The order of the Bench was delivered by
Ms. Sushma Chowla, Judicial Member - The appeal filed by the Revenue is against the order of the Commissioner of Income-tax (Appeals), Chandigarh, dated April 24, 2009 relating to the assessment year 2006-07 against the order passed under section 143(3) of the Income-tax Act, 1961 (in short "the Act"). The assessee has filed cross-objections against the appeal filed by the Revenue.
2. Both appeals of the Revenue and the cross-objections filed by the assessee on the similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee has withdrawn the cross-objection and hence the same are dismissed as not pressed.
4. The Revenue in I. T. A. No. 652/Chd/2009 has raised following ground of appeal :
"1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) vide appellate order No. 327/ P/08-09 has erred in deleting the addition of Rs. 46,48,960 under the head 'dealers scheme and incentive' which was made under section 40(a)(ia) by accepting the contention of the assessee that it was an incentive for enhancing the sales and no service part was involved in it.
4. It is prayed that the order of the learned Commissioner of Income-tax (Appeals) be cancelled and that of the Assessing Officer may be restored.
5. That the appellant craves leave to add or amend any grounds of appeal before the appeal is heard or disposed of."
5. The only issue arising in the appeal is in relation to the allowability of expenditure claimed under the head "dealer's scheme and incentives" at Rs. 46,48,960.
6. The brief facts of the case are that the assessee was engaged in the business of sale of mobile connection of M/s. Hutchison Essar South Ltd. and also in the sale and purchase of products of Dabur. The assessee had received commission and incentive on the sale of mobile connection of M/s. Hutchison Essar South Ltd. at Rs. 113.63 lakhs. As against the same, the assessee had claimed expenditure of Rs. 47.68 lakhs on account of "dealer's scheme and incentives". The assessee had not deducted any tax at source out of the payment on account of "dealer's scheme and incentives". The assessee was to show cause to explain the nature of payments and also to justify as to why the tax was not deducted out of the said payments. The explanation of the assessee vide reply dated December 12, 2008 was that this amount is allowed to our dealers for providing them to enhance the sale of the products. Basically it is scheme/bonus to dealers for selling more Hutch connection. In turn they also pass part of scheme amount to the customers for the purpose of sales promotion of the products. Mainly it is provided on Hutch products. These are basically sales promotions expenses incurred by the assessee for which no TDS is required to be deducted as per the provisions of the Income-tax Act, 1961. The Assessing Officer was of the view that the so-called incentives paid under the "dealer's scheme and incentives" were in the nature of commission on which tax at source was deductible, which was not deducted and hence whether the same should be allowed as an expenditure. From the details furnished by the assessee, the Assessing Officer noted that there were 195 cases where the amount paid to each dealer exceeded Rs. 2,500 totalling Rs. 46.48 lakhs. The list of such dealers is enclosed as annexure-A to the assessment order. The Assessing Officer was of the view that the provisions of section 194H of the Act were applicable to the same. The plea of the assessee was that the amounts paid to the dealers were as per scheme of the company which was purely target of the turnover based and was directly relatable to the sales of the product of the company and as such was not commission under section 194H of the Act. The Assessing Officer noted that copies of few of the assessee's purchase bill, sale bills and details of payments falling under the "dealer's scheme and incentives" were obtained. A copy of the assessee's agreement with Hutchison Essar South Ltd. (HESL) dated April 2007 was also given by the assessee. This agreement does not reveal anything regarding the formula at which commission/brokerage has been paid by HESL to the assessee. The assessee could not separately give the method as per which it receives commission/brokerage, despite being asked for it, nor could it explain the method at which it pays to its dealers payment reflected under "dealer's scheme and incentives". The Assessing Officer further observed as under :
"However, the assessee's representative stated that SIMs are sold to dealers at rates less than their MRP. In this regard four invoices were obtained from the assessee in which SIMs with their MRP at 99 were sold to the assessee's dealers at the rate of Rs. 84. It was further explained that when these SIMs gets activated then on the basis of number of SIMs activated by each dealers, further amount is paid to each dealer which is reflected under the title 'dealer's scheme and incentives'. A list of a few dealers for a small period, showing number of activations by each was also given by the assessee. In this list, activations of dealers ranging from 1 to 87 have been shown. This only means that amounts paid to the dealers under the head 'dealer's scheme and incentives' are not target based but they invariably get these amount on the number of activations. As per annexure III to the agreement with HESL, one of the formality at the time of sale is regarding proper verification of the identity of the customers in respect of the sale of prepaid cards and proper documentation like customer agreement forms and enrollment forms. Thus there is a service aspect which is involved in the sale process."
