Applicability of TDS U/s 194H on issuance of recharge vouchers to distributors by cellular service provider at discount

Applicability of TDS U/s 194H on issuance of recharge vouchers to distributors by cellular service provider at discount


Applicability of TDS U/s 194H on issuance of recharge vouchers to distributors by cellular service provider at discount

No commission element was embedded in sale of prepaid SIM cards/ prepaid vouchers/ recharge coupons and, therefore, assessee was not liable to deduct tax under section 194H.

Assessee a cellular service provider issued its recharge vouchers/starters packets to distributors at discount. AO treated the discount element as commission and held assessee to be in default under section 201(1)/201(1A) on account of non deduction of tax under section 194H.

Held: No commission element was embedded in sale of prepaid SIM cards /prepaid vouchers/recharge coupons and, therefore, assessee was not liable to deduct tax under section 194H.

Decision: In assessee’s favour.


S. S. GODARA, J.M. & DR. A. L. SAINI, A.M.

Idea Cellular Ltd. v. ACIT

ITA No. 1204 &1302/Kol/2016, ITA No.2490/Kol/2016 & ITA No.22/Kol/2017

31 May, 2018

Assessee by: Somdipta Basu, Staff of Company

Revenue by: Md Usman, CIT-DR & S. Dasgupta, Addl. CIT-DR


S.S.Godara, J.M.

The assessee and Revenue have filed their respective cross-appeals in assessment years in former assessment years 2012-13 against Commissioner of Income-tax (Appeals)-24, Kolkata’s order dated 17-3-2016 in Case No.1534, 882, 1275/CIT(A)24/Kol/2012-13 & 13-14 (taken up together) and dated 31-10-2016 in Appeal No.1590/CIT(A) 24/Kol/2015-16 in latter assessment years 2013-14; respectively involving proceedings under section 201(1)/201(1A) of the Income Tax Act, 1961; in short ‘the Act’.

2. We proceed assessment year-wise for the sake of convenience and brevity. Former assessment year 2012-13 involves assessee’s and Revenue’s cross-appeal ITA No.1204 & 1302/Kol/2016. The taxpayer’s appeal’s sole substantive issue pleads that both the lower authorities have erred in law as well as on facts is treating it to be an assessee in default under section 201(1) and 201(1A) of the Act on account of non deduction of TDS pertaining to its discount coupons amounting to Rs. 44,03,27,555 (MRP of recharge vouchers starter packs of Rs. 470,33,82,078 issued for Rs. 426,30,54,523 to its distributors). This assessee is a cellular service provider. It issued its recharge vouchers/starters packets in relevant previous year to its distributors without deducting TDS thereupon. The assessing officer treated the assessee to be in default under section 201(1)/201(1A) on account of its above failure in non deduction of TDS upon the said discount sums. The assessee had pleaded that the said differential amount did not represent any commission element so as to be eligible for TDS deduction under Chapter-XVIIB of the Act. Its further case was that said SIM cards etc. did not have any value in themselves as well. All this failed to convince the assessing officer who raised then impugned demand.

3. The Commissioner (Appeals) upholds assessing officer’s action in question as follows :–

“4. The grounds No. I, IT, III & TV in respect of Appeal Nos. 1534 & 882 and Grounds Nos. II, Ill, V & VI in respect of Appeal No.1275 are common nature in all the three appeals. They are, therefore, decided together as under.

5. The appellant is a Cellular/Mobile Telephone Service Provider and has engaged distributors for collection of various charges from its ultimate customers, who are the users of its various services. Instead of directly paying these distributors, there is a system of collection in which margins are left for the distributors. These margins being the difference in the price paid to the appellant and that collected from the customers are the gross revenue in the hands of the distributors. The assessing officer’s case is that the appellant service provider is a principal having engaged distributors as its agents and in return for the said service the above said difference is being allowed by the appellant to the distributors. The assessing officer, therefore, has held the appellant liable for deduction of tax at source on commissions/discounts allowed to the said distributors in the above said manner. As the assessing officer held it liable for TDS and the appellant did not deduct TDS, the liability under section 201(1), in respect of tax ought to have been deducted but not deducted by the appellant, was raised by the assessing officer The grounds of appeal raised in effect challenges the assessing officer’s above said case. The plea taken by the appellant is that the distributors are not its agents, that the distributors are not being paid commissions by the appellant and that the distributors are acting as independent business partners. The appellant has relied on various judicial decisions on the point of above said liability determined by the assessing officer.

5.1 The issue is covered in favour of Revenue by the following decisions of the High Courts :–

(a) Vodafone Essar Cellular v. ACIT (2010) 7 Taxman (Ker).

