2014 (12) TMI 642 - HC - Income Tax

Liability to deduct TDS on discount/commission made u/s 194H - sale of SIM Cards - Trade discount for bulk sales within the scope or not assessee M/s Bharti Airtel Limited is a Public Limited Company engaged in the business of telecom operations Relationship of assessee or distributor or not Scope of term income u/s 2(24) Survey conducted for verification of compliance of TDS provisions Held that - On delivery of the prepaid card the assessee raises invoices and updates the accounts - In the first instance sale is accounted for Rs. 100/- which is the first account and Rs. 80/- is the second account and the third account is Rs. 20/- the sales is for Rs. 100/- commission is given at Rs. 20/- to the distributors and net value is Rs. 80/- The assessee s sale is accounted at the gross value of Rs. 100/- and thereafter the commission paid at Rs. 20/- is accounted - the essence of the contract of the assessee and distributor is that of service and therefore Section 194H of the Act is attracted - however in the first instance if the assessee accounted for only Rs. 80/- and on payment of Rs. 80/- he hands over the prepaid card prescribing the MRP as Rs. 100/- then at the time of sale the assessee is not making any payment - the distributor is not earning any income - this discount of Rs. 20/- if not reflected anywhere in the books of accounts in such circumstances Section 194H of the Act is not attracted The assessees sell prepaid cards/vouchers to the distributors - at the time of the assessee selling these pre-paid cards for a consideration to the distributor the distributor does not earn any income - In fact rather than earning income distributors incur expenditure for the purchase of prepaid cards - Only after the resale of those prepaid cards distributors would derive income - at the time of the assessee selling these pre-paid cards he is not in possession of any income belonging to the distributor - Therefore the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assessee to the distributor does not arise. 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 Rs. 20/- that Rs. 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 Rs. 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. Whether the word "income" under Section 2(24) of the Income Tax Act, 1961 includes "trade discount" for bulk sales.
2. Whether Section 194H of the Income Tax Act is applicable to the sale of RCVs, prepaid cards, and starter kits, and if the trade discount allowed to distributors amounts to "Commission" requiring TDS deduction.

Issue-wise Detailed Analysis:

1. Definition of "Income" under Section 2(24) of the Income Tax Act:
The court examined whether the term "income" could be extended to include trade discounts provided to distributors for bulk purchases of telecommunication products. The court noted that the definition of income under Section 2(24) is broad and includes profits and gains. However, it emphasized that the trade discount given to distributors does not constitute income in their hands at the point of sale. Instead, it is a reduction in the sale price, and the income for distributors arises only upon resale of the products. The court concluded that trade discounts do not fall under the definition of "income" for the purposes of Section 2(24).

2. Applicability of Section 194H to Trade Discounts:
The court analyzed whether the trade discounts given to distributors for the sale of RCVs, prepaid cards, and starter kits could be considered as "commission" under Section 194H, which mandates TDS on commission payments. The court reviewed various agreements between the telecom companies and their distributors, noting that these agreements explicitly stated a principal-to-principal relationship rather than a principal-agent relationship. The court highlighted key clauses that demonstrated the distributors' independence, such as the responsibility for sales tax, insurance, and the inability to return unsold products.

The court relied on precedents where similar relationships were interpreted as principal-to-principal, such as the cases of Ahmedabad Stamp Vendors Association and Mother Dairy. These cases established that trade discounts given for bulk purchases do not constitute commission payments. The court distinguished these from cases like Singapore Airlines and Idea Cellular, where the nature of the transactions and relationships was different, involving clear principal-agent dynamics.

Judgment:
The court held that the relationship between telecom companies and their distributors is that of principal-to-principal. Consequently, the trade discounts provided to distributors do not amount to commission payments under Section 194H. Therefore, the telecom companies are not required to deduct TDS on these trade discounts. The court set aside the orders of the lower authorities and remitted the matter back to the assessing authority to verify the accounting treatment of the trade discounts in the books of the telecom companies. If the discounts are not reflected as commission, Section 194H would not be applicable.

Order:
1. Appeals allowed.
2. Impugned orders set aside.
3. Matter remitted to the assessing authority to verify the accounting treatment of trade discounts. If discounts are not reflected as commission, Section 194H is not applicable.