Application of 194H - Post Paid & Pre Paid Mobile Services

SUMMARY OF CASE LAW

Where the assessee company itself admits that it is liable to deduct tax at source u/s 194H in respect of post-paid services rendered through itsdistributors, it is the duty of the assessee to prove that the services rendered by the assessee through thedistributors on pre-paid package is different from the post paid package so as to qualify the former for exemption from operation of section 194H; therefore, if post-paid scheme is subject to section 194H, it is quite unlikely that pre-paid system would be outside the purview of section 194H.

CASE LAW DETAILS
Decided by: ITAT, COCHIN BENCH, COCHIN, In The case of: Vodafone Essar Cellular Ltd. v. ACIT, Appeal No. ITA Nos. 106 to 113/Coch/2009, Decided on: April 30, 2009

RELEVENT PARAGRAPH

25. There is no dispute or dis-agreement regarding the nature of transactions entered into between the assessee and its distributors. The assessee company, by virtue of the licence issued by the Department of Telecommunications, Government of India, is engaged in providing Mobile telephone services to the public at large. The Govt, of India \s allotting the licence to various parties in the field on the basis of geographical specifications. The assessee is operating on all India level and therefore provides services in various States. The services provided by the assessee-company in the State of Kerala is treated as a unit, under the name and style of Kerala Circle for the purpose of sales, administration and control. The assessee company either of its own or through outsourcing establishes the infrastructure facilities for providing Cellular services.

26. The assessee is offering two types of services to the public. The first of its kind is postpaid mobile services whereby the customers are opening account with the assessee company and makes the payment on monthly basis or so against the bills issued by the assessee company. In that case, the assessee company provides services to its customers at the first instance and thereafter issues bills and realizes the proceeds. The assessee company has appointed a number of distributors to manage the distribution business of postpaid mobile services, where the distributorsare supposed to identify the customers, ensure proper documentation of the connection on behalf of the assessee, attend to the complaints of the customers, account for the air time consumed by the customers, and carry out the work of raising bills and collection of the proceeds. In this segment of activity carried on by the assessee company, it is paying commission to the distributors for the services rendered by them and deducts tax at source, whenever the services are remunerated either by payment or by book entry. Therefore, there is no dispute about the applicability of section 194H as far as the post paid mobile telephone services are concerned.

27. The second segment of services rendered by the assessee is the pre-paid mobile services. In pre-paid mobile services, the assessee is delivering the access cards known as SIM Cards of fixed denomination coupled with specific air time duration to the consumers at large. The consumers pay in advance and use SIM Cards by activating their mobile connection provided by the assessee company. It appears that in view of the developments in modern technology, there are number of products and services available in the market and also provided by the assessee company alongwith SIM Cards, to the consumers at large. As In the case of post-paid services, in this segment also the assessee company is appointing State-wide Distributors for identifying the customers and distributing the pre-paid products to the consumers.

28. The distinction in the present case is that the consumers are paying in advance to the distributors as well as the distributors are paying in advance to the assesseecompany. In the case of post-paid cellular services, the customers are paying after availing the services and the distributors are also collecting the amount and paying over to the assessee company after rendering the services.

29. In the case of pre-paid cellular services, the assessee appoints a number ofdistributors on the basis of agreements. As already stated, just like consumers are paying in advance for obtaining SIM Cards from the distributors, the distributors are also paying in advance to the assessee company for getting the pre-paid products. Against such advance payment, the assessee company is delivering the necessary products to the distributors. The Maximum Retail Price (MRP) is mentioned on every product. Distributors/ Retailers are not permitted to sell the products to the ultimate consumers beyond the MRP. The assessee company is delivering these products to thedistributors for a specified margin. For example, if the MRP is Rs. 100/-, the assesseecompany may deliver the same to its distributors at Rs.80/-. This is the invoice price of the assessee company. The assessee company collects this invoice price in advance from the distributors. The distributors are permitted to deliver these products to the ultimate consumers at a price of their choice but not exceeding Rs.100/- per unit, which is the MRP. The margin earned by the distributors being the difference between the sale price and the invoice price is the remuneration of the distributors in this chain of transactions. Therefore, the basic question to be decided in these appeals is whether this margin of the distributors is commission or brokerage coming within the purview ofsection 194H of the I.T.Act,1961 or the margin is a discount as claimed by the assessee company which is outside the purview of that section. The questions whether the assessee is in default and is liable to proceed u/s.201(1) and 201(1A) are only consequential to the finding whether the margin of the distributors is commission/brokerag e or discount.

32. A commercial/business agreement is always subject to various restrictions imposed by the parties inter se but not contravening the provisions of any law. The restriction should not act as a restriction on trade. The restrictions cannot act as un-lawful regulations on the parties. It is permissible for the parties to enter into such contracts and agreements so long as those terms and conditions are not violating provisions of any law.

