The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) in its ruling which was in favour of Vodafone Idea Ltd has held that there cannot be any disallowance under section 40 (a)(ia) of the Income Tax Act, 1961 on Sale of Prepaid Sim card/Recharge Vouchers to distributors.
The assessee is in the business of providing cellular services in the telecom circles of Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh, Kerala, Uttar Pradesh(W), Haryana, Delhi, Uttar Pradesh (E), Himachal Pradesh and Rajasthan. The assessee had filed its return of income on 26/09/2009 declaring a total income of Rs.‟Nil‟ after setting off brought forward unabsorbed depreciation of Rs.33,06,29,157/- and filed its revised return of income on 01/04/2010 declaring total income at Rs. Nil after set off of brought forward unabsorbed depreciation of Rs.229,74,10,373/- on 30/03/2011.
The AO observed that the assessee had deducted tax at source for the commission payments made but had not deducted tax for the discount allowed to the distributors. The AO merely followed the decision in the case of the assessee company reported in 325 ITR 148 (Del) wherein it was held that the relationship between the assessee and the Distributors was that of Principal to Agent and accordingly the discount given to the dealers/distributors would be like commission on which tax is 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 CIT(A) rejected the additional evidence furnished by the assessee.
The assessee sold prepaid sim cards and recharge vouchers at a discounted price than the MRP to the distributors. This amounts to the sale of the right to service. Assuming the MRP of the sim cards and recharge vouchers is Rs.100/-, the assessee sells the same to its distributors at a discounted price of Rs.70/-. Later the distributor in turn sells the same product to retailers at Rs.90/- and thereafter, the retailer sells the same product to the ultimate customer /user at Rs.100/-.
A Coram comprising of Shri Vikas Awasthy, Judicial Member & Shri M Balaganesh, Accountant Member observed that the assessee has got no control over the appointment of retailers. Hence, the entire computation mechanism of deduction of tax at source in terms of Section 194H of the Act grossly fails as the income component thereon is not determinable when the assessee sells the sim cards to the distributors. The ITAT held that the sale of prepaid sim cards/recharge vouchers by the assessee to distributors cannot be treated as commission/discount to attract the provisions of section 194H of the Act and hence there cannot be any obligation on the part of the assessee to deduct tax at source thereon and consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. The Tribunal allowed the appeal of the assessee.
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