Jai Shree Enterprises, Muzaffarnagar vs Department Of Income Tax

ITO Jai Shreee Enterprises Aayakar Bhawan, Jansath Road, Bhoor, G.T.Road, Khatauli Distt Vs Khatauli Distt Muzaffarnagar Muzaffarnagar, PAN:AAFFJ5546H Appellant Respondent

ITA No. 4171/Del/2011 (Assessment Year: 2008-09)

Jai Shreee Enterprises ITO Jansath Road, Bhoor, Aayakar Bhawan, Khatauli Distt Vs G.T.Road, Khatauli Distt Muzaffarnagar, Muzaffarnagar PAN:AAFFJ5546H Appellant Respondent

Appellant by : Sh. Gaurav Dudeja, Sr. DR Respondent by : Sh. K.L. Aneja, Adv

Date of Hearing 04.03.2015 Date of pronouncement 22.04.2015 ORDER PER A. T. VARKEY, JUDICIAL MEMBER

This appeal by the revenue and Cross Objection by the assessee is directed against the order of the ld CIT(A), Muzzaffarnagar dated 29.06.2011 for the Assessment Year 2008-09.

2. In this appeal the revenue has raised following grounds:-

"1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law in deleting the addition of Rs.15,84,800/- made by the Assessing Officer on account of discounts/ incentives paid to its buyers by the assessee firm which is not the case as the assessee was the distributor of post paid connections and not of pre-paid connections.

Page 2 of 9 2. On the facts and in the circumstances of the case, the CIT(A) has erred in law in conversion of the nature of business activities of the assessee firm.

3. The ground raised in CO by the assessee is as under:-

"1 That the learned CIT(Appeals) has erred in law and on facts/ in the holding the sum of Rs.3,06,460/- paid by the appellant, though described the same to be Discounts/ Incentives was in the nature of commission so as to attract the provision of section 194H of the Income Tax Act.

2. That the ld CIT(Appeals) was not justified in law in making in disallowance of the sum of Rs.3,06,460/- by applying the provisions of Section 40a(ia) of the Act on a/c of non-deduction of TDS therefrom and non payment the the same to the credit of Central Govt."

3. The effective grounds raised by the revenue is Ground No.1. Apropos deletion of addition of Rs.15,84,800/- made by AO on account of discounts and incentives paid to its buyers by the assessee firm since the assessee was the distributor of post paid connections and not of pre-paid connection and the ground No.1 and 2 of C.O. in respect to addition of Rs.3,06,460/- paid by the assessee described as discounts/ incentive was in the nature of commission so as to attract TDS and disallowance can be made u/s 40a(ia) of the Act for not deducting TDS. Both the issues being common are adjudicate together.

4. Brief facts of the case are that the assessee is a registered partnership firm deriving income from the trading of SIM cards of prepaid connections and sale of recharge coupons of M/s. Vodafone Essar South Ltd. It was observed by the AO, that the assessee had debited discount/incentives at Rs.15,84,800/- in its P&L account out of the commission amounting to Rs.16,15,873/- received during the year. As per AO, the assessee was the distributor of the post-paid connections of the telecom company. It was intimated by the assessee that the assessee firm used to give the discounts/scheme & incentives to the wholesalers and retailers as per directions of the telecom company; and the said disbursed discount/incentives were claimed by the assessee firm from the telecom company. According to the assessee, the telecom company used to give the commission in the form of compensation and the same was paid in the Page 3 of 9

form of e-tops. As per AO, although details of discount/incentive claims bills and other relevant papers were produced before him by the assessee, but assessee failed to produce the following evidences i.e. regarding the directions given by the telecom companies to the assessee to disburse discount/ incentives, copies of distribution agreement/contract regarding trading of SlM cards, recharge coupons, etc. and procedure for the said claim. The AO relying on the decisions in the case of M/s. Vodafone Essar Cellular Ltd. vs. ACIT, ITA No.1742 of 2009 (Ker), ACIT vs. Bharti Cellular Ltd. 1051TD 129(Kol) and other Court rulings held that the assessee firm got commission of Rs.15,15,873/- which was subjected to TDS also; and so expenses claimed on disbursement of discount/incentives of Rs.15,84,800/- claimed by the assessee against the commission it received from the telecom company were not allowable. Accordingly, the claim of Rs.15,84,800/- was disallowed by the A.O. and the same was added to the income of the assessee.