46. Therefore, it is necessary for us to examine at the outset itself, whether the nature of business transactions entered into between the assessee-company and itsdistributors are sale and purchase of goods or providing service through various distributors/ agents.

48. Therefore, the question whether the assessee company and the distributors are linked up in providing any service is to be answered in the affirmative, in the light of the judgment of the Hon’ble High Court of Kerala in the case of M/s. BPL Mobile Cellular Ltd. vs. State of Kerala and others in Writ Petition No.29202 of 2005. The Court has held that there is no sale or purchase of goods. In the present case, the assessee is doing exactly the same business. Therefore, it is not possible to hold that the SIM Cards and re-charge coupons delivered by the assessee company to its consumers and made available by them to the ultimate considers in the State of Kerala are goods.

49. The above recent judgment of the Hon’ble High Court on the nature of the transaction is paramount in deciding the issue. We may not be able to place much reliance on the judgments of Hon’ble High Court in the case of Kerala State Stamp Vendors Association vs. Office of the Accountant General and others -282 ITR 07(Ker.); M.S.Hameed and Others vs. Director of State Lotteries and others – 249 ITR 186(Ker.) and that of Ahmedabad Stamp Vendors Association vs. Union of India – 257 ITR 202(Guj.) and also on the decision of the Delhi Bench in the case of Idea Cellular Ltd. – 121 TTJ 352 and also that of Hyderabad Bench in the case of M/s. Idea Cellular Ltd., a copy of which was placed before us after the conclusion of hearing. Therefore, all thecase laws relied on by the assessee will have to be viewed in the light of the judgment of the Hon’ble High Court Kerala in the case of M/s. BPL Mobile Cellular Ltd. where the court has held that the relationship between the predecessor of the assessee-company and distributors are relationship of parties involved in providing service of pre-paid telephone services to the ultimate consumers.

50. While relying on the above judicial pronouncements, the assessee company has very much relied on the flexibility of pricing given to the distributors as per the latest agreement. It is the case of the assessee company that there was no occasion for the assessee company to make any payment to the distributors or to credit their accounts .for services rendered by them. While the case of the assessee company is compared to the case of lottery tickets agents and stamp vendors, there are few vital differences. In the case of stamp vendors, even if he is purchasing stamp paper from the Government Depot at a discounted price, the stamp vendor cannot sell the stamp papers at below the denomination printed on it. The stamp worth Rs.100/- is always sold to the general public at Rs.100/- and not for any lesser price or any discount. Government remunerate the stamp vendors by providing a margin which is given at the time of the delivery of the stamp paper itself so that net amount receivable by the Government is collected instantly. Except for realizing the margin, the stamp vendors do not have any freedom of price fixation. This is almost in the case of lottery tickets as well. Therefore, there is no much force in the argument of the assessee company that the case of the assessee is always different because of the freedom of pricing given to the distributors.

51. It is obvious that a service can only be renderedand cannot be sold. The owner of the SIM Cards and re charge coupons is the assessee company, M/s. Vodafone vEssar Cellullar Ltd. This is because the assessee company .is operating under the right of a licence agreement entered into with the Govt, of India. No-body else can be given the right to operate as Cellular telephone service providers. The ultimate service is provided by the assessee company to every one and every-where. The SIM Card is in the nature of a key to the consumer to have access to the telephone net-work established and operated by the assessee company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee company to the distributor or from the distributor to the ultimate consumer. The distributors are acting only as a link in the chain of service providers. The assessee company is providing the mobile phone service. It is the ultimate owner of the service system. The service is meant for public at large. In between providing of that service, it is necessary for the company to appoint distributors to make available the pre-paid products to the public as well as to look after the documentation and other statutory matters regarding the mobile phone connection. So, what is the essence of service provided by the distributors? The essence of service rendered by the distributors is not the sale of any product or goods. The distributors are providing facilities and services to the general public for the availability of devices like SIM Cards to have access to the mobile phone network of the assessee company. Therefore, it is beyond doubt that all the distributors are always acting for and on behalf of the assessee company. Only for the reason that the distributors are making advance payment for the delivery of SIM Cards and other products and distributors are responsible for the stock and account of those cards, it is not possible to hold that the distributors are not acting for the assessee company but the distributors are acting on their own behalf. Such a proposition is in-conceivable in the facts of the present case. It is always possible for the telephone company itself to provide all these services directly to the consumers as the Department of Telecom was doing; but such a direct service is not feasible now-a-days. Therefore, the assessee has made out a business solution to appoint distributors to take care of the operational activities of the company for providing service. The distributor is one of the Important links in that chain of service.

52. Another important feature is that the SIM Cards stocked by the distributors are still the property of the service provider, the assessee company. The permissive right to use SIM Cards to get access the phone network of the assessee company is given only to the ultimate consumer who activates the connection by using the secrete number provided in the SIM Card. It is only for the ultimate consumer or the assessee company who has the authority to un-cover the secrete number and bring the card into activation. This unique situation negates the argument of the assessee company that once delivery of the SIM Card is taken, it is the absolute property of the distributors. No, this is a mis-conception. distributors are acting on the platform of principal to principal relationship.

