2015 (7) TMI 474 - AT - Income Tax

Tax withholding demand raised under section 201(1) and 201(1A) read with Section 194 H - non deduction of tax at source on trade discount granted to prepaid distributor - whether the provisions of section 194H will come into play in respect of the difference between the price at which the airtime is thus sold to the distributors and its recommended retail price to the end consumers? - Held that - This issue is covered, in favour of the assessee, by Hon ble Karnataka High Court s common judgement in the cases of Bharti Airtel Limited, Tata Teleservices Limited and Voadfone South Limited, reported as Bharti Airtel Limited vs. DCIT 2014 (12) TMI 642 - KARNATAKA HIGH COURT wherein held The condition precedent for attracting Section 194H of the Act is that there should be an income payable by the assessee to the distributor the income accrued or belonging to the distributor should be in the hands of the assessees - the assessee sells SIM cards to the distributor and allows a discount of ₹ 20/-, that ₹ 20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub-distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer - The profit earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share ₹ 20/- which is allowed as discount by the assessee to the distributor - There is no relationship between the assessee and the sub-distributor as well as the retailer. Thus, it is a sale of right to service - The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands - The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS - the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent thus, the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable. - The matter is remitted 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 Section 194H of the Act is not attracted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 194H on trade discount to prepaid distributors.
2. Applicability of Section 194J on payments towards national roaming charges.
3. Verification of tax payments by distributors.

Issue-wise Detailed Analysis:

1. Applicability of Section 194H on Trade Discount to Prepaid Distributors:
The primary issue was whether the trade discount given to prepaid distributors should be treated as commission and thus subject to tax deduction at source under Section 194H. The assessee argued that the relationship with distributors was on a principal-to-principal basis, not principal-agent, and thus the discount was not commission. The Assessing Officer (AO) and CIT(A) disagreed, treating the discount as commission, citing various judicial precedents, including decisions from the Kerala High Court and Delhi High Court, which had ruled in similar cases that such discounts were indeed commissions.

However, the Tribunal noted that the Karnataka High Court in Bharti Airtel Limited vs. DCIT held that the sale of prepaid cards to distributors did not constitute commission since the relationship was principal-to-principal. The Tribunal emphasized that at the time of sale, the distributor did not earn any income; hence, Section 194H did not apply. The Tribunal preferred this interpretation, favoring the assessee, and directed the AO to verify if the sale proceeds were credited at the transaction value. If credited at face value, the tax withholding liability would be sustained to that extent.

2. Applicability of Section 194J on Payments Towards National Roaming Charges:
The assessee contested the applicability of Section 194J on payments made for national roaming charges, arguing that these were not technical services. The CIT(A) had remitted this issue back to the AO for reconsideration in light of the Supreme Court's judgment in CIT Vs Bharti Cellular Limited, which held that services not involving human intervention could not be considered technical services. The Tribunal found no fault in this approach and upheld the CIT(A)'s decision, confirming that the AO should examine the nature of the services involved.

3. Verification of Tax Payments by Distributors:
The assessee raised concerns about the CIT(A)'s directions for verifying tax payments by distributors. However, since the Tribunal upheld the assessee's primary grievance regarding the non-applicability of Section 194H, this issue became academic and infructuous. Consequently, the Tribunal did not address this matter further.

Conclusion:
The Tribunal partly allowed the appeal, primarily ruling in favor of the assessee regarding the non-applicability of Section 194H on the trade discount to prepaid distributors, subject to verification by the AO. The issue of Section 194J on national roaming charges was remitted back to the AO for reconsideration, and the verification of tax payments by distributors was deemed academic and not addressed further. The judgment was pronounced on 7th July 2015.