2010 (2) TMI 24 - HC - Income Tax

TDS under section 194H commission - assessee-company is engaged in the business of providing cellular telephone network through a card called Subscriber Identification Module (SIM). Prepaid or post paid connections are provided to the subscribers through distributors called Prepaid Market Associates (PMAs) appointed by the assessee - On the basis of facts and the types of control exercised by ICL on its prepaid distributors the Assessing Officer came to the conclusion that transaction with ICL and prepaid distributors were that of Principal and Agent at all times and prepaid distributors were selling a prepaid SIM Card/recharge coupon on behalf of the ICL. Consequently amount of discount offered to prepaid distributor was in nature of commission and liable to tax deduction at source under Section 194H of the Income-tax Act. He accordingly treated the assessee as defaulter Under Section 201(1) and charged interest under Section 201(1 A) on amount of commission so paid by the assessee. held that - Service cannot be sold or purchased and it can only be provided. The operational features explained by the assessee-company are necessary in running a mammoth system of providing mobile telephone services over a large geographical area. The distributors provide essential services to the assessee-company in running such a huge operational system. The distributors are linking agents in the chain of delivery of services to consumers. Therefore the relationship is not of a principal to principal Assessee is liable to deduct TDS Decision in favor of revenue against the assessee

Issues Involved:
1. Whether the relationship between the assessee and its distributors is that of "principal and agent" or "principal and principal."
2. Whether the discount offered to distributors qualifies as "commission" under Section 194H of the Income Tax Act.
3. Applicability of tax deduction at source (TDS) under Section 194H for the discounts offered.

Issue-wise Detailed Analysis:

1. Relationship between Assessee and Distributors:
The primary issue was to determine the nature of the relationship between the assessee and its distributors. The Tribunal concluded that the relationship was that of "principal and principal" rather than "principal and agent." The Tribunal's reasoning included:
- Clause 3 of the agreement explicitly stated that the relationship was of independent contracting parties.
- Clause 6(b) indicated that the title and interest in the prepaid SIM cards/recharge coupons remained with the assessee, but the PMA had to pay processing fees for any replaced cards, suggesting a seller-purchaser relationship.
- Clause 9 allowed PMAs to appoint retailers, and Clause 10 specified the price at which PMAs acquired the prepaid SIM cards/recharge vouchers, indicating a sale transaction.
- The Tribunal found no fiduciary relationship or obligation for the PMAs to account for the sale price to the assessee, further supporting the principal-principal relationship.

2. Discount Offered as "Commission":
The Tribunal held that the discounts offered to PMAs did not qualify as "commission" or "brokerage" under Section 194H of the Income Tax Act. The Tribunal distinguished between a contract of sale and a contract of agency, emphasizing that:
- In a contract of sale, the title to goods is transferred for a price, and the buyer becomes liable as a debtor for the price.
- In a contract of agency, the agent sells goods on behalf of the principal, who remains the owner and is liable for the proceeds.
- The Tribunal noted that the PMAs operated independently, bore the risk of unsold or unusable SIM cards, and were not reimbursed for expenses by the assessee, indicating a sale rather than an agency relationship.

3. Applicability of TDS under Section 194H:
The Tribunal's decision implied that since the relationship was that of "principal and principal," the discounts offered were not "commission" and thus not subject to TDS under Section 194H. However, the High Court disagreed with the Tribunal's findings, emphasizing:
- The legal relationship between the assessee and the ultimate consumer/subscriber, created through the activation of SIM cards and the provision of services by the assessee.
- The overall control exercised by the assessee over the PMAs, including the retention of ownership of SIM cards, restrictions on selling competitors' products, and the requirement for PMAs to obtain written approval for appointing retailers.
- The High Court cited similar cases where the relationship was deemed to be that of "principal and agent," and the discounts were considered "commission" subject to TDS under Section 194H.

Conclusion:
The High Court concluded that the relationship between the assessee and its distributors was that of "principal and agent," and the discounts offered to the distributors qualified as "commission" under Section 194H. Consequently, the assessee was obligated to deduct tax at source on these payments. The appeals were allowed, and the judgment of the Tribunal was set aside.

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