7. The Assessing Officer was of the view that this payment for activation of SIMs is certainly a payment received by the dealer acting (like the act of documentation) on behalf of another person (the assessee in this case) for services rendered (services of documentation and retaining the documents or submitting them to the assessee) in the course of selling of goods (SIMs).
8. All the elements of the inclusive definition of commission given in section 194H are fulfilled and on the basis of the above discussion, it is held that the payments of Rs. 47,68,743 given by the assessee to its dealers described by it as "dealer's scheme and incentives" are commissions within the meaning of section 194H of the Income-tax Act, 1961 on which no tax has been deducted by the assessee at source and so the payment of Rs.46,48,960 (only in those cases out of a total of Rs. 47,68,743 where payment to each dealer exceed Rs. 2,500) claimed as expenditure by the assessee are disallowed under section 40(a)(ia) of the Income-tax Act, 1961.
9. Before the Commissioner of Income-tax (Appeals) the assessee furnished written submissions which are incorporated under paragraph 7 at pages 5 and 6 of the appellate order, which were forwarded to the Assessing Officer, who in turn furnished its report which is incorporated under paragraph 8 at pages 6 and 7 of the appellate order. The Commissioner of Income-tax (Appeals) at paragraph 10 held as under :
"10. After analysing the entire material on record, I find that as per DOT's regulations, every consumer has to fill up the identification form. It is the regulation of the Government which has to be complied with by the company. This requirement has been necessitated for security reasons. All the companies are required to obtain these forms. It is stated by the assessee that the distributor, i.e., the assessee, asked the dealer to get the form filled up from the customers which are sent to the company directly. According to the Assessing Officer, such documents come within the purview of the services and hence the provisions of section 194H are applicable. In my view, the sale cannot be effective until the consumers furnished the prescribed form. It is a statutory regulation and is to be complied with by all the companies. It is part of the sale. It is not the choice of the assessee that any SIM can be given without getting the prescribed form. The SIMs are activated when the company gets those prescribed forms. The assessee has given additional amounts to the dealers as part of the sales. As per section 194H, commission of brokerage includes any payment received directly or indirectly by the person acting on behalf of another person for services rendered or for any services in the course of buying and sale of goods. In the present case, the dealers are not providing any services in the course of buying and selling of goods. The filling up of the prescribed form is only a statutory requirement in the course of buying the goods from the distributor. In order to enforce the statutory regulation, some further incentive is given to the dealers. In my view, this does not come within the purview of services rendered by the dealer to the assessee. The stand of the assessee is that some amount is allowed to the dealers to enhance the sale of the product. The Assessing Officer has stated that the amounts are not paid to enhance the sales. These are not target based. The discount is paid to the dealers on the basis of number of activations. In my opinion, this is in the nature of further discount given to the dealers for getting the maximum number of activations. This is a strategy adopted by the assessee to enhance the sales as ultimately the parent company, i.e., Hutch would be willing to get maximum number of activations to have a wider market share and presence, scheme and incentive are linked to enhancing of sales. The assessee being distributor is also interested in enhancing sales. The sales would definitely get enhanced if there are maximum number of connections which would in turn benefit the assessee-company as the company, i.e., Hutch would continue their distributorship. Any company would be interested in the maximum number of activations in this competitive world. For achieving this purpose, the company is making its presence through distributors, dealers, etc."
10. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee holding that the payments were incentives given to the dealers to enhance the sales and were not subject to tax deduction at source.
