SODEXO SVC INDIA PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX (TDS)-2(2), MUMBAI

At the outset, we must observe, these appeals were earlier disposed of by a common order dated 07.10.2019. However, while deciding the miscellaneous applications filed by the assessee, the order was recalled for fresh hearing of the appeals. This is how the appeals came up for hearing before this Bench.

The controversy in the present set of appeals is confined to applicability of section 194C to certain payments made by the assessee to its affiliates. 4. Relevant material facts for disposal of the present appeals are, the assessee, a resident company, is stated to be engaged in the business of issuing meal vouchers to its clients/customers through which certain benefits in kind is provided by the clients to their employees. The employees of the clients/customers use these meal vouchers at specified places, such as, restaurants, eating places, caterers, super markets, etc., who are affiliates of the assessee for accepting the meal vouchers as payments towards purchase of food items or non alcoholic beverages. To verify tax deduction at source (TDS) compliance of the assessee, a survey under section 133(2A) of the Act was conducted at the business premises of the assessee on 21/01/2016. In course of such survey action, the assessing officer noticed that while the assessee had deducted tax at source on certain payments made to one category of affiliates, i.e. caterers; however, it has not deducted tax at source on payments made to other affiliates, such as, restaurants, super markets and food establishments. Noticing this, the assessing officer issued a show cause notice to the assessee to explain why it should not be treated as an assessee in default in terms of section 201(1) for failure to deduct tax at source.

In response to the show cause notice issued, the assessee furnished necessary details with an exhaustive submission explaining the reason for not deducting tax at source. The primary contention of the assessee was, in terms of approval granted by the Reserve Bank of India (RBI) under the Payment and Settlement Systems Act, 2007 (in short, ‘’PSS Act’’), the assessee is operating a payment system for issuance of meal vouchers, wherein, the only role played by it is to provide an alternative system of payment. It was submitted, since the payment made by the assessee to the affiliates is merely reimbursement for the prepaid vouchers under the alternative system of payment, it is not exigible to TDS provisions. Explaining further, it was submitted that assessee is not making any payment to the affiliates, but actually payment is made by employees of the clients through prepaid instruments issued by the assessee and the assessee is merely reimbursing the face value of the vouchers. It was further submitted, since the affiliates are neither doing any work nor are providing any labour/services to the assessee, the provisions of section 194C would not be applicable.

The assessing officer, however, was not convinced with the submissions of the assessee. The assessing officer observed, certain corporate/firms enter into agreement with the assessee for buying meal vouchers for use of their employees. He observed, on the payment made to the assessee towards purchase of vouchers, the clients are deducting tax at source under section 194C of the Act. However, when making payment to the affiliates, the assessee is not deducting any tax at source, though, it has entered into similar type of agreement with the affiliates. He observed, while the assessee is deducting tax at source on payment made to caterers; however, it is not doing so in respect

Explaining the business model of the assessee, learned counsel appearing for the assessee submitted, the assessee operates a semi closed prepaid payment system within the framework set out under the PSS Act. He submitted, as per the RBI guidelines issued in respect of prepaid payment instruments in India, the assessee issues meal vouchers which can be utilized for the purchase of food and non alcoholic beverages at the outlets of assessee’s affiliates. He submitted, the affiliates are persons/entities, who own and operate shops like restaurants and super markets, etc. and who enter into agreement with the assessee to honour the vouchers issued by it. Proceeding further, he submitted, the assessee enters into contracts with customers to provide the customers with vouchers that can be used at the Sodexo SVC India 6 to 934/M/2019 shops of the affiliates of the assessee. He submitted, the meal vouchers can be used by the employees of the customers/clients only for purchasing food and non alcoholic beverages from the outlets of the affiliates. He submitted, while issuing meal vouchers to customers/clients, the assessee receives the face value of the voucher alongwith service charge for providing the voucher. He submitted, the face value of the vouchers issued to the customers is to be exclusively used to settle/reimburse the face value of the vouchers when they are presented to the affiliates. He submitted, the face value of the vouchers received from clients/customers, as per RBI guidelines has to be kept in an escrow account for onward payment to the affiliates on settlement of the meal vouchers. Thus, he submitted, the face value of the vouchers kept in the escrow account do not represent the income of the assessee, but is a liability to be discharged to the affiliates who have accepted the meal vouchers as payment made towards the user of the vouchers for purchase of food or non alcoholic beverages. He submitted, since, the face value of the voucher is a liability to be discharged to the affiliates, it was not routed through the profit and loss account but was shown in the balance-sheet as a liability. He submitted, the service charges received by the assessee from the customers for issuance of meal vouchers is shown as income and offered to tax. Similarly, the service charges received from affiliates for providing the service of acting as a payment medium/facilitator, the assessee deducts the service charge from face value of the vouchers and recognizes it as income and offers to tax. Thus, he submitted, the assessee functions merely as a facilitator or a medium for enabling payments to be made by the user of the vouchers to the affiliates when the user purchases food and non alcoholic beverages from the affiliates.

