2017 (1) TMI 1393 - AT - Income Tax

TDS u/s 194H - sale of SIM cards/recharge coupons at discounted rate of distributors - Held that - Sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS u/s.194H of the I.T. Act. However, the Hon ble High Court in Bharti Airtel Ltd. Vs. DCIT 2014 (12) TMI 642 - KARNATAKA HIGH COURT while holding so has remitted the matter back to the assessing authority only to find out how the books are maintained and how the sale price and the sale discount is treated and whether the sale discount is reflected in their books. If the accounts are not reflected as set out above in para 60 of the order, section 194H is not attracted. Therefore, in line of the above observation of the Hon ble High Court we restore the matter to the file of the Assessing Officer for necessary verification. The grounds raised by the assessee are accordingly allowed for statistical purposes.

Issues Involved:
1. Limitation and Validity of Orders under Section 201(1) and 201(1A) of the Income Tax Act.
2. Applicability of Section 194H on Discounts Extended to Distributors.
3. Relationship Between the Assessee and Distributors (Principal to Principal vs. Principal to Agent).
4. Requirement of TDS Deduction on Trade Discounts.
5. Interest under Section 201(1A) of the Income Tax Act.

Detailed Analysis:

1. Limitation and Validity of Orders under Section 201(1) and 201(1A) of the Income Tax Act:
The assessee argued that the orders passed under Section 201(1) and 201(1A) were barred by limitation. The survey conducted on 23-04-2008 initiated the proceedings, and the requisite details were filed by 08-05-2008. According to the Special Bench decision in Mahindra & Mahindra Ltd., the maximum time limit for passing such orders is one year from the end of the financial year in which proceedings are initiated. The CIT(A) dismissed the additional ground raised by the assessee, stating that the show cause notice for F.Y. 2007-08 was issued on 21-01-2010, and thus the order passed on 22-03-2011 was within the permissible time limit. However, the Tribunal found that no show cause notice was issued for A.Y. 2007-08, and hence, the order passed was void and illegal due to non-issuance of the statutory notice and being barred by limitation.

2. Applicability of Section 194H on Discounts Extended to Distributors:
The assessee contended that the discount offered to distributors was on a principal-to-principal basis and not commission, hence not attracting Section 194H. The CIT(A) upheld the Assessing Officer's view that the discount constituted commission, relying on decisions from the Delhi, Kerala, and Kolkata High Courts. However, the Tribunal found merit in the assessee's argument, citing the Karnataka High Court's decision in Bharti Airtel Ltd., which held that the sale of SIM cards/recharge coupons at discounted rates to distributors is not commission and therefore not liable to TDS under Section 194H. The Tribunal remitted the matter back to the Assessing Officer for verification of how the sale price and discount are treated in the books.

3. Relationship Between the Assessee and Distributors (Principal to Principal vs. Principal to Agent):
The assessee argued that the relationship with distributors was on a principal-to-principal basis, meaning the transaction was akin to a sale and purchase of goods. The CIT(A) disagreed, treating the relationship as principal to agent, thus categorizing the discount as commission. The Tribunal, following the Karnataka High Court's decision, held that the relationship was indeed principal-to-principal, thus supporting the assessee's stance.

4. Requirement of TDS Deduction on Trade Discounts:
The Tribunal observed that the discount extended by the assessee to distributors did not constitute income at the time of sale, as the distributors only earned income upon resale. Therefore, the provisions of Section 194H, which require TDS deduction on commission, did not apply. The Tribunal directed the Assessing Officer to verify the treatment of discounts in the books of accounts in line with the Karnataka High Court's guidelines.

5. Interest under Section 201(1A) of the Income Tax Act:
The assessee argued that interest under Section 201(1A) should only be charged for the period the tax department was deprived of tax dues. The Tribunal noted that interest is compensatory and should be computed from the due date of payment of withholding tax to the date of payment by the recipient.

Conclusion:
The appeal for A.Y. 2007-08 was allowed, and the orders for the remaining years were partly allowed for statistical purposes. The Tribunal directed the Assessing Officer to verify the treatment of discounts in the books of accounts, following the Karnataka High Court's decision. The ground relating to the validity of orders for other years was dismissed due to lack of substantiation by the assessee.

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