2016 (4) TMI 516 - AT - Income Tax

TDS u/s 194H - disallowance under section 40(a)(ia) - non-deduction of TDS on payments made to distributors as discount on sale of pre-paid recharge vouchers - Held that - Once in assessee s own case, it has been categorically held that, assessee was not liable to deduct TDS on such a trade discount given by the assessee to the Distributors then it cannot be reckoned as a commission , and consequentially disallowance under section 40(a)(ia) does not has any legs to stand. There could not be a situation where on one hand, a finding has attained finality that assessee was not liable to deduct TDS on trade discount given by the assessee and cannot be treated as commission payment to the distributors; and on the other hand, a disallowance of expenditure under section 40(a)(ia) is being made on the same amount by holding that that assessee should have deducted TDS. Thus, we do not find any infirmity in the order of the CIT(A) in deleting the said disallowance - Decided in favour of assessee Disallowance u/s 14A - Held that - Once the assessee has not earned any exempt income then in view of the ratio laid down by the Hon ble Delhi High Court in the case of Cheminvest Ltd. (2015 (9) TMI 238 - DELHI HIGH COURT ), no disallowance under section 14A can be made. The Hon ble Delhi High Court after taking the note of Hon ble Supreme Court in the case of CIT vs Rajendra Prasad Mody, reported in 1978 (10) TMI 133 - SUPREME Court held that if no exempt income has been earned during the year, then no disallowance can be made under section 14A.- Decided in favour of assessee

Issues Involved:

1. Deletion of addition of ?1,96,91,62,889/- paid to distributors as discount on sale of prepaid services.
2. Disallowance under section 40(a)(ia) read with section 194H.
3. Nature of discount given to distributors and its classification as commission.
4. Relationship between the assessee and distributors and the applicability of TDS under section 194H.
5. Disallowance of ?8,65,06,770/- under section 14A.
6. Disallowance of ?8,65,06,770/- under section 14A for the purpose of computing book profit under section 115JB.

Detailed Analysis:

1. Deletion of Addition of ?1,96,91,62,889/- Paid to Distributors as Discount on Sale of Prepaid Services:

The primary issue revolves around whether the discount given by the assessee to its distributors on the sale of prepaid services should be treated as commission, thereby necessitating the deduction of TDS under section 194H. The assessee contended that the transactions were on a principal-to-principal basis, and the distributors were not their agents. The distributors paid the discounted price upfront, and the margin retained by them was treated as a discount rather than commission. The AO, however, treated this discount as commission and disallowed the amount under section 40(a)(ia) for non-deduction of TDS.

2. Disallowance under Section 40(a)(ia) Read with Section 194H:

The AO's stance was based on the premise that the discount constituted commission, which required TDS deduction under section 194H. The CIT(A), however, relied on a previous order in section 201(1) proceedings, which held that the trade discount was not in the nature of commission, and hence, no TDS was required. This decision was accepted by the Department as no appeal was filed against it. Consequently, the CIT(A) deleted the disallowance under section 40(a)(ia).

3. Nature of Discount Given to Distributors and Its Classification as Commission:

The CIT(A) and the Tribunal both concluded that the discount given to the distributors did not amount to commission. The Tribunal referred to the Karnataka High Court's decision in Bharti Airtel, which distinguished between trade discounts and commissions, emphasizing that the relationship between the assessee and its distributors was that of principal-to-principal, not principal-agent. Therefore, the provisions of section 194H were not applicable.

4. Relationship Between the Assessee and Distributors and the Applicability of TDS under Section 194H:

The Tribunal upheld the CIT(A)'s finding that the relationship between the assessee and distributors was not that of an agent and principal. The distributors purchased the prepaid vouchers outright and sold them at their discretion, bearing the risk of profit or loss. This principal-to-principal relationship negated the requirement of TDS deduction under section 194H on the discount given.

5. Disallowance of ?8,65,06,770/- under Section 14A:

The AO made a disallowance under section 14A, calculating indirect expenditure based on Rule 8D, even though Rule 8D was not applicable for AY 2007-08. The CIT(A) deleted this disallowance, noting that the AO had not pointed out any specific default in the allocation of expenses and that the assessee had not earned any exempt income during the year.

6. Disallowance of ?8,65,06,770/- under Section 14A for the Purpose of Computing Book Profit under Section 115JB:

The CIT(A) also deleted the disallowance made for computing book profit under section 115JB, as it was contingent on the disallowance under section 14A, which was already deleted. The Tribunal upheld this decision, stating that since no disallowance under section 14A was warranted, the related disallowance under section 115JB was also not applicable.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all counts. The discount given to distributors was not considered commission, and thus, no TDS was required under section 194H. Consequently, the disallowance under section 40(a)(ia) was deleted. Additionally, the disallowance under section 14A was also deleted, as no exempt income was earned during the year, and the related disallowance under section 115JB was rendered academic.

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