As a relief to Vodafone Idea ltd, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the Sale of prepaid sim cards/recharge vouchers to distributors cannot be treated as commission to attract Section 194H of the Income Tax Act,1961 and no tax deductible at source(TDS).
Shri J D Mistry appeared on behalf of the assessee and Shri T Shankar appeared on behalf of the revenue.
The assessee is in the business of providing cellular services in the telecom circles of Maharashtra, Gujarat, Andhra Pradesh, Delhi, Uttar Pradesh (West), Uttar Pradesh East, Haryana, Kerala, Rajasthan, Himachal Pradesh and Madhya Pradesh. The company also trades in handsets and accessories which are an integral part of the nature of the business in which the assessee is operating.
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 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 assessee furnished a copy of the agreement entered into with the distributors and filed a detailed reply before the AO. It was submitted by the assessee that it appoints distributors who purchase prepaid Starter Packs and recharge vouchers in bulk and then sell them to sub-dealers or retailers. It was submitted that there is a principal-to-principal relationship between the assessee company and the distributors and the prepaid Starter Packs and Recharge Vouchers are given to them at a discounted price.
It was submitted that the assessee company receives the sale proceeds from the distributors in advance and thereafter, delivers the products to the distributors irrespective of whether they in turn are sold or unsold by the distributors. The distributors are free to sell the prepaid cards/recharge vouchers to any retailers who shall be appointed by them on their account (i.e. the distributors) and no control is being exercised by the assessee company thereon, at any price which the distributor decides subject to the maximum retail price (MRP).
The assessee company does not have any risk of any bad debts as payment is received by it in advance from the distributors. It was submitted that any loss that the distributor may suffer on account of any unsold/damaged/obsolete stock is not compensated by the assessee company. Thus, what the distributor earns is the difference between the price paid to the assessee company and the price at which they decide to sell the products to retailers.
From the perusal of the various clauses of the distributor’s agreement, it was observed that the relationship between the assessee and the distributor is only that of principal to principal and not principal to the agent as alleged by the Revenue.
The ITAT bench consisting of Shri Vikas Awasthy, judicial member & Shri M Balaganesh, accountant member 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 there cannot be any obligation on the part of the assessee to deduct tax at source. Consequentially there cannot be any disallowance u/s 40(a)(ia) of the Act. The appeal was allowed.
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