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TMI Blog2019 (5) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 (1), New Delhi for the financial year 2009 10 (assessment year 2010 11) against the order of the ld CIT(A)-XXX, New Delhi dated 11.06.2013 for the Assessment Year 2010-11. 2. The revenue has raised the following grounds of appeal:- (1) in deleting the demand of ₹ 1,08,91,578/- raised u/s 201(1 )/201(1 A) holding that trading margin allowed by the assessee to the distributor will not constitute commission and brokerage as envisaged u/s 194H of the I T Act. (2) in holding that the relationship between the assessee and the distributors is a Principal to Principal and not Principal to Agent. (3) in ignoring that while adjudication the appeals in the case of Vodafone Essar Mobile Services Ltd. for FY 2007-08 to 2010-11 in Appeal No.36/10-11, 35/10-11, 12/10-11 and 578/10-11 dated 6/9/2011, the finding the Revenue on the issue of similar nature was sustained by the Ld CIT(A). (4) in accepting the contention of the assessee that payment is made by the distributors to the assessee and not by the assessee to the distributors. Here, the payment in question is not the value of Recharge Vouchers, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent in the respect of the sale of prepaid talk time to them. In absence of any such payment, whether actual or constructive, there was neither an obligation on the assessee to withdraw tax u/s 194H of the act nor any occasion for the respondent to do so. It was further submitted that that even otherwise the assessee is not a person who is responsible for paying any sum and further there is no credit in the account of the payee or payment by way of cash or by issue of cheque or draft by any other mode of any income in the nature of commission. It was further submitted that income is not in the hands of the distributor in the nature of the commission. In the and it was stated that the provisions of section 194H of the income tax act does not apply for the above reasons the learned authorised representative further relied on the decision of the honourable Karnataka High Court in case of Bharati Airtel Ltd and others vs DEPUTY COMMISSIONER OF INCOME TAX 52 taxmann.com 31. The assessee further relied upon the decision of the coordinate bench (Jaipur) in ITA number 64 65 66/2013 dated 29/5/2015 for squarely covered the issue in favour of the assessee. 6. We have car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act. He accordingly treated the assessee as defaulter under section 201(1) and charged interest under section 201(1A) on the amount of commission so paid by the assessee. 6. The assessee preferred appeals before the Commissioner of Income-tax (Appeals), but was unsuccessful, as its appeals were dismissed. However, it has succeeded in further appeals preferred before the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal ). The decisions of the Commissioner of Income-tax (Appeals) as well as the Assessing Officer have been reversed and the issue is decided in favour of the assessee company. The Tribunal has opined that the relationship between the assessee and its distributors is that of principal and principal and not principal and agent . Therefore, what was paid to the PMAs was not commission or brokerage and was not subject to deduction of tax at source under section 194H of the Act. The Tribunal has arrived at the aforesaid findings in the following manner : 14. In order to ascertain whether the PMAs were acting as agents of the assessee or were outright purchasers of goods supplied by the assessee, it is necessary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s principal as a man of ordinary prudence. Another contention of the Revenue that clause 8 of the agreement debars the PMA to enter into agreement with other parties for similar telephony services and therefore he is not to act independently. In our view the restrictions prescribed in clause 8 deals with the com petitors of the assessee. Such terms and conditions are generally found in commercial agreements. Clause 9 provides for appointment of retailer by PMA. Further clause 10 deals with the price at which PMA shall acquire the prepaid SIM cards/recharge vouchers. The retailers can sell the recharge vouchers to end user at any price not exceeding the maximum retail price. The assessee will receive the fixed amount including service charges. In case of a agent the price collected by him is remitted to the principal after deduction of his commission and expenses relating to sale of the goods. The assessee is not making any reimbursement of the expenditure incurred by the PMA and his retailers. This also suggests that the agreement between the assessee and PMA is that of seller and purchaser. Agreement also provides certain conditions relating to protection of intel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial Gazette specify in this behalf ; (b) Where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees. Explanation.-For the purposes of this section,-(i) 'Commission or brokerage' 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 of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing ; (ii) 'Professional services' means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA ; (iii) Where any income is credited to any acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-paid or post-paid connections are provided to the subscriber. In this case, the pre-paid services are termed as Idea Chitchat Prepaid. For rendering its services to the subscriber, the company appoints distributors called pre paid market associates (PMAs) . ICL also appoints I-CAPs to promote its chitchat prepaid services. The main duty of I-CAP is to obtain subscribers of SIM cards and activate them. In short, sometimes I-CAPs are directly appointed by the company and not through its PMAs. The assessee company offers discounts on prepaid calling services to its distributors. No break-up, however, has been given for the discounts offered on prepaid calling services to PMAs and I-CAPs. The break-up is, however, available for discounts offered on starter packs and recharge coupons. 