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Income Tax Appellate Tribunal, DELHI BENCH ‘D’: NEW DELHI
ITA No. 1685/Del/2011 is against the order dated 28.12.2010 passed by the Learned Commissioner of Income Tax (Appeals), Meerut {CIT(A)} for Assessment Year 2008-09 and is the assessee’s appeal pertaining to Assessment Year 2009-10. Since, both the appeals involved identical issues, they were heard together and they are being disposed of through this common order for the sake of convenience.
2.0 The brief facts of the case are that the assessee is a limited company engaged in the business of providing telecommunication services across the country. In the course of telecommunication services business, the assessee sells Recharge Coupon Vouchers (RCV) and starter kits to its channel partners for onward sale to the retailer and, thereafter, to the final customers.
The Assessing Officer (AO), while placing reliance on the order of the Co-ordinate Bench of this Tribunal in the case of M/s Vodafone Essar Cellular Ltd. vs. ACIT, in (Cochin Bench), held that the discount offered to the distributors/channel partners was in the nature of commission on which the assessee was liable to deduct tax at source U/s 194H of the Income Tax Act, 1961 (hereinafter called ‘the Act’). Accordingly, the Assessing Officer proceeded to raise a demand on account of non deduction of tax at source and also levied consequential interest U/s 201(1A) of the Act.
2.1 Aggrieved, the assessee preferred an appeal before the Ld. First Appellate Authority, who set aside the order passed U/s 201(1) of the Act on the ground that the transaction of sale of recharge coupon vouchers and starter kits was done on principal to principal basis and, therefore, the provisions of section 194H were not applicable.
2.2 This issue is common in both the years in appeal before us. Identical orders were passed by the Assessing Officer for both the years and the Ld. CIT(A), vide a common order (impugned order), gave relief to the assessee. The relevant findings of the Ld. CIT(A) are being reproduced herein under for a ready reference:-
“ I have carefully considered the facts of the case and the judgments of different higher judicial authorities. It is important to note that the appellant is a limited company engaged in the business of providing telecommunication services across the country. Such services include sale of products such as starter kits and recharge coupon vouchers (RCVs.) RCVs are the prepaid vouchers used for selling validity and talk time to prepaid subscribers. The starter kits are new connection containing Removable User Identity Module (RUIM) cards or Subscriber Identity Module (SIM) cards for providing telecommunication connection. The sole basis of the AO to apply the provisions of section 194H to the appellant’s case is he judgment of the ITAT, Cochin Bench in the case of M/s.
Vodafone Essar Cellular Limited Vs. The ACIT(TDS), Kochi, 113/Coch/2009 dated 30.04.2009.
In Bharat Sanchar Nigam Ltd. Vs. UOI (2006), 282 ITR 273 (SC), the Hon’ble Apex Court has held that the SIM cards are “goods, sale of which qualifies as sales within the meaning of the Sale of Goods Act, 1930 for the purpose of levy of Sales Tax. “Goods” may be tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility, (b) its capability of being bought and sold, and (c) its capability of being transmitted, transferred, delivered stored and possessed. This is the correct approach to the question as to what are “goods for the purpose of sale tax.
If the SIM card is not sold to the subscribers but is merely part of the services rendered by the services provides, the SIM card cannot be charged separately to sales tax. If the parties intended that the SIM card would be a separate object of sale, it would be open to the sales tax authorities to levy sales tax thereon. If the sale of the SIM card is merely incidental to the services being provided and facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax.
The Union of India cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the services. In The light of the above decision of the Ho’ble Supreme Court, I do not agree with the following findings in Vodafone Essar Cellular Ltd. Vs. ACIT (2010) 129 TTJ (Coch.) 222 relied upon by the AO: i. Where the distributors do not have any freedom of price due to pre-stated MRP on the products, it cannot be a sale transaction.
In mu opinion since MRP is mandatorily required to be stated for all consumer goods which flow to the ultimate consumer through a chain of middlemen and if such a proposition as above was to be followed, then no sale of goods will ever take place. Therefore, this is not a true test for establishing whether the distribution engaged for SIM cards is rendering services on behalf of the cellular telephone service provider of sale of goods. ii) Since the SIM card is only a device to have access to the mobile phone network, there is no question of passing any ownership or title of the goods from the assessee company to the distributor or from the distributor to the ultimate consumer.
