IN THE ITAT BANGALORE BENCH ‘A’
Tata Teleservices Ltd.
Versus
Deputy Commissioner of Income-tax (TDS)
IT APPEAL NOS. 308 TO 310 & 393 TO 396 (BANG.)
OF 2011, 1014 TO 1021 & 1285 TO 1290 (BANG.) OF 2012
[ASSESSMENT YEARS 2005-06 TO 2008-09]
NOVEMBER 27, 2012
ORDER
1. All the appeals arise out of orders passed u/s 201(1) and 201(1A) of the Income-tax Act, 1961 [the Act]. The above appeals arise under the following facts and circumstances:
2. The assessee is a company. It is engaged in the business of providing telecommunication services across the country. The telecommunication services include basic telephones, ISD, NLD, Broadband and CDMA mobile services. The assessee is duly licensed to establish, maintain and operate telecommunication services and other value added services in various telecom circles in India under licenses granted by the Government of India through Department of Telecommunications (DOT).
3. To market its products and services the assessee appoints persons who are called “Channel Partners” [‘CP’ for short]. The CPs are appointed for specified geographical areas. The terms of the Agreement between the assessee and CP need to be specified as the same is of importance for deciding the issues that arise for consideration in these appeals. A copy of Channel Partner Agreement [CPA] dated 16-4-2008 between assessee and one M/s. Aastha Distributors represented by Prop. Mr. Muneer Ahmed was filed before us and it was submitted that the said Agreement is a standard form adopted in the case of all CPs. The terms of the CPA, in so far as it is relevant for the present case, are as follows:
(a) CPs are appointed to market products and services of the assessee.
(b) Products and services are defined in clause 1(n) as follows:
‘Products’ and/or ‘Service’ shall mean one or more of the telecom products and services provided by TTSL either directly or through its distributors, in the Service Area, which includes distribution of mobile handsets, telephone instruments, telecom equipment, network interface units (NIU), SIM cards, RUIM cards, USB modems, v-data cards, recharge vouchers, calling cards, provision of all unified access telecommunication services and other value added services under the Unified Service Licenses issued by DoT and all other services within the purview of the said licenses, as may be included/specified by TTSL, from time to time.
(c) Clause 2.1 of the Agreement mentions that Channel Partner is being appointed for the purpose of distributing /selling/ reselling of products and services.
(d) Clause 2.2 provides that the appointment is non-exclusive and other persons can be appointed as CP in the same area.
(e) Clause 2.4 of the Agreement reads as follows:
“2.4 Channel Partner acknowledges that it is acting for the limited and exclusive purpose of this Agreement, which does not constitute Channel Partner as a servant or employee or partner or joint venture or affiliate or group company of TTSL. Channel Partner shall have no authority to bind TTSL in any respect whatsoever and shall not hold itself out as owned by or associated with TTSL other than as an independent channel partner on a principal to principal basis authorized and permitted to market the Products and Services under these presents. None of the employees of Channel Partner shall be construed or deemed to be the employees of TTSL at any time and Channel Partner shall indemnify and keep indemnified TTSL, its directors and officers against any claim, demand, loss or whatsoever in this connection.”
(f) Within his area the CP is permitted to have different outlets.
(g) The expression ‘consideration’ has been defined in clause 1(c) of the Agreement as follows:
“1(c) ‘Consideration shall man the trade discounts, commissions and other monetary compensation that Channel Partner is entitled to receive for distributing the Products and Services, which will keep changing periodically due to various factors including changing nature of market and the same will be informed by TTSL to Channel Partner from time to time, as set forth in the Schedule B”.
(h) The responsibilities, duties and obligations of the assessee and that of the CP are as follows:
“7. Responsibilities, duties and obligations of TTSL
TTSL shall be responsible for the following and accordingly shall:
7.1 Endeavor to provide Channel Partner with such marketing information and periodic Products and Service features which in TTSL’s opinion will assist Channel Partner in the performance of its/his/her obligations here under.
