The judgment of the court was delivered by
The subject matter of challenge in the appeal is a judgement and order dated 5th May, 2006 passed by the learned Income Tax Appellate Tribunal allowing an appeal preferred by the revenue pertaining to the assessment year 2004-05. The assessee has come up in appeal. The following questions were formulated at the time when the appeal was formally admitted:-
“1.Whether the Tribunal was justified in law in holding that the discount allowed by the appellant to the distributors in respect of starter packs and recharge coupons for its prepaid service amounted to payment by the appellant of commission or brokerage within the meaning of section 194H of the Income Tax Act, 1961 and its purported findings in that behalf are arbitrary, unreasonable and perverse ?
2. Whether and in any event and having regard to the fact that in respect of sale of starter packs and recharge coupons for prepaid service, the appellant did not make any payment to or credit the accounts of the distributors, the appellant was not a person “responsible for paying” within the meaning of section 194H and could not be proceeded against under section 201 and the Tribunal was justified in law in rejecting the said contention of the appellant?”
Mr. Khaitan, learned Senior Advocate appearing for the appellant restricted his submissions to the question as to whether there was, in fact, a relationship of principal and agent between the assessee and his buyers or that the goods were sold on principal to principal basis.
Mr. Khaitan added that once this question is resolved, the questions formulated at the time of admission of the appeal have to be consequently answered. In support of his submission, Mr. Khaitan drew our attention to the obligation undertaken by the buyer under various clauses of the agreement entered into between the assessee and its buyers:-
“(b) Ensure that all payments to HTEL due under this Agreement are tendered in a timely manner;
(f) Unless otherwise agreed in writing, be solely responsible for all costs and expenses for all operating expenses incurred in connection therewith;
(i)Make payment to HTEL for any amounts due under this Agreement by way of Account Payee cheque or Banker’s Draft or in such other manner as HTEL may agree;
(k)Pay the Service tax to HTEL as may be assessed and levied from time to time;
(17) NO CREATION OF THIRD PARTY OBLIGATIONS
The Service Provider shall not assume or create any obligations on HTEL’s behalf without any prior written permission or incur any liability on behalf of HTEL or in any way pledge or purport to pledge HTEL’s credit or accept any contract binding upon HTEL without HTEL’s prior written consent.”
He also drew our attention to the sample invoice appearing at Page-75 and the price list at Page-77 which contain the cost of the retailer, the cost of the distributor and the maximum retail price with specific reference to the percentage of discount enjoyed by the distributor and the retailer. He also drew our attention to a judgement of the Bombay High Court in the case of Daruvala Bros.(P)Ltd. v. CIT reported in (1971) 80 ITR 213 for the following proposition:-
“Having regard to the above discussion, we are unable to accept Mr.Joshi’s submission that the present agreement is merely for distribution of Ciba products through the assess-firm. What is described as entrustment of goods and agreement for distribution really commences with the payment of price of all the goods supplied and delivered by the assessee-firm to the importers, and since the agreement authorises the assessee-firm to sell all these goods for itself, the phrase “entrustment” must be held to be in law not correct in connection with the goods in the possession of the assessee-firm. We cannot accept the contention that what the assessee-firm earns from out of the sale of the goods to the firm is merely commission. For earning what is mentioned by Mr.Joshi as commission, in the first instance, the assessee-firm agreed to pay and paid the invoice prices of the goods delivered to it. We are unable to accept his submission that during the interval between the delivery and return of the goods under clauses 19 and 30, the assessee-firm held the goods delivered to it in trust for and on behalf of the importers.
Under the circumstances, it must be held that the finding made by the Tribunal that the above agreement was an agency agreement was not correct. The true fact is that the agreement made between the assessee-firm and the importers mentioned above was not an agreement of agency as was necessary for levying income-tax on the assess-firm in respect of the sum of Rs. 50,000 mentioned in the question under section 10(5A) of the Act.