11. The Revenue is in appeal against the order of the Commissioner of Income-tax (Appeals). The learned Departmental representative for the Revenue at the outset pointed out that similar issue arose before different Benches of the Tribunal wherein similar issue was decided against the assessee. The learned Departmental representative for the Revenue further pointed out that the hon'ble Delhi High Court in CIT v. Idea Cellular Ltd. [2010] 325 ITR 148/189 Taxman 118 had held that the commission or discount to distributors of SIM card/recharge coupon was commission and was subject to TDS under section 194H of the Act. The learned Departmental representative for the Revenue also placed reliance on the ratio laid down by the hon'ble Kerala High Court in Vodafone Essar Cellular Ltd. v. Asstt. CIT [2011] 332 ITR 255/[2010] 194 Taxman 518. Similar issue has been laid down by the hon'ble Calcutta High Court in Bharti Cellular Ltd. v. Asstt. CIT [2013] 354 ITR 507/[2011] 200 Taxman 254/12 taxmann.com 30.
12. The learned authorised representative for the assessee stressed that the facts of the present case were different and reference was made to the observation of the Assessing Officer at page 4 of the assessment order. Further it was pointed out that in the absence of principal to principal relationship there is no merit in holding that such expenditure was subject to tax deduction at source. Reliance was placed by the learned authorised representative for the assessee on the following decisions :
| (i) |
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Government Milk Scheme v. Asst. CIT [2006] 98 ITD 306 (Pune) ; |
(ii) |
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Ahmedabad Stamp Vendors Association v. Union of India [2002] 257 ITR 202/124 Taxman 628 ; and |
(iii) |
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CIT v. Mother Dairy India Ltd. [2012] 206 Taxman 157/18 taxmann.com 49 (Delhi). |
13. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the allowability of expenditure booked under the head "dealer's scheme and incentives" totalling Rs.47.68 lakhs. The claim of the assessee was that the said amount was being paid to the dealer for enhancing the sale of the product of the assessee. It was pleaded by the assessee that physically the same was a scheme/bonus allowed to the dealers for selling more Hutch connection and expenditure was in the nature of sales promotion expenses incurred by the assessee on which no tax was to be deducted at source. However, the Assessing Officer noted that as per the details furnished by the assessee, the total of the amount paid to each dealer in the year exceeding Rs. 2,500 was Rs.46,48,960. There were total of 195 such cases and list of the said persons is enclosed as annexure-A of the assessment order. The assessee had entered into agreement with M/s. Hutchison Essar South Ltd. under which it was not clear as to why it receives commission/brokerage from M/s. Hutchison Essar South Ltd. Further the assessee had not been able to produce any evidence to explain the method by which it pays the amount to the dealer reflected under the head "dealer's scheme and incentives". The Assessing Officer noted that there were two transactions. The first was in respect of the sale of SIM cards and second was in respect of activation of the SIM. The first transaction of sale was completed by giving delivery of the SIMs to the dealers, against which invoices were issued. However, where dealers activated the SIM there was service part attached to it in the shape of customers' documentation. The said payment by way of service to the customers was not target based or performance based. The expenditure booked under the "dealer's scheme and incentives" was based upon number of SIMs activated by the dealer in the given period. The issue arising in the present appeal was in relation to the said payment made to the dealers by the assessee for activation of SIMs being on account of service rendered in the course of selling the SIMs. The said payments were held to be commission paid to the dealers within the meaning of section 194H of the Act.
14. We find that the nature of payment made to the distributors of SIM card/recharge coupon on activation of SIMs arose before the hon'ble Delhi High Court in Idea Cellular Ltd. (supra) and it was held that the same was in the nature of commission and was subject to TDS under section 194 of the Act. The hon'ble High Court observed as under (page 164) :
"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) |
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Activation of the said SIM card by the assessee in the name of the consumer/subscriber. |
(b) |
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Service provided by the assessee to the subscriber. Further, dealings between the subscribers and the assessee in relation to the said SIM card including any complaint, etc. for improper service/ defect in service. |
(c) |
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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 service provided by the assessee to the ultimate consumers/subscribers, whether it is prepaid or post-paid 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 bills 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 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 in 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] 145 STC 91 (SC), the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof 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, PMA is supposed to make the payment in advance. That would not make any difference to the nature of 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/offering for sale, Idea chitchat pre-paid services, and shall forthwith return to ICL the entire stock of pre-paid SIM cards/recharge coupons remaining with him and/or his authorised 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 be any such obligation to receive back the unsold stocks. Further, clause 25(f) lays down that on termination of agreement, PMA or its authorised 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' . . .