7.2 Use its best efforts to provide good coverage and grade of Service consistent with market requirements.
7.3 Endeavor to make available and provide to Channel Partner, Products and Service consultations and brochures and other aids, as have been published by TFSL. The quantities will be established by TTSL.
7.4 Make the Consideration to Channel Partner, as contemplated in the Schedule B of this Agreement.
7.5 Communicate/inform Channel Partner on an ongoing basis of all changes in the rates, conditions and Service Areas, as soon as practicable after any such change.
7.6 Assign a representative of contact in TTSL to assist Channel Partner for resolving problems, to support Channel Partner’s service efforts or to provide Channel Partner with information pertinent to the Products and Service or other information that ‘TTSL would deem necessary/important.
8. Responsibilities, Duties and Obligations of Channel Partner
8.1 Channel Partner shall be responsible for various duties and obligations set forth in this section and undertakes to perform the same and all other duties and obligations under scope of service for channel partner arrangement as set forth in Schedule A hereto, as amended, modified from time to time by TTSL, in letter and spirit.
8.2 Channel Partner acknowledges and agrees that strict compliance with the standards and requirements as set out in this Agreement and the Manuals that may be supplied and as are modified and amended time to time by TTSL, is necessary for Channel Partner to maintain its/his appointment as a channel partner of TTSL. Channel Partner without limiting to the generality of the foregoing shall comply with those responsibilities duties and obligations set forth herein.
8.3 Channel Partner acknowledges and agrees that it is its/his responsibility for deployment of necessary resources, equipments, facilities and to appoint dealer/retailers to work under its/his supervision and control, who will run the outlets in the Service Area, as contemplated above and as may be stipulated by TTSL, from time to time. In such cases Channel Partner shall have absolute control over such dealers/retailers functioning in terms of the guidelines/stipulations/instructions of TFSL. Channel Partner shall be fully responsible for the remuneration/wages/salary/any other payment/discount that may be payable to its dealer/retailers/personnel in respect of the services rendered by them and T1’SL shall not be held responsible for any such payments, whatsoever. Channel Partner shall be liable to ensure that the personnel identified/appointed by Channel Partner do not commit any act or omission, which may result in violation of this Agreement or of the agreement between Channel Partner and such dealers/retailers and/or of any applicable law/s.
8.4 Channel Partner agrees to and accordingly shall:
(i) Obtain necessary license, permits and the like from the concerned statutory and/or local bodies in respect of Channel Partner’s operation under this Agreement, including any specific licenses/permits required for playing channel/pipe music in the Outlets and other business outlets in connection herewith and ensure its continued validity and strict compliance thereof;
(ii) Diligently and faithfully can out all its/his/her obligations and duties as a channel partner and at all times protect and promote the interest of TTSL;
(iii) Not commit breach or violate any of the terms and conditions of this Agreement and shall also honors and follow such instructions as may be issued by TFSL from time to time;
(iv) Accept and abide by any change in the terms and conditions of this Agreement including but not limited to the scope of service, which may in the absolute discretion of TTSL become necessary due to any change in law, rules and regulations or due to market dynamics, or due to any change in the terms or conditions of the said licenses granted by the DOT including any change in- the tariff or which change may be necessary to ensure that the Subscribers, general public get better Service and range of Products;
(v) For all times to come, keep strictly confidential all information, data, details, customer lists, Manuals and all other documents, which Channel Partner may receive or acquire from TTSL, by virtue of it/him/her being appointed as TTSL channel partner;
(vi) Appoint dealers /retailers /operators to work under it/him/her in the Service Area depending upon the requirements and/or as may be instructed/advised by TTSL from time to time;
(vii) Have complete control over such dealers/retailers/operators and ensure their strict compliance of statutory obligations and rules, regulations and all other guidelines/ instructions etc from TFSL, in their operation by means of thorough supervision of their activities;
(viii) Pay applicable commissions/service charges in terms of the agreement between Channel Partner and the dealers/ retailers/operators and ensure uninterrupted service in distribution of Products and Services;
(ix) Follow the guidelines/stipulations that are outlined in the Manuals that may be supplied by TFSL, from time to time, Channel Partner agrees to and accordingly shall
8.5 Channel Partner agrees to and accordingly shall
(i) Be liable to pay all the taxes such as sales tax, service tax applicable and payable in respect of the subject matter of this Agreement and any statutory increase in respect thereof;
(ii) Maintain such marketing and distribution standards as are, in the opinion of TTSL, appropriate considering the quality and reputation of Products and Service;
(iii) At all times promptly, efficiently and in businesslike manner provide top quality service to the Subscribers, potential subscribers and respond to any and all Customer/public inquiries regarding the Products and Service;
(iv) Employ a fully trained service staff in accordance with the standards set by TTSL. The number of trained sales personnel shall be adequate to provide prompt and efficient services keeping in view the TTSL’s service standards.