5. Aggrieved by order of the AO assessee has preferred an appeal

before the ld CIT(A), who was pleased to partly allow the appeal of the

assessee by holding as under:-

"Herein this case, the appellant is' working as an agent of the company and its activities whatsoever are on behalf of its principal telecom company. Similar agreement (CMU agreement: Pre-paid) dated 01-08-2006 existed between HESL and the appellant firm. It is further observed that the company had replaced it with a new agreement (Distributorship agreement) dated 28-03:-2007 so as to absolve itself from the liability of its distributors which have been discussed in the preceding paras. Therefore, the appellant firm's status in pre-paid agreement is not so, wherein the telecom company and the appellant firm are working on principal to principal basis and the appellant firm is distributor of the goods & services of the telecom company. Therefore, the expenses claimed by the appellant firm has no correlation with the condition imposed by the telecom company. It is observed that admittedly the Vodafone company deducted T.D.S u/s 194H of the Act on the payment of Rs 16,15,873/- as the payments are in the nature of brokerage or commission paid to the assessee. Further the appellant in its written submissions has admitted the fact that the payments to the extent of Rs.15,84,800/- were in the nature of 'commission', which were passed on to the dealers and retailers. It is Page 4 of 9

observed that the details of total claim of total claim of Rs.15,84,800/- are as under:-

Rs.13,01,133/- is F.C.F.R incentive

Rs.2,03,155/- is CIFFID Incentive and

Rs. 80,152/- is DMS & Market expenses

It is observed that while CIFF ID incentives are the payments made by the appellant firm to its employees, etc, and DMS market expenses are also the expenditure made by it; it is only the F.C.F R (First Call First Recharge) incentive which is the commission which is passed on dealers and/or retailers. It is the item attracts provisions of TDS U/s 194H of the Act, even if the appellant designates these amounts as discounts/incentives. The appellant was asked to furnish the complete list of dealer/retailers to whom such commission has been passed on. Admittedly, the appellant has not deducted tax on payment of commission as prescribed U/s 194H of the Act. The appellant has furnished the desired list which is made part of this' order as Annexure 'A', the details of the same are summarized as under:-

No. Of Discount/ Discount/ Total in (Rs.) Dealers/ Incentives less Incentive more retailers than Rs.2500/- than Rs.2500/- 1 to 49 Rs.9,94,673/- Rs.3,06,460/- Rs.13,01,133/-

From the details furnished in respect of discount allowed to the customers/retailers it is observed that the payment exceeding Rs.2,500/- aggregate to Rs.3,06,460/- whereas the payment below Rs.2,500/- aggregate to Rs.9,94,673/-. On the aggregate of payments below Rs.2,500/-, the provisions of section 194H of the Act are not attracted and provision of section 40a(ia) of the I. T. Act, are not applicable on this amount. However, in respect of aggregate of payments at Rs.3,06,460/- above Rs.2,500/-, provisions of section 194H are clearly attracted and the appellant was under legal obligation to deduct T.D.S. on such payments made but the same has not been done. Therefore the claim of expenses made by the appellant to the- extent of Rs.3,06,440/- in its Profit & Loss Account are not allowable and hence the addition of Rs.3,06,440/- is hereby made U/S 40a(ia) of Act, 1961. The A.O is directed to give effect to these directions. Ground No. 1 to 3 are allowed as addition of Rs.15,84,800/- stands deleted but enhancement separately is made for Rs. 3,06,460/- in appellant's income.