(b) Bharati Cellular Ltd. v. ACIT (2013) 354 ITR 507 (Cal.)(HC)

5.2 Though conflicting decisions are there on the issue I am following the above decisions of the Hon’ble High Court of Calcutta and of Kerala as these two decisions according to me correctly define the relations between the appellant and its distributors and the payments involved. According to the above decision of the Kerala High Court, the discounts given to the distributors at the time of sale of SIM Card or Recharge coupons is nothing but commission on which tax is deductible. The test to be applied has been held as one to see whether or not assessee appellant has made any payment and whether it was for services rendered by the payee to the assessee deductor. The jurisdictional High Court of Calcutta has held the views to the following effect :–

(1) the property in the starter pack and pre-paid coupons even after transfer and delivery to the franchises remained with the assessee;

(2) the franchises really acted as a facilitator or instrumentality of providing services by the assessee to the ultimate subscriber;

(3) the franchises had no free choice to sell it and everything was being regulated and guided by the assessee, and

(4) the rate at which the franchises sold to retailers and that’s at which the assessee sold to the franchises, was also regulated and fixed by the assessee.

It was thus held that there was indirect payment to the franchisees of the commission and the commission would be liable to tax: deduction at source. Whatever the effect of the terms of agreement, the appellant is a principal exercising overall control on the business, various schemes and products and services, reducing the distributors or franchisees to agents. In effect the distributors or the franchises have thus been held liable as agent and there is indirect payment. I, therefore, agree with the assessing officer’s view that the discount or commission is hit by section 194H and thus the appellant is liable to the provision of TDS. This ground, there/ore, is not allowed.

6. The second issue is that the assessing officer should have ascertained whether the recipient assessees or distributors failed to pay tax directly and in case the recipient thus paid, the appellant’s plea is that the deductor cannot be treated as assessee in default. The appellant has relied on the case of DCIT v. Jagaran Prakashan Ltd. (2012) 345 ITR 288 (HC).This plea was also taken before the assessing officer in the course of determination of the liability under section 201, who rejected it on the ground that the appellant did not comply with all the provisions of TDS and did not furnish any evidence that the tax was already paid by the deductees. The appellant has also relied on the decision of Hon’ble Lucknow Tribunal in the case of ICICI Bank (2013) 156 TTJ 569. The extract of the submission on the point as in para-4 dated 24-12-2015 is reproduced as under :–

“4. The decision of Hon ‘ble Lucknow Tribunal in the case of lClCI Bank Ltd. v. Dy. CIT (2013) 156 TTJ 569  (Refer page no. 51 to 55 of LPB which has after following the decision of Jagran Prakashan Ltd. (supra), categorically held as under :–

The onus is on the revenue to demonstrate that the taxes have not been recovered from the person who had the primarily liability to pay tax, ands it is only when the primary liability is snot discharged that vicarious recovery liability can be invoked.

Once all the details of the person to whom payments have been made are on record, it is for the assessing officer, who has all the powers to requisition the information from such payers and from the income-tax authorities, to ascertain whether or not taxes have been paid by the persons in receipt of the amounts from which taxes have not been withheld.

As a result of the judgment of Hon’ble Allahabad High Court in Jagran Prakashan Ltd. case, there is a paradigm shift in the manner in which recovery provisions under section 201 (1) can be invoked.

As observed by Their Lordships, the provisions of section 201(1) cannot be invoked and the “tax deductor cannot be treated an assessee in default till it is found that assessee has also failed to pay such tax directly.

Once this finding about the non-payment of taxes by the recipient is held to a condition precedent to invoking section 201 (1), the onus is on the assessing officer to demonstrate that the condition is satisfied. No doubt the assessee has to submit all the information about the recipient as he is obliged to maintain under the law, once this information is submitted, it is for the assessing officer to ascertain whether or not the ta;’1;es have been paid by the recipient of income”

6.1 In my view! in view of various judicial decisions on the point, it is not correct to collect the tax twice – ones from the deductee and then from the deductor. The assessing officer should have examined whether the distributors included the commission in its income chargeable to tax and offered it in the return. Only in cases of failure to pay taxes on the part of the deductees the assessing officer can resort to the collection mechanism of section 201 of the Income Tax Act. I, therefore, direct the assessing officer to verify the payment of taxes by the distributors of the appellant and restrict the liability under section 201(1) of the Income Tax Act only to the amount of tax not deducted by the appellant and not paid by the deductee distributors. The ground relating to this issue is accordingly treated as allowed, for statistical purposes but subject to finding of the above direction.