In mu opinion the question of passing of ownership or title of goods needs to be established from the actual facts of a transaction and the conduct of the parties involved and merely because SIM card is a facilitating deice for accessing the mobile phone network it cannot be held that no transfer of title/ownership can pass from the mobile phone service provider to the distributor. If this proposition was to be held as true, then even the sale of mobile phone instruments would have to be understood as provision of services since mobile phone network cannot be accessed otherwise than through the said instrument, which shall lead to an absurd conclusion. iii) Since it is the ultimate consumer or the assesse- company only who have the authority to uncover the secret number provided in the SIM card to bring it into activation, and the distributor does not have any authority or right to use the SIM card, it does not become the absolute property of the distributor and hence no sale take place.
In mu opinion it is more a question of maintaining the privacy of the consumer than passing or not of the absolute property in the goods involved. If the above proposition was to be followed it would lead to an anomalous situation since most of the white goods are supplied the distributors by the manufactures in a sealed- pack condition and these are finally opened for used by the ultimate consumers normally and it is a well-known fact that the consumers desist from accepting any such items where the sealed packing is amiss. Thus, even this is not a true test of establishing whether SIM cards received by the distributors from the cellular telephone services providing companies is under contract of sale or a part of services.
However, I fully agree with the finding of the ITAT in the above case that the nature and content of the services rendered under both the post-paid and prepaid methods is one and the same thing. Therefore, if the assessee was found to be considering the margin of distributor as commission and also subjecting the same to TDS u/s. 194H in the case of post-paid SIM cards, then the same treatment shall have to be given in the case prepaid SIM cards as well. Moreover, in the above case the Hon’ble Tribunal had also found that the assessee was debiting the margin given to the distributors under the head “commission paid to distributors”, leading to their conclusion that it was a admittance on the part of that assessee that the transfer of the SIM cards from the assessee company to its distributors was on commission basis on which TDS was definitely required to be deducted.
Therefore, in my opinion, drawing support from the decision of the Hon’ble Supreme Court in Bharat Sanchar Nigam Ltd. Vs.UOI (Supra), the said transaction between the appellant company and its distributors must be viewed from the actual conduct of the parties involved and not in a generic manner.
In the instant case of the appellant, the appellant company has furnished enough documentary evidences to show that the transaction between it and the distributors in respect of the SIM cards is one of sale of goods on principal to principal basis and there is no principal-agent relationship involved which is a sine qua non for attracting the provisions of section 194H. the facts of the appellant are quite similar to the facts in the case of ACIT Vs. Idea Cellular Ltd. (2009) 125 TTJ (Hyd.) 663, where the assessee was not held as a defaulter u/s. 201(1) and 201(1 A) for not deducting TDS u/s. 194H on margin allowed to the distributors on bulk sales of prepaid cards/ recharge coupons.
The AO’s orders, therefore, cannot be upheld. The appeals are allow3ed. In respect of F.Y. 2009-10, a copy of the letter dated 09.11.2010 of the DCIT, Circle-59, Kolkata has been filed which shows that enquiry on the same issue was made at Kolkata. In that light the AR’s submission is correct. The AO at Meerut had no jurisdiction over the appellant for the year. The order under appeal for F.Y. 2009-10 is, therefore, void on this account. ”
2.3 Now, the Department has approached this Tribunal assailing the order of the Ld. CIT(A) and the grounds raised by the Department in Assessment Years 2008-09 and 2009-10 are respectively as under:- for Assessment Year 2008-09:
“1.1 The CIT (A) has erred on facts and in law, in cancelling the order dated 01.02.2010 passed by the ITO(TDS) Meerut and in directing that provisions contained in section 194H of the I.T.Act,1961 is not applicable on the amount of discount/commission allowed on recharge coupons (prepaid) SIM cards to franchisees by the assessee, ignoring the fact of the case that the deductor company is liable to deduct the tax u/s 194H at the rate of 10% on the amount of discount/commission.
