Addition on account of discount extended to prepaid distributors
Third proviso to section 194H will get attracted only when the nature of payment is “commission or brokerage”. Parties before us agree that majorly the distribution of products by BSNL and MTNL takes place through Public Call Office franchisees since this was an infrastructure existing with them even before mobile telephone services became popular. Moreover, as upheld by Hon’ble Punjab & Haryana High Court in case of appellant itself (supra) that “…….. the above extracts from the Board circular would show that the amendment in the Section 194 H was brought about because, as admitted by the CBDT itself, very few of the recipients had a tax liability.”
The issue can also be considered from different prospective. As stated by us above, Hyderabad Bench of ITAT in case of appellant for the year under consideration has already held that there is no default on part of the appellant for not having deducted tax on discounts given for its prepaid products. This in our considered opinion operates res judicata for examining whether there is any default committed u/s 40(a)(ia). We find that co-ordinate bench of Delhi ITAT in case of Bharti Hexacom (supra) has held that in such a scenario disallowance cannot be sustained by invoking provisions of section 40(a)(ia).
We therefore hold that appellant had a reasonable / bonafide cause for not deducting TDS on payment of discounts to the distributors / franchises of its repaid products. This is accordingly not a fit case for making disallowance of an expense by invoking penal provisions of section 40(a)(ia).
Addition on account of IUC charges paid to foreign / non-resident telecom operators
Issue in dispute is directly covered by the decision of ITAT in case of Bharti Airtel Limited (supra). In that case coordinate bench of this court after deep examination of the issue i.e after considering and going through the process of providing roaming services; examination of technical experts and its cross examination and also opinion of Hon’ble the then Chief Justice of India Mr. S.H. Kapadia dated 03rd September 2013, has held that payment of IUC Charges is not “Fee for Technical Services” or “Royalty” within the meaning of its definition as per section 9(1)(vi) and 9(1)(vii) of the Act. While reaching the above conclusion the co-ordinate bench also took into consideration retrospective amendments made to section
9 by Finance Act 2012. Relevant head-notes of this decision as reported in (2016) 67 taxmann.com 223(Del) are reproduced below:
“Section 9 , read with sections 194J and 195, of the Income-tax Act, 1961, read with article 12 of Model OECD Convention – Income – Deemed to accrue or arise in India (Royalties and Fees for technical services) – Assessment years 2008-09 to 2011- 2012 – Assessee, as part of its International Long Distance (ILD) Telecom Services business, was responsible for providing services to its subscribers in respect of calls originated/terminated outside India – For provisions of ILD services, assessee was required to obtain services of Foreign Telecom Operators (FTOs) – ILD Operators were in turn billed by FTOs in form of Interconnected Usage Charges(IUC) – There was no manual or human intervention during process of transportation of calls between two networks – This was done automatically, with human intervention being required only for installation of network which could not be said to be for inter-connection of a call – Assessee merely delivered calls that originated on its network to inter connection locations of FTO and FTO carried and terminated calls on its network – Whether thus payment of IUC by assessee to FTO in connection with its ILD telecom service business was neither FTS under section 9(1)(vii), nor royalty/process royalty under section 9(1)(vi) – Held, yes – Whether ever retrospective amendment in domestic legislation does not affect royalty definition under DTAA, hence retrospective insertion of Explanations 5 & 6 to section 9(1)(vi) also could not have altered this position – Held, yes [Paras 33, 44, 55, 56& 72][In favour of assessee]
Section 9 of the Income-tax Act, 1961, read with section 5 and article 7 of Model OECD Convention – Income – Deemed to accrue or arise in India (Business Profits) – Assessment years 2008-09 to 2011- 2012 -Assessee made payment of Inter-connected Usage Charges(IUC) to Foreign Telecom Operators (FTOs) in connection with its ILD telecom service business – Payment in question did not accrue or arise to ‘FTOs’ in India – Entire business operations were carried out outside India by FTOs – FTOs also did not have any Permanent Establishment in India – Whether thus no income could be deemed to accrue or arise to FTO’s in India and hence under article 7 also income could not be brought to tax in India – Held, yes – Whether further in absence of permanent establishment of FTOs in India, payment of ‘IUC’ to FTOs could not be deemed to accrue or arise in India under any of clause of section 9(1) read with section 5(2) – Held, yes [Paras 74 & 78][In favour of assessee]”
To the similar effect are other decisions cited by Ld AR. The Ld CIT(DR) has not been able to controvert the fact that the issue in dispute is no more res integra considering the above binding precedents. Moreover, a perusal of sample agreement for payment of IUC charges between BSNL and Cable & Wireless UK in the instant case also clearly shows that a standard facility for availing interconnectivity services while roaming was availed by the appellant in the instant case. This does not require any human intervention. Respectfully following the above judicial precedents, we hold that payment for IUC Charges is not chargeable to tax in India in the hands of the non-resident recipients and hence TDS was not deductible as per provisions of section 195 of the Act. Therefore, we reverse the order of the Ld CIT(A) on this issue and decide the same in favour of the assessee. Accordingly, respective grounds Nos. 7, 8 & 9 are allowed.
