Relief for Vodafone West Ltd: ITAT Deletes Addition on Trade Discount, Rules Trade Discount to Prepaid Distributors is Not 'Commission' [Read Order]
The tribunal held that a cellular mobile service provider is not under a legal obligation to deduct tax at source on the income or profit component in the payment received by distributors or franchisees from 3rd party customers.
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹71,82,87,365 made under section 40(a)(ia) and ruling that the trade discount given to prepaid distributors does not qualify as "commission" subject to tax deduction at source.
Vodafone West Limited (formerly known as Vodafone Essar Gujarat Limited) (assessee) a cellular mobile telephony service provider, had debited an amount of ₹71,82,87,365 as "commission on prepaid products".
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This amount represented the difference between the Maximum Retail Price (MRP) of prepaid starter packs (SIM cards) or recharge coupons (prepaid talk time) and the price charged from the prepaid distributors.
The assessee argued that this difference was in the nature of a trade discount and did not qualify as "commission" under section 194H of the Act. The assessee also contended that the relationship with the distributors was Principal to Principal rather than Principal Agent.
The Assessing Officer (AO) disagreed with the contentions of the assessee and held that distributors were merely agents of the assessee, SIM cards and services were in the nature of services, not goods, meaning the distributors had to be treated as agents.
The AO held that the trade discount was in the nature of "commission" liable to withholding tax under section 194H of the Income Tax Act. Since the assessee did not deduct the required tax at source, the entire amount was proposed for disallowance under section 40(a)(ia) of the Income Tax Act.
The Dispute Resolution Panel (DRP) rejected the assessee's detailed objections, and the AO made the addition in the final assessment order. Aggrieved by the final assessment order, the assessee filed an appeal before the ITAT.
The two-member bench comprising Vikram Singh Yadav (Accountant Member) and Sandeep Singh Karhail (Judicial Member) noted that the Supreme Court, while deciding a similar issue in the case of Bharti Cellular Ltd. vs. ACIT.
The Supreme Court had held that a cellular mobile service provider is not under a legal obligation to deduct tax at source on the income/profit component in the payment received by distributors/franchisees from 3rd party customers.
The Supreme Court specifically ruled that section 194H is not applicable on trade discounts given to prepaid distributors. The tribunal also observed that similar findings were rendered recently by a Co-ordinate Bench in the case of Vodafone Digilink Ltd.
Respectfully following the binding precedents, the tribunal deleted the disallowance made on account of the trade discount. In this Ground raised in the assessee's appeal was allowed.
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