming under the taxable net, more so the land lady submitted form 15-G with request not to deduct any amount towards TDS as she does not have any other source of income except the rent which she was receiving from the assessee firm. In paragraph 9.1 of the order, the First Appellate Authority took into consideration the submission of form 15-G by the Land Lady but failed to appreciate that in the circumstances non deduction of TDS is justified. The learned AR of the assessee submitted that the disallowance of Rs. 1,92,000 made u/s.40(a)(ia) of the I.T.Act is not justified and therefore, he prayed for its deletion.
2.4 In support of the above submissions, the learned AR of the assessee filed a voluminous Paper Book, which were also before the authorities below, containing interalia copy of franchiseeship agreements executed by the assessee with BSNL, audited account for the Assessment Year 2008-09, copy of the invoice samples for the Assessment Year 2008-09, copy of the discount ledger account of all the branches of the assessee, copy of freight ledger account, copy of the Deed of rent agreement executed with the house owner Smt.Pramila Kumar Ratha, copy of the ledger account of shop and godown rent, sample copy of purchase invoice, copy of TDS certificates in respect of deduction made u/s.194H by the BSNL.
2.5 On the basis of above submissions and the supporting evidences furnished in the Paper Book, the learned AR of the assessee submitted that the disallowance u/s.40(a)(ia) of the I.T. Act of expenditures on account of discount of Rs. 1,74,00,814 and disallowance of shop and go-down rent of Rs. 1,92,000 on the facts and circumstances of the case are not justified and therefore he prayed for deletion of the same.
3. The learned CIT-DR opposed the contentions of the learned Counsel of the assessee by holding a view that the case laws cited at the bar and relied upon by the learned CIT(A) has not been distinguished insofar as BSNL being a server or a service provider is akin to the assessee providing services as was considered in the case of Vodaphone and it is only a method of participating in the profits when there are three tier system of services being provided by the assessee in the lines of the assessee becoming service provider who ought to have deduct tax at source u/s.194H. The comparison for distinguishing the facts of the assessee with that of Vodaphone case, therefore, have been wrongly presented insofar as the learned CIT(A) has noted that the services provided by the assessee company through various distributors is regulated by law. Carrying on the business of providing service is subject to so many statutory compliance requirements, like verification of the identity of the consumer and the related documentation, etc. The assessee company is having all lawful ob1igations to a prepaid consumer, even though the direct deal is between the distributor and the consumer. This is because the distributor does not have anything to provide as service to the consumer. These are all features of agency relationship. The learned CIT(A) therefore, came to the conclusion that the discount given to the distributors was commission within the meaning of Explanation (i) on which tax was deductible u/s.194H. She fully relied on the orders of the authorities below.
3.1 With respect to the non-deduction of tax at source on account of rent paid for shop and godown by the assessee to the land lady being a Senior citizen, the Assessing Officer found some infirmity in the Form 15G filed by the assessee which never got clarity insofar as the provisions of Section 194-I are violated for disallowance of the rent claimed as expenditure u/s.40(a)(ia). The learned CIT(A) therefore, rightly considered to uphold such disallowance.
