No TDS in respect of Sale of Pre-paid Sim Cards and RCVs: ITAT [Read Order]

In Asstt. Commissioner of Income Tax vs. Tata Teleservices (M) Ltd. the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that the sale of prepaid sim cards and Recharge Coupon Vouchers by the assessee to the distributors are on principal–to–principal basis and hence no TDS is applicable.

The assessee provides basic mobile telecommunication service and internet service. They filed returns declaring loss and the return was accepted by the Assessing Officer (A.O). However, the assessments were reopened and the A.O found that the assessee has not deducted tax on the alleged commission paid to distributors on sale of prepaid sim cards and recharge coupon vouchers (RCVs). The assessee claimed that under their pre-paid business model, the distributors buy starter kits, bulk talk–time i.e., telecom products from the operators by paying for the same and thereafter trade in telecom products through their network of retailers. It was submitted by the assessee that the starter kits and RCVs were sold to distributors on principal–to–principal basis and there is no relationship of principal and agent with the Distributors. Therefore, the discount given to the distributors on the MRP of the starter kits and RCVs cannot be treated as commission as provided under section 194H of the Income Tax Act,1961.

The Assessing Officer observed, the discount on MRP given by the assessee to the distributor on sale of prepaid sim card and RCVs is in the nature of commission as per section 194H of the Act.

Accordingly, he made disallowance under section 40(a)(ia) of the Income Tax Act for an amount of Rs.37.23 Crores under section 40(a)(ia) of the Income Tax Act. The Commissioner of Income Tax (Appeals) (CIT(A)) found that the matter was already decided in favour of the assessee in their own case by the Karnataka High Court, for the AY 2009-10 and 2010-11.

Aggrieved Revenue appealed before the Tribunal. The Departmental Representative (D.R) referring to different clauses of the agreement submitted that there is some amount of control over the distributors with regard to sale of prepaid sim cards and RCVs. He further submitted, that the distributor cannot act independently but has to be bound by the restrictions / conditions imposed under the agreement and thus it cannot be held that the transaction relating to sale of prepaid sim card / RCVs between the assessee and the distributors are on principal–to– principal basis. Therefore, the discount given by the assessee to the distributors on MRP is nothing but commission liable for deduction of tax under section 194H of the Act. The assessee having not deducted tax at source, the Assessing Officer has rightly made disallowance under section 40(a)(ia) of the Act.

Citing various cases, the Authorised Representative (A.R) of the assessee argued that the nature of transaction between the assessee and its distributors being on principal–to–principal basis the trade discount given to the distributor is not in the nature of commission, hence, does not attract the provisions of section 194H of the Act.

The Bench comprising of Judicial Member Saktijit Dev & Accountant Member Rajesh Kumar observed “Upon considering the totality of facts and circumstances of the case and applying the principle laid down in the judicial precedents cited before us, we hold that the sale of prepaid sim cards and RCVs by the assessee to the distributors are on principal–to–principal basis, hence, outside the ambit of section 194H of the Act. Therefore, no disallowance under section 40(a)(ia) can be made.”