DCIT, NEW DELHI vs. M/S. SISTEMA SHYAM TELESERVICES LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “G”: NEW DELHI BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER AND SHRI K.N.CHARY, JUDICIAL MEMBER ITA No. 5083/Del/2013 (Assessment Year: 2010-11) DCIT, Vs. Sistema Shyam Teleservices Circle-5(1), Ltd, New Delhi A-60, Naraina Industrial Area, Phase-I, New Delhi PAN: AACCS1709H (Appellant) (Respondent)

Revenue by : Shri N.K. Bansal, Sr. DR Assessee by: Shri Alok Vasant, CA Date of Hearing 20/02/2019 Date of pronouncement 15/05/2019

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the the learned deputy Commissioner of income tax, circle – 51 (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 Rs. 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 the element of margin retained by the distributors during the course of sale transaction of Recharge Vouchers.” Page | 1

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 carefully considered the rival contention and perused the orders of the lower authorities. In the present case the issue is squarely covered against the assessee by the decision of the honourable jurisdictional High Court in case of CIT VS IDEA CELLULAR LTD 325 ITR 148 wherein it has been held that the payment made by the assessee constitutes the commission and tax is required to be withhold u/s 194H of the income tax act. All the arguments raised by the assessee also been considered by the honourable Delhi High Court with respect to the sale of the goods and principal to principal transaction of the assessee as under:-

ICL and the pre-paid distributors were that of principal and agent at all times and pre-paid distributors were selling a Page No : 0153 pre-paid SIM card/recharge coupon on behalf of the ICL. Consequently, the amount of discount offered to the pre-paid distributor was in the nature of commission and liable to tax deduction at source under section 194H of the Income-tax 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 to discuss the distinction between the con tract of sale or contract of agency. The essence of contract to sale is the transfer of title to the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of goods as a debtor for the price to be paid and not an agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the deli very of goods to a person, who is to sell them, not as his own pro perty but as the property of the principal who continues to be the owner of goods and who is therefore liable to account for the pro ceeds. The true legal relationship between the assessee and the PMAs has to be inferred from the nature of contract, its terms and condi tions and the nature of respective obligations undertaken by the parties. Clause 3 of the agreement specifically provides that the rela tionship 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 pre-paid SIM card/recharge coupons delivered to PMAs shall remain in ICL and shall not pass to PMAs. However, in case the pre-paid SIM cards/ recharge coupons with PMAs become unusable, sub- standard or are Page No : 0154 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 pre-paid SIM cards/ recharge coupons subject to payment of processing fees for such replaced cards. On cursory look on this condition of agreement it appears that ownership on pre-paid SIM card/recharge coupons remains with the assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of the principal and agent, there was no need for recovery of processing fee for replacement of cards destroyed or become unusable. In case of a con tract of agency the agents acts on behalf of the principal and no ques tion arises for seeking the compensation from the agent in case of loss of property due to natural calamity or occurrence or circumstances beyond the reasonable control of the agent. The agent is required to protect the interest of his principal as a man of ordinary prudence. Another contention of the Revenue that Page | 4

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 intellectual pro perty rights of the assessee. The other conditions stipulated in the agreement including termination clause do not throw any light so as to suggest that the agreement between the assessee and PMA is that of principal and agent. In the case of Gordon Woodroffe and Co. Ltd. v. Shaik Majid and Co., AIR 1967 SC 181 held that even an agent can become a purchaser when agent pays the price to the principal on his own responsibility. In the case before the goods are sold to the PMA Page No : 0155 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 the PMAs. Termination of the retailers is co-terminus with the termination of the agreement with the PMA. In our considered view the legal relation ship 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 the PMA stands in a fiduciary position in relation to the assessee. It is admitted by the Revenue that the agreement in sub stance is the agreement 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 the PMA will not fall in the definition of commission of brokerage." 7. Section 194H of the Act reads as under : "194H. Commission, Brokerage, etc.—(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of October, 1991 but before the 1st day of June, 1992, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) 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 rate of ten per cent. (2) The provisions of sub-section (1) shall not apply— (a) To such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the Revenue, by notification in the Official 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 Page | 5