Strongly relying upon the observations of the assessing officer and learned CIT(A), the learned departmental representative submitted, the agreement between the assessee and the affiliates is not merely a contract for payment but also involves work element. He submitted, as per the instruction of the assessee, the affiliates are honouring the meal vouchers and receiving the payment from the assessee. Therefore, they are not only acting as agent of the assessee but are performing certain work on behalf of the assessee.

We have carefully considered the rival submissions and perused the material on record. The factual matrix reveals that the assessee is operating a semi-closed prepaid payment system being authorized by RBI in terms of section 7 of the Payment and Settlement System Act, 2017. Under the aforesaid scheme, the assessee issues printed paper vouchers to be utilized for purchase of food and non-alcoholic beverages at certain specified establishments. For better appreciation, a diagrammatic representation of assessee’s business model is depicted below :

As could be seen from the above, the client/customer approaches the assessee for purchase of paper printed meal vouchers having a certain face

In this context, it is relevant to refer to the decision of the Hon’ble Supreme Court in assessee’s own case i.e. Solexo SVC Pvt. Ltd. vs State of Maharashtra [2016] 331 ELT 23. Though, the aforesaid decision was rendered in the context of levy of octroi by treating the meal vouchers as goods, however, certain observations of the Hon’ble Supreme Court regarding business model of the assessee would be very much relevant for deciding the issue at hand. After analyzing the business model of the assessee, the Hon’ble Supreme Court has observed that the assessee had made arrangements with affiliates for supply of goods against vouchers to simply help the customers by facilitating the provision for making available food items etc. of a particular amount represented by the vouchers to the employees of the customers. The Hon’ble Court observed, though, the vouchers bear a particular value and for such value goods are provided to the employees, however, the goods are not provided by the assessee but by the affiliates. The assessee is only a facilitator and medium between the affiliate and customer and is merely providing some services. The Hon’ble Court observed, the intrinsic and essential character of the entire transaction is to provide services by the assessee and this is achieved through the means of the vouchers. The goods belong to affiliates which are sold by them to customer’s employees on the basis of vouchers given by the customer to its employees. It is the affiliates, who are getting

Thus, from the aforesaid observations of the Hon’ble Supreme court, it is very much clear that rather than the assessee availing certain services or getting some work done through affiliates, it is the affiliates who are availing certain services from the assessee for which service charge is paid to the assessee. While analyzing the business model of the assessee, the Hon’ble Court also took note of the fact that the assessee cannot trade or sale the vouchers separately. Ultimately, the Hon’ble Court observed that the meal vouchers for purchase of food/non-alcoholic beverages provided by an employer to employee is treated as expenditure incurred by the employer and amenity at the hands of the employee. It is the customers of the assessee who provide this perquisite to its employees by adopting the methodology of vouchers and for which services of the appellant is availed. Thus, essentially, while acting as a facilitator/medium between the end user of the vouchers and the affiliates, the assessee is providing services both to the customers as well as affiliates for which it received service charges from both the parties. The payment of face value of the vouchers to the affiliates after withdrawing from the escrow account is never an income of the assessee. Rather, it is a liability of the assessee which has to be discharged in terms of the PSS Act and Master Circular issued by the RBI. Therefore, the amount received from the customers towards issuance of meal vouchers cannot be treated as income of the assessee, except, to the extent of service charges received thereon. For this reason, alone, the face value of the meal vouchers are not routed through the profit and loss account and is shown as liability in the balance sheet. It is a fact

Resultantly, demand raised under section 201(1) and 201(1A) are deleted. The grounds raised by the assessee are allowed.

In the result, the appeals filed by the assessee are allowed.