(v) Advertise the Products and Services using the promotional materials or literature either supplied by or approved in advance in writing by TTSL and shall maintain stock of Point of Purchase (POP) material or any other printed material, advertisement material, etc. as specified by TTSL from time to time, which shall be used for the purpose of promotion and distribution of Products and Services. All such POP materials shall have TTSL logo and shall be printed’ only after specific written approval of TTSL. However, any tax liability/ies, as may be applicable from time to time with respect to display of such POP materials in the Outlets shall be borne by the Channel Partner;
(vi) Participate in all programmes and promotions and other activities, which TTSL may require Channel Partner to participate from time to time;
(vii) At all times co-operate with and render all assistance to the representatives TTSL and report promptly to TTSL within 24 hours of any information, which may come to Channel Partner’s notice regarding customer complaints or claims or feedback with respect to the Products and Services, Customer needs and interests and local market conditions and shall maintain a separate registers in respect of the same and the communications to TFSL.
(viii) Provide a interest free security deposit as may be decided by TTSL from time to time, as a security for due performance and observance of all the terms and conditions of this Agreement, all the instructions from TTSL relating to the rules and regulations governing the Products and Services and any orders in connection therewith by the statutory authorities;
(ix) Immediately inform TTSL, if at any point of time in future, any relative of Channel Partner/persons in charge/control of Channel Partner/partners/associates of Channel Partner engaged in any Competing Service. Channel Partner has assured TTSL that at present no such person of Channel Partner is engaged in any business or activity in Competing Service;
(x) Be responsible for the rent, rates, taxes and other expenses pertaining to the maintenance of the Outlets and provision of the distribution services thereat;
(xi) Comply with all requirements/obligations/ guidelines/instructions, established by TTSL for Channel Partners from time to time;
(xii) Promptly inform TTSL forthwith in case of any change in the constitution of the Channel Partner and shall submit a copy of revised constitutional documentation to TTSL, within reasonable time. However this provision shall not apply if the Channel Partner is a proprietary concern.
8.6 Statutory Compliance
(i) Channel Partner acknowledges and agrees that it/he/she having to associate with T under these presents, which is always demonstrating to be a good and responsible corporate citizen, shall have to conduct business at all times in strict compliance with all applicable laws, rules, regulations and other governmental/statutory/regulatory requirements, which is mandatory to maintain its association with TFSL as a channel partner. Accordingly, Channel Partner shall be responsible various labour enactments, including but not limited to the provisions of Provident Fund and Miscellaneous Provisions Act, Employees State Insurance Act, 1948, Minimum Wages Act, Payments of Wages Act, 1936, Shops and Establishments Act, Child Labour Act, other provisions under corporation/municipal & other local laws, and shall ensure that no person below the age of 18 years will be engaged directly or indirectly for execution of the terms of this Agreement. Channel Partner confirms that TTSL shall not be liable in any manner whatsoever for any non-compliance on the part of Channel Partner of the applicable laws and in the event of any adverse claims/actions/demands/proceedings of whatsoever nature arising thereof, the entire burden including costs and expenses shall be strictly borne by Channel Partner. Channel Partner agrees to indemnify and keep TTSL indemnified in respect hereof.