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 ; Page No : 0156

(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 account, whether called 'suspense account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the pro visions of this section shall apply accordingly." 8. It is clear from the aforesaid provision that tax is to be deducted at source by a person responsible for paying any income by way of commission or brokerage. The expression "commission" or "brokerage" has been defined in the Explanation, which 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 and selling of goods or in relation to any transaction relating to the following services : (i) for services rendered (not being professional) ; (ii) for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing. 9. Counsel for both the parties agreed that element of agency is to be established in all the aforesaid circumstances. It was for this reason that the Tribunal had considered as to whether the transaction in question between the assessee and the PMAs amounted to contract of sale (thereby constituting relationship of "principal and principal") or it amounted to contract of agency (thereby resulting in "principal and agent"). Both the parties concur that this was the essence of dispute. However, the difference is in the perception inasmuch as according to the Revenue, the agreement constituted contract of agency and, therefore, payment made by the assessee to the PMAs was "commission" or "brokerage" attracting the provisions of section 194H of the Act. 10. Learned counsel for the Revenue submitted that from the nature of services provided by the assessee to its ultimate consumers through the medium of these distributors called "pre-paid marketing associates (PMA)". It was clear that these distributors were only agent and link between the assessee and the ultimate consumers. She highlighted the nature of the transaction by pointing out that a subscriber uses the cellular telephone network through a card called subscriber identification module (SIM card). Pre-paid or post-paid connections are provided to the Page No : 0157 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 Page | 6

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 recharge coupons in such a way as to clearly indicate at all times that the pre-paid SIM card/recharge coupons are owned by ICL and is not allowed to remove, obscure or delete any mark placed on prepaid SIM card/recharge coupons. (c) The distributor is not free to sell the similar products offered by the competitors company without the written consent of the assessee. (d) PMA is allowed to appoint the retailers only after the written approval from the assessee. (e) The maximum price of SIM card/recharge coupon is also decided by ICL. (f) It is the responsibility of the PMA to obtain all relevant informa tion concerning a subscriber and to forward the same to ICL and unless that is done, no activation of SIM card can be done. (g) The ICL has the right to use service marks, trademarks, trade names, copyrights, logos (collectively the intellectual property) or any other copy right that ICL may create in future. (h) The PMA has to comply with all requirements of ICL in respect of invoicing and accounts, maintenance of brand image and provide monthly sales reports return and other information relating to business. (i) The representative of the ICL, under the agreement, has right to inspect the things material to the business, which is the subject-matter of agreement. Page No : 0158 (j) Minimum performance targets for the distributors are also set by the company and company reserves the right to terminate the agreement unilaterally. 12. Highlighting the aforesaid features of the agreement between the ICL and the PMAs, the learned counsel for the Revenue pleaded that the overall control always remained with the assessee. The ownership in the SIM cards were never transferred by the assessee to PMAs and, therefore, the transaction in question was not that of sale and purchase between the assessee and the PMAs and for this reason, no sales tax was even paid. According to her, it was always treated as "service". The PMAs were only appointed as distributors and were offered discount on the pre-paid calling services/SIM cards. The discounts were, therefore, in the nature of "commission" or "brokerage" to the PMAs by the assessee. 13. She further submitted that since the expression "commission" or "brokerage" was not given 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] Page | 7

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 to attract the provisions of section 194H of the Act : (a) expenses of principal-cum-agent-relationship, which was lacking in this case ; (b) payment or credit by the assessee to its distributors, which attribute was again missing ; and (c) the amount, which the Revenue claims to be subject to TDS under section 194H must be shown to the income of the recipient, which ingre dient again was missing. Page No : 0159 15. Dilating on the first ingredient, viz., there was no relationship of "principal and agent", the learned counsel submitted that the transaction in question between the assessee and the PMAs was that of outright sale in view of the following characteristics : (i) The fact that payment for goods is made by a distributor to the principal upfront, prior to the realization by the distributor of the proceed ings of the sale made by him has been recognized, in the following deci sions, as a crucial factor in establishing that the transaction is one of a sale by the principal to the distributor :

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. Page No : 0160 (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) The distributor is not liable to pay to the respondent the price at which he effects the sale to the retailer/subscriber (clause 10 of the PMA agreement). 18. Our attention was also drawn to clause 3 of the PMA agreement, which specifically negates the existence of a "principal and agent" relationship. This clause is of particular relevance especially considering the decision of the Supreme Court in the case of Indian Oil Corporation v. Consumer Protection Council [1994] 1 SCC 397. 19. His further submission was that the aspects highlighted by the learned counsel for the Revenue between the assessee and the PMAs were of no consequence inasmuch as it was held by the Supreme Court in the case of Bhopal Sugar Industries Ltd. v. STO 40 STC 42 (SC) and the Gujarat High Court in the case of Ahmedabad Stamp Vendors Association [2002] 257 ITR 202, that the following factors would not be relevant to determine as to whether an agency exists : —The fact that the distributor is subject to operational control by his principal ; —The fact that the distributor is subject to geographical controls by his principal ; —The fact that the distributor has to maintain detailed records and accounts ; and —The fact that the distributor has to submit accounts to the principal. 20. Two provisions, which would be relevant for determining the issue and to decide the real nature of transaction between the parties are section 4 of the Sale of Goods Act and section 182 of the Indian Contract Act. Section 4 of the Sale of Goods Act defines "sale". Therefore this provision becomes material provision to determine as to whether the transaction between the assessee and the distributors is that of "sale" of SIM cards as contended by the assessee. Section 182 of the Indian Contract Act, on the other hand, defines an agent, which definition becomes important to consider as to whether the relationship between the assessee and PMAs is that of "principal and agent". A conjoint reading of the two provisions would be Page No : 0161

