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TMI Blog2009 (2) TMI 246X X X X Extracts X X X X X X X X Extracts X X X X ..... onstructively i.e., in an implied manner - further held that since there was no payment at all either in monetary terms or in terms of goods and/or services, the provisions of s. 194H are not attracted - further held that simply because the agreement shows the difference between the market price and the price at which the distributor buys the cards as commission or the treatment given in accounts, it would not partake the character of commission for the purpose of taxation - CIT(A) while observing that viewed from any angle, it cannot be said that the assessee was a defaulter, attracting the provisions of s. 201(1) and the provisions of s. 201 (1A). HELD THAT:- The Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. vs. STO [ 1977 (4) TMI 151 - SUPREME COURT] explained the contract of agency to mean;- A contract of agency, however, differs essentially from contract of sale in as much as an agent after taking delivery of the property of the principal does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in course of its business, has been appointing distributors for prepaid cellular connections and recharge coupons. The market price of prepaid cards providing cellular connection (starter packs) and recharging facilities are fixed by the company and printed on such cards. However, at the time of selling its prepaid cellular connections and recharge coupons to the distributors, some margin is allowed to the distributors in the form of discount/commission on the market price. The prepaid cards as well as the recharge coupons were in the form of pre-defined information enabling the ultimate user to have access to the service centres for availing telephony services. There was no consumable product in the physical form passing from the assessee company to the ultimate user in such arrangement. The AO was of the view that the margin allowed to the distributors on bulk sales of such prepaid cards/recharge coupons was nothing but "commission" paid to them which attracted deduction of tax at source under s. 194H of the Act. Since the assessee had not deducted any tax at source, a show-cause notice was issued asking the assessee to explain as to why it should not be treated as an assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailers formed part of the distribution network of the assessee company, they cannot be treated as agents of the company to whom "commission" is payable. It was further submitted that deduction of tax at source under s. 194H is to be done when the relationship between the payer and payee is that of a principal and an agent. Sec. 194H requires a person responsible for paying any commission or brokerage to make TDS at the time of crediting the account of the payee or at the time of actual payment, whichever is earlier. In the present case, the assessee company was not making any payment at all but was actually receiving discounted payments from the distributors. It was further submitted that the assessee did not reverse the entries relating to the discount allowed to the distributors in prepaid segment since it does not permit return of prepaid cards after they are invoiced. The invoiced amount received on delivery of prepaid cards/coupons were nothing but trading receipts of the company and the accounting of the same, initially as an advance, has no relevance for the purpose of determining the true nature of the transaction. The company received full consideration from the distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpected to conduct promotional programmes to assist the distributors in expansion of the customer base. It cannot be said that such an arrangement is adopted in a principal to principal transaction. (iii) The distributors were expected to keep the prepaid SIM cards scratch vouchers owned- by the company and was not expected to remove obscure or delete any mark placed on such prepaid SIM cards/scratch vouchers etc. This means that the principal continued to exercise right over the product even after sale to the distributor. Therefore, there was no principal to principal relationship. (iv) Records and accounts were to be properly maintained by the distributor for a period of ten years which meant that the principal was still exercising control over the distributor as to how he should maintain the accounts which is not necessary in a principal to principal transaction. (v) As per the agreement, the distributor was an Authorised Representative as different from another principal. Besides, such representative is expected to seize marketing, promoting and selling the services provided by the assessee. This means, there was no principal to principal relationship between the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utors, which is not permissible under the Act. Reliance was also placed on the decisions in Grindlays Bank Ltd. vs. CIT (1991) 94 CTR (Cal) 46 : (1992) 193 ITR 457 (Cal) 469; CIT vs. Divisional Manager, New India Assurance Co. Ltd. (1983) 33 CTR (MP) 248 : (1983) 140 ITR 818 (MP), CIT vs. Kannan Devan Hill Produce Co. Ltd. (1987) 63 CTR (Ker) 28 : (1986) 161 ITR 477 (Ker), CIT vs. M.P. Agro Morarji Fertilizers Ltd. (1988) 73 CTR (MP) 180 : (1989) 176 ITR 282 (MP), (2000) 242 ITR (St) 187, CBDT Circular No. 275/20/2002-II(B), dt. 20th Jan., 2003 r/w Circular No. 275/201/1995-IT(B). It was further contended that distributors appointed further sub-dealers for selling SIM cards to the ultimate users. They allow discount to the sub-dealers who in turn would sell the cards at a price not higher than the MRP fixed by the assessee. On the issue of "any other modes" envisaged under s. 194H it was contended by the assessee that the principle of "ejusdem generis" requires that general words following particular words should not be construed in their widest meaning but to be held as applying to objects, persons or things in the same nature as or class as those specifically enumerated. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh. Luring of customers is essential for carrying on mobile telecom business which is of recent origin. This requires adoption of scientific marketing techniques and setting up of an advanced and well-trained distribution channel. (iii) The assessee invested huge sums of money in the business and its survival depends upon good distributors network. The clauses referred to by the AO are merely protective in nature and ensured that the distributor is tied to the distribution channel of the assessee, has adequate infrastructure, is committed to further the sales, maintains highest standard of quality service, supports the marketing initiatives of the assessee to penetrate at the market and does not deal with the competitors. Just because there is a connection between the assessee and the end customer/subscriber, the distributor in between does not become an agent. The distributor decides upon his internal network as well as the terms for dealing with the retailer network. The marketing and distributing tasks carried out by the distributor at his choice and in terms of the agreement. Therefore, when such a distributor pays the invoice amount from the distributor for the sale of prepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clature in the agreement as commission is misplaced which actually is merely a discount offered to the distributors, being the difference between the list price and the actual selling price. (viii) The Hon'ble apex Court, in the case of Federation of Andhra Pradesh Chambers of Commerce Industry Ors. vs. State of Andhra Pradesh Ors. (2001) 165 CTR (SC) 672 : (2001) 247 ITR 36 (SC) as well as in the case of State of Bombay vs. Automobile Agricultural Industries Corporation 12 STC 122 (SC) has held that a taxing provision should be interpreted strictly. Sec. 194H provides that every person who is responsible for paying on or after 1st day of June, 2001, to a resident any income by way of commission (not being insurance commission referred to s. 194D or brokerage, shall, at the time of credit of such income to account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode whichever is earlier, deduct income-tax thereon........." Therefore, the section is applicable only in case of payments made by a person. In the present case, the assessee does not make any payments to the distributor. On the contrary, it is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial relationships and such relationship cannot be put in a straight jacket. (xiv) The IT Act is not concerned whether the prepaid cards are at all a tradable product. It is the general law which decides the issue. The AO attempted to foist agency on the distributor whereas actually there is no principal-agent relationship between the assessee and the distributor. (xv) The assessee sold prepaid cards to the distributors. However, in respect of postpaid cards, dealers were appointed, commission was paid and TDS was made therefrom. (xvi) The accounting practice followed by the assessee is that the amount received is credited in the accounts as prepaid card advance, prepaid recharge fees and service-tax collected. The account of the distributor is debited net of discount. (xvii) Territorial jurisdiction of distributors are not restricted in urban areas, though such restriction is there in case of rural distributors. (xviii) Though provisions of TDS refer to gross sum in respect of ss. 194C and 194J unlike 194H, where the term used is income. Since the distributor does not earn any "income" from the purchasing of cards, it cannot be a subject to deduction of tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) the accounting practices followed by the assessee are indicating the constructive payment of commission." 