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TMI Blog2015 (7) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... esent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub-distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer - The profit earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share ₹ 20/- which is allowed as discount by the assessee to the distributor - There is no relationship between the assessee and the sub-distributor as well as the retailer. Thus, it is a sale of right to service - The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the SIM cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands - The deduction of income tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS - the right to service can be sold then the relationship between the assessee and the distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson making payment for commission has the obligation to deduct tax at source, but the assessee has not complied with this statutory obligation. It was in this backdrop that the assessee was that the proceedings for treating the assessee as an assessee in default , in this respect, were initiated against the assessee. During the course of these proceedings, it was explained by the assessee that there is no principal agent relationship between the assessee and its distributors, and that the assessee sells the products, on the outright sale basis though at a discounted price, to its distributors who, in turn, are free to sell the same to the retailer at such price, as they may deem expedient, within the MRP. It was also explained that the distributors are making advance payments to the assessee, that the distributors are free to decide their terms and conditions of doing business with the retailers, and that, as per specific provisions in the agreement entered into by the assessee and the distributors, the assessee is not responsible for created by the distributor. The relationship between the assessee and the distributors, it was thus highlighted, is on principal to principal basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers, the deductor has made out business solution to appoint distributors to take care of operational activity of the company to provide service and the distributor is important link in that chain of service. Moreover, the essence of prepaid card and postpaid card, sim card etc are same to provide service to customers and difference is of billing. In prepaid card amount are received in advance whereas, in postpaid card bills are being raised after providing the service. Therefore, if postpaid card is subject to section 194H, it is quite unlikely that prepaid system would be outside the purview of section 194H. This view has also been upheld by The Hon'ble Delhi High Court in the case of CIT v/s Idea Cellular Limited in appeal No.2010-TIOL-139-HC-DEL-IT in which it is held that it is a case of Principal and Agent relationship and the commission offered in form of Discount on pre paid SIM Cards is liable to TDS u/s 194H of the IT Act. In view of the above facts and considering the findings in the case of M/s. BPL Mobile Cellular Limited (WP No. 29202 of 2005), and also in view of finding of Delhi High Court, the essence of the contract between company and distributors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, respectfully following the above judgment of Hon ble Kerala High Court (in the case of the group company of the appellant), I am of the view that discount offered by the appellant to its prepaid distributors is in the nature of commission within meanings of Explanation (i) to Section 194 H of the Act. I, therefore, hold that the learned AO has rightly held that the appellant was required to deduct tax at source under section 194 H of the Act on commission given by the assessee. 5. The assessee is not satisfied with the stand so taken by the learned CIT(A) as well, and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that what is sold by the assessee is airtime, whether through the physical vouchers or through the electronic transfer of refill/ recharge value, to its distributors. It is this transaction which is subject matter of different perceptions, so far as tax withholding obligations of the seller are concerned, of the parties before us. As a matter of fact, the assessment order itself states that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of that income, the assessee has to deduct income tax thereon at the rate of 10% and then pay the remaining portion of the income to the distributor. In this context it is pertinent to mention that the assessee sells SIM cards to the distributor and allows a discount of ₹ 20/-, that ₹ 20/- does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub distributor who in turn may sell the SIM cards to the retailer and it is the retailer who sells it to the customer. The profit 86 earned by the distributor, sub-distributor and the retailer would be dependent on the agreement between them and all of them have to share ₹ 20/- which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20/ - to the distributor, then there is no liability to deduct tax under Section 194H of the Act. This exercise has to be done by the assessing authority before granting any relief. The same exercise can be done even in respect of other assessees also. 65. In the light of the aforesaid discussions, we are of the view that the order passed by the authorities holding that Section 194H of the Act is attracted to the facts of the case is unsustainable. 10. As we take note of the views so expressed by Hon ble Karnataka High Court, we may also note that this issue has been decided against the assessee by, amongst others, Hon ble Kerala High Court, in the case of Vodafone Essar Cellular Ltd vs. ACIT [(2010)332 ITR 255 (Ker)]. The same approach has been adopted by some various other Hon ble non jurisdictional High Courts as well, such as in the cases of Bharti Cellular Limited Vs ACIT [(2013) 354 ITR 507 (Cal)] and CIT Vs Idea Cellular Limited [(2010) 325 ITR 148 (Del)]. In the case of Vodafone Essar Cellular Ltd (supra) Their Lordships have, inter alia, observed as follows :- 4. The main question to be considered is whether Section 194H is applicable for the discount gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is pertinent to note that besides the discount given at the time of supply of Sim Cards and Recharge coupons, the assessee is not paying any amount to the distributors for the services rendered by them like getting the subscribers identified, doing the documentation work and enrolling them as mobile subscribers to the service provider namely, the assessee. Even though the assessee has contended that the relationship between the assessee and the distributors is principal to principal basis, we are unable to accept this contention because the role of the distributors as explained above is that of a middleman between the service provider namely, the assessee, and the consumers. The essence of a contract of agency is the agent's authority to commit the principal. In this case the distributors actually canvass business for the assesssee and only through distributors and retailers appointed by them assessee gets subscribers for the mobile service. Assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed that the distributor is only rendering services to the assessee and the distributor commits the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t.' 11. There is no, and there cannot be any, dispute about the fundamental legal position that in the hierarchical judicial system, that we have in our country, lower tiers of judicial hierarchy has to respectfully follow the views expressed by the higher tiers of judicial hierarchy. In the case of ACIT Vs Dunlop India Limited [(1985) 154 ITR 172 (SC)], Hon ble Supreme Court has observed, quoting the House of Lords, as follows: We desire to add and as was said in Cassell Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that in the hierarchical system of Courts which exists in our country, it is necessary for lower tier , including the High Court, to accept loyally the decisions of the higher tiers . It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary.... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted (See observations of Lord Hailsham and Lord Diplock in Broome vs. Cassell). The better wisdom of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and, therefore, it was open to it to proceed on the basis that s. 140A(3) was non-existent. He also submitted that for that reason, the Tribunal was not right in following the judgment of the Bombay High Court in Godavaridevi s case (supra). 4. In our opinion, the legal position is correctly stated by the Punjab Haryana High Court in CIT vs. Ved Prakash (1989) 77 CTR (P H) 116 : (1989) 178 ITR 332 (P H) when it observed that unless and until the Supreme Court or the High Court of the State in question, under Art. 226 of the Constitution, declares a provision of the Act to be ultra vires, it must be taken to be constitutionally valid and treated as such . 5. In our opinion, the Tribunal of another State would be justified in proceeding on the basis that the provision has ceased to exist because it has been declared as ultra vires by the High Court only when there is some material to show that the said decision has been accepted by the Department. . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. Of course, when the matter travels to Hon ble jurisdictional High Court, Their Lordships, being unfettered by the views of a non-jurisdictional High Court, can take such a call on merits. That exercise, as we understand, should not be carried out by us. 18. The choice of which of Hon ble High Court to follow must, therefore, be made on some objective criterion. We have to, with our highest respect of all the Hon ble High Courts, adopt an objective criterion for deciding as to which of the Hon ble High Court should be followed by us. We find guidance from the judgment of Hon ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd. [(1972) 88 ITR 192 (SC)]. Hon ble Supreme Court has laid down a principle that if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted Although this prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of State of M.P. vs. Dadabhoy s New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 (SC) 614. That is what Hon ble jurisdictional High Court has also held in the case of Shah Electrical Corporation (supra). None of these exceptions, however, admittedly apply to the situation that we are dealing with at present. 20. There can be no dispute on the proposition that irrespective of whether or not the judgments of Hon ble non jurisdictional High Courts are binding on us, these judgments deserve utmost respect which implies that, at the minimum, these judgments are to be considered reasonable interpretations of the related legal and factual situation. Viewed thus, when there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted by us. In other words, Hon ble non jurisdictional High Court s judgment in favour of the assessee, in the light of this legal principle laid down by Hon ble Supreme Court, is to be preferred over the Hon ble non jurisdictional High Court not favourable to the assessee. In our humble understanding, it is only on this basis, without sitting in value judgment on the views expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arative chart of these clauses is as follows: Sl.No. Disclosure in the Agreement as highlighted in the Hon ble Karnataka High Court s judgment relevant extracts Corresponding clause in the agreement of the assessee with its pre-paid distributors 1 The agreement stipulates that the distributors have to represent to the customers that the distributor s agreement with the customers/its dealers is on Principal-to-Principal basis and assessee is no way concerned or liable to the customers/dealers of the Distributor Page 68. Clause 17.2 specifically provides that the relationship created by the agreement is that of a buyer and seller and that the agreement is on a principal to principal basis and neither party is, nor shall be deemed to be, an agent/partner of the other. It Is also provided that nothing in the Agreement shall be construed to render the distributor a partner or agent of the assessee 2 Distributor shall not make any promise, representation or to give any warranty or guarantee with respect to services and products, who are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the retailers unless authorized by the assessee . The distributor shall not make any promises or representations or give any warranties or guarantees in respect of the products (i.e. SIM cars and pre-paid vouchers) (Clause 1e Annexure III). 24. In the light of the above discussions, and particularly as there is no dispute that the factual matrix of all the cases before the Hon ble non jurisdictional High Courts were materially the same as in this case, in conformity with the esteemed views of Hon ble Karnataka High Court in Bharti Airtlel s case (supra), and hold as follows: (a) On the facts of the case, and as is evident from a reading of the agreements before us, the assessee has sold, by way of prepaid vouchers, e-top ups and prepaid SIM cards, the right to service on principal to principal basis to its distributors. As evident from the terms and conditions for sale, placed at page 136 of the paper-book, not only that the sale was final and the assessee was not responsible for any post-delivery defects in the services, it was specifically agreed that no request of refund of any money shall be entertained by VEGL (i.e. the assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational roaming charges The CIT(A) has erred in not holding that in the facts and circumstances of the case, the providing of roaming facilities to the appellant by the other telecom operators are not in the nature of technical services and hence the provisions of Section 194 J are not applicable to the payments made3 towards national roaming charges. 27. We have noted that this issue has been remitted by the CIT(A) to the file of the Assessing Officer for the purposes of redeciding the issue in the light of Hon ble Supreme Court s judgment in the case of CIT Vs Bharti Cellular Limited [(2010) 330 ITR 239 (SC)]. As held by Hon ble Supreme Court, in a situation in which no human intervention is involved, these services cannot be considered to be technical services in nature. That aspect, however, is to be examined by the AO, as was directed by Hon ble Supreme Court in the said case as well. We, therefore, see no infirmity in the order of the CIT(A). We confirm his findings and decline to interfere in the matter. 28. Ground no. 2 is thus allowed. 29. In ground no. 3, the assessee has raised grievance against CIT(A) s directions for certain verifications in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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