necessary to provide the answer. Therefore, we take note of these provisions at this stage. Section 4 of the Sale of Goods Act, 1930 reads as under : "4. Sale and agreement to sell.—(1) A contract of sale of goods is a contract whereby the seller transfers 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 any quarrel, is as under : " 'Commission' has been judicially defined by Davey L. J. as follows :

'Commission is prima facie the payment made to an agent for agency work, usually according to a scale, it may be on ad valorem scale, but not necessarily on ad valorem scale. It is the most general word that can be used to describe the remuneration paid to an agent for an agency work other than a salary'—Drielsma v. Manifold [1894] 3 Ch 100 (CA)'

Again, a 'commission' is the recompense of reward of an agent, factor, broker or bailee, when the same is calculated as a percentage on the amount of his transaction or on the profit to the principal— Sunderland v. Day 145 NE 2d 39, 41 ; 12111.2d. 50.

'Commission' generally denotes the compensation which an agent receives on sales— National Paper and Cordage Co. v. Atlantic Carton Corporation 127 N. E. 2nd 196 332, Mass. 651. Page No : 0162

'Commission' is compensation paid to another for services rendered in the handling of another's business or property and based proportionately upon the amount or value thereof—Rubinstein v. Rubinstein 109 NYS 2d 725, 734." 22. Before we part with, we would like to point out that if the cellular operators like the assessee in the present case is asked to deduct tax at source in respect of commissions paid to their agents, viz., distributors, it does not affect them. The concerned distributors can always file their Income-tax returns and claim the credit for the payments already made on their behalf by the assessee. On the other hand, such a provision serves public purpose inasmuch as, viz., such distributors who Page | 10

would be otherwise liable to pay tax, but are evading the tax, would come under the Income-tax Act. We may clarify that we have not answered the legal question influenced by this factor and our discussion has proceeded on the basis of legal position. This is only a passing remark, which justifies the incorporation of such a provision like putting obligation on the payer to deduct the tax at source and the view we have taken subserves this rationale behind such a provision as well. 23. This court in CIT v. Singapore Airlines Ltd. [2009] 319 ITR 29 (Delhi) analyses the aforesaid definition in the following manner (page 48) : "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 behalf of the principal subject to the limits to his authority prescribed by the principal (See Lakshminarayan Ram Gopal and Son Ltd. v. Page No : 0163

Government of Hyderabad [1954] 25 ITR 449 (SC) at pages 456-457. This cited with the approval in Qamar Shaffi Tyabji v. CEPT [1960] 39 ITR 611 (SC) at pages 615, 616.

(iv) There is no necessity of a formal contract of agency, it can be implied which could arise from the act of parties or situations in which parties are put." 24. At this stage itself, we may point out that in the aforesaid case, this court held relationship between the Airlines and the travel agents as that of "principal and agent". After examining in detail the operational aspect of the transaction, the significant aspects which were referred by the court, having semblance with the present case as well : (a) The legal relationship was created between the passenger (to whom the travel agents were selling tickets and the concerned airline) as on the basis of the said ticket, the passenger was entitled to travel in the concerned airline. Any request made by the passenger was to be forwarded by the agent to the traffic carrier/airline to enable the carrier to extend such services to the customer.