1.2 In directing so, CIT(A) has failed to appreciate the following (i) The Ld. CIT(A) has erred to admit the additional evidence produced by the assessee before him in contravention of Rule 46A(3) of the Income Tax Rules, 1962, in as much as no opportunity was given to the A.O to examine the correctness of the additional evidence produced by the assessee before the C.I.T(Appeals).
(ii) The Ld.CIT(A) has erred in holding that the transactions between the assessee and the distributor ip respect of the SIM Cards is one of the sale of goods on principal to principal basis and there is no principal- agent relationship involved. The inference derived by the CIT(A) is no acceptable in view of the reasons as under:- a) The assessee company, being owner of SIM cards and recharge coupons, is operating under the right of the license agreement entered into with the government of India and therefore the right to operate as cellular service provider cannot be transferred to any other person. Since SIM cards is only a device to have access to mobile phone network, there is no question of passing of any ownership or title of goods from the assessee company to the distributor. Therefore the distributors are acting only as a service provider between the assessee company and the consumer. b) The right to use SIM cards to get access to the network of the assessee company is given only to the consumer who activates the connection by using the secret number provided in the SIM Cards. Therefore, the SIM cards do not become the absolute property of the distributor.
(c) The essence of service rendered by the franchisee to the prepaid and post-paid consumers are same and the difference exist only in the billing system. Therefore, the nature of transaction between the assessee company and the franchisee for sale of prepaid recharge coupon cannot be distinguished from the sale of post-paid recharge coupons. Therefore, if the assessee was found liable for deducting TDS u/s 194H on post- paid SIM cards, then the same treatment shall have to be given in case of prepaid SIM cards as well. d) The franchisees are providing essential services to the assessee company having a huge operational network and therefore the relation of assessee and distributor is not of principal to principal basis, but in fact, is principal to agent basis, irrespective of the terms of agreement between the assessee and the franchisees. e) The order of Ld. C.I.T((A) is in contravention of ratio of judgement given by Hon’ble High Courts in cases as under:- i) CIT Vs. Idea Cellular Ltd., Appeal No.ITA No.146 of 2009 with of 2009 decided on 19.02.2010 by Hon’blel Delhi High Court. ii) Vodafone Essar Cellular Limited Vs. Assistant Commissioner Income Tax, in 1759, 1761, 1762, 1763, 1764, 1773 & 1780 of 2009 order dated 17.08.2010 by Hon’ble Kerala High Court. for Assessment Year 2009-10:
“1.2 The CIT (A) has erred on facts and in law, in cancelling the order dated 01.02.2010 passed by the ITO(TDS) Meerut and in directing that provisions contained in section 194H of the I.T.Act,1961 is not applicable on the amount of discount/commission allowed on recharge coupons (prepaid) SIM cards to franchisees by the assessee, ignoring the fact of the case that the deductor company is liable to deduct the tax u/s 194H at the rate of 10% on the amount of discount/commission.
1.2 In directing so, CIT(A) has failed to appreciate the following (i) The Ld. CIT(A) has erred to admit the additional evidence produced by the assessee before him in contravention of Rule 46A(3) of the Income Tax Rules, 1962, in as much as no opportunity was given to the A.O to examine the correctness of the additional evidence produced by the assessee before the C.I.T(Appeals).