7. Interest under section 201(lA)

As the assessing officer treated the appellant as defaulter in respect of discounts/commission to the distributors the interest was levied under section 201(IA) @ 30%. The appellant’s plea is that the interest can be levied only in cases of defaults in the payment of taxes and that in cases of refund claims and loss returns by the recipients the interest cannot be levied. It has further been pleaded that interests should be calculated after considering the advance tax and self assessment tax paid by the distributors and only upto the date on which the distributor has paid taxes on their income as advance tax or self assessment tax. It is, therefore directed that in cases where tax contained in the commissions/discounts were paid by the distributors or recipients the interest under section 201(lA) should be restricted to the period from the date of deductibility to the date when the taxes were paid by the recipients. Furthermore, in cases where tax was not paid by the recipients or distributors the interests should be levied from the date of deductibility to the date when the tax was actually paid by the appellant deductor. The grounds are treated as partly allowed as above.”

4. We have given our thoughtful consideration to rival pleadings qua the instant issue. The assessee vehemently contends that both the assessing officer and Commissioner (Appeal) ought not to have treated it to be in default under section 201(1) and interest under section 201(1A) of the Act. We find that instant issue as to whether there is commission element embedded or not in sale of prepaid SIM cards /prepaid vouchers/recharge coupons is no more res integra in view of hon’ble jurisdictional high court’s judgment in Bharti Cellular Ltd. v. ACIT (2013) 354 ITR 507 (Cal). It is submitted from the taxpayer’s side that various hon’ble high courts have also deleted the very kind of demand as well. We find no merit since all the relevant issues involved herein including that of principle to principle relationship stands adjudicated in hon’ble jurisdictional high court against the assessee. We thus decline assessee’s instant ground challenging correctness of the impugned demand.

5. The assessee’s next plea is that the interest under section 201(1A) of the Act is not leviable in its case as well. Same is the Revenue’s grievance in its cross-appeal ITA 1302/Kol/2016 that the Commissioner (Appeals)’s directions (contained in above extracted para-7 of lower appellate order) to the assessing officer for carrying out necessary exercise of factual verification to be not sustainable as per under section 251(1)(a) of the Act. Its case therefore is these directions go contrary to scheme of the Act after necessary legislative amendment with effect from 1-6-2001. We find that in this backdrop of pleadings that Commissioner (Appeals)’s direction in question qua section 201(1A) interest restore the issue in view of assessee’s arguments that the amount in question is to be recalculated after considering the corresponding advance and self-assessment tax paid by its distributors. We make it clear that said aspect had not been examined in assessing officer’s order. There is thus no prejudice caused either to the taxpayer or to the Revenue at this stage. The Revenue’s last plea is that such a course is no more open to the Commissioner (Appeals) is also found to be without any substance being mere technical in nature. We repeat that the above indicated circumstances clearly make out a case of factual verification. The Revenue’s argument alleging violation of section 251(1)(a) is therefore rejected as we selves direct the assessing officer to finalize consequential verification as per law after affording adequate opportunity of hearing to the assessee. Both parties therefore fail in their respective substantive grounds regarding applicability of under section 201(1A) interest in above facts and circumstances of the instant case. The assessee’s appeal ITA No.1204/Kol/2016raising the these issues of section 201(1) demand and 201(1A) interest fails accordingly.

6. We proceed further to notice that Revenue’s second substantive grievance in its appeal is that Commissioner (Appeals) has erred in law as well as on facts in reversing Assessing Officer’s action holding assessee’s roaming charges liable for TDS deduction under section 194J being in the nature of royalty payments under section 9(1)(vi) Explanation 6 of the Act involving the amount in question of Rs. 143,074,891 The assessing officer treated the assessee be in default qua the instant issue on account of its failure in deducting TDS relevant to these roaming charges as well.

7. The Commissioner (Appeals) accepts assessee’s corresponding substantive ground(s) as under :–

“8. ROAMING CHAGES:- [Ground No. IV in respect of Appeal No.1275] The grounds raised against holding roaming charges liable to TDS are as under :–

1. On the fact and circumstances of the case, it appears that the DCIT erred in treating the Appellant as an assessee in default under section 201(1) of the Act for non-deduction of tax under section 194J of the Act on roaming charges paid to the OTOs

2. The DCIT failed to appreciate and ought to have held that :–

(a) The aforesaid payments were made to the network operators for providing roaming facilities which were not subject to deduction of tax at source under any of the provisions of Chapter XVII of the Act.

(b) Payment for the use of standard facility does not amount to fees for technical services under section 9(1)(vii) LWS 194J of the Act.

(c) In absence of human intervention during the actual roaming process, amount paid cannot constitute fees for technical service under section 9(1)(vii) of the Act.

(d) Without prejudice, the payment is towards roaming facility, which is for the use of other telecom operator’s network and not for the use of a “earmarked equipment” and therefore, falls outside the ambit of section 194J read with Explanation 2(iv)(a) to section 9(1)(vi) of the Act.