(b) By entering into such a legal relationship on behalf of the principal (the airline) by issuing the traffic documents to a third party, i.e., passen ger. (c) Similarly, by virtue of such a transaction, i.e., issuance of traffic documents by a travel agent to passenger, it enables the principal, i.e., air line to issue the same to the third party, which is the passenger. 25. Another argument was raised in the said case, viz., that the assessee airline was not paying income by way of commission, as "the supplementary commission" was retained by the travel agent and thus, section 194H of the Act was not attracted. This contention was brushed aside in the following manner (pages 55) : "This brings us to the second leg of the transaction as to whether income by way of commission has been paid by the assessee-airline to the travel agent. It is not disputed that any amount which the travel agent would receive over and above the net fare would be assessed in the hands of the travel agent as profit, gain or income. As a matter of fact one of the submissions of the learned counsel for the assessee- airline 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 Page No : 0164 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 Act was not applicable and hence did not examine any other contention of the assessee-airline, as also, the quantum and the period for which the assessee-airline would be entitled to pay interest or to what extent the benefit of the certificate issued to them, if any, under section 197 of the Act would be avail able. We allow the following appeals and set aside the impugned judgments passed by the Tribunal in each of these appeals and remand the matter to the Tribunal for examining all other aspects of the matter as also the consequences which would flow therefrom." 26. In view thereof, the argument of the learned counsel that section 194H is not applicable, as there is no "payment or credit" by the assessee to its distributor is to be rejected. Likewise, the argument that the amount must be shown to be the income of the respondent also does not hold good. 27. We, thus, come back to the central question, which is to be addressed, viz., the nature of relationship. Reverting back to this aspect, in the present case, we are of the opinion that the legal relationship is established between the assessee and the ultimate consumer/subscriber, who is sold the SIM card by the agents further appointed by the PMAs with the consent of the assessee. It is created by : (a) activation of the said SIM card by the assessee in the name of the consumer/subscriber. (b) service provided by the assessee to the subscriber. Further, deal ings between the subscribers and the assessee in relation to the said SIM card including any complaint, etc. for improper service/defect in service. Page | 12

(c) entering into the ultimate agreement between the subscriber and the assessee (clause 15 of the agreement). 28. It is to be borne in mind that the nature of the service provided by the assessee to the ultimate consumers/subscribers, whether it is prepaid or Page No : 0165 postpaid SIM card—remains the same. In the instant case, the SIM cards are prepaid, which are sold by the assessee to the consumers through the medium of PMAs. In the case of post-paid, SIM card transaction is entered into directly between the assessee and the subscriber and the subscriber is sent a bill periodically depending upon the user of the SIM card for the period in question. In both the cases, the legal relationship is created between the 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 tax. 30. No doubt, as per clause 6(a) of the agreement, the PMA is supposed to make the payment in advance. That would not make any difference to the nature of the transaction in view of clause 25(d) of the agreement, which stipulates as under : "25.(d) Upon the termination or expiration of this agreement for any reason, PMA shall discontinue the marketing/distributing/offer ing for sale, idea chitchat prepaid services, and shall forthwith return to ICL the entire stock of pre-paid SIM cards/recharge coupons remaining with him and/or his authorized retailer. ICL shall pay to PMA for such pre-paid SIM cards/recharge coupons received by it from the distributor." 31. Thus, even if advance payment is made by the PMA on receipt of the SIM cards, qua those SIM cards, it does not amount to "sale" of goods. The purpose is to ensure that the payment is received in respect of those SIM cards, which are ultimately sold to the subscriber inasmuch as unsold SIM cards are to be returned to the assessee and the assessee is required to make payment against them. This is an antithesis of "sale". There cannot Page No : 0166 be any such obligation to receive back the unsold stocks. Further, clause 25(f) lays down that on termination of the agreement, the PMA or its authorized retailer appointed by it, is not entitled to any compensation for cost or expenses incurred by it in either setting up or promotion of its business, etc. No such clause was required in case of "sale". (To be taken from Assessing Officer's order . . . ) 32. We may now refer to the three decisions of various Benches of the Tribunal which have taken a view contrary to the one held by the Tribunal in impugned Page | 13

decision. In Vodafone Essar Cellular Ltd. [2009] 317 ITR (AT) 234 (Cochin), the Cochin Bench has discussed the issue much elaborately in the following manner (pages 251, 255, 257, 258, 260) : "The assessee-company has made a lot of reliance on the conten tion regarding the freedom of pricing. It is the case of the assessee- company that the distributors are free to fix the selling price but the price should not exceed the MRP. The Revenue says that there is no such freedom in fixing the sale price. As far as the present case is concerned, earlier it was BPL and thereafter BPL Hutch and now it is M/s. Vodafone Essar 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 fast rules of any legal proposition as far as these matters are concerned . . . It is obvious that a service can only be rendered and cannot be sold. The owner of the SIM cards and recharge coupons is the asses see-company, M/s. Vodafone Essar Cellular Ltd. This is because the assessee-company is operating under the right of a licence agreement Page No : 0167 entered into with the Government of India. Nobody else can be given the right to operate as cellular telephone service providers. The ulti mate service is provided by the assessee-company to everyone and everywhere. 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 ques tion of passing of any ownership or title of the goods from the asses see-company to the distributor or from the distributor to the ultimate consumer. The distributors are acting only as a link in the chain of service providers. The assessee-company is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant for public at large. In between providing of that service, it is necessary for the company to appoint distributors to make available the pre-paid products to the public as well as to look after the documentation and other statutory matters regarding the mobile phone connection. So, what is the essence of service provided by the distributors ? The essence of service rendered by the distri butors is not the sale of any product or goods. The distributors are providing facilities and services to the general public for the avail ability of devices like SIM cards to have access to the mobile phone network of the assessee-company. Therefore, it is beyond doubt that all the distributors are always acting for and on behalf of the assessee company. Only for the reason that the distributors are making advance payment for the delivery of SIM cards and other products and distributors are responsible for the stock and account of those cards, it is not possible to hold that the distributors are not acting for the assessee-company but the distributors are acting on their own behalf. Such a proposition is inconceivable in the facts of the present case. It is always possible for the telephone company itself to provide all these services directly to the consumers as the Department of Telecom was doing ; but such a direct Page | 14