(ii) The Ld.CIT(A) has erred in holding that the transactions between the assessee and the distributor in respect of the SIM Cards is one of the sale of goods on principal to principal basis and there is no principal- agent relationship involved. The inference derived by the CIT(A) is no acceptable in view of the reasons as under:- a) The assessee company, being owner of SIM cards and recharge coupons, is operating under the right of the license agreement entered into with the government of India and therefore the right to operate as cellular service provider cannot be transferred to any other person. Since SIM cards is only a device to have access to mobile phone network, there is no question of passing of any ownership or title of goods from the assessee company to the distributor. Therefore the distributors are acting only as a service provider between the assessee company and the consumer. b) The right to use SIM cards to get access to the network of the assessee company is given only to the consumer who activates the connection by using the secret number provided in the SIM Cards. Therefore, the SIM cards do not become the absolute property of the distributor. c) The essence of service rendered by the franchisee to the prepaid and post-paid consumers are sam< and the difference exist only in the billing system. Therefore, the nature of transaction between the assessee company and the franchisee for sale of prepaid recharge coupon connot be distinguished from the sale of post-paid recharge coupons. Therefore, if the assessee was found liable for deducting TDS u/s 194H on post-paid SIM cards, then the same treatment shall have to be given i case of prepaid SIM cards as well. d) The franchisees are providing essential services to the assessee company having a huge operational network and therefore the relation of assessee and distributor is not of principal to principal basis, but in fact, it is principal to agent basis, irrespective of the terms of agreement between the assessee and the franchisees. e) The order of Ld. C.I.T((A) is in contravention of ratio of judgement given by Hon’ble High Co in cases as under:- i) CIT Vs. Idea Cellular Ltd., Appeal No.ITA No. 146 of 2009 with of 2009 decided 19.02.2010 by Hon’ble Delhi High Court. ii) Vodafone Essar Cellular Limited Vs. Assistant Commissioner of Income Tax, in 1759,
1761, 1762, 1763, 1773 & 1780 of 2009 dated 17.08.2010 by Hon’ble Kerala High Court.”
3.0 The Ld. CIT-DR supported the action of the Assessing Officer and argued that in light of the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Idea Cellular Ltd. in Appeal Nos.146/2009 and 784/2009 and another judgment of the Hon’ble Kerala High Court in the case of Vodafone Essar Cellular Ltd. vs. ACIT [2011] 332 ITR 255 (Ker.), in the assessee was liable to deduct tax at source U/s 194H of the Act on discount offered to the distributors of the Recharge Coupon Vouchers and starter kits. The Ld. CIT-DR also argued that the Ld. CIT(A) was not justified in accepting some additional evidences without giving proper opportunity to the Assessing Officer to comment on the same and, thus, it was in clear violation of Rule 46A.
4.0 Per contra, the Ld. Authorized Representative (AR) referring to the Paper Book filed by the assessee submitted that this very issue has been decided by the Hon’ble High Courts and Co- ordinate Benches of the ITAT including the judgment of the Hon’ble Karnataka High Court in the case of Bharti Airtel Ltd. vs. CIT & Anr. [2015] 372 ITR 33 (Karn). The Ld. Authorized Representative also referred to an order of Jaipur Bench of Tribunal in a related company of the assessee in the case of TTSL vs. ITO, Jaipur reported in [2016] 71 Taxman.com 285 (Jaipur). The Ld. AR further submitted that in the case of DCIT vs. Idea Cellular in vide order dated 01.05.2018, the Co-ordinate Bench of ITAT Delhi had decided the issue of applicability of section 194H of the Act vis-à-vis discount on pre-paid cards in favour of the assessee despite the judgment of the Hon’ble Delhi High Court in the case of that very assessee. It was further argued by the Ld. AR that the adverse judgment of the Hon’ble Delhi High Court and the Hon’ble Kerala High Court were not applicable in the case of the assessee, as the case of the assessee fell under the jurisdiction of the Hon’ble Allahabad High Court and that there was no judgment either favourable or unfavourable by the Hon’ble Allahabad High Court on the issue. The Ld. AR pleaded that a view favouring the assessee may be taken in light of the judgment of the Hon’ble Apex Court in the case of CIT vs. Vegetable Products reported in [1973] 1SCC 442.