6. Aggrieved with such an order, the revenue and the assessee has filed the present cross-appeal before us.

7. We have heard both the parties and perused the records and case laws cited before us. We find that the ld CIT(A) has noted that AO has made Page 5 of 9

an addition of Rs.15,84,800/- on the ground that evidence regarding direction given by the Telecom Company, copy of distribution/ contract, detail of commission/ compensation paid co-relating the discount/ incentive were not produced before him. And since the commission is given by the Telecom Company to the assessee firm is not against the discount or incentives but service rendered by the assessee under the post paid scheme. And since the Telecom Company have deducted tax at source on the commission under the post paid service, not the compensation in the mode of reimbursement against the discount/ incentive given by the assessee to the whole seller/ retailers. However after hearing the assessee, the ld CIT(A) in Page 11 of his impugned order opined that the assessee is distributor of pre- paid connections and not post-paid connection and the case laws relied upon by the AO are not applicable to the facts of the case since those cases relates to post-paid connection. Ld DR could not bring to our notice any other material which can aid us to take a different opinion on this factual aspect.

8. The question whether the assessee is dealing with post paid or prepaid is immaterial. In both post-paid and pre paid the assessee company or the distributor has to deduct TDS as per the order of the Hon'ble Delhi High Court as stated in the case of the Idea Cellular (2010) 325 ITR 148 (Delhi). The ld CIT(A) after observing that the assessee is into distributor of pre-paid connections has held:-

"From the language of this clause of the agreement, it is clear that the appellant firm was purely a distributor of the telecom company who paid commission to it based on certain mutually agreed formula. On papers, it is free to do its business as far as passing on the incentive/discount dealers or retailers is concerned. It is entirely different matter that the appellant firm had chosen to pass on almost the entire commission received from the company to its dealers/ retailers but there existed no such legal binding as far as terms of the agreement are concerned. Therefore, the expenses claimed by the appellant firm should be examined from the angle of its business expediency and its genuineness. On examination of bills and records, it is observed that the appellant firm has actually passed on such commission (incentive/ discount) to dealers and retailers and such payment was expedient to the business requirements to remain in the competitive market. Therefore, the expenses so claimed prima facie are allowable and A.O. is not justified in disallowing the entire amount of Rs.15,84,800/- on the ground is stated in the assessment order."

Page 6 of 9 9. Before adverting to the issue in hand we may take note of the order of the Hon'ble Delhi High Court in CIT(A) Vs. Idea Cellular Ltd (supra) wherein the Hon'ble High Court's order which is reported in ITR will throw light on the issue in hand and held in head notes of the same as follows:-

A perusal of the section 194 Income-tax Act, 1961, makes it clear that taxes are to be deducted at source by a person responsible for paying any income by way of commission or brokerage. The expression "commission" or "brokerage" has been defined in the Explanation, which 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 and selling of good or in relation to any transaction relating to the following services: (i) for services rendered (not being professional) and )ii) for any services in the course of buying and selling or in relation to any transaction relating to any assets, valuable article or thing.

The assessee was engaged in the business of providing cellular telephone network though a card called subscriber identification module (SIM). Prepaid or post-paid connections were provided to the subscribers through distributes called pre-paid market associated (PMAs) appointed by the assessee. The assessee offered discount for the pre-paid calling services to its distributors. The Assessing Officer noted that under the agreement the distributors were required to store the SIM cards and recharge coupons in such a way as to clearly indicate all times that the pre-paid SIM cards/recharge coupons were owned by the assessee. They were not allowed to remove, obscure or delete any marks placed on the prepaid SIM cards/recharge coupons.

The terms of the agreement further provided that without the written consent of the assessee the distributors (PMAs) shall not directly or indirectly: (i) market, solicit, sell, offer and accept offers for telephony services that competed with the assessee's telephony services; (ii) induce or refer any actual or prospective subscriber of the assessee's telephony services to subscribe to any competitive telephony services; and (iii) provide any company or customer information/data to any competitive entity. From this clause the Assessing Officer came to the conclusion that distributors were not free to sell similar products offered by the competitors of the assessee. The PMAs further appointed the retailers after the written approval of the assessee. The maximum price of SIM cards/ recharge coupons was also decided by the assessee. It was also found that under the agreement, it was the responsibility of the PMAs to obtain all the relevant information concerning a subscriber and to forward the same to the assessee; Unless that was done, no activation of SIM card could be done. Further, the assessee had the right to use service marks, trademarks, trade names, copy rights, logos or any other copy right that might be created in future. The PMAs had Page 7 of 9