9. The learned Departmental Representative while relying on the order of the AO and the relevant clauses of the agreement mentioned in the impugned order of the AO submits that before the AO and learned CIT(A) the assessee claimed that the transactions were on principal to principal basis; no amount was paid by the assessee to the distributor as commission; even though an amount was shown as commission, it was only a discount for the sale of coupons, it cannot be accepted for the following reasons (point Nos. 1 to 5 of written submissions by learned Departmental Representative): 1. There was no principal to principal concept because there was no product which had, in fact, been transferred from one principal to other principal. The first so-called principal i.e., the assessee had still had control over the product till the ultimate consumer establishes the connectivity, the assessee had control over providing the connectivity services. Further, the assessee had options to modify the terms and conditions of the services. Even, the card which is claimed to be the product i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Jp) 1. She therefore submits that the order passed by the AO be restored. 10. On the other hand, the learned counsel for the assessee while reiterating the same submissions as submitted before the learned CIT(A) refers to the receipt dt. 18th Feb., 2003 of prepaid starter pack SIM, activation fees, recharge coupons etc., issued by the company to Sri Ajay Enterprises, one of the distributors, whose agreement has been referred by the AO in the impugned order, and who in turn sells the SIM cards etc., to the retailers, who sells the same to the ultimate users and submits that the amount was charged by the company from the distributor as principal to principal and not as principal and agent, therefore the provisions of s. 194H are not applicable to the assessee's case. The learned counsel for the assessee after referring to the provisions of s. 194H of the Act, submits that it is a simple case of principal to principal as the assessee as per bill supra, received the amount from the distributor and not from agent or ultimate user. The learned counsel for the assessee while relying on the decision of the Hon'ble Supreme Court in Gordon Woodroffe Co. vs. Sheikhk M.A. Majid Co. AIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or after the 1st day of June, 2001 to a resident any income by way of commission or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the specified rate. The term 'commission or brokerage' has been defined in the Expln. (i) and includes any payment received or receivable directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course or buying or selling of goods or in relation to any transaction relating to any asset, valuable article or a thing not being securities. Definition of expression 'commission or brokerage' as contained in cl. (i) of Explanation to s. 194H, is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods. To fall within the said Explanation, the payment received or receivable, directly or indirectly, by a person acting on behalf of another person (i) for services rendered (not being professio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods to a person, who is to sell them, not as his own property but as the property of the principal who continues to be the owner of goods and who is therefore liable to account for the proceeds. The true legal relationship between the assessee and the PMAs has to be inferred from the nature of contract, its terms and conditions and the nature of respective obligations undertaken by the parties. Clause 3 of the agreement specifically provides that the relationship created by the agreement is that of independent contracting parties and is not, and shall not deem to be any relationship inter alia employer/employee principal and agent. Clause 6(b) provides that full legal equitable title and interest in all and any of the prepaid SIM card/recharge coupons delivered to PMAs shall remain in ICI and shall not pass to PMAs. However, in case the prepaid SIM cards/recharge coupons with PMAs become unusable, substandard or are destroyed due to natural calamities or occurrences or circumstances beyond the reasonable control of either party or due to negligence of PMA in storage, the assessee shall replace the prepaid SIM cards/recharge coupons subject to payment of processing fees for such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods arc sold to the PMA who in turn transfer goods to retailer to be sold to the end users. The retailers are appointed by the PMA though with the approval of the assessee but they are working under the instructions of PMAs. Termination of the retailers is coterminous with the termination of the agreement with PMA In our considered view the legal relationship between the assessee and PMA is that of seller and purchaser. We do not find any condition in the agreement from which it can be inferred that PMA stands in a fiduciary position in relation to the assessee. It is admitted by the Revenue that the agreement in substance is the agreements entered into between the assessee and the PMA is in the nature of contract to sale and not contract of the agency. Therefore, the discount allowed by the assessee to PMA will not fall in the definition of commission of brokerage." (iii) In Foster's India (P) Ltd. vs. ITO, the Tribunal after relying on the decision in Ahmedabad Stamp Vendors Association vs. Union of India, Bhopal Sugar Industries Lid. vs. STO and distinguishing the decisions in Asstt. CIT vs. Bharti Cellular Ltd. and Hindustan Coca Cola Beverages (P) Ltd., has held that distr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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