11. Her submission was that the agreement brought out the following significant aspects showing principal and agent relationship : (a) Full legal and equitable title and interest in pre-paid SIM card and recharge coupons delivered to the distributors at all times remains with the assessee. (b) The distributors store the SIM card and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven in statutory definition under the Act, one had to take into account the expression as judicially defined. She referred to these definitions, which are even taken note of by the Assessing Officer. She also argued that after the purchase of SIM cards by the ultimate consumers, the legal relationship between the said consumer/subscriber and the assessee, is created in the entire deal. She also heavily relied upon the decisions rendered by the Cochin Bench of the Tribunal in the case of Vodafone Essar Cellular Ltd. v. Asst. CIT [2009] 317 ITR (AT) 234 (Cochin) ; [2009] TLOL- 630-ITAT-Cochin, decided on April 30, 2009 in addition to more judgments of other Benches of the Tribunal. 14. Mr. Farookh Irani, learned counsel who appeared on behalf of the assessee, countered the aforesaid submissions by making a passionate plea that the approach of the Tribunal is perfectly justified and it was permissible for the Tribunal not to take myopic view of the matter on the basis of trivial aspects of the agreement pointed out by the Revenue, which were not material to determine the controversy. His submission was that the following three conditions were to be fulfilled in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal (section 213 of the Indian Contract Act). The agent is obliged to pay to his principal the sale price of the goods, which he sells on behalf of his principal (section 218 of the Indian Contract Act). 17. The learned counsel argued that on the contrary, the following factors indicated that the relationship between the assessee and its distributors was one of the principal and principal in view of the following factors emerging on record: (i) The transaction between the respondent and its distributor is one of sale. (clauses 10, 19 and 25(d) of the PMA agreement) (ii) The distributor makes payment to the respondent upfront. (clause 6(a) of the PMA agreement. (iii) There is a specification of the price at which goods are transferred by the respondent to its distributors. (clause 10 of the PMA agreement). (iv) The distributor has freedom to sell at his own price (clause 10 of the PMA agreement). (v) The distributor is not liable to account to the respondent for the price at which he effects the sale to the retailer/subscriber (clause 10 of the PMA agreement). (vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional. (3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Section 182 of the Indian Contract Act reads as under : An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom the said act is done, or who is so represented, is called the principal. 21. The legal position is explained by the Assessing Officer in his order reproducing the definition of commission in various law dictionary, about which there cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear from the definition that an agency comes into existence where one person is vested with the authority or capacity to create a legal relationship between person referred to as a principal and an outside third party. Therefore, the basic and essential requisites of an agency ordinarily would be that : (i) The agent makes the principal answerable to third persons whereby the principal can sue third parties directly and renders him self, that is, the principal, liable to be sued directly by the third parties.-Varsha Engineering P. Ltd. v. Vijay Traders, AIR 1983 Guj 166, 168-169, para 5. (ii) The person who purports to enter into a transaction on behalf of the principal would have the power to create, modify or terminate contractual relationship between his principal, that is, the person whom he represents, and the third parties.-P. Krishna Bhatta v. Mundila Ganapathi Bhatta, AIR 1955 Mad 648 at page 651, para 36. (iii) An agent, though bound by instructions given to him by the principal does not work under the direct control and supervision of the principal. The agent thus uses his own discretion to act on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of fact one of the submissions of the learned counsel for the assesseeairline has been that they ought not to be held an assessee in-default in view of the fact that the supplementary commission, that is, sums received over and above the net fare by the travel agent and retained by them have been disclosed by the travel agent as their income on which the travel agents have paid tax. In view of this we find no difficulty in holding that the supplementary commission is income within the meaning of section 194H of the Act . . . In view of the above we hold that the supplementary commission which is the amount retained by the travel agent is commission within the meaning of section 194H read with Explanation (i) to the said section. The assessee-airlines were thus obliged to deduct tax at source at the rate prescribed during the relevant period. The assessee airline having not deducted the tax at source, they are liable to be held, within the terms of section 201(1) as the assessee(s)-in-default and also liable for payment of interest in terms of section 201(1A) of the Act. In view of the fact that the Tribunal having coming to the conclusion that section 194H of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subscriber and the assessee that too by entering into specific agreement between these two parties. 