to comply with all the requirements of the assessee in respect of invoicing and accounts, maintenance of brand image and provide monthly sales reports return and other information relating to business. The assessee's representative could inspect the things or material of the business which were the subject matter of the agreement. Further, minimum performance targets for the distributors were also set by the assessee and it reserved the right to terminate the agreement unilaterally. The Assessing Officer came to the conclusion that the transaction between the assessee and the pre-paid distributors were selling pre-paid SIM cards/ recharge coupons on behalf of the assessee. Consequently, the amount of discount offered to the pre- paid distributors was that of principal and agent at all times and the pre-paid distributors were selling pre-paid SIM cards/ recharge coupons on behalf of the assessee. Consequently, the amount of discount offered to the pre-paid distributors was in the nature of commission and liable to tax deduction at source under section 194H. The Tribunal however opined that the relationship between the assessee and its distributors was that of "principal and principal" and not "principal and agent. On appeal to the High Court:

Held, allowing the appeals, that the legal relationship was established between the assessee and the ultimate consumer/ subscriber, who was sold the SIM cards by the agents further appointed by the PMA 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 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 were pre-paid which were sold by the assessee to the consumers through the medium of PMAs. In the case of post-paid SlM cards, the transaction is entered into directly between the assessee 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 card it did not amount to "sale" of goods. The purpose was to ensure that the payment was received in respect of those 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 authorized 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 case of "sale". The payment by the assessee constituted commission and tax had to be deducted at source on such payment.

Page 8 of 9 10. From a perusal of the aforesaid ratio of the Hon'ble Delhi High Court, we endorse the finding of the ld CIT(A) that the payment made by the assessee to its sub-distributors constituted commission and tax had to be deducted at source on such payment and we find that Vodaphone company deducted TDS u/s 194H of the Act, on the payment of Rs.16,15,873/- as the payments are in the nature of brokerage or commission paid to the assessee. Further the assessee in its written submissions has admitted the fact that the payment to the extent of Rs.15,84,800/- were in the nature of commission, which were passed on to the dealers and retailers. The ld CIT(A) has rightly observed that CIFF ID incentives are the payments made by the assessee to its employees etc and DMS and Market expenses are also the expenditure made by it and it is only the First Call First Recharge (FCFR) incentive which is the "Commissions" which was passed on to the dealers/ retailers. And so this amount/ discount/ incentive alone attracts provision of TDS u/s 194H of the Act, we endorse this finding of the ld CIT(A). However we find force in the argument of the ld DR that the ld CIT(A) gave show-cause notice to the assessee and called for the details of the commission disbursed to its dealer to non-deduction of TDS, but we find that ld CIT(A) has not given any opportunity to the AO before embarking into such an exercise. The ld CIT(A) has given relief to the assessee of Rs.9,94,673/-, because the discounts/ incentives / commission disbursed was less than Rs.2,500/-. And has directed an addition of Rs.3,06,460/- because the discounts and incentives to the dealers were more than Rs.2,500/-. In such circumstances it would be just and proper to set aside the order of the ld CIT(A) and remand the matter back to the file of AO to examine and verify whether the commission/ discount/ incentive given by the assessee to its dealers are correct and we direct that AO shall examine and verify this fact aspect and the amount disbursed if it falls below Rs.25,00/- it shall not attract TDS and the amounts disbursed which is more that Rs.2,500/- shall attract TDS and shall be disallowed. We remand it back to AO, for doing this limited exercise and pass order accordingly. Needless to say that opportunity be granted to the assessee before passing order afresh as stated above.

Page 9 of 9 11. In the result the ground of the revenue is allowed for statistical

purposes.

Order pronounced in the open court on 22.04.2015.

-Sd/- -Sd/- (N.K.SAINI) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:22/04/2015 A K Keot

Copy forwarded to

1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi