2015 (4) TMI 765 - AT - Income Tax

Allowability of expenditure claimed under the head dealer's scheme and incentives - TDS not deducted u/s 194H - Payment made to distributors of SIM card / recharge coupon on activation of SIM - Held that - We find that the nature of payment made to the distributors of SIM card/recharge coupon on activation of SIMs arose before the hon'ble Delhi High Court in CIT v. Idea Cellular Ltd. 2010 (2) TMI 24 - DELHI HIGH COURT and it was held that the same was in the nature of commission and was subject to TDS under section 194 of the Act. Further, the hon'ble Kerala High Court in Vodafone Essar Cellular Ltd. 2010 (8) TMI 691 - KERALA HIGH COURT observed that the SIM cards/ recharge coupons were only for the purpose of rendering service to the subscriber of the mobile phone and the distributor was only a middleman arranging customers or subscribers for the service provider and payment made on account thereof for the supply of SIM card and recharge coupon was in the nature of commission and discount to distributors and exigible to tax deduction at source under section 194H of the Act. In the entirety of the facts and circumstances of the case, we find no merit in the plea of the assessee in this regard. Reliance placed by the learned authorised representative for the assessee on the relationship of principal to principal is misplaced in view of the ratio laid down on identical issue as in the present appeal by the hon'ble Delhi High Court in Idea Cellular Ltd. 2010 (2) TMI 24 - DELHI HIGH COURT , the hon'ble Kerala High Court in Vodafone Essar Cellular Ltd. 2010 (8) TMI 691 - KERALA HIGH COURT and the hon'ble Calcutta High Court in Bharti Cellular Ltd. 2011 (5) TMI 590 - CALCUTTA HIGH COURT . In view thereof, we reverse the findings of the Commissioner of Income-tax (Appeals) and disallow the expenditure of ₹ 46,48,960 booked under the head dealer's scheme and incentives as not being an allowable expenditure for failure to deduct tax at source in view of the provisions of section 40(a)(ia) of the Act. - Decided against the assessee.

Summary

Issues Involved:
1. Allowability of expenditure under the head "dealer's scheme and incentives".
2. Applicability of Section 194H of the Income-tax Act, 1961.
3. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure under the Head "Dealer's Scheme and Incentives":
The assessee, engaged in the sale of mobile connections and products, claimed an expenditure of Rs. 46,48,960 under "dealer's scheme and incentives" to enhance sales. The Assessing Officer (AO) questioned the nature of these payments, suspecting they were commissions requiring tax deduction at source (TDS). The assessee argued these were sales promotion expenses, not commissions. However, the AO noted that the payments were based on the number of SIM activations, suggesting a service component, thus disallowing the expenditure under Section 40(a)(ia) for non-deduction of TDS.

2. Applicability of Section 194H of the Income-tax Act, 1961:
The AO viewed the payments as commissions under Section 194H, necessitating TDS. The Commissioner of Income-tax (Appeals) (CIT(A)) disagreed, stating that filling up customer identification forms was a statutory requirement, not a service, and the payments were incentives for sales enhancement, not commissions. However, the Tribunal referenced judicial precedents, including the Delhi High Court's ruling in CIT v. Idea Cellular Ltd. and the Kerala High Court's decision in Vodafone Essar Cellular Ltd. v. Asst. CIT (TDS), which classified similar payments as commissions subject to TDS under Section 194H.

3. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961:
The Tribunal found the payments to be commissions, aligning with the definitions and judicial interpretations under Section 194H. Consequently, the assessee's failure to deduct TDS on these payments led to the disallowance of the expenditure under Section 40(a)(ia). The Tribunal reversed the CIT(A)'s decision, disallowing the Rs. 46,48,960 expenditure for non-compliance with TDS provisions.

Conclusion:
The Tribunal concluded that the payments under "dealer's scheme and incentives" were commissions requiring TDS under Section 194H. The assessee's failure to deduct TDS resulted in the disallowance of the claimed expenditure under Section 40(a)(ia). The Revenue's appeal was allowed, and the assessee's cross-objection was dismissed.