(ii) Channel Partner shall maintain all requisite records, registers, account books etc. which are obligatory under any applicable law and shall provide such information as may be required under any law to any authority.
(iii) Channel Partner shall furnish a mandatory indemnity to TTSL in the format provided in Appendix 2 herein.
8.7 Channel Partner shall ensure that neither Channel Partner nor the dealers/retailers appointed by Channel Partner or anyone under any of them:
(i) Make/s or give/s directly or indirectly, orally or in writing, any guarantees, representations or warranties, express or implied, with respect to the Products and Services, rate packages in the Products and Services, to the Customers or any Person, save and except as may have been expressly authorized by TTSL.
(ii) Offer the Products and Service to anyone at rates or prices other than those specified by TTSL or provides incentives or subsidies, which have the effect of doing so.
(iii) Engage or do or cause to be done or be a party to any unfair or unethical trade practices or any other business practice with respect to the distribution service or indulge in any illegal or unlawful activities.
(iv) Carry on or allow anyone to carry on, at any time in its/his Outlets or any part thereof any other business including the business of any Competing Service or otherwise howsoever associating with any Competing Service.
8.8 Channel Partner expressly agrees that in view of rapidly changing market dynamics, TTSL shall have the right and option to revise the scope of the services to be rendered by Channel Partner from time to time based on the operational requirements and the same shall be final and binding on Channel Partner.
8.9 Channel Partner shall procure the Products from TTSL or such Person/s authorized TTSL. Channel Partner shall ensure that there is no sale of spurious and unauthorized Products from Channel Partner outlet(s) and/or the retails outlets under the control of Channel Partner.
8.10 It shall be the responsibility of Channel Partner to effect the sales and service through proper invoices or as may be advised by TTSL. In case of invoices, it shall serially numbered, dated and detailing the material particulars of the Products and Services, name and address of purchasers and after reasonable verification that such purchase is for subscribing for TTSL Service in the circle in which the Channel Partner is appointed. If Channel Partner has been paid cash by TTSL or any Person at the instance of TTSL, on any Product sold to the Channel Partner by TTSL or any authorized dealer of TTSL, any lethargy, negligence in observing this condition or malafide act on the part of the Channel Partner would entitle TTSL to terminate this Agreement without notice and recover from Channel Partner the amount of subsidy/support on the quantity of the Products, which in the reasonable opinion of TTSL has been diverted to uses and/or areas not intended under this Agreement or in violation of uses/areas intended under any agreement signed by Channel Partner with authorized dealers/vendor/s of TTSL. This is without prejudice to right Of TI’SL to take any other legal action including action for criminal breach of trust.
8.11 Channel Partner warrants that no officer, director, employee of TTSL or immediate family member thereof (collectively ‘TTSL personnel”) has received or will receive anything of value of any kind from Channel Partner or its officers, directors, employees or agents (collectively “Channel Partner personnel”) in connection with this Agreement and that no TTSL personnel have a business relationship of any kind with Channel Partner or Channel Partner personnel.
(i) Clause 10 of the Agreement provides for consideration payable by assessee to CP. The gist of this clause in so far as it relates to starter packs and RCVs is that the assessee will supply Starter Kits and RCVs to Channel Partner under sale invoices at a discount from the Maximum Retail Price (MRP). Clause 10.4 of the CPA provides that CP is liable to pay State and local taxes including Sales-tax in relation to the Agreement.
(j) Clause 15.2 provides that assessee shall have no obligation to take back products sold to CP.
4. As far as the present appeals are concerned, we are concerned only with mobile telephone services provided by the assessee to its customers through CP. In particular, we are concerned with the Starter Kits and RCVs that are provided by the assessee to CP who, in turn, provide them to the customers to enable them to use the mobile telephone services provided by the assessee. The nature of these services provided by the Assessee needs to be explained. A mobile phone (also known as a cellular phone, cell phone and a hand phone) is a device that can make and receive telephone calls over a radio link while moving around a wide geographic area. It does so by connecting to a cellular network provided by a mobile phone operator, allowing access to the public telephone network.
