2017 (11) TMI 115 - AT - Income Tax

TDS u/s 194H - TDS on discount provided by the assessee on the sale of pre-paid talk time - assessee was selling the recharge coupon / vouchers and starter pack to the customers through the net of distributors - AO has treated the discount given by the assessee to its distributors on the sale of recharge coupons/ starter pack as commission expenses - assessee treated the aforesaid transaction as sale at a price net of discount in the books of accounts - nature of agreement - Held that - On perusal of the agreement it can be inferred that the transaction between the assessee and the distributor was based on principal to principal basis and which is in the nature of purchase and sale transaction. There was no clause in the agreement suggesting that the assessee is liable for the payment of the commission to the distributors. The distributor was authorized to sale the prepaid recharge coupons at a price of its/ his choice but not exceeding MRP determined by the assessee. We also find that all the risks & rewards attached with the product were shifted to the distributor. Thus we hold that there was no agreement between the assessee and the distributor as of principal and agent. under the post-paid connection there are certain services rendered by the assessee such as collection of documents for proof of identity, delivery of SIM cards, collection of charges etc. Against these services the distributors are paid the amount of agreed commission by the assessee after deducting TDS u/s 194H of the Act. As we find that in case of prepaid connection the recharge coupons are sold to the distributors on outright sale basis at a discounted price. The amount of discount is not recorded in the books of accounts. Therefore we hold the transaction between the assessee and prepaid distributor for recharge coupons is nature of sale & purchase. Thus amount of discount cannot be equated with the commission as envisaged under section 194H of the Act. the provisions of TDS under section 194H of the Act are not attracted on the sale of recharge coupons for the prepaid talk time to the distributors and accordingly the assessee cannot be treated as assessee in default for non deduction of TDS u/s 201. See Bharti Airtel Limited Vs. CIT & ANR. 2014 (12) TMI 642 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the discount given by the assessee to its distributors on the sale of prepaid recharge coupons is subject to Tax Deducted at Source (TDS) under Section 194H of the Income Tax Act, 1961.
2. Whether the assessee can be treated as an 'assessee in default' for non-deduction of TDS under Section 201 of the Income Tax Act.
3. Whether interest under Section 201(1A) of the Income Tax Act can be charged on the assessee.
4. Whether the initiation of penalty proceedings under Section 221 of the Income Tax Act against the assessee is justified.

Detailed Analysis:

1. TDS on Discount to Distributors (Section 194H):
The primary issue was whether the discount given by the assessee to its distributors on the sale of prepaid recharge coupons should be treated as commission, thus attracting TDS under Section 194H. The assessee argued that the relationship with distributors was on a principal-to-principal basis, and the discount was not commission but a reduction in sale price. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the discount as commission due to the nature of the relationship and the terms of the agreement, which indicated an agency relationship. However, the Tribunal found that the agreements between the assessee and distributors were modified, establishing a principal-to-principal relationship. The Tribunal referenced several judicial precedents, including the Karnataka High Court in Bharti Airtel Limited vs. CIT and the Rajasthan High Court, which supported the assessee's position that the discount was not commission and thus not subject to TDS under Section 194H.

2. Assessee in Default (Section 201):
Given the Tribunal's finding that the discount did not constitute commission, it concluded that the assessee could not be treated as an 'assessee in default' for non-deduction of TDS under Section 201. The Tribunal emphasized that the transaction was a sale of goods at a discounted price, not a commission payment, thus negating the applicability of Section 194H and the consequent default under Section 201.

3. Interest under Section 201(1A):
The Tribunal noted that since the assessee was not liable to deduct TDS under Section 194H, the question of charging interest under Section 201(1A) did not arise. The CIT(A)'s decision to uphold the interest charge was thus overturned, aligning with the Tribunal's broader conclusion that the discount was not commission.

4. Penalty Proceedings under Section 221:
The initiation of penalty proceedings under Section 221 was also addressed. The Tribunal found that since the primary issue of TDS liability under Section 194H was resolved in favor of the assessee, the basis for penalty proceedings was invalid. Consequently, the Tribunal dismissed the grounds related to the initiation of penalty proceedings.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the discount given to distributors on the sale of prepaid recharge coupons did not constitute commission subject to TDS under Section 194H. As a result, the assessee could not be treated as an 'assessee in default' under Section 201, and no interest or penalties were applicable. The Tribunal's decision was based on the modified agreements establishing a principal-to-principal relationship and supported by relevant judicial precedents. The appeals of the Revenue were dismissed, and the assessee's appeals were partly allowed.