Full Text of the ITAT Order is as follows:-
This is an appeal filed by the assessee against the order of ld. CIT(A)-35, New Delhi dated 08.11.2016 for the assessment year 2009-10 on the following grounds :-
“1. That on the facts and circumstances of the case and in law, the impugned order passed by the learned Commissioner of Income Tax (Appeals) – 35, New Delhi [‘learned CIT(A)’] under section 250 of the Income tax Act, 1961 (‘Act’) is a vitiated order having been passed in violation of principals of natural justice and is otherwise arbitrary and is thus bad in law and void ab-initio.
Validity of re-opening of the assessment proceedings :-
2. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the validity of the re-assessment proceedings under section 147 of the Act initiated by the learned Additional Commissioner of Income-tax, Range-4, New Delhi (‘learned AO’) without appreciating the facts of the case of the Appellant.
3. That on the facts and circumstances of the case and in law, the learned CIT(A) has, without appreciating the facts of the case erred in alleging that there is omission and failure on part of the Appellant to disclose fully and truly all the material facts leading to escapement of income chargeable to tax.
Addition on account of discount extended to prepaid distributors
4. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs.631,71,72,727/-made by the learned AO under the provisions of Section 40(a)(ia) of the Act by alleging that the relationship between the Appellant and its distributors / franchises is that of principal – agent and accordingly, the discounts extended by the Appellant to its distributors / franchises are in the nature of ‘commission’, liable for deduction of taxes under Section 194H of the Act.
5. Without prejudice to the Ground 4 above, on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that certain portion of the prepaid sales of the Appellant are effected through its own ‘Customer Service Centres’ and therefore, the discount offered on the portion of such sales cannot be treated as ‘commission’ liable for deduction of tax at source under the provisions of Section 194H of the Act.
6. Without prejudice to the Grounds 4 to 5 above, the learned CIT(A) has erred in confirming the disallowance, without appreciating the fact that all distributors / franchisees are Indian residents and accordingly, no disallowance under Section 40(a)(ia) of the Act can be made, where conditions prescribed under second proviso to Section 40(a)(ia) of the Act inserted vide Finance Act, 2012 (curative in nature are fulfilled.
Addition on account of IUC charges paid to foreign / non-resident telecom operators
7. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance of Rs.57,78,92,080/- made by the learned AO under the provisions of Section 40(a)(ia) of the Act on account of alleged non-deduction of TDS on IUC / international roaming charges payable to the Non-resident Telecom Operators (‘NTOs’) by treating the same to be in the nature of ‘royalty under the provisions of Section 9(i)(vi) of the Act and the applicable Double Taxation Avoidance Agreements (‘DTAA’).
8. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the aforesaid disallowance by alternatively alleging the same to be in the nature of ‘fees for technical services’ under the provisions of Section 9(i)(vii) of the Act and the applicable DTAAs.
9. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the aforesaid disallowance without appreciating that the provisions of Section 40(a)(ia) are applicable only in case of payments made to residents.