The appellant prays that it be held that payment of roaming charges neither fall within “fees for technical services” as defined under Explanation 2 to section 9(1)(vii) nor falls within “Royalty” as defined Explanation 2 to section 9(1)(vi). Therefore, no tax is deductible under section 194J on roaming charges and, consequently, the action of the assessing officer in holding the Appellant as ‘assessee in default’ under section 201 LWS 194J be set aside/quashed. The Appellant prays that it be held that no tax is deductible under section 194J of the Act and hence, the Appellant cannot be held as an “assessee in default” under section 201(1) of the Act. In the statement of facts the appellant has challenged the assessing officer’s action based on the following two propositions :–

(a) Any payment for the use of standard facilities doesn’t amount to fee for technical services and;

(b) In absence of any human intervention during the actual roaming process payment would not be fees for technical services.

8.1 On both the above propositions reliance has been made on various judicial decision. In roaming there is no human intervention. This facility is standard and similarly there is no finding from the assessing officer that human intervention is required to facilitate the roaming. As this facility is only standard or general in nature and has no human intervention in ensuring facilities between the users and the visiting operators and the home operators, I have to intervene in the Assessing Officer’s order on the point.

8.2 A regards treating of roaming charge as royalty by the AO, it is seen that the amendment to the said effect was with effect from 1-6-1976 brought in by the Finance Act, 202, which comes into operation only after 31-3-2012.

8.3 The appellant’s submission is not addressing this aspect of the amendment which has been utilized by the assessing officer to include Data / Signal transmissions in the definition of process and thus treatment of commission as royalty by the assessing officer. The appellant cannot be held liable to deduct as at the material time there was no such liability. In other words, some judicial decisions hold that the TDS provisions cannot be made retrospective. In view of the above consideration I hold the assessing officer not correct and allow the grounds relating to roaming charges.”

8. Learned Departmental Representative strongly supports the assessing officer’s findings treating assessee’s roaming charges payments as royalty liable for TDS deduction. We find no substance in Revenue’s instant grievance. It fails to rebut the Commissioner (Appeals)’s clinching finding of fact that the assessee had availed / used standard facilities only not amounting to royalty under section 9(1)(vi) of the Act. We quote hon’ble Delhi high court’s judgment in Asia Satellite Telecommunications Co. Ltd. v. DIT 332 ITR 340 (Del) holding that mere use of an equipment not in assessee;’s control without any right vested in it for using standard services does not amount to royalty under section 9(1)(vi) of the Act as followed in co-ordinate bench’s decision in Yahoo (India) (P) Ltd. in ITA 506/Mum/2008 decided on 24-6-2011. Learned Departmental Representative quotes retrospective amendment in section (9)(1)(vi) inserting Explanation-4 with effect from 1-6-1976 by Finance Act, 2012 as well. This plea is also declined in view of hon’ble Bombay high court’s judgment in CIT v. N.G.C. Network (P) Ltd. [Tax Appeal No. 397 of 2015 decided on 29-1-2018 concluding that above amendment cannot be held applicable retrospectively as per doctrine of impossible compliance. We therefore reject Revenue’s latter substantive grievance as well as its main appeal ITA No.1302/Kol/2016.

Assessment Year: 2013-14

(Assessee’s appeal ITA No.2409/Kol/2016 and Revenue’s cross-appeal ITA 22/Kol/2017

9. The assessee raises two substantive grounds in challenging correctness of both the lower authorities action treating as an assessee in default under section 201(1) & 201(1A) of the Act for not deducting TDS upon prepaid SIM card/ recharge vouchers/ service coupons qua its discounted price offered to its distributors. We have already rejected its similar substantive grounds in forgoing discussion in preceding assessment year (supra). The Revenue’s cross appeal assails correctness of Commissioner (Appeals)’s directions regarding 201(1A) interest amount in tune with those in said preceding assessment year. We have already upheld similar direction in preceding paras. The very discussion is followed mutatis mutandis to reject both parties respective pleadings pertaining to this former issue of under section 201(1) demand read with 201(1A) interest. The Revenue’s appeal ITA 22/Kol/2017 fails accordingly.

10. We proceed further to notice that the assessee has raised its fourth substantive ground alleging therein that Commissioner (Appeals) has not adjudicated its grievance challenging assessing officer’s action treating it as assessee in default on account of short deduction of tax to be tune of Rs. 27,949 in respect of payments made for subscriber’s acquisition service charges. We find that the assessee’s representative himself had made it clear in the lower appellate proceedings that the assessing officer had issued necessary rectification dated 24-4-2015 to this effect. We therefore decline assessee’s instant substantive ground as well main appeal ITA 2409/Kol/2016.

11. These two assessee’s appeals ITA 1204/Kol/16 & 2409/Kol/2016 as well as Revenue’s cross appeals ITA 1302/Kol/2016 & ITA 22/Kol/2017 are dismissed.