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TMI Blog2017 (1) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase and sale transaction in which no services was rendered by the distributors to the assessee company. Referring to the provisions of Indian Contract Act, 1872 the assessee tried to explain its position from the definition of terms "Agent", "Commission" and "Discount". The assessee also relied on the following decisions: 1. Gordon Woodroffe & Co. Vs. M.A. Majid reported in AIR 1967 SC 181 2. Bhopal Sugar Industries Vs. STO reported in 1977 AIR 1275 3. Ahmedabad Stamp Vendors Agency Vs. UOI reported in 257 ITR 202 (Guj.) 4. Foster's India Pvt. Ltd. Vs. ITO reported in 117 TTJ 346 4.1 Alternatively, it was submitted that the assessee receives the purchase order from distributors and the distributors are liable to pay the assessee the discounted price immediately in advance upon the delivery of the products to them. Thus, there was no case of the assessee either paying or grouping the account of distributors. Further, it was not possible to quantify the exact amount of income in the hands of distributors. Relying on the decision of Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd. reported in 293 ITR 226 it was submitted that no tax u/s.201(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich such proceedings are initiated. Similar show cause notice was also issued on 10-09-2010 for A.Y. 2008-09 to which similar reply was filed and the Assessing Officer has passed a combined order on 22-03-2011. It was accordingly submitted that since the proceedings were initiated in F.Y. 2007-08 the TDS Officer was supposed to pass the order u/s.201(1)/201(1A) by 31-03-2010 in view of the decision of the Special Bench of the Tribunal in the case of Mahindra and Mahindra Limited (supra). Since, the same has not been passed, therefore, the order passed by the Addl.CIT (TDS) being barred by limitation should be quashed. 8. It was also submitted that proviso to section 201(3) of the I.T. Act introduced through Finance Act (No.2) 2009 w.e.f. 01-04-2010 will not rescue the situation in favour of the TDS Officer as the proceedings got barred by limitation of time on 31-03-2010 itself and the said proviso cannot extend the inherent time limit or revalidate an action which is already barred by limitation. 9. It was further argued that since there was no show cause notice issued for F.Y. 2006-07, therefore, the order passed for F.Y. 2006-07 was against the principles of natural justice a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin a period of six years from the end of the relevant Assessment Year if the income chargeable to tax in the hands of payee by virtue of sum paid within TDS is equal to or more than ₹ 1 lac, and four years if such amount is less than ₹ 1 lac and order u/s.201(1) has to be passed within one year from the end of the Financial Year in which proceedings u/s.201(1) are initiated. 16. In this case, the appellant claims that due to survey action in April, 2008, the proceedings were initiated in F.Y. 2008-09 and therefore as per the ratio of Hon'ble Special Bench decision in the case of Mahindra & Mahindra Ltd. (Supra), the TDS Officer was required to pass order u/s.201(1) of Income-tax Act by 31-03-2010. This contention of the appellant is not correct as survey action is carried out to collect the information relevant for the purpose of assessment and for other proceedings under the Act. Survey action u/s.133A is itself a proceeding which gets completed after verification is completed at the premises and survey team leaves the premises. In post-survey enquiry also, certain information is called for which the appellant is not able to furnish during the course of survey actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis and not that of principal to agent. It was argued that under this arrangement, the transaction in all substantial respects is akin to sale and purchase of goods as it happens in FMCG sector. The discount extended represents the difference between the MRP of the talk time and prepaid connections and the price at which these are transferred to the prepaid distributors. Since no payment is made by the assessee to its prepaid distributors, the discount extended to the prepaid distributors is in the nature of trade margin and such discount cannot be termed as commission so as to attract the provisions of section 194H of the Income Tax Act. It was further argued that the mechanism of TDS is not workable on the facts and the circumstances of the case. Relying on the decision of Hon'ble Kerala High Court in the case of M.S. Hameed and others vs. Director of State Lotteries and others reported in 249 ITR 186 and various other decisions it was argued that the assessee company was not an assessee in default and demand u/s.201(1) and 201(1A) of the Income Tax Act was not justified. 