Penalty proceedings under section 271(1)(c) of the Act
10. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in not directing the learned AO to drop the penalty proceedings under Section 271(1)(c) of the Act.”
2. Ground No.1 is general in nature since specific grounds have been raised for challenging additions / disallowances made. As such, Ground No.1 of the Appeal does not call for any specific adjudication. Ground No.1 is accordingly dismissed. In Ground No.10 Appellant challenges the action of AO having initiated penalty proceedings u/s 271(1)(c) of the Act. This ground, in our considered opinion is premature and as such Ground No.10 of the Appeal is also dismissed. A composite glance of the remaining grounds of appeal reveals that following three issues require our adjudication :
(i) Validity of assumption of jurisdiction to reassess u/s 147 of the Act
(ii) Disallowance u/s 40(a)(ia) of Rs.631,71,72,727/- for non deduction of tax on discounts given by the appellant to its distributors / franchisees for distribution of prepaid SIM Cards / Talktime.
(iii) Disallowance u/s 40(a)(i) of Rs.57,78,92,080/- on payment of IUC Charges to International Telecom Operators.
3. We would first take up for consideration the issue pertaining to validity of assumption of jurisdiction to reassess u/s 147 of the Act. Brief facts of the case are that appellant is a Government of India Undertaking engaged in the business of providing telecommunication services. For the year under consideration the return of income was filed by the appellant on 29th September, 2009 declaring total income of Rs.4448,71,00,000/-. Assessment u/s 143(3) of the Act was completed on 2nd November, 2011 assessing total income of the appellant at Rs.5948,96,78,618/- under normal provisions of the Act and book profit of Rs.4959,37,00,000/- u/s 115JB of the Act. Thereafter, during course of assessment proceedings for AY 2011-12 the AO observed that appellant has offered certain discounts on its prepaid products to its distributors / franchisees which as per AO was payment of “commission” liable for tax deduction u/s 194H of the Act. Since the appellant had failed to deduct tax thereon in assessment proceedings for AY 2011-12 the expense was disallowed u/s 40(a)(ia) of the Act. In support of this conclusion AO relied upon the decision of Hon’ble Delhi High Court in the case of Idea Cellular Ltd., 325 ITR 148 (Del). Based on conclusions drawn by the AO in assessment proceedings for AY 2011-12 notice u/s 148 dated 31st March, 2014 was issued for the year under consideration i.e., AY 2009-10. Reasons recorded u/s 148(2) read as under :-
“Reasons to believe for reopening of the Assessment in the case of M/s Bharat Sanchar Nigam Limited (PANAABCB5576G) for A.Y.2009-10 u/s 147/148 of the Act
Return of income for the assessment Year 2009-10 was filed electronically vide Ack. No.94156100290909 on 29.09.2009 declaring total income of Rs.4448,71,00,000/- after claiming of deduction under Chapter VI-A amounting to Rs.260,14,00,000/-. The return of income field was processed u/s 143(1) of the Act on 29.04.2010. Subsequently order u/s 143(3) of the Act was passed on 02.11.2011 at total income of Rs.5948,96,78,618/- as per normal provisions of IT Act. Tax was determined on Income under the normal provisions of the IT Act as the same was more than 10% of the book profits as determined under the provisions of section 115JB of the IT Act.
From the perusal of assessment records and the Annual Report submitted, it was observed that the assessee company has reported in Segmental Information represented in a chart from titled “Segment Reporting” being part of its Annual Report at point 16 on page 51, service revenue on prepaid products on the “INCOME FROM SERVICES” at Rs.111,83,55,00,000/-.