5.0 We have heard the rival submissions and have also gone through the records. As far as the Department’s ground regarding violation of Rule 46A of the Income Tax Rules is concerned, a perusal of the impugned order shows that the assessee had raised the ground of violation of principles of natural justice before the Ld. First Appellate Authority as is evident from page 10 of the impugned order read along with the two page order passed by the Assessing Officer. It is very much clear that no proper opportunity was given to the assessee to justify its case of non deduction of tax at source. Further, it is also seen that there is no reference to any application made by the assessee for admitting additional evidences before the Ld. CIT(A). Thus, the Ld. CIT(A) examined the various documents in exercise of his powers U/s 250(4) of the Act and under such circumstances, we are of the considered opinion that when the Assessing Officer had failed to provide proper opportunity to the assessee, the Ld. CIT(A) had acted well within his power to adjudicate the issues after calling for necessary information and details and it cannot be said that there was any violation of Rule 46A of the Income Tax Rules. It is trite that the First Appellate Authority has powers which are co-terminus with the powers of the Assessing Officer and that he is empowered to call for any details or documents which he deems it necessary for the proper adjudication of the issue and there is no requirement under the law for granting any further opportunity to the Assessing Officer in terms of section 250(4) of the Act in such cases. Accordingly, finding no strength in the arguments of the Ld. CIT-DR on this issue and looking into the factual matrix of the case, we dismiss the ground No.1.2(i) of the Department’s appeal.
5.1 Coming to the merits of the case, the sole issue for our consideration is the applicability of provisions of section 194H of the Act on the discount allowed to distributors/channel partners on the sale of recharge coupon vouchers and the starter kits for telecommunication services. In this context, it is seen that the order U/s 201(1) of the Act has been passed by ITO (TDS), Meerut and, further the registered address of the assessee as appearing in the order U/s 201(1) of the Act, in the impugned order and in Form No.36 is that of Meerut. Therefore, we agree with the contention of the Ld. AR that the jurisdiction of the assessee falls under the jurisdiction of the Hon’ble Allahabad High Court. Therefore, we are respectfully of the considered opinion that the judgment of the Hon’ble Delhi High Court in the case of Idea Cellular (supra) and the Hon’ble Kerala High Court in the case of Vodafone Essar Cellular (supra) cannot be considered as binding for the assessee on the issue. We also note that the Hon’ble Karnataka High Court in the case of Bharti Airtel Ltd. vs. CIT & Anr (supra) has decided the issue in favour of the assessee by holding that tax was not deductable on discount allowed to distributors. In this judgment, the Hon’ble Karnataka High Court in the cases of three assessees i.e., Bharti Airtel Ltd., Vodafone Essar Ltd. and another group company of the assessee Tata Tele Service Ltd. identical issue was considered and the issue was settled in favour of the assessee.
Similarly, the Jaipur Bench of the Tribunal in the case of TTSL vs. ITO, Jaipur (supra) followed the judgment of the Hon’ble Karnataka High Court in the case of Bharti Airtel vs. DCIT (supra) and held that the discount on sale of recharge vouchers and SIM cards by telecommunication company to its distributors did not amount to commission in terms of section 194H of the Act. We also note that the Hon’ble Rajasthan High Court in the case of Tata Tele Services Ltd. reported in 402 ITR 439 (Rajsthan) and the Hon’ble Bombay High Court in the case of CIT vs. Vodafone Cellular Ltd in Income Tax Appeal No.1152 of 2017 vide order dated 27.01.2020 have also decided the issue in favour of the assessee by holding that the provisions of section 194H were not applicable to the transaction of sale of starter kits and pre-paid SIMs to distributors on principal to principal basis. Under such circumstances and taking guidance from the judgment of the Hon’ble Apex Court in the case of Vegetable Products (supra), we hold that the view favouring the assessee needs to be taken.