34. We thus answer the question, as formulated, in favour of the Revenue and against the assessee. As a consequence, these appeals are allowed and judgment of the Tribunal on this aspect is set aside. No costs."
15. Thus the court held that on true and correct appreciation of the relationship between the assessee and its distributor, the Tribunal had erred in holding that the payment made by the assessee was not commission as envisaged under section 194H of the Act.
16. Further, the hon'ble Kerala High Court in Vodafone Essar Cellular Ltd. (supra) observed that the SIM cards/ recharge coupons were only for the purpose of rendering service to the subscriber of the mobile phone and the distributor was only a middleman arranging customers or subscribers for the service provider and payment made on account thereof for the supply of SIM card and recharge coupon was in the nature of commission and discount to distributors and exigible to tax deduction at source under section 194H of the Act. The hon'ble High Court observed as under (page 263) :
"5. The main question to be considered is whether section 194H is applicable for the 'discount' given by the assessee to the distributors in the course of selling SIM cards and recharge coupons under prepaid scheme against advance payment received from the distributors. We have to necessarily examine this contention with reference to the statutory provisions, namely, section 194H which is extracted hereunder for easy reference :
"194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, 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 :
Explanation.—For the purposes of this section,—
| (i) |
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'commission or brokerage' 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 or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities ; |
6. What is clear from Explanation (i) of the definition clause above is that commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for the services rendered. We have already taken note of our finding in BPL Cellular's case abovereferred that a customer can have access to mobile phone service only by inserting SIM card in his handset (mobile phone) and on the assessee activating it. Besides getting connection to the mobile network, the SIM card has no value or use for the subscriber. In other words, SIM card is what links the mobile subscriber to the assessee\qs network. Therefore, supply of SIM card, whether it is treated as sale by the assessee or not, is only for the purpose of rendering continued services by the assessee to the subscriber of the mobile phone. Besides the purpose of retaining a mobile phone connection with a service provider, the subscriber has no use or value for the SIM card purchased by him from the assessee's distributor. The position is same so far as recharge coupons or E topups are concerned which are only air-time charges collected from the subscribers in advance. We have to necessarily hold that our findings based on the observations of the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India [2006] 145 STC 91 (SC) in the context of sales tax in the case of BPL Cellular Ltd., squarely apply to the assessee which is nothing but the successor company which has taken over the business of BPL Cellular Ltd. in Kerala. So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of SIM cards or recharge coupons is only for rendering services to the ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee. The terms of distribution agreement clearly indicate that it is for the distributor to enroll the subscribers with proper identification and documentation which responsibility is entrusted by the assessee on the distributors under the agreement. It is pertinent to note that besides the discount given at the time of supply of SIM cards and recharge coupons, the assessee is not paying any amount to the distributors for the services rendered by them like getting the subscribers identified, doing the documentation work and enrolling them as mobile subscribers to the service provider, namely, the assessee. Even though the assessee has contended that the relationship between the assessee and the distributors is principal to principal basis, we are unable to accept this contention because the role of the distributors as explained above is that of a middleman between the service provider, namely, the assessee, and the consumers. The essence of a contract of agency is the agent's authority to commit the principal. In this case the distributors actually canvass business for the assessee and only through distributors and retailers appointed by them the assessee gets subscribers for the mobile service. The assessee renders services to the subscribers based on contracts entered into between distributors and subscribers. We have already noticed that the distributor is only rendering services to the assessee and the distributor commits the assessee to the subscribers to whom the assessee is accountable under the service contract which is the subscriber connection arranged by the distributor for the assessee. The terminology used by the assessee