5. A common component found on all phones is a Subscriber Identity Module SIM card and Removable User Identity Module (RUIM). The SIM has information like the phone number and payment account and this is needed to make or receive calls. A subscriber identity module (SIM) is an integrated Circuit that securely stores the International Mobile Subscriber Identity (IMSI) and the related key used to identify and authenticate subscribers on mobile telephony devices (such as mobile phones and computers). A SIM is embedded into a removable SIM card, which can be transferred between different mobile devices. A SIM card contains its unique serial number (ICCID), international mobile subscriber identity (IMSI), security authentication and ciphering information, temporary information related to the local network, a list of the services the user has access to and two passwords: a personal identification number (PIN) for ordinary use and a personal unblocking code (PUK) for PIN unlocking. SIM cards store network-specific information used to authenticate and identify subscribers on the network. The most important of these are the ICCID, IMSI, Authentication Key (KI), Local Area Identity (LAI) and Operator-Specific Emergency Number. The SIM also stores other carrier-specific data such as the SMSC (Short Message Service Center) number, Service Provider Name (SPN), Service Dialing Numbers (SDN), Advice-Of-Charge parameters and Value Added Service (VAS) applications.
6. The network is the company that provides the phone service. In most areas there will be more than one mobile network. Customers choose networks based on how well the different networks work in their area, or by price.
7. There are two main ways to pay for use of mobile telephone services:
Post paid: If you pay by contract you will pay the network money every month so that you can make calls.
Prepaid: If you pay as you use, you will pay for a fixed amount of call time credit which you then use up when phoning people. Once the credit is used up you must buy some more to use the phone.
8. As explained above, it is the card which enables the Assessee to provide and the customer to use the pre- paid/post-paid mobile telephone services.
9. As already explained, the Assessee to enable customers to avail of the services it provides appoints persons who are called “Channel Partners” (CP for short). CPs are appointed for various areas or regions. A customer who wishes to use the services of the Assessee approaches the CP. The CP gets all the required details of the customer. The customer is then given a starter pack which contains the terms and conditions subject to which the services will be provided and availed by the customer. It also contains the SIM card and the telephone number correlating to a particular SIM card number.
10. When the customer avails of prepaid mobile telephone services, he can purchase recharge vouchers from the CPs. The recharge vouchers will enable the customer to use the mobile telephone services equivalent to the value of the recharge vouchers.
11. Apart from Starter packs and Recharge vouchers, the CP also renders services whereby the mobile telephone services are activated, i.e., the customer is linked to the network of the Assessee and can also use the network of other mobile telephone service providers as well as telephone service providers. There is no dispute in these appeals that the charges paid by the Assessee to CP for services rendered for activating the SIM card is in the nature of commission paid by the Assessee attracting the provisions of Sec.l94-H of the Act.
12. The assessee to enable its customers to use its services gives Starter packs as well as recharge vouchers to its CPs. The Assessee raises commercial invoices in respect of each and every sale of product to the CP. While the MRP value of the products are fixed at the time of raising invoices the products are priced at the discounted price agreed to between the assessee and the CP. The CPs, however are free to sell the products to retailer at any price (but not exceeding the MRP) and retain the margin with them as their share of profit.
