2017 (10) TMI 380 - AT - Income Tax

TDS u/s 194H - cash discount allowed to the distributor to be treated as commission paid/allowed by the assessee-deductor to the distributors - non deduction of tds - A.O. was of the opinion that there exists principal to agent relationship - Proceedings u/s 201(1) as well as levy of interest u/s 201(1A) - deductibility of TDS for post-paid and non-deductibility of TDS for pre-paid services - Held that - While giving a finding in the case on hand we have also carefully gone through the distributorship agreements. We are unable to accept the contention of the assessee that the distributor has complete right and control over the matter of providing talk-time to ultimate subscribers; distributor can of course insist upon assessee while making a request to provide talk-time through e-module etc., but the final decision has to be taken by assessee, only upon verification of consumer details which in turn has to be provided by distributor. Assessee can terminate the contract at any time by giving thirty days time without assigning any reason and distributor has to return all equipment and furniture supplied by the VESL upon termination of such contract. Other conditions such as maintaining the confidentiality and limitation of assigning rights or obligations to third party by distributor would also indicate that distributor is merely acting as an agent i.e., as a connecting link between assessee and ultimate subscriber. We therefore held that though distributor commits assessee to subscribers and exercise his authority to ensure arranging connection to subscriber, it will not alter the situation since the overall context in which such power is given to distributor has to be looked into in the circumstances of the case and the role of distributor can only be said to be a middleman between service provider on one hand (assessee herein) and ultimate consumer on the other hand. In other words the distributor can only be termed as an agent of assessee in which event providing service to ultimate consumer through the medium of distributor cannot be said to be a sale of service by assessee to the distributor. Distributor is merely a link between assessee and ultimate consumer/subscriber and distributor can at best enforce obligation on the part of assessee to provide connection/talk-time to subscriber which itself would not change the characteristic of transaction from principal to agent to principal to principal . We therefore hold that the order passed by Assessing Officer, as confirmed by Ld CIT (A), by holding that assessee is a defaulter u/s 201(1) and consequently liable to pay interest u/s 201(1A) of the Act, subject to certain conditions as prescribed by Hon ble Supreme Court in Hindustan Coca Cola Beverage P. Ltd (2007 (8) TMI 12 - SUPREME COURT OF INDIA ), is in accordance with law.- Decided against assessee Penalty levied by TDS Officer u/s 271C - reasonable cause - Held that - No doubt assessee has not specifically submitted before the Tax Authorities that non-deduction of tax at source was based on it s understanding of provisions of section 194H of the Act, which in turn constitutes a reasonable cause . But the fact remains that by the time the assessee was under obligation to deduct tax at source for the AYs under consideration, there were judgments in favour of assessee and even after the decisions of Hon ble Delhi High Court and Kerala High Court, Hon ble Karnataka High Court had taken a different view of the matter which implies that non- deduction of tax was based on such understanding of relevant provisions of the Act in which event penalty is not imposable u/s 271C of the Act. We therefore set aside the order passed by AO as well as Ld CIT (A) on this aspect and hold that penalty u/s 271C is not imposable. - Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of Section 194H regarding the relationship between the assessee and its distributors.
2. Liability of the assessee under Section 201(1) and 201(1A) for non-deduction of TDS.
3. Imposition of penalty under Section 271C for failure to deduct TDS.

Issue-wise Detailed Analysis:

1. Applicability of Section 194H:
The primary issue was whether the relationship between the assessee (a cellular service provider) and its distributors for pre-paid services was on a 'principal to principal' basis or a 'principal to agent' basis. The assessee argued that the relationship was 'principal to principal,' asserting that the distributors purchased the services at a discount and sold them independently, thus not requiring TDS under Section 194H. The Assessing Officer (A.O.) and subsequent judicial bodies, including the Tribunal, disagreed, concluding that the relationship was 'principal to agent.' The A.O. highlighted that the distributors acted on behalf of the assessee, adhering to guidelines, and were restricted in their operations, indicating an agency relationship. This conclusion was supported by various High Court decisions, including those from Delhi, Kerala, and Calcutta, which held that such transactions involved commission payments, thus attracting Section 194H.

2. Liability under Section 201(1) and 201(1A):
The assessee was treated as a defaulter under Section 201(1) for not deducting TDS on the commission payments to distributors and was also liable for interest under Section 201(1A). The assessee contended that no demand could be raised if the taxes had already been paid by the distributors. However, the A.O. rejected this claim due to the lack of proof of tax payment by the distributors. The Tribunal upheld this view, emphasizing that the assessee failed to provide evidence of tax payment by the distributors, thus justifying the demand and interest levied.

3. Imposition of Penalty under Section 271C:
The penalty under Section 271C was imposed for the failure to deduct TDS. The assessee argued that it was under a bona fide belief that no TDS was required, constituting a reasonable cause for non-compliance. The Tribunal noted that the assessee had relied on earlier favorable Tribunal decisions and the subsequent Karnataka High Court decision, which supported the view that the relationship was 'principal to principal.' Given the conflicting judicial opinions and the assessee's reliance on these judgments, the Tribunal concluded that the non-deduction of TDS was based on a reasonable cause. Therefore, the penalty under Section 271C was not warranted and was set aside.

Conclusion:
The Tribunal dismissed the appeals related to the demand raised under Section 201(1) and 201(1A), affirming the assessee's liability for TDS and interest. However, it allowed the appeals against the penalty under Section 271C, recognizing the reasonable cause for the assessee's non-deduction of TDS due to conflicting judicial interpretations.