Vodafone Idea Ltd Vs DCIT (ITAT Mumbai)
Conclusion: ITAT held that the sale of SIM cards/recharge coupons at discounted rate to the distributors was not commission and therefore not liable to deduct the TDS under Section 194H.
Facts: In present case, the cross appeals for A.Y.2008-09 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-4, Mumbai in appeal No.CIT(A) No.4/IT-239/ITO.3(2)(4)/2011-12 dated 10/01/2014 against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 dated 27/12/2010 by the ld. Dy. Commissioner of Income Tax-3(2), Mumbai.
The ground No. II raised by the assessee wherein the disallowance of discount amounting to Rs.320,00,00,000/- given to prepaid distributors u/s.40(a)(ia) of the Act for non-deduction of tax at source u/s.194H of the Act was challenged. The ground No.I raised by the assessee is with regard to non-adjudication of additional evidences filed before the ld. CIT(A) is interconnected with ground No.II.
Assessee was in the business of providing cellular services. During the course of assessment proceedings, the assessee was asked to submit details of commission and discount given to dealers and tax deducted on the same. On perusal of the details furnished by the assessee, the ld. AO observed that assessee had deducted tax at source for the commission payments made but had not deducted tax for the discount allowed to the distributors. The ld. AO concluded that the discount given to the dealers / distributors is in the nature of commission on which tax was deductible u/s 194H of the Act which has not been done by the assessee and consequently the same would be liable for disallowance u/s.40(a)(ia) of the Act. The action of the ld. AO was upheld by the ld. CIT(A).
The ITAT observed that assessee in the course of its business appoints prepaid distributors (i.e. distributors). The assessee supplies prepaid sim cards and recharge vouchers to its distributors at a discounted price. The assessee supplies prepaid sim cards containing the talk time worth at a higher figure than the discounted price to the distributors. The distributors supply them to the retailers and retailers sell the same to the ultimate customer / user. The distributors make payment of the discounted price in advance to the assessee and there is no payment of any kind made by the assessee to its distributors. The distributors would sell to the retailers after adding its margin and the retailers would sell to the customer after adding his margin. The ultimate price to the customer / user is subjected to the Maximum Retail Price (MRP) fixed by the assessee. It is pertinent to note that the distributor does not earn any income just by obtaining the prepaid sim cards and recharge vouchers from the assessee. The distributor earns income only if the said sim cards and recharge vouchers were sold further. Hence, there is no fixed amount of commission that could be determined from the agreement entered into by the assessee with the distributors. Once the amount of commission income that could be determined in the hands of the distributor is not permissible, there cannot be any obligation of deduction of tax at source that could be casted on the assessee.
In Reliance was placed upon the decision of Hon‟ble Karnataka High Court in the case of Bharti Airtel Ltd vs DCIT reported in 372 ITR 33 (Kar) wherein it was held as under:-
62. ………………………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 demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal.
It was observed by ITAT that what is to be seen is the broader question raised before the Hon’ble Jurisdictional High Court in Income Tax Appeal No. 1129 of 2017 dated 13/01/2020 in assessee’s own case against the order of Pune Tribunal. For the sake of convenience, the entire order is reproduced hereunder:-
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