The second judgment cited by Mr.Khaitan is in the case of The Bhopal Sugar Industries Ltd. Vs. Sales Tax Officer Bhopal reported in 1977(3) SCC 147 wherein it was held that the question, as to whether there was a sale, was required to be determined having regard to the terms and the recitals in the agreement. The intention of the parties might to be spelt out from the terms of the documents and the surrounding circumstances and also from the course of dealings between the parties. He also drew our attention to the judgment in the case of Moped India Limited Vs Assistant Collector of Central Excise reported in 1986(1) SCC 125 wherein the following views were taken:-
“7. That takes us to the second question, namely, whether the Division Bench was right in taking the view that the commission of Rs. 110, 145 and 165 per moped in respect of different varieties of mopeds sold to the dealers could not be said to be trade discount. Mr. Nariman, learned counsel appearing on behalf of the appellants, contended that this commission allowed to the dealers was clearly trade discount and was, therefore, liable to be deducted in determining the excisable value of the mopeds by reasons of sub-section (b)(ii) of Section 4 of the Act. Now, it is true that this amount allowed to the dealers has been referred to in the agreement as commission but the label given by the parties cannot be determinative because it is for the court to decide whether the amount is trade discount or not, whatever be the name given to it. If we look at the terms of the agreement, it is clear that the agreement was between the appellants and the dealers on principal to principal basis. The clauses of the agreement which we have set out above clearly show beyond doubt that under the agreement, the mopeds were sold by the appellants to the dealers and the dealers did not act as agents of the appellants for the purpose of effecting sales on behalf of the appellants. It is clear from Clause 5(a) of the agreement that the bills in respect of the mopeds delivered to the dealers were to be sent by the appellants through their bankers and it was the responsibility of the dealers to retire the bills for the purpose of taking delivery of the mopeds. Clause 5(b) of the agreement laid an obligation on the dealers to insure the mopeds against all risks, pilferage, non-delivery and SRCC including breakage from the time the mopeds left the factory or stockyard of the appellants until they arrived at the premises of the dealer and this again would show that the dealers acted as principal to principal in purchasing the mopeds from the appellants. The dealers were also liable under Clause 6 of the agreement to maintain adequate organisation for sale and service of the mopeds, including show rooms, service stations, repair shops, spare parts, salesmen etc. and the mechanics were also to be trained at the cost of the dealers. The relationship between the appellants and the dealers was clearly on principal to principal basis and in the circumstances, it is difficult to see how the amount of Rs. 110, Rs. 145 and Rs. 165 allowed to the dealers in respect of different varieties of mopeds could be regarded as anything other than trade discount. The appellants charged to the dealers the price of the mopeds sold to them less the amount of Rs. 110, Rs. 145 and Rs. 165 in respect of different varieties of mopeds.
These amounts allowed to the dealers were clearly trade discount liable to be deducted from the price charged to the dealers for the purpose of arriving at the excisable value of the mopeds”.
He also drew our attention to the judgment in the case of Bharti Airtel Ltd. Vs. Deputy Commissioner of Income-Tax reported in (2015) 372 ITR 33 (Karnataka) wherein the following views were taken:-
“59) The seller may have fixed the MRP and the price at which they sell the products to the distributors but the products are sold and the ownership vests and is transferred to the distributors. However, whoever ultimately sells the said right to the customers is not entitled to charge more than the MRP. The income of these middlemen would be the difference in the sale price and the MRP, which they have to share as per the agreement between them. The said income acrues to them only when they sell this right to service and not when they purchase this right to service. The assessee is not concerned with quantum and time of accrual of income to the distributors by reselling the pre-paid cards to the sub-distributors/retailers.
As at the time of sale of pre-paid 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 categorised as commission. The sale is subject to conditions and stipulations. This by itself does not show and establish the principal and agent relationship."
He also drew our attention to the paragraph 62 of the judgment which reads as follows:-
“62) In the appeals before us, the assessees sell pre-paid cards/vouchers to the distributors. At the time of the assessee selling these pre-paid cards for a consideration to the distributor, the distributor does not earn any income. In fact, rather than earning income, distributors incur expenditure for the purchase of prepaid cards. Only after the resale of those pre-paid cards, distributors would derive income. At the time of the assessee selling these pre-paid cards, he is not in possession of any income belonging to the distributor. Therefore, the question of any income accruing or arising to the distributor at the point of time of sale of prepaid card by the assesse to the distributor does not arise. The condition precedent for attracting section 194H of the Act is that there should be an income payable by the assessee to the distributor. In other words, the income accrued or belonging to the distributor should be in the hands of the assessees. Then out of that income, the assessee has to deduct income-tax thereon at the rate of 10 per cent and then pay the remaining portion of the income to the distributor. In this context, it is pertinent to mention that the assessee sells sim cards to the distributor and allows a discount of Rs. 20, that Rs. 20 does not represent the income at the hands of the distributor because the distributor in turn may sell the SIM cards to a sub distributor who in turn may sell the sim cards to the retailer and it is the retailer who sells it to the customer. The profit earned by the distributor, sub-distributor and the retailer would be dependant on the agreement between them and all of them have to share Rs. 20 which is allowed as discount by the assessee to the distributor. There is no relationship between the assessee and the sub-distributor as well as the retailer. However, under the terms of the agreement, several obligations flow in so far as the services to be rendered by the assessee to the customer is concerned and, therefore, it cannot be said that there exists a relationship of principal and agent. In the facts of the case, we are satisfied that, it is a sale of right to service. The relationship between the assessee and the distributor is that of principal to principal and, therefore, when the assessee sells the sim cards to the distributor, he is not paying any commission; by such sale no income accrues in the hands of the distributor and he is not under any obligation to pay any tax as no income is generated in his hands. The deduction of income-tax at source being a vicarious responsibility, when there is no primary responsibility, the assessee has no obligation to deduct TDS. Once it is held that the right to service can be sold then the relationship between the assessee and the distributor would be that of principal and principal and not principal and agent. The terms of the agreement set out supra in unmistakable terms demonstrates that the relationship between the assessee and the distributor is not that of principal and agent but it is that of principal to principal.”.