29. In contrast, the legal position when the goods are sold by a principal to its distributors creating principal and principal relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers-the ultimate users. The principal/manufacturer does not come into the picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC) ; AIR 2006 SC 1383, the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof the Sales tax Act is not attracted, though the decision was rendered in the context of liability of sales t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cellular Ltd. In the earlier two occasions, there was no clause on pricing in the agreements entered into between the predecessors of the assessee-company and the distributors. It is in the latest agreement between the assessee and its distributors that the clause on pricing has been inserted that the distributors are free to determine the ultimate sale price subject to MRP. We do not think that this so-called pricing freedom is so crucial in examining the exact nature of the business relation between the assessee-company and its distributors. The pricing factor is also a matter of mutual consent between the parties. Even in the case of an agency, there can be a clause by which an agent is authorized to sell the goods for a price less than the MRP. Even in a case of principal to-principal, there may be a clause that the distributor cannot sell a product for a price less than the MRP unless a consent is given by the manufacturer. The matter of pricing in both the cases, i.e., principal to-principal and principal to agents can be a matter of mutual consent between the parties and even a matter of negotiation after the execution of the agreement. There are no hard and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telephone company itself to provide all these services directly to the consumers as the Department of Telecom was doing ; but such a direct service is not feasible now-a days. Therefore, the assessee has made out a business solution to appoint distributors to take care of the operational activities of the company for providing service. The distributor is one of the important links in that chain of service. Another important feature is that the SIM cards stocked by the dis tributors are still the property of the service provider, the assessee company. The permissive right to use SIM cards to get access to the phone network of the assessee-company is given only to the ultimate consumer who activates the connection by using the secrete number provided in the SIM card. It is only for the ultimate consumer or the assessee-company who has the authority to uncover the secret number and bring the card into activation. This unique situation negates the argument of the assessee-company that once delivery of the SIM card is taken, it is the absolute property of the distributors. No, this is a misconception . . . In the case of post-paid scheme, the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities and depending upon the working results, they can adjust the TDS collected by the assessee-company against their tax liability or the refund due. The fact that the distributors may some time deliver the products for a price less than the MRP is not at all an impediment in deducting the tax at source. The distributors may deliver the products at a lesser price, but even then for the purpose of section 194H, as in the above example, the margin available to the distributor is ₹ 20, which is to be treated as commission, and the assessee has to consider that amount for the purpose of quantifying the element of TDS. The assessee-company has to collect the net price along with the abovestated TDS element. Therefore, the argu ment that there was no occasion as in the case of M.S. Hameed v. Director of Lotteries [2001] 249 ITR 186 (Ker) has no relevance here. The situation considered by the hon'ble High Court was different. In that case one party is the State Government. Without executing an authority in conformity with the statutory and administrative Rules, no body can become an agent of the Government. Further, the court has considered the subject transaction as that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mobile telephone services over a large geographical area. The distributors provide essential services to the assessee-company in running such a huge operational system. The distributors are linking agents in the chain of delivery of services to consumers. Therefore, the relationship is not of a principal to principal. 33. We are in agreement with the view taken by the said Bench. Identical view is taken by the Calcutta Bench in the case of Asst. CIT v. Bharti Cellular Ltd. [2007] 294 ITR (AT) 283 . Both these Benches specifically rejected the arguments of the assessee based on Ahmedabad Stamp Vendors Association [2002] 257 ITR 202 (Guj), Bhopal Sugar Industries Ltd. 40 STC 42 (SC), Kerala Stamp Vendors Association [2006] 282 ITR 7 (Ker) and Bajaj Auto Ltd. [1995] 6 SCC 566 distinguishing those judgments and holding that they are not applicable in the given situation. We agree with the same. 34. We thus answer the question, as formulated, in favour of the Revenue and against the assessee. As a consequence, these appeals are allowed and the judgment of the Tribunal on this aspect is set aside. No costs . 7. In view of the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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