13. The Assessing Officer i.e. the Income-tax Officer, TDS Ward, considered the terms and conditions of the agreement and also going by the nature of services provided, concluded that the actual relationship in regard to this transaction between the assessee and the Distributor is that of Principal and Agent. He also concluded that the difference between the price fixed (i.e. MRP) and the price charged for them by the assessee, constitutes only Commission payment. Therefore, the stand of the Assessing Officer is that the difference denotes deemed payment of Commission which falls under the realm of the provisions of Section 194H of the Act. The assessee on the other hand took the stand that on the basis of the terms and conditions entered into with the Distributors, the relationship was not that of Principal and Agent as has been held by the Assessing Officer. It was the stand of the assessee that the difference between the invoiced price and the MRP is only in the nature of sales/trade discount. The relationship between the assessee and Distributor is nothing but Principal to Principal. The AO did not agree with the submissions of the Assessee. Consequently order u/s.201(1)) & 201 (1A) was passed treating the Assessee as Assessee in default in respect of tax not deducted at source u/s.201(1) of the Act and also passed order levying interest u/s.201(lA) of the Act. The CIT(A) concurred with the view of the AO. Aggrieved by the order of the CIT(Appeals) upholding the applicability of section 194H in respect of difference between the MRP of Starter Kit/packs and RCVs and the price at which they were given to the CP, the assessee preferred appeals being ITA Nos.308 to 310/Bang/2011 for assessment years 2006-07 to 2008-09.
14. Apart from the above, the assessee has arrangement with several banks whereby the customers of the assessee, who also hold Credit Card of such banks, can make payment for services utilized by them from the assessee through Credit card. The banks agree to render payment processing services to the assessee in consideration for the assessee making payment of fee to the bank. The assessee does not make any payment to banks. When a customer makes payment by credit card of a bank, the bank processes payment to the assessee after retaining for it the fees for processing the payment and remits the remaining sum to the assessee. According to the Revenue the fee retained by the bank is also in the nature of commission and therefore the assessee ought to have deducted tax at source on such payment u/s 194H of the Act. An order u/s 201(1) and 201(1A) of the Act was passed by the AO for assessment years 2005-06 to 2008-09 treating the assessee as assessee in default for not deducting tax at source on the tax so not deducted and levying interest thereon from the date on which tax sought to have been deducted till actual payment of such taxes to the Government.
15. On appeal by the assessee, the CIT(Appeals) held that provisions of section 194H of the Act were not attracted in respect of such payments. The relevant observations of the CIT (Appeals) were as follows:
“7. The next ground of appeal is with regard to TDS on credit card payments. The A.O noticed that the appellant company was collecting its payments from the customers through credit card companies and in that process these credit card companies are earning commission from the appellant company. The A.O felt that the appellant company is liable to deduct tax at source U/s 194 H of the IT act 1961 and accordingly raised demands U/S-201(1) & 201(IA) of the IT Act.
The arguments of the appellant are as under.
‘The appellant had arrangements with banks, wherein the appellant used to get the payments made by its subscribers through credit cards discounted. The procedure is as under.
i. The appellant takes EDC machines (Card Swipe Machines,) from designated banks. Each machine is having a Merchant Establishment (ME) number.
ii. A specific percentage rate called Merchant Discounting Rate(MDR,) will be negotiated.
iii. These machines are installed at various collection locations.
iv. The subscriber walks in and swipes his card. Through online authorization process, the payment can be approved/rejected.
v. For approved payments, designated bank gives credit to appellant’s bank account in the agreed time. The credit will be net amount (Gross amount paid by customer – MDR)
vi. After the collections are credited to appellants account, the designated bank, in turn collects the amount front various bank based on the card issuer bank. This settlement will take some time lag. As a result the designated bank collects the discount charges from the appellant’s payments.
The appellant further argued that there is no principle to agent relationship between the appellant and time banks and hence provisions of section 194H of the IT Act 1961 are not applicable. The MDR charges are nothing but Bill Discounting Charges and would fall within the definition of the term interest as envisaged U/S-2(28A) of the IT Act 1961. Thus ordinarily, if at all any TDS provisions apply, it could be only 194A. However clause (iii) to sub section (3) to section 194A specifically provides that the provisions of sub section (1) shall not apply to such income credited or paid to any banking company.
8. I have carefully considered the arguments of both the A.O and the appellant. I found that the stand taken by the appellant is in order and accordingly the demands raised by the A.O U/S-201(1) & 201(1A) as mentioned below are cancelled.