Mr. Khaitan, however, added that there are judgments wherein a contrary view has been taken. Such judgments include a judgment of this Court. Mr. Bhowmik, learned advocate, appearing for the Revenue drew our attention to those judgments, wherein a contrary view was taken. They are the judgments in the case of C.I.T. Vs. Idea Cellular Ltd. reported in (2010) 325 ITR 148(Delhi), wherein the following view was taken:-
“…that the legal relationship was established between the assessee and the ultimate consumer/subscriber, who was sold the SIM card by the agents further appointed by the PMAs with the consent of the assessee. It was created by : (a) activation of the SIM card by the assessee in the name of the consumer/subscriber ; (b) service provided by the assessee to the subscriber. Further, dealings between the subscribers and the assessee in relation to the SIM card including any complaint, etc., for improper service/defect in service; and (c) entering into the ultimate agreement between the subscriber and the assessee. The nature of service provided by the assessee to the ultimate consumers/subscribers, whether it was pre-paid or post-paid SIM card remained the same. The SIM cards wereprepaid which were sold by the assessee to the consumers through the medium of PMAs. In the case of post-paid SIM cards, the transaction is entered into directly between the assessee and the subscriber and the subscriber was sent a bill periodically depending upon the user of the SIM card for the period in question. In both the cases, the legal relationship was created between the subscriber and the assessee that too by entering into specific agreement between these two parties. Even if advance payment was made by the PMAs on receipt of the SIM cards, qua those SIM cards it did not amount to “sale” of goods. The purpose was to ensure that the payment was received in respect of those SIM cards, which were ultimately sold to the subscriber inasmuch as unsold SIM cards are to be returned to the assessee and the assessee was required to make payment against them.
This was an antithesis of “sale”. There could not be any such obligation to receive back the unsold stocks. Further, clause 25(f) laid down that on termination of the agreement, the PMA or its authorised retailer appointed by it, was 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 cause of “sale”. The payment by the assessee constituted commission and tax had to be deducted at source on such payment.”
The Delhi High Court had considered the judgment in the case of C.I.T Vs. Director, Prasar Bharti reported in (2010) 325 ITR 205 (Kerala), wherein the following view was taken:-
“…that the transaction was a pure agency agreement between Doordarshan and the advertising agencies because one acts for the other and the act of the agent binds Doordarshan in its capacity as principal. The payment of 15 per cent by whatever name called whether discount or commission, fell within the definition of “commission” as defined under Explanation (i) to section 194H. Since permission given to agents was to withhold 15 per cent out of advertisement charges collected by them from the customers, and payable to Doordarshan, it was nothing but a payment made to agents in advance by Doordarshan before remittance of net advertising charges to them by the agents. Irrespective of the pattern of account maintained by Doordarshan, what happened when the agent paid 85 per cent of the advertisement charges collected from the customers was that the agent simultaneously got paid commission of 15 per cent which he was free to appropriate as his income. Tax deducted at source on the commission charges of 15 per cent had to be paid by Doordarshan to the Income-tax Department with reference to the date on which 85 per cent of the advertisement charges were received from the agent.”
Another judgment, on the point, of the Kerala High Court itself is in the case of Vodafone ESSAR Cellular Ltd. Vs. Assistant Commissioner of Income- Tax(TDS)(Kerala) reported in (2011) 332 ITR 255, wherein the following view was taken:-
“…the distributor acted on behalf of the assessee for procuring and retaining customers and, therefore, the discount given was commission within the meaning of Explanation (i) on which tax was deductible under section 194H.” The judgment of this Court is in the case of Bharati Cellular Limited Vs. Assistant Commissioner of Income-Tax and Another reported in (2013) 354 ITR 507, wherein the following views were taken:-
“that the salient features of the agreement between the assessee and the franchisees were (i) the property in the start up pack and pre-paid coupons even after transfer and delivery to the franchisees remained with the assessee, (ii) the franchisee really acted as a facilitator or instrumentality of providing services by the assessee to the ultimate subscriber, (iii) the franchisee had no free choice to sell it and everything was being regulated and guided by the assessee, and (iv) the rate at which the franchisee sold to retailers and that at which the assessee sold to the franchisee, was also regulated and fixed by the assessee. From the conditions in clauses 16, 16.1, 16.2 and 16.3 of the agreement, it emerged though the nomenclature had been used as franchisee, the agreement was essentially that of the principal and agent albeit the stipulation in clause 16.2. In the real sense, the franchisee acted on behalf of the assessee for selling start up packs and pre-paid recharge coupons to the customers of the assessee. There had been indirect payment by the assessee to the franchisee of the commission and the commission would attract tax deduction at source under section 194H.”
