In a major setback to telephone companies, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the provisions relating to tax deduction at source under section 194H of the Income Tax Act, 1961 is applicable on discounts allowed on prepaid products offered by the telephone operator, BSNL, since such amount to ‘commission’.
Assessee, Bharat Sanchar Nigam Limited (BSNL), has allowed discounts on its prepaid proiducts to its distributors / franchisees. Assessing Officer found that such discounts are actually in the nature of “commission” for which assessee is liable to deduct tax at source u/s 194H of the Income Tax Act. The AO, by invoking section 40(a)(ia) of the Act, disallowed the claim made by the assessee and initiated penalty proceedings.
Before the appellate authorities, the assessee contended that the distributor margin is in nature of “discount” and not “commission”, and therefore, section 194H would not apply. It was further submitted that the relationship between BSNL and Distributors / Franchisees was on principal to principal basis and hence TDS was not deductible. They relied on the decision of the Karnataka High Court in the case of Bharti Airtel Ltd.
On first appeal, the Commissioner of Income Tax (Appeals) upheld the above order by relying on the decision of the Delhi High Court in the case of Idea Cellular Ltd.
The bench noticed that in the above case, the jurisdictional High Court has found that a legal relationship is established between the telephone service provider and the consumer i.e the subscriber to its products. In that case, the Court has followed the decision of the Apex Court in appellants’ case i.e BSNL vs UOI to hold that this is not a case for sale of goods but a case of providing telephone services and hence there can be no sale of goods from the service provider to its distributor so as to create a principal to principal relationship.
“We are therefore compelled to hold that the discount on prepaid products offered by the appellant is in nature of “commission” which does attract rigors of section 194H of the Income Tax Act,” the bench said.
With regard to the levy of penalty, the bench accepted the contention of the assessee that the benefit of bonafide cause be granted to the appellant since provisions of section 40(a)(ia) are penal in consequences. It therefore, held that it is not a fit case for making disallowance of an expense by invoking penal provisions of section 40(a)(ia) of the Income Tax Act.
Read the full text of the order below.