5.2 We also note that the Assessing Officer has relied upon the judgment of the Hon’ble Delhi High Court in the case of Idea Cellular (supra). However, it will be appropriate to refer to findings recorded by a Co-ordinate Bench of this Tribunal in subsequent order passed in the case of DCIT vs. Idea Cellular in vide order dated 01.05.2018 wherein despite the adverse judgment of the Hon’ble Delhi High Court, the Co-ordinate Bench decided the issue of applicability of the provisions of section 194H of the Act in favour of the assessee. We would also like to refer to the observations of the Co-ordinate Bench of this Tribunal, Jaipur Bench in the case of Teta Tele Services Ltd. vs. ITO, Jaipur (supra) wherein view favourable to the assessee was taken. The relevant observations and findings of the Co-ordinate Bench of this Tribunal are being reproduced herein under for a ready reference:-
“2.22 We have heard the rival contentions and perused the material available on record. Following observations emerge from the record:- i Assessee has claimed that as per its business agreement terms the sale price is collected in advance from distributor. The sale price is received minus discount, what is accounted for in its books is net sale price and not the commission. Assessee has demonstrated it from its pleading before lower authorities in this behalf and its written submissions filed before us. They are neither controverted by the authorities below nor by the Id. DR. Consequently the assessee s case falls in para 61 of the Honble Kamatak High Court judgment and not in para 60 as proposed by Id. DR. ii When assessee is not holding any income payable to distributors the question of deducting TDS u/s. 194H does not arise. Therefore the facts, circumstances, accounting treatment and nature of relationship between assessee and its distributors qua the impugned sales fall within the ambit and observations at para 61 of the order. In view of the foregoings we have no hesitation to hold that: iii What is sold by the assessee service provider to the distributor is the right to service. Once the distributor pays for the service, and the service provider, delivers the Sim Card or Recharge Coupons, the distributor acquires a right to demand service. Once such a right is acquired the distributor may use it by himself. iv. Distributor may also sell the right to sub-distributors who in turn may sell it to retailers, thus the property in goods is transferred in favour of the distributor. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the distributor at the time of the delivery then he is thereafter liable for the same and would be dealing with them in his own right as a principal and not as an agent. v. The assessee may have fixed the MRP and the price at which they sell the products to the distributors but the products are sold and ownership vests and is transferred to the distributors. The discounted income accrues to distributor only when they sell this right to service and not when they purchase this right to service from assessee. vi. As at the time of sale of prepaid card by the assessee to the distributor, income has not accrued or arisen to the distributor, there is no primary liability to tax on the Distributor. In the absence of primary liability on the distributor at such point of time, there is no liability on the assessee to deduct tax at source. The difference between the sale price to retailer and the price which the distributor pays to the assessee is his income from business. It cannot be categorized as commission. Merely because sale is subject to agreed conditions and stipulations cannot convert the relationship of principal to principal into that of principal and agent relationship.
2.23 We find merit in the contention of Id. Counsel that there is no jurisdictional High Court judgment on this issue. Hon'ble Karnataka High Court Judgment is elaborate, detailed, considers the previous Delhi and Kerala High Court judgment against the assessee and is latest comprehensive adjudication on the issue. Even if it is held that there exist divergence of judicial opinion a view favourable to the assessee is to be adopted as held by Hon'ble Supreme Court in Vegetable Products Ltd. and Vatika Township (P.) Ltd.'s case (supra). From this angle also in these facts and circumstances Hon'ble Karnataka High Court judgment is applicable to the assessee's case. Respectfully following the same we hold that: a. The relationship between assessee and its distributors qua the sale of impugned products is on principal to principal basis; the consideration received by assessee is sale price simplicitor. b. There is no relationship of Principal and agent between assessee and distributors as held by authorities below there orders are reversed. c. Looking at the transaction being of Sale/lhirchase and relationship being of principal to principal the discount does not amount to commission in terms of sec. 194H, the same is not applicable to these transactions. Therefore, assessee's cannot be held in default; impugned demand raised applying sec. 194H is quashed. Assessee's grounds are allowed.
2.24 Apropos the revenue appeal since we have held that sec. 194H is not applicable, there remains no substance in revenue appeals. In any case there is no infirmity in the order of Ld. CIT(A) in admitting the additional evidence in the light of Hon'ble Supreme Court judgment in the case of Hindustan Coca- Cola Beverages (P.) Ltd.(supra) and following his past orders. Revenue grounds are dismissed.”
5.3 Therefore, in light of the discussion in the above paras and respectfully following the judicial precedents referred to above, we hold that the sale of recharge voucher coupons and starter kits and the discount offered to the distributors would not attract TDS provisions u/s 194H of the Act and as such no default U/s 201(1) of the Act can be attributed to the assessee. Accordingly, the order of the Ld. CIT(A), allowing relief to the assessee, is upheld and the grounds raised by the Department are dismissed. The orders of the Ld. CIT(A) for both the assessment years in appeal are, thus, upheld.
6.0 In the final result, both the appeals of the Department are dismissed.
Order pronounced on 27th September, 2021.