During the course of assessment proceedings for the A.Y. 2011-12, it was observed from the Annual Report of the Assessee that it has reported in Segment Reporting which is part of its ‘Annual Report at point 16 on page 77, service revenue on prepaid products on the ‘INCOME FROM SERVICES’ at Rs.10695,60,00,000/- on which the assessee company is incurring expending on account of discount to prepaid distributors and franchisee. The assessee company has shown this figure after netting off the discounted amount. The company was asked to provide the details of discount given to distributors / franchisee but the same was not provided. Further, it was assumed that the assessee company M/s BSNL is providing discount @ 5%. According the discount amount was calculated @ 5% which was found to be in the nature of commission expenses on which TDS was liable to be made u/s 194H of the Act. However, on verification, it was observed that no TDS deduction has been made by the assessee and the assessee company was an assessee in default as per the provisions of chapter XVII of the Act. Taking note of the same, the assessee was asked to show cause as to why this amount should not be disallowed u/s 40(a)(ia) of the Act. The assessee was further asked to explain as under :-
“Kindly confirm that the revenues on account of sale of prepaid products such as SIMS, Recharge Coupons etc. 9see para 2(e) schedule T of accounting policies) is being recognized in the accounts at the customer sale price or on distributor sale price such that the distributor margin is earned by the distributor on transfer of such recharge product to the subscriber. In such a scenario in terms of the case of Hon’ble Delhi High Court in the matter of Idea Cellular, TDS u/s 194H will be applicable on such margin to the distributor. You are requested to confirm the company’s position and in case the tax has not been withheld during the year, why not such expense be disallowed u/s 40(a)(ia) of the IT Act. Kindly produce relevant books of accounts in original for supporting the replies / arguments.”
The assessee vide written submission 26.03.2014 submitted that tax is being duly deducted u/s 194J and section 194H respectively on the above items as and where applicable. Further, the assessee submitted as under :-
“It has been explained before that the company follows a decentralized Accounting system and procedure spread across more than 700 PAU’s. All primary records and books of account are therefore maintained there and further at the Circle / SSA or PAU level only. These unit accounts are subject to Statutory, Internal and Tax Audits by independent Auditors. Disallowances u/s 40(a)(ia) are reported by them in their Tax Audit reports and complied at H.O. level. During the year, we have voluntarily disallowed Rs.103.50 crores u/s 40(a)(ia) at line item C 2 in the computation of income, based on the Tax Audit Reports.”
In view of the above reply, it is ascertained that the discounts given by the assessee to its distributors and franchisee was in the nature of commission and was liable to TDS u/s 194H for the allowability of the same as revenue expenditure. Since the assessee company failed to discharge the onus cast on it u/s 194H r.w.s. 40(a)(ia) an amount of Rs.534,78,00,000/-representing the dealers / distributors and franchisee margin the form of free airline was disallowed u/s 40(a)(ia) of the Act and was added to the income of the assessee company.
The assessee company has shown during A.Y. 2009-10 service revenue on prepaid products on the ‘INCOME FROM SERVICES” At Rs.11,83,55,00,000/- on which the assessee company is incurring expenditure on account of discount to prepaid distributors and franchisee. The said amount is after netting off the discounted amount. Assuming that discount is provided @ 5%.
Hence calculating the amount of discount at Rs.111,83,55,00,000/- @ 5% comes to Rs.559,17,75,000/- representing the dealers / distributors and franchisee margin in the form of free airtime on which no TDS deduction was made by the assessee and the assessee company is an assessee in default as per the provisions of chapter XVII of the Act and the same deserves to be disallowed u/s 40(a)(ia) of the Act.
Reference is also invited to the judgement of Hon’ble Delhi high Court in the case of Idea Cellullar Limited (2010) 325 ITR 148 wherein the issue is settled in favor of the Revenue. The Hon’ble Delhi High Court held that
“the relationship between the case, and the distributors was held to be one of principal to agent. It was further held that the discounts offered to distributors were in the nature of commission and thereby liable to TDS u/s 194H of the act.
In view of above, I have reason to believes that Rs. 559,17,75,000/-representing the dealers/distributors and franchisee margin in the form of free airtime on which no TDS deduction was made by the assessee and the assessee company is an assessee in default as per the provisions of chapter XVII of the Act, so allowed, resulted into income escaping assessment within the meaning of section 147 of the I.T. Act and it is a fit case for initiating proceedings u/s 147 of the I.T. Act and for issue of notice u/s 148 of the I.T. Act.”