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 Page No : 0168 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-company is treating the benefits enjoyed by a distributor as commission and deducting tax at source. Where the assessee-company itself admits that it is liable to deduct tax at source under section 194H in respect of post-paid ser vices rendered through its distributors, it is the duty of the assessee to prove that the services rendered by the assessee through the distri butors on pre-paid package is different from the post-paid package so as to qualify the former for exemption from operation of section 194H. It is beyond any dispute that the essence of service rendered to the pre-paid and post-paid consumers are one and the same. There is no difference. The only difference is technical. The difference exists only in billing system and revenue collection, etc. In both the cases the assessee-company is providing the service. Distributors are helping to reach such services to the ultimate consumers. In both the systems, there is documentation. In both the systems, the distributors render similar types of services to the assessee-company. Of course account ing the revenue collection and related matters are different. The essence of post-paid and pre-paid services rendered by the assessee- company is the same and the relationship between the assessee and the customers is also the same. Therefore, if post-paid scheme is sub ject to section 194H, it is quite unlikely that pre-paid system would be outside the purview of section 194H . . . The next question is whether the commission/brokerage allowed by the assessee- company at the stage of raising the invoice is equiv alent to paying of commission/brokerage to the distributors. The assessee has always raised a contention, that too in the light of the judicial pronouncements including that of M. S. Hammed [2001] 249 ITR 186 (Ker) that the assessee-company had no occasion to deduct tax at source as the assessee-company was not making any payment to the distributors or crediting the account of the distributors for any services rendered to it. But that occasion was removed by the assessee itself by conscious wordings of the terms of the agreement. The assessee-company can collect the net sale proceeds along with TDS Page No : 0169 element from he distributors while distributing the pre-paid products to the distributors. The distributors shall file their returns before the concerned authorities 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 Page | 15

above example, the margin available to the distributor is Rs. 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 purchase and sale of goods. But, in the present case, there is no failure of any procedural provisions as apprehended by the assessee- company . . . We have come to the above conclusion specifically on the follow ing grounds :

(1) In the judgment of the hon'ble High Court of Kerala in the case of BPL Mobile Cellular Ltd. v. State of Kerala (W. P. No. 29202 of 2005) it has been held that in the supply and delivery of SIM cards and other recharge coupons, there is no sale and purchase of goods, but only of providing services ;

(2) The hon'ble Kerala High Court in the case of Kerala Stamp Vendors Association v. Office of the Accountant General [2006] 282 ITR 7 and M. S. Hameed v. Director of State Lotteries [2001] 249 ITR 186 (Ker) and the hon'ble High Court of Gujarat in the case of Ahmedabad Stamp Vendors Association v. Union of India [2002] 257 ITR 202 have treated the subject transactions as transaction of pur chase and sale of goods ;

(3) The assessee-company as a service provider is always the owner of the above products which is meant only as devices to have access to the mobile phone network system maintained and operated by the assessee-company ; Page No : 0170

(4) The services provided by the assessee-company through various distributors is regulated by law. Carrying on the business of providing service is subject to so many statutory compliance require ments, like verification of the identity of the consumer and the related documentation, etc. The assessee-company is having all lawful obli gations to a pre-paid consumer, even though the direct deal is between the distributor and the consumer. This is because the distributor does not have anything to provide "as service" to the consumer. These are all features of agency relationship.

(5) Other matters explained by the assessee as, there was no pay ment by the assessee in cash or cheque by way of commission to the distributors or not crediting the accounts of the distributors for any commission, delivering the products only after getting the price in full, are all matters of assessee's indoor management.

(6) Service cannot be sold or purchased and it can only be pro vided. The operational features explained by the assessee-company are necessary in running a mammoth system of providing 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." Page | 16