ITAT: Vodafone Idea not liable to TDS on discount extended to prepaid distributors
The Income Tax Appellate Tribunal (ITAT), Delhi Bench by two members bench, Amit Shukla (Judicial Member) and Prashant Maharishi (Accountant Member) allowed the appeals filed by appellant Vodafone Idea Ltd against the respondent's order- Commissioner of Income Tax (Appeals) [CIT(A)] and held that the Vodafone Idea Ltd. was not liable to deduct Tax Deductible at Source (TDS) on discount extended to its pre-paid distributors on distribution of prepaid services.
The CIT(A) upheld the order of the TDS Officer in treating appellant/assessee,as 'assessee in default' for non-deduction of tax at source under section 194H of the Income Tax Act (IT Act), on discount extended of Rs. 2,10,56,933 by the appellant to the distributors of its pre-paid services.
As per the TDS officer the relationship between the appellant and the pre-paid distributors was not that of 'Principal to Principal' and the discount allowed to them was in nature of commission liable for tax deduction at source as envisaged under section 194H of the IT Act.
The appellant pleaded that the discount allowed by the appellant was not income in the hands of its distributors and that income, if any, arises only when the pre-paid services are further distributed by the distributors.
The appellant contended that there was no flow of excises from the appellant to the distributor of pre-paid services but rather from the distributor to the appellant, and hence, the provisions of section 194H of the IT Act fail to apply.
The Tribunal observed that there was no requirement for the assessee to withhold taxes on the amount of discount offered by it on prepaid services under section 194H of the IT Act and consequently the assessee could not be treated as an assessee- in-default in terms of section 201 of the IT Act.
The Tribunal also found that the commercial arrangement between the Assessee and its distributors had undergone a change with effect from 1st January, 2007 and under the new commercial arrangement the relationship between the Assessee and the distributorswas clearly based on principal-to-principal basis given that all risk in the services tickets, once having sold to the distributors, passed to the distributorshence, the earlier judgments would not apply.
The issue that whether the discount given by the assessee was in the nature of commission, the Tribunal noted that the transaction of recharge coupons was treated as sale in the books of accounts which was shown net of discounts in the books of accounts. In this connection the agreement made between the assessee and the distributor was for the sale of recharge coupons and not the agreement for the commission, stated the Tribunal.
The Tribunal observed, "there was no clause in the agreement suggesting that the assessee was liable for the payment of the commission to the distributors. The distributor was authorized to sale the prepaid recharge coupons at a price of its/ his choice but not exceeding MRP determined by the assessee. We also find that all the risks & rewards attached with the product were shifted to the distributor", concluding which the Tribunal held that there was no agreement between the assessee and the distributor as of principal and agent.
Special emphasis was given on the business model adopted by the assessee for the prepaid mobile connections and post-paid mobile connections were different. Tribunal highlighted that in case of post-paid connections the assessee was said to be paying commission to the distributors against certain services rendered by them and therefore the TDS was being deducted. The ITAT observed:
"Under the post-paid connection there are certain services rendered by the assessee such as collection of documents for proof of identity, delivery of SIM cards, collection of charges etc. Against these services the distributors are paid the amount of agreed commission by the assessee after deducting TDS u/s 194H of the Act. However, we find that in case of prepaid connection the recharge coupons are sold to the distributors on outright sale basis at a discounted price. The amount of discount was not recorded in the books of accounts".
The ITAT finally observed that the transaction between the assessee and prepaid distributor for recharge coupons was in the nature of sale and purchase thus, amount of discount could not be equated with the commission as envisaged under section 194H of the IT Act.