The agreement between the assessee, who has been referred to therein as ‘HTEL’ and Poddar Communications, who has been referred to in the agreement as the ‘Service Provider’ provides that the service provider has been appointed by HTEL on the terms and conditions contained therein which include (a) that the service provider shall keep the premises open for the purpose of rendering and performing services during the office hours; (b) he shall maintain at least one telephone line and email connectivity; (c) he shall maintain minimum support staff; (d) he shall not correct, amend or remove any signets from the products of the assessee; (e) he shall keep the assessee informed as regards any infringement or violation of the intellectual property rights of the assessee; (f) he shall maintain the branch image of HTEL and shall not do anything which may tarnish or spoil or reduce the value of the assessee; (g) he shall keep the assessee informed as regards feed back received from the customers and shall also keep the assessee informed as regards the purchases and inventory; (h) he shall pay the service tax to the assessee as may be assessed and levied from time to time;
(i) he shall not enter into any agreement with any third party which may be considered to be in competition of the business of the assessee; (j) he shall comply with all instructions and directions of the assessee; and (k) he shall not transfer or assign or sub-licence any of its rights and obligations. In consideration of the service to be rendered by him, he shall get a commission at the rates as per the policy to be adopted by the assessee from time to time.
The terms and conditions noticed above leave no manner of doubt that the relationship between Poddar Communications and the assessee appearing from the agreement relied upon by Mr. Khaitan is that of an agent and principal. Poddar Communications appears to have been employed to act on behalf of the assessee for the purpose of feeding the retailers and through them to sell the services to the consumers.
The judgments cited by Mr. Khaitan do not really provide any assistance to him in deciding the matter in one way or the other. In the case of Daruvala Bros. (P) Ltd. (Supra), the question for consideration was whether the compensation received by the assessee was a revenue receipt or a capital receipt.
The contention was that the compensation had been received by the assessee because the agency was surrendered for some of the territories. In lieu of such surrender, the compensation was paid by the principal. It is in that context, the question was considered and it was held that the sum paid to the assessee did not partake the character of compensation at all. We do not find any applicability of this judgment to the issue before us.
The second judgment is in the case of The Bhopal Sugar Industries Limited (Supra). The proposition laid down in the aforesaid judgment would militate against the case of the appellant before us rather than helping him. The clauses of the contract highlighted above would go to show that the service provider of the assessee in this case was not selling services on its own behalf. He was selling services on behalf of the assessee.
The question for consideration in the case of Moped India Limited (Supra) was whether the discount granted amounted to commission. It was found by the Apex Court that the dealers were wholesale buyers of the mopeds manufactured by the appellants and since the transactions between them were on principal to principal basis, it was difficult to appreciate how the appellants could possibly be said to have any interest, direct or indirect in the business of the dealers. If it could be said that the dealings and transactions between the assessee and the service providers in this case were on principal to principal basis, the question would have become simplier. In that case, it would not be difficult to hold that what was given by the assessee was a discount and not a commission. But that unfortunately is not possible. The assessee could have possibly run a case that the transactions were de hors the agreement entered into between the assessee and the service provider. If that were the case possibly one could say that these were dealings and transactions on principal to principal basis. But when the case is that the dealings and transactions were pursuant to the contract indicated above it is difficult to hold that the dealing were between principal to principal. Therefore, the judgment in the case of Moped India does not render any assistance to the appellant before us.
Lastly, the judgment cited in the case of Bharti Airtel (Supra) is of no assistance because we have not been able to persuade ourselves that the dealings and transactions between the assessee and service provider were on the principal to principal basis. The Karnataka High Court held in favour of the assessee only on that basis.
Such a full-fledged hearing could have been avoided because the point in substance is already covered by an earlier judgment of this Court in the case of Bharat Cellular Limited vs. Assistant Commissioner of Income-Tax & Anr. (supra). But considering the strenuous effort of learned Advocates on either side we thought it proper to devote time to examine the issue.
For the aforesaid reason, the first question formulated has to be answered in the affirmative and in favour of the revenue. In so far as the second question is concerned, we hold that the appellant was a person responsible for paying commission and, therefore, the provisions of Section 194H were attracted and the Tribunal was justified in taking the view as they did. The question is, accordingly, answered. The appeal is dismissed.
It is clarified that since we have not interfered with the order of the Tribunal, the directions issued by the Tribunal shall remain operative.