12. However, the Ld.CIT(A) was not satisfied with the explanation given by the assessee. Rejecting the argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax at source on discount extended by the Appellant to the distributors of its pre-paid SIM cards/talktime and thus, holding the Appellant to be liable to pay tax under section 201 (1) and interest under section 201(1A) of the Act. 2.2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that the relationship between the Appellant and the distributors of pre-paid SIM cards/talk time is not that of 'Principal to Principal' and the discount allowed to the distributors is in nature of commission liable for deduction of tax as envisaged under section 194H of the Act. 2.3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the provisions of section 194H of the Act would be applicable to the Appellant's case without taking cognizance of the fact that the Appellant is not responsible to make any payment/credit to the prepaid distributors towards the discount extended to them and responsibility/obligation to make payment is a condition precedent for application of section 194H of the Act, which is absent in the present case. 2.4. On the facts and circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Hon'ble Bombay High Court in the case of Director of Income Tax (IT) Vs. Mahindra and Mahindra reported in 365 ITR 560 he submitted that the Hon'ble High Court has upheld the order of the Special Bench of the Tribunal and dismissed the appeal filed by the revenue. Therefore, the orders passed by the TDS Officer for the A.Y. 2007-08 is barred by limitation. 15. Referring to the statement of R. Narayanan, Manager (Accounts) of Vodafone Essar Cellular Ltd. recorded during the course of survey u/s.133A of the I.T. Act. on 23-04-2008, the Ld. Counsel for the assessee drew the attention of the Bench to the answer to Question No.13 wherein the assessee replied as under : "Q.No.13 On going through the agreement and undertaking taken from the distributor it appears that you are having full control over the distributor regarding stock, terms of sale and terms of payment moreover you are also paying service tax on behalf of distributors, similar is the situation in respect of transaction whatsoever may be with the franchise as you have stated that no separate and different agreement is made with the franchise with whom you are dealing as per you sale with trade margin. Conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2010, the law as on date of issue of notice has to be applied and in case the proceedings have become barred by limitation before 01-04-2010 then the proviso cannot come to the rescue of the Assessing Officer to save such limitation. For the above proposition the Ld. Counsel for the assessee relied on the decision of the Delhi Bench of the Tribunal in the case of ACIT Vs. M/s. Catholic Relief Services vide ITA No. 2742 and 2744/Del/2011 order dated 13-01-2012. He submitted that where no time limit is provided for passing/completion of the order then such order should be passed/completed within a reasonable time and incase the order is delayed beyond a reasonable time then such order is liable to be quashed. 18. Referring to the decision of Hon'ble Supreme Court in the case of S.S. Gadgil Vs. Lal and Company reported in 53 ITR 231 he submitted that the words in an amending Act which enable the department to make an assessment or reassessment in respect of years which were over when the amending Act began, are not to be construed as authorizing action in respect of the year for which action was already time-barred at the date when the amending Act came into force. 19. He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 194H of the Act which require tax deduction at source from any income by way of commission, cannot be held applicable to the facts of the case. 22. The Ld. Counsel for the assessee further submitted that the entire discount allowed by the assessee to the distributor cannot be considered as an income in the hands of the distributor since a part of discount is always passed down at each level of the distribution chain and hence the whole of the discount amount does not automatically become the income of the prepaid distributors. Therefore, tax deduction at source on the entire discount amount would be against the principles of law. 23. Referring to the decision of Hon'ble Karnataka High Court in the case of the sister concern of the assessee namely Vodafone Essar South Ltd. Vs. DCIT reported in 372 ITR 33 he submitted that the Hon'ble High Court in the said decision has held that sale of SIM cards/recharge coupons at discounted rate of distributors is not commission and therefore not liable to TDS u/s.194H. He submitted that the TDS officer as well as the CIT(A) have relied on the decision of Hon'ble Delhi High Court in the case of Idea Cellular Ltd. (supra) the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Although in the said show cause notice there is no mention of F.Y. 2006-07 but this will not make much difference in the sense that the assessee was made aware of the default in F.Y. 2006-07. Therefore, opportunity was provided by the TDS officer for A.Y. 2006-07 before passing the order for A.Y. 2007-08. 27. So far as the merit of the issue is concerned the Ld. Departmental Representative heavily relied on the order of the CIT(A). 28. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in the business of providing cellular mobile phone services for Maharashtra and Goa circle excluding Mumbai. The assessee company provides prepaid and postpaid services. The prepaid services are in the form of recharge coupons and SIM cards. Since the assessee has not deducted TDS from the discount offered by the assessee to their distributors the Assessing Officer treated such discount offered by the assessee to their distributors as "commission" and treated the assessee as an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.201(1)/201(1A) of income-tax Act was issued for F.Y. 2007-08 for the first time on 21-01-2010. It is true that in the show cause notice there is no mention of F.Y. 2006-07, but this will not make much difference in the sense that the appellant was made aware of the default for F.Y. 2006-07 and accordingly, details of discount was provided by the appellant for F.Y. 2006-07. . . . . . . . . . ." 