for the payment to the distributors, in our view, is immaterial and in substance the discount given at the time of sale of SIM cards or recharge coupons by the assessee to the distributors is a payment received or receivable by the distributor for the services to be rendered to the assessee and so much so, it falls within the definition of commission or brokerage under Explanation (i) of section 194H of the Act. The test to be applied to find out whether Explanation (i) to section 194H is applicable or not is to see whether the assessee has made any payment and if so, whether it is for services rendered by the payee to the assessee. In this case there can be no dispute that discount is nothing but a margin given by the assessee to the distributor at the time of delivery of SIM cards or recharge coupons against advance payment made by the distributor. The distributor undoubtedly charges over and above what is paid to the assessee and the only limitation is that the distributor cannot charge anything more than the MRP shown in the product, namely, SIM card or recharge coupon. The distributor directly or indirectly gets customers for the assessee and SIM cards are only used for giving connection to the customers procured by the distributor for the assessee. The assessee is accountable to the subscribers for failure to render prompt services pursuant to connections given by the distributor for the assessee. Therefore, the distributor acts on behalf of the assessee for procuring and retaining customers and, therefore, the discount given is nothing but commission within the meaning of Explanation (i) on which tax is deductible under section 194H of the Act. The contention of the assessee that discount is not paid by the assessee to the distributor but is reduced from the price and, so much so, deduction under section 194H is not possible also does not apply because it was the duty of the assessee to deduct tax at source at the time of passing on the discount benefit to the distributors and the assessee could have given discount net of the tax amount or given full discount and recovered tax amount thereon from the distributors to remit the same in terms of section 194H of the Act. This proposition is supported by the decision of the Supreme Court cited by standing counsel for the respondent in J. B. Boda & Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271 (SC) wherein the Supreme Court has held as follows (page 281) : "A two-way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case". The standing counsel for the Department referred to our decision in CIT v. Director, Prasar BhartiDoordarshan Kendra [2010] 325 ITR 205 (Ker) wherein this court held that Prasarbharti/Doordarshan Kendra was liable to deduct tax on the commission retained by advertising agencies, no matter, the commission was not paid by Doordarshan but was allowed to be retained by the advertising agencies who recovered total advertising cost and remitted only net amount to the Prasarbharti. We, therefore, do not find any merit in the contention of the assessee that recovery of tax is not permissible at the time of giving discount on the delivery of products to the distributors."
17. We find that the assessee before us is a dealer of SIM cards of Hutchison which in turn was taken over by Vodafone. The facts of the case before us are identical to the issue raised in the cases of service providers vis-a-vis payments made to the dealers in relation to sale of SIM cards. The assessee is one such distributor of SIM cards, who in turn has paid commission to the dealer for activation. The payment so made is in the nature of commission or brokerage within the meaning of clause (i) to the Explanation to section 194H of the Act on which the assessee was liable to deduct tax at source. The assessee having failed to deduct tax at source is exigible to the provisions of section 40(a)(ia) of the Act under which it is provided that all such payments out of which the assessee is liable to deduct tax but had failed to do so, are not to be allowed as a deduction, for computing the income of the relevant year. In the entirety of the facts and circumstances of the case, we find no merit in the plea of the assessee in this regard. Reliance placed by the learned authorised representative for the assessee on the relationship of principal to principal is misplaced in view of the ratio laid down on identical issue as in the present appeal by the hon'ble Delhi High Court in Idea Cellular Ltd. (supra), the hon'ble Kerala High Court in Vodafone Essar Cellular Ltd. (supra) and the hon'ble Calcutta High Court in Bharti Cellular Ltd. (supra). In view thereof, we reverse the findings of the Commissioner of Income-tax (Appeals) and disallow the expenditure of Rs. 46,48,960 booked under the head "dealer's scheme and incentives" as not being an allowable expenditure for failure to deduct tax at source in view of the provisions of section 40(a)(ia) of the Act.
18. In the result, the appeal of the Revenue is allowed and the cross-objection filed by the assessee is dismissed as withdrawn.
The order pronounced in the open court on 22nd May, 2013.