4. We have heard the rival contentions and perused the impugned orders of the authorities below and the material available on record. On consideration of the facts and circumstances of the case, we are inclined to hold that the agreements as produced by the rival parties in support of the contentions that the assessee falls in line as in accordance with the case laws cited in the case of Vodafone Essar Cellular Ltd. (supra) we are of the considered view that the facts in those case laws were not in the light of Sales of Goods Act as were in the case of the public sector undertaking BSNL who wanted to sell its products through its franchisees viz., the assessee. This is clarified from the prime fact that the commission was acknowledged by the assessee foregone by the service provider namely, BSNL at the threshold when the assessee books the purchases of the products by disclosing the gross margin therein booking the sales at the MRP provided by BSNL. In other words, the purchase and sales clearly indicate that the commission earned by the assessee was to be subjected to deduction of tax at source u/s.194H which as per the bills produced by the learned Counsel for the assessee as of now in the Paper Book submitted along with other documentary evidences that the commission was between the assessee and the BSNL lost its identity of commission again when the assessee chose to foregoe part of its margin by giving various discounts to its authorized dealers or sub-franchisees as notified by it to BSNL as per the agreement brought on record. It was never the case of BSNL being the service provider to raise bills for the same product which had been billed by the assessee on the distributors at the MRP being the recharge coupon, Top up coupons and other SIM card s etc. In the case of Vodafone Essar Cellular Ltd. (supra) it has been clearly held that the foregoing of commission as a matter of discount cannot arise to a different person insofar as the sale price remains the same which purchases have been booked by the assessee alone at the discounted price being the commission subject to deduction of tax at source u/s.194H. The learned DR’s submission that in case the assessee has foregone a part of its profit was a matter of contract entered into between the assessee and the distributor was made known to the service provider namely, BSNL. This in itself tohave given a reason to invoke the provisions under Chapter XVIIB demolishes the stand taken by the learned CIT(A) after relying on the decision of Vodafone Essar Cellular Ltd. (supra) and CIT v. Idea Cellular Ltd.  325 ITR 148. It is not the case of the service provider to keep track of its commission foregone at the same selling price of its products which are shared amongst the various franchisees and sub-franchisees would lost its identity as commission in the first place and also cannot be appreciated as a matter of contract between the service provider and the assessee’s franchisee or distributors. Purchase and sales have been acknowledged by the service provider when the maximum retail price has been rendered to tax by the service provider for the purpose of deduction of tax at source being commission u/s.194H. The same income cannot be taxed again in the hands of different recipients which are a matter of business conducted being the fast net work availability of BSNL products was not considered by the learned CIT(A) to establish that the discount available to the second and third tier franchisees was a matter of availability of products at its maximum retail price and not because they had made income from the service provider. In the case of Vodafone Essar Cellular Ltd and Idea Cellular Ltd., (supra) it was marking of the selling price below the price they were sold resulted in consideration of invoking the provisions of Section 194H or Section 194C was considered by the Hon’ble High Courts in the case of Vodafone Essar Cellular Ltd and Idea Cellular Ltd. (supra). In this view of the matter, we are inclined to consider the contention of the learned Counsel for the assessee for the trade discount made available to the sub-franchisees was a compensation by foregoing the part of the commission already subjected to tax at source by the service provider could not have suffered taxation u/s.194H insofar as the product never belonged to the assessee. The learned Counsel for the assessee has distinguished the case laws cited at Bar with that of facts of the assessee as mentioned above, which we are inclined to uphold. For the reasons discussed above, we are of the considered view that the disallowance of Rs. 1,74,00,814 u/s.40(a)(ia) of the I.T. Act made by the Assessing Officer and confirmed by the learned CIT(A) is not justified and as such, the same is hereby deleted.
4.1 With respect to the deduction u/s.194-I,the learned Counsel for the assessee has submitted that the land lady being a senior citizen has submitted Form 15G to the assessee declaring that no tax should be deducted on the rent paid to her when the taxable limit for taxation in her hand was to be Rs. 1,95,000. Mistakes in the form submitted by the land lady as provided under the Act remains a mere technical formality when the assessee cannot be subjected to disallowance of expenditure claimed as rent for its shop and godown which together were to be considered under the provisions of Section 194-I r.w.s 197A of the I.T. Act. Obviously the disallowance u/s.40(a)(ia) comes after considering the collection and recovery of tax by deduction of tax at source which the assessee has satisfied for non-deduction cannot result in disallowance of expenditure for no fault of the assessee. The remedy lies elsewhere. The learned CIT(A) therefore, erred in misinterpreting the facts of the assessee’s case as brought on record by the Assessing Officer by holding a view that the applicability of Section 40(a)(ia) of the Act is for the amounts payable and not to the amounts already paid was not tenable. This reasoning by the learned CIT(A) does not violate the provisions of Section 197A. In this view of the matter, the disallowance u/s.40(a)(ia) of Rs. 1,92,000 being expenditure on rent paid by the assessee to the land lady for its shop and godown, must be held to be unjustified and as such, the same is hereby deleted.
5. To sum up, the additions of Rs. 1,74,00,814 and Rs. 1,92,000 made u/s.40(a)(ia) of the I.T.Act,1961 being the expenditure on discount and rent paid respectively are here by deleted.
6. In the result, the appeal of the assessee is allowed.