32. Merely because the assessee has filed certain details for A.Y. 2006-07 it cannot be said that non issue of such notice will not make any difference. Issue of a notice is mandatory before charging any assessee for its liability. Therefore, in absence of issue of any notice, the order passed u/s.201(1) and 201(1A) for A.Y. 2007-08 has to be held as void and illegal. 32.1 Further, as per the chronology of events reproduced at page 7 of the order of the CIT(A) which has already been reproduced at para 6 of this order, we find the assessee has filed all the requisite details on 0805-2008. We find the Special Bench of the Tribunal in the case of Mahindra and Mahindra Ltd. (supra) has held that the maximum time limit for passing the order u/s.201(1) or 201(1A) is the same as prescribed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributor at the time of delivery of SIM Cards or Recharge Coupons against advance payment made by the distributor. 58. In both the aforesaid cases, the Court proceeded on the basis that service cannot be sold. It has to be rendered. But, they did not go into the question whether right to service can be sold. 59. The telephone service is nothing but service. SIM cards, have no intrinsic sale value: It is supplied to the customers. for providing mobile services to them. The SIM card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to. the distributor or from the distributor to the ultimate consumer. Therefore, the SIM card, on its own but without service would hardly have any value. A customer, who wants to have its service initially, has to purchase a sim-card. When he pays for the sim-card, he gets the mobile service activated. Service can only be rendered and cannot be sold. However, right to service can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given at ₹ 20/- to the distributors and net value is ₹ 80/-. The assessee's sale is accounted at the gross value of ₹ 100/- and thereafter, the commission paid at ₹ 20/- is accounted. Therefore, in those circumstances of the case, the essence of the contract of the assessee and distributor is that of service and therefore, Section 194H of the Act is attracted. 61. However, in the first instance, if the assessee accounted for only ₹ 80/- and on payment of ₹ 80/-, he hands over the prepaid card prescribing the MRP as ₹ 100/-, then at the time of sale, the assessee is not making any payment. Consequently, the distributor is not earning any income. This discount of ₹ 20/- if not reflected anywhere in the books of accounts, in such circumstances, Section 194H of the Act is not attracted. 62. In the appeals before us, the assessees sell prepaid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors: incur expenditure for the purchase of prepaid cards. Only after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrate that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal. 63. It was contended by the revenue that; in the event of the assessee deducting the amount and paying into the department, ultimately if the "dealer is not liable to tax it is always open to him to seek for refund of the tax and, therefore, it cannot be said that Section 194H is not attracted to the case on hand. As stated earlier, on a proper construction of Section 194H and keeping in mind the object with which Chapter XVII is introduced, the person paying should be in possession of an income which is chargeable to tax under the Act and which belongs to the payee. A statutory obligation is cast on the payer to deduct the tax at source and remit the same to the Department. If the payee is not in possession of the net income which is chargeable to tax, the question of payer deducting any tax does not arise. As held by the Apex Court in Bhavani Cot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books. If the accounts are not reflected as set out above in para 60 of the order, section 194H is not attracted. Therefore, in line of the above observation of the Hon'ble High Court we restore the matter to the file of the Assessing Officer for necessary verification. The grounds raised by the assessee are accordingly allowed for statistical purposes. 35. Identical grounds have been raised by the assessee for the remaining years wherein the assessee has challenged the order of the CIT(A) in upholding the action of the Assessing Officer in treating the assessee as an assessee in default for non deduction of tax at source on discount extended by the assessee to the distributors and its prepaid SIM cards/talktime and therefore liable to pay tax u/s.201(1) and interest u/s.201(1A) of the I.T. Act. 36. In view of our discussion in the preceding paragraphs we hold that the sale of SIM cards/recharge coupons at discounted rate to distributors is not commission and therefore not liable to TDS u/s.194H of the I.T. Act. However, we have restored the issue to the file of the Assessing Officer for necessary verification in the light of the decision of Hon'ble Karnataka High Court (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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