In recent decision, the division bench of the Pune ITAT allowed the appeal of the Vodafone Cellular Ltd and held that the sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS under section 194H of the Income Tax Act.
The appeal was filed against the TDS assessment by the Officer who treated the discount offered by them to their distributors as commission. Consequently, the Company was treated as assessee in default u/s.201(1) r.w.s. 194H of the Income Tax Act.
Before the appellate authorities,the company argued that the discount allowed to the distributors is on account of principal to principal basis and not that of principal to agent. It was also submitted that under this arrangement, the transaction in all substantial respects is akin to sale and purchase of goods as it happens in FMCG sector. The discount extended represents the difference between the MRP of the talk time and prepaid connections and the price at which these are transferred to the prepaid distributors. Since no payment is made by the assessee to its prepaid distributors, the discount extended to the prepaid distributors is in the nature of trade margin and such discount cannot be termed as commission so as to attract the provisions of section 194H of the Income Tax Act and therefore, the provisions of TDS are not applicable in their case.
The bench noted the contention that no payment or credit to the account of the distributors has been made by the assessee towards discount extended to them and hence, provisions of section 194H of the Income Tax Act cannot be applied in the absence of a payment/credit towards the discount extended by the assessee.
The bench noticed that, in similar facts, the High Court of Kerala in the own case of the assessee, the Delhi High Court in Idea Cellular Ltd case and the Calcutta High Court in Bharti Cellular Ltd case, were decided the issue against the assessee by upholding the action of the Assessing Officer in treating the assessee to be an assessee in default.
Further, the Karnataka High Court, in Bharti Airtel Ltd. Vs. DCIT reported in 372 ITR 33 has held that sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS u/s.194H. It was also pointed out by the Court that the decisions of the above Courts are not applicable to the said case since in all these cases, the assessee had appointed distributors in connection with several services regarding the mobile phone connection and, therefore, the essence of service rendered by the distributor is not the sale of any product or goods and, therefore there existed a principal-agent relation with the company and distributors.
Applying the ratio of the Karnataka High Court decision, the bench concluded the matter in favour of the assessee.
Read the full text of the order below.
