2013 (1) TMI 480 - AT - Income Tax

Non deduction of TDS on Merchant Discounting Rate(MDR) charges - default u/s 194H - assessee is a company engaged in the business of providing telecommunication services - assessee contested against no principle to agent relationship between the appellant and time banks - MDR charges are nothing but Bill Discounting Charges and would fall within the definition of the term interest as envisaged u/s 2(28A) and if at all any TDS provisions apply, it could be only 194A - Held that - As decided in BSNL v. UOI 2006 (3) TMI 1 - SUPREME COURT the principle to be kept in mind was as to what was the intention of the parties regarding the SIM card transaction. If the parties intended that the SIM card would be a separate object of sale, it will be open to the sales tax authorities to levy the tax. However, if the sale of the SIM card was merely incidental to the services being provided and only facilitated the identification of the subscriber and other details, it would not be assessable to the sales tax. Consequently, the Supreme Court held that both taxes could not possibly apply to the transaction in question and based on the above determination of intent, concluded that the transactions relating to SIM cards were held not taxable to sales tax and these proceedings stood concluded. As decided in IDEA Mobile Communication Ltd. v. CCEC, Cochin 2011 (8) TMI 3 - SUPREME COURT OF INDIA that the amount received by the telecom company from its subscriber towards the SIM card would form part of the taxable value for the levy of service tax in relation to the activation charges, which were undeniably in the nature of a service, since the SIM card was never sold independent from the above service and was hence considered part and parcel of such service. The dominant intent of the transaction was clearly to provide services and not to sell any goods. It was thus held that value of the SIM card formed part of the activation charges since no activation was possible without a valid functioning SIM card. It was precisely for this reason that the sales tax authorities had withdrawn their attempt to tax such services to the sales tax. Consequently, it held that the sale and supply of SIM cards to subscribers, including the activation charges, was indeed intended and dealt with by both parties as services and not as sale of goods. Therefore,the transactions relating to supply of SIM cards between telecom operators and the subscribers would be charged to just the one tax i.e. the service tax and not the sales tax. Determination of tax payable u/s 201(1) should be done after taking into consideration the decision of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT 2007 (8) TMI 12 - SUPREME COURT OF INDIA wherein held that if the payee has made payment of taxes then to that extent, the assessee should not be considered as an assessee in default - direct the AO to consider the claim of the assessee only with regard to determination of the liability u/s 201(1) - appeals of the assessee challenging the order u/s 201(1) stand partly allowed for statistical purposes. Whether the payments on account of credit card charges should be treated as commission within the meaning of sec.l94H - Held that - On going through the nature of transactions commission paid to the credit card companies cannot be considered as falling within the purview of S.194H as the liability to make TDS under the said section arises only when a person acts behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission/ brokerage for acting on behalf of the merchant establishment - payments to banks on account of utilization of credit card facilities would be in the nature of bank charge and not in the nature of commission within the meaning of sec. l94H.

Summary

Issues Involved:
1. Applicability of Section 194H of the Income-tax Act, 1961 to the discount on Starter Kits and Recharge Vouchers (RCVs).
2. Applicability of Section 194H to the Merchant Discount Rate (MDR) retained by banks on credit card transactions.
3. Determination of tax liability under Section 201(1) and levy of interest under Section 201(1A).

Detailed Analysis:

1. Applicability of Section 194H to the Discount on Starter Kits and RCVs:
The primary issue was whether the difference between the Maximum Retail Price (MRP) of Starter Kits and RCVs and the discounted price at which they were sold to Channel Partners (CPs) constitutes a commission, thereby attracting the provisions of Section 194H of the Income-tax Act, 1961.

The Tribunal examined the nature of the relationship between the assessee (a telecom service provider) and its CPs. The assessee argued that the relationship was on a principal-to-principal basis, and the difference in price was merely a trade discount. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the relationship was that of principal and agent, and the difference in price was deemed as commission.

The Tribunal referred to the Supreme Court's decision in the case of IDEA Mobile Communication Ltd. v. CCEC, Cochin, which held that SIM cards have no intrinsic sale value and are merely a medium to provide telecom services. The Supreme Court concluded that the dominant intent of the transaction was to provide services and not to sell goods, thereby supporting the view that the difference in price is in the nature of commission.

Despite the assessee's reliance on the decisions of the Gujarat High Court in Ahmedabad Stamp Vendors Association v. UOI and the Delhi High Court in CIT v. Jai Drinks (P.) Ltd., the Tribunal upheld the CIT(A)'s order, agreeing that the provisions of Section 194H were applicable.

2. Applicability of Section 194H to the Merchant Discount Rate (MDR) Retained by Banks:
The second issue was whether the MDR retained by banks on credit card transactions should be treated as commission under Section 194H.

The CIT(A) had held that the MDR charges were in the nature of bank charges and not commission. The Tribunal referred to the decision of the Hyderabad Bench of the ITAT, which held that the commission retained by credit card companies is akin to normal bank charges and does not fall within the purview of Section 194H.

The Tribunal confirmed the CIT(A)'s order, stating that the payments to banks for credit card facilities were not commission but bank charges, and hence, Section 194H was not applicable.

3. Determination of Tax Liability under Section 201(1) and Levy of Interest under Section 201(1A):
The Tribunal directed the AO to reconsider the determination of tax liability under Section 201(1) in light of the Supreme Court's decision in Hindustan Coca Cola Beverages (P.) Ltd. v. CIT, which held that if the payee has paid the tax, the payer should not be considered an assessee in default.

The Tribunal allowed the assessee's appeals partially for statistical purposes regarding the determination of tax liability under Section 201(1). However, the appeals challenging the levy of interest under Section 201(1A) were dismissed.

Conclusion:
- The Tribunal upheld the applicability of Section 194H to the discount on Starter Kits and RCVs, treating the difference as commission.
- The Tribunal confirmed that MDR charges retained by banks on credit card transactions are not commission and do not attract Section 194H.
- The Tribunal directed the AO to reconsider the tax liability under Section 201(1) in light of the Supreme Court's decision, while the levy of interest under Section 201(1A) was upheld.