3.1 Vide written objections dated 20th February, 2015 appellant raised objections against assumption of jurisdiction to reassess. Ld. AO did not find any merit in the objections so raised and vide order dated 9th March, 2015 he disposed off the objections in accordance with law laid down by Hon’ble Apex Court in case of GKN Driveshafts India Ltd., 259 ITR 19 (SC). Thereafter the AO proceeded to pass the reassessment order.
4. During the course of hearing before us Ld. AR strongly objected to the action of assumption of jurisdiction by issuance of notice u/s 148 dated 31st March, 2014. In this regard, it was submitted by the Ld. AR that there was no omission on the part of the appellant to disclose fully and truly all material facts necessary for its assessment during the course of original assessment proceedings since all material facts like audited financial statements, tax audit report were specifically called upon and furnished before the AO during the course of proceedings u/s 143(3) of the Act. It was further submitted by the ld. AR that since the order u/s 143(3) was passed after an in depth examination of the facts of the case the present reassessment proceedings are bad in law as it tantamount to a case of change of opinion.
5. CIT(DR) on the other hand supported the action of lower authorities in assuming jurisdiction to reassess in the instant case. It was submitted by Ld. CIT(DR) that the first appellate authority has for appropriate reasons upheld validity of jurisdiction to reassess.
6. Having considered the rival submissions in the light of entire material available on record, we find that it is no doubt true that the factum of Appellant having offered discount to its distributors / franchisee for distribution of its prepaid products is clearly discernible from the audited annual accounts for financial year ending 31st March, 2009. However, a perusal of the original assessment order u/s 143(3) shows that there is no examination by the AO regarding the issue as to whether said discount was in nature of “commission” liable to tax deduction u/s 194H of the Act. It would be relevant to note that the decision in the case of Idea Cellular (supra) was rendered by Hon’ble Delhi High Court on 19th February, 2010 whereas order u/s 143(3) for AY 2009-10 in the instant case was passed by the AO on 2nd November, 2011, it was therefore all the more necessary for the AO to specifically examine this issue during the course of original assessment proceedings. The assessment order nowhere speaks that the AO had taken a conscious decision or formed any opinion on this issue nor was there any application of mind by the AO thereupon. In presence of these facts borne out on record, we do not find any justification to discard the decision reached by the ld. CIT(A) for sustaining the initiation of proceedings u/s 147 in the instant case. For this view, we stand fortified by the decision of Hon’ble Jurisdictional High Court in the case of Consolidated Photo and Finvest Ltd. vs. ACIT 281 ITR 394 (Del) and of Hon’ble Gujrat High Court in the case of Praful Chunilal Patel vs. ACIT 236 ITR 832 (Guj). The decisions relied on by the appellant are not found applicable, being based on different footing and distinguishable on the facts of the present case. Hon’ble jurisdictional High Court in the case of Consolidated Photo (supra) has observed as under :
“The principal that a mere change of opinion cannot be a basis for reopening completed assessments would be applicable only to situation where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important is whether the Assessing Officer had based on the material available to him taken a view. If he had not done so, the proposed reopening cannot be assailed on the ground that the same is based only on a change of opinion.”
6.1 This decision is squarely applicable in the instant case, as the Assessing Officer has not addressed the relevant issue in the original assessment order nor formed any opinion nor took any express decision thereupon. Moreover, we observe that the reassessment proceedings in the instant case got triggered on the basis of findings recorded by the Ld. AO in the assessment proceedings for the subsequent year i.e., AY 2011-12, vis a vis issue in dispute. This in our opinion would constitute to a material relevant for assumption of jurisdiction u/s 147. Support in this regard can safely be drawn from the decision of Hon’ble Bombay High Court in the case of Multiscreen Media Pvt. Ltd. vs. UOI reported in 324 ITR 54 (Bom) wherein it is held that reassessment proceedings on the basis of subsequent assessment is valid. It was also submitted before us that there is no failure or omission on part of the appellant to disclose material relevant during the course of original assessment proceedings. We find that this is totally irrelevant. Proviso to section 147 is not applicable in the instant case since action u/s 147 has been initiated by issuance of notice u/s 148 dated 31st March, 2014 i.e., before expiry of 4 years from the end of the relevant assessment year. Therefore, respectfully following the decisions stated above, we sustain the conclusion reached by the ld. CIT(A) on this count. Accordingly, Ground Nos. 2 and 3 of the Appeal are dismissed.
7. Now coming to the merits of the case. In ground Nos.4 to 6 the appellant is aggrieved by the action of AO in making a disallowance u/s 40(a)(ia) of Rs.631,71,72,727/-. In this regard, it is noted by the Ld. AO that for the year under consideration in the profits and loss account appellant has shown income from prepaid services at a net figure after reducing a discount given by it to the distributors / franchisees of its prepaid Sim Card and Recharge Vouchers. During course of reassessment Ld. AO directed the appellant to submit as to why said discount should not be treated as a commission paid to distributors / franchisees on which tax was deductible as per provisions of section 194H of the Act. In reply it was submitted by the appellant that the distributor margin is in nature of “discount” and not “commission” which would triger applicability of section 194H. It was further submitted that the relationship between BSNL and Distributors / Franchisees was on principal to principal basis and hence TDS was not deductible. In support of its claim the appellant relied upon the decision of Karnataka High Court in the case of Bharti Airtel Ltd. reported in 372 ITR 33 (Kar). The Ld. AO, however, was not convinced by the submissions made by the appellant and in his order of assessment he rejected the claim of the assessee by observing as under :-
“The submissions of the assessee have been considered and are discussed here under :-
(i) The assessee’s contention that the distributor margin is in the nature of ‘discount’ and not commission which would attract section 194H is not acceptable since in subsequent years, the assessee itself had issued circular (H.O. Instructions No.772/4.3.11 & 774/14.3.11) directing deduction of tax in terms of section 194H on the discount given to distributors / franchisees. In the submission filed on 17/3/2015 during the course of assessment proceedings for A. Y.2012-13 the assessee contended that instructions had been issued to the field formations regarding strict adherence to TDS u/s 194H on payment under discount scheme to adherence to TDS u/s 194H on payment under discount scheme to Franchisees / Distributors. The assessee had further submitted that any cases of non-compliance are duly reported by the Branch Tax Auditors u/s 44AB and taken into account for voluntary disallowance u/s 40(a)(ia) while framing the computation of income at the central level. Thus the assessee itself accepted the factum and voluntarily deducted the TDS u/s 194H on the discount in the subsequent year. Thus, taking the cognizance of this fact and consistency, it is clear that for A.Y.2007-08, the assessee is under default for not deducting the TDS u/s 194H of the income tax act, 1961 on the discount offered to the franchisees / distributors.
(ii) The decision of the Karnataka High Court cited above has not been accepted by the Department and SLP has been filed.
(iii) The above position is also vindicated by the decision of Hon’ble ITAT Delhi Bench in the assessee’s own case in BSNL vs. ITO (TDS & Survey) in ITA No.258, 259 & 260/Del/2011. In that case, the AO (TDS) had raised demand u/s 201/201(1A) r.w.s. 194H of the I.T. Act on the assessee. The ITAT referred to the following observation made by the Co-ordinate Bench in the case of ICICI Bank Limited vs. DCIT, 156 TTJ 569;
“…The onus is on the revenue to demonstrate that the taxes have not been recovered from the person who had the primarily liability to pay tax, and it is only when the primary liability is not discharged that vicarious recovery liability can invoked. Once all the details of the persons to whom payments have been made are on record, it is for the Assessing Officer, who has all the powers to requisition the information from such payers and from the income tax authorities to ascertain whether or not taxes have been paid by the persons in receipt of the amounts from which taxes have not been withheld.
The provisions regarding interest in delay in depositing the taxes are set out in Section 201(1). These provisions provide that for any delay in recovery of such taxes is to be compensated by the levy of interest. As far as recovery provisions are concerned, these provisions are set out in Section 201(1) which seeks to make good any loss to revenue on account of lapse by the assessee tax deductor. However, the question of making the loss of revenue arise only when there is indeed a loss of revenue can be there only when recipient of income has not paid tax.”
The ITAT observed that there is no finding by the AO to the effect that the recipient of the money i.e., franchisees have not paid the taxes on income embedded in the amounts in question. It held that for raising demand u/s 201/201(1A) r.w.s. 194H, the AO had to prove that the principal liability (of payment of tax by the distributor / franchisees) remained undischarged and therefore sent the matter back to the file to the AO for reconsideration. Perusal of the above shows that, in fact, the wrong ITAT’s order reaffirms that the assessee was under an obligation to deduct tax at source u/s 194H in respect of the discount so allowed to the franchisees.
(iv) No evidence regarding sale effected through BSNL’S own Customers Services Centers (CSCs) has been furnished.
(v) As per the sales and Distribution Policy, 2006 of the assessee company, discount of 6.5% is prescribed for prepaid recharge coupons.
8.4 Further, the issue has been settled in favour of the Revenue by the jurisdictional High Court of Delhi in the case of Idea Cellular Limited (2010) 325 ITR 0148 wherein it was held that the relationship between the assessee, who was also a telecom service provider like the assessee in the present case, and the distributors was one of Principal-to-Agent. It was further held that the discounts offered to distributors were in the nature of commission and thereby liable to TDS u/s 194H of the Act.
8.5 In view of the above, it is held that as the assessee has failed to deduct tax at source, in terms of provisions of section 194H of the I.T. Act, 1961 from the discount given to the distributors / franchisees, the same is disallowable u/s 40(a)(ia). During the course of assessment proceedings for A.Y.12-13, the assessee furnished copy of its Sales and Distribution Policy, 2006. As per this policy, discount of 6.5% is prescribed for prepaid recharge coupons.”
8. Being aggrieved, appellant preferred an appeal before the ld. CIT(A). The first appellate authority examined the nature of relationship between the appellant and its franchisee by scrutinizing the franchisee agreement between the appellant and M/s Happy Ezone Ltd. Ld. CIT(A) thereafter concluded in the impugned order as under :-
“4.4.22. The contention of the appellant that the Delhi High Court judgment in the case of Idea Cellular Ltd., 325 ITR 145 (Del) is not applicable to the present case, is also not acceptable as in view of analysis and discussions in the preceding paras by me. I hold that the facts of the present case are very much similar to that of the case of Idea Cellular.
4.4.23. After considering the arguments put forth by the appellant during appellate proceedings and after perusing the provision of the agreement, it leaves no doubt whatsoever that the relationship between BSNL and Franchisees is that of a principal and agent. I have also considered the judgment of Delhi, Kolkata & Kerala High Court in the case of Idea Cellular Ltd. 325 ITR 148 (Del), Bharti Cellular Ltd. vs. ACIT 244 CTR 185 (Cal) and Vodafone Esaar Cellular Ltd. vs. ACIT (2009) 317 ITR (AT) 234 (Cochin), I hold that the discounts allowed and incentives given by the appellant to its Franchisees on sale of its products is in nature of commission and the same attracts the provision of section 194H of the Act. During appellate proceedings the ld. AR has quoted the judgment of Karnataka High Court which is in favour of appellant. It would be pertinent to state that the said judgment has not been accepted by Revenue and the judicial pronouncement has been contended before the Supreme Court. The SLP proposed by Revenue has been admitted by the Apex Court which proves that the issue is alive and debatable. Considering all these facts, Ground No.3 is dismissed.”
9. Aggrieved, the appellant is now in appeal before us. At the outset, it was submitted by the Ld. AR that the decision of Hon’ble Delhi High Court in Idea Cellular (supra) is distinguishable both on facts and in law. In this regard, it was submitted by Ld. AR that a true and correct appreciation of relationship between appellant and its distributors in the instant case demonstrates that the said relationship is principal to principal and not principal to agency. It was submitted by Ld. AR that the facts of present case are more akin to the decision of Hon’ble Karnataka High Court in the case of Bharti Airtel (supra).
In support of the above contentions ld. AR filed a written note summarizing the contents of franchisee agreement as under:
