Bharath Sanchar Nigam Limited, ... vs Assessee

Income Tax Officer (TDS-2), V/s. General Manager, Tirupati . Bharat Sanchar Nigam Ltd., Telecom, Tirupati

(TAN - HYDB 1769 F )

(Appellant) (Respondent)

Cross Objection No.10/Hyd/2010 (in ITA No.170/Hyd/10 : Assessment year 2009-10 General Manager, V/s. Income Tax Officer (TDS-2), Bharat Sanchar Nigam Ltd., Tirupati . Telecom, Tirupati

(TAN - HYDB 1769 F )

(Cross Obejctor) (Appellant-in Appeal)

Assessee by : None

Department by : Shri Ramakrishna Bandi

Date of Hearing 04.06.2015 Date of Pronouncement 5.6.2015

ORDER

This appeal by the Revenue and cross-objection by the assessee are directed against the order passed by the Commissioner of Income-tax(Appeals) Tirupati, wherein he observed that the demand raised by the Assessing Officer under S.201(1) and S.201(1A) is not in accordance with law.

2 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

2. The following grounds were raised by the Revenue-

"1.The order of the Learned CIT (A) is opposed to the law and the facts of the case.

2. The learned CIT(A) erred in concluding that the transactions conducted with the franchisees constitute sale of goods on a principal to principal basis owing to collection of consideration in advance at the time of transferring the recharge/top up cards. The learned CIT(A) ought to have appreciated that there is no sale of goods as no sale invoice is raised in the name of the franchisees, delivery of cards is made through the delivery challan only and no VAT is paid by the assessee on transfer of cards to the franchisees.

3. The learned CIT(A) ought to have relied on the decision of the Hon'ble Kerala High Court in the case of M/s. BPL Mobile Cellular Limited Vs. State of Kerala & Others in writ petition no. 29202 of 2005 wherein it was held that no sales tax is exigible in respect of SIM cards and recharge coupons delivered to the distributors as the transaction between the service provider and the distributor is only that of service and not sale and purchase of any goods or merchandise.

4. The learned CIT(A) ought to have seen that the recharge/top up cards do not represent physical goods and they only provide access to the mobile phone service rendered by the assessee and consequently the franchisees act as an agent of the assessee in facilitating the access to such services of the assessee by distributing the cards to the customers. Accordingly, the learned CIT(A) ought to have held tha the transactions conducted with the franchisees is on a principal to agent basis and the discount allowed to the franchisees is in the nature of commission falling within the ambit of section 194H of the LT. Act.

5. The learned CIT(A) erred in placing reliance on the contents of the circular issued by the corporate office of the BSNL in concluding that the transactions with the franchisees are on principal to principal basis and the incentive allowed to them is in the nature of trade discount and instead he ought to have examined the true nature of transactions which is rendering of service to the customer with the franchisee acting as an agent.

6. The learned CIT(A) ought to have placed reliance on th decisions of the Hon'ble Kolkata Tribunal in the case of Bharati Cellular Limited (2007) 108 TTJ 38 and the Kochin Tribunal in the case of Vodafone Essar Cellular Limited Vs. ACIT in ITA os. 106 to 113/Coch/2009 to hold that the discount allowed to the 3 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

franchisees is in the nature of commission liable for u/s. 194H of the LT. Act.

7. ..... "

Supporting the order passed by the learned Commissioner of Income-tax(Appeals), assessee has filed cross-objection by raising the following grounds.

"1. The Hon'ble Commissioner of Income Tax (Appeals) Thirupathi has correctly interpreted the law and facts involved in the case, and held that the transactions relating to Franchisee top up card sales as transfer of property in the pre-paid cards and allowed the appeal placing reliance on various judicial pronouncements.

2. The transaction being on a principle to principle basis and the revenue on prepaid recharge coupons etc. is net of discount given to franchisee by BSNL. The discount shall e treated as trade discount and further in selling the prepaid coupons the appellant fully passes on the risk and rewards to franchisee along with the property therein and accordingly and invoice is raised to collect the consideration.

3. The Respondent is of the view that in the actual position the deduction from the amounts collected is nothing but discount, and therefore, TDS is not applicable.

4.....'

3. None appeared on behalf of the assessee. I have heard the Learned Departmental Representative and have carefully perused the relevant record.

4. Facts necessary for the dispose of this appeal are stated in brief: The assessee sold SIM/recharge cards and top-up cards during the previous year relevant to assessment year under consideration on discounted price. The sale having been made to the franchisees at a concessional price, the differential price is treated as trade discount, and treated accordingly in the books of account of the BSNL On the other hand, the case of the Assessing Officer is that the differential amount has the attribute of commission payment falling within the meaning of S.194H of the 4 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

Act, in which event, the assessee is liable to deduct tax at source and for the failure to do so, the provisions of S.201(1) and S.201(1A) get attracted. In this regard, he observed that the nomenclature adopted by the BSNL in the agreement would not decide the relationship between the BSNL and the franchisees and the nature of the transaction has to be taken into consideration. He also observed that it is not the card that is sold to the customer but the code number embedded in the recharge coupon which is sold and only when the code number gets activated, the ultimate customer is entitled for discounted talk time for spec period. He, therefore, assumed that the consideration paid by the ultimate customer is for the services rendered by the BSNL, which would make it clear that the franchisees are only the agents between the BSNL and the customers. Therefore, it is not the case of simple sale of goods so as to treat the discount as a trade discount.

5. Aggrieved, assessee contended before the CIT(A) that the Revenue generated by BSNL, on sale of prepaid recharge coupons, etc., is taken into account net of discount given to the franchisees. In this regard, a circular issued by the Corporate Office of the BSNL dated 13.12.2007 and another Circular No.131 dated 15.4.2008 were referred to. He also furnished a copy of the franchise agreement and copy of the invoice raised on one of the franchisees to highlight that the discount on the face value of the discount coupon has been deducted resulting in net amount receivable, for which the franchisee has paid by demand draft in favour of BSNL. As such the franchisee offered the net amount to tax, which is in accordance with the method followed in accordance with AS-9. It was further contended that the relationship between BSNL and the franchisee is on 'principal to principal basis'; a franchisee pays the amount and collects the recharge coupon and thereafter the coupons become the property of the franchisee and 5 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

the obligation of the BSNL is only to the customer for the value of the services to be rendered. In fact, the risks and rewards in the recharge coupons are fully transferred to the franchisee alongwith the property therein, and hence, the relationship between the assessee and the franchisee is that of 'principal to principal' and the transaction completed is one of sale.

6. The learned CIT(A) examined the facts placed before him and came to the conclusion that the transaction between the parties is on principal to principal basis and therefore, the concession given to the franchisees cannot be treated as commission, but trade discount. In this regard, he observed as under-

"9. The facts gathered by the ITO (TOS-2), Tirupati in his order u/s 201 (1) & 201 (1A) and the arguments relied upon by him have been carefully analyzed and compared with rival submissions, back ground, the relationship emphasized by the appellant and the case laws relied upon have been examined. The ITO (TOS-2), Tirupati has rejected the change in the method of recognizing the revenue followed by the appellant. Even though, the reasons and circumstances under which the change has been effected by the appellant, the same has not been found favour with the !TO. He has also found that the transaction continues till the discount is distributed to the sub-franchisees. I have gone through the instructions received by the appellant company from their Corporate Office wherein it is clearly mentioned that the transaction on the recharge coupons shall be done on a "principal to principal" basis and that the incentive given to the franchisee shall be treated or categorized as trade discount as per AS-9. There is adequate strength in the submissions given by the appellant and his AR, when they had stated that the transactions are done on a "principal to principal" basis, consideration is collected in advance at the time of transferring the recharge coupons to the franchisee and hence the transaction is considered as sale with the risk and reward transferred to franchisee. The existence of Implied Warranties, that is, assurance of the BSNL to provide service to the ultimate buyer of the recharge coupon does not take away the character of the sale in this instance. This is also s by the clause of the franchisee agreement as laid down in the clause No.11.1.2 as extracted below :-

6 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

"11.1.2. Basic Fixed Discount / Commission:

a) Discount on Recharge Coupons: There will be uniform discount allowed for Recharge Coupons in BSNL license area. The Discount allowed to sub-franchiseees and retailers by franchiseee will be from their own discount.

Discount to be given by franchiseee to sub-

franchisee/Retailer will be decided."

10. As can be seen from the above, it is very clearly mentioned that the franchisee will be allowed discount on recharge coupons. It is also clear from the copy of the invoice filed and relied upon by the appellant that the franchisee has not only placed an indent for supply and delivery of the prepaid cards of different ations but he has also paid the total cost of such cards by means of an account payee demand drafts. This clearly expounds that the franchisee has made the payment for the cards he is indenting which clearly establishes that the property, risk and rewards have been transferred to the franchisee. On these two counts, the ITO loses his case and the appellant wins his appeal convincingly. It would be appropriate to mention here that the method of accounting cannot be permanent for ever in the case of an assessee as he has right to choose that particular method of accounting which can result in proper and accurate arrival of profits. As the appellant company noticed the lacunae in accounting for the gross sale receipts as sale, they are at liberty to revert to the correct method of accounting as given in AS-9. This cannot be found fault with nor this can be a bar for roping in the assessee in section 201. This has been accepted and settled by various judicial authorities."

7. Aggrieved, Revenue has come up in appeal before us.

8. The Learned Departmental Representative relied upon the decision of the ITAT Kolkata Bench in the case of Bharti Cellular Ltd. (2007) 108 TTJ (Kol) 38 and Delhi High Court in the case of idea Cellular Ltd. (325 ITR 148). Whereas this decision was already considered by the learned CIT(A) and having regard to the factual matrix of the case, it was held that the assessee has followed a systematic method of accounting as given in AS-9, and therefore, it has to be treated as a trade discount only.

9. It is not in dispute that the assessee has not deducted tax at source. As per third proviso to S.194H which is inserted by 7 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

the Finance Act, 2007, no deduction need to be made on any commission or brokerage paid by BSNL to its Public Call Office franchisee, and this proviso was held to be clarificatory in nature by the Hon'ble Punjab and Haryana High Court in the case of CIT V/s. Bharat Sanchar Nigam Ltd. (265 CTR 212). Having regard to the circumstances of the case, I notice that the assessee being public sector undertaking stands on a different footing and the view taken in the case of Idea Cellular (supra) cannot be applied, since the relationship between the BSNL and the franchisee stands on a different footing and the same was recognised by the CBDT. In fact, the decision of Hon'ble Delhi High Court and other High courts, on this point were considered by Hon'ble Karnataka High Court in the case Bharti Airtel Ltd. V/s. Dy. CIT and others (372 ITR 33) while holding that Section 194H is not applicable . Since no jurisdictional High Court decision is available as on date, the latest decision of Karnataka High Court, which considered and distinguished earlier rulings of other High Courts, deserves to be followed.

10. In fact, the first appellate authority has taken into consideration the circular issued by the corporate office of the BSNL dated 13.12.2007 and another circular dated 15.4.2008 while coming to the conclusion that the nature of the payment made by the assessee to its franchisee is trade discount only. Since the view taken by the learned CIT(A) is mainly based on the factual matrix of the case, I am of the firm view that the order passed by the learned CIT(A) does not call for any interference.

11. In view of the above discussion, the Cross objection filed by the assessee to support the order of the CIT(A), being infructuous, deserves to be dismissed.

8 ITA No.170/Hyd/2010 & CO 10/H/10 Bharat Sanchar Nigam Ltd., Tirupati

12. In the result, appeal filed by the Revenue is dismissed, and the CO filed by the assessee, being infructruous, is also dismissed.

Order pronounced in the Court on 5th June, 2015

Sd/-

(D.Manmohan) Vice President

Dt/- 5th June, 2015

Copy forwarded to:

1. General Manager, Bharat Sanchar Nigam Ltd., Sanchar Bhavan, Tirupati

2. Income Tax Officer (TDS)-2 Tirupati

3. Commissioner of Income-tax(Appeals) Tirupati 4 Commissioner of Income-tax Tirupati ome-tax, Vijayawada

5. Departmental Representative, ITAT, Hyderabad.

B.V.S