53.De facto, there is no case of any purchase and sale in the,matter of pre-paid SIM Cards /re-charge coupons. All these technical products are only distributed through distributors and retailers. Any contractual or legal obligation in respect of providing of a pre-paid mobile telephone service is in fact, between the assessee company and the ultimate consumer.

54As held by the Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More (1973) 82 ITR 540, human conduct and behavior have to be seen in order to decide the true and correct nature of the transaction between the parties.

55.The basic function of the assessee company is delivery of service relating to mobile telephone system. The assessee is operating under the licence issued by the Govt, of India. Assessee is providing services on post-paid basis as well as on pre-paid basis. Even though post-paid and pre-paid are two different methods employed by Telecom operators for providing services and collecting revenue, the nature and content of the service rendered under both the methods is one and the same. As far as the ultimate consumer is concerned, they are getting the service of mobile telephone whether he is subscribing to the scheme of post paid or the scheme of pre-paid.

56. In the case of post-paid scheme, the assessee company is treating the benefits enjoyed by a distributor as commission and deducting tax at source/ -r Where the assessee company itself admits that it is liable to deduct tax at source u/s.l94H in respect of post-paid services rendered through its distributors, it is the duty of the assessee to prove that the services rendered by the assessee through the distributors on pre-paid package is different from the post paid package so as to qualify the former for exemption from operation of section 194H.

57. It is beyond any dispute that the essence of service rendered to the pre-paid and post-paid consumers are one and the same. There is no difference. The only difference is technical. The difference exists only in billing system and revenue collection, etc. In both the cases, assessee company is providing the service. Distributors are helping to reach such services to the ultimate consumers. In both the system, there is documentation. In both the system, the distributors render similar types of services to the assessee company. Of-course accounting the revenue collection and related matters are different. The essence of post-paid and pre-paid services rendered by the assessee company is the same and the relationship between the assessee and the customers is also the same. Therefore, if post-paid scheme is subject to section 194H, it is quite unlikely that pre-paid system would be outside the purview of section 194H.

58. In the case of pre-paid scheme, the ultimate consumer pays in advance and in turn distributors also pay in advance. In the pos- paid scheme, the ultimate consumer is paying after availing the service and the distributors are also paying afterwards In one case money is received in advance and in the other case services are rendered in advance. Billing and collection may be different. But billing, collection, etc. are peripheral matters. These matters do not change the basic character of the transaction/ service between the distributors and the assessee company. Under both the schemes, the character of the relationship between the assessee company and the distributors is the same. Therefore, we find it difficult to accept the profound contention of the assessee company against the application of section 194H.

59. Now from the accounting point of view also, as mentioned in the assessment order, the assessee has debited the account for “commission paid to distributors” . What are the accounting entries passed by the assessee company on delivering the pre-paid cards to the distributors? The assessee company is crediting the sales account by the gross amount and not by net proceeds. For example, the MRP of a pre-paid card is Rs.100/-; margin availed by the distributor is Rs.20/-. The net proceeds available to the assessee is Rs.80/-. Let us see how the assessee is accounting for the above. When the SIM Card is given to the distributor, the assessee company is crediting the sales account for an amount of Rs.100/-. Assessee is debiting the cash account with Rs.80/- being the cash paid by the distributor. Assessee company is debiting the commission account for Rs.20/-. This is the margin enjoyed by the distributor. As far as the assessee company is concerned, it has given a commission of Rs.20/-. On delivery of a pre-paid card of Rs.100/-, assessee is adjusting the payment of commission through accounts and invoice. In the first instance sale is accounted for Rs. 100/-; the second cash is accounted for Rs.80/-; and the third commission is accounted for Rs.20/-. It shows that as far as the sale is concerned, it is Rs.100/- and the assessee has given a commission of Rs.20/- to the distributor and the net cash proceeds is Rs.80/-. Instead of treating the sale at the net value of Rs.80/-, the assessee is accounting the sales at the gross value of Rs.100/- and thereafter debiting an expenses account for commission paid of Rs.20/-. Therefore, in the facts and circumstances of the case and in the light of the finding of the Hon’ble jurisdictional High Court in the case of M/s. BPL Mobile Cellular Ltd. (Writ Petition No-29202 of 2005) that the essence of the contract between the assessee and the distributor is that of service, we find that the distributors are acting as agents of the assessee company and the margin enjoyed by the distributors are the commission/brokerag e allowed by the assessee company.

60. The next question is whether the Commission/brokerag e allowed by the assessee company at the stage of raising the invoice is equivalent to paying of commission/brokerag e to the distributors. The assessee has always raised a contention, that too in the light of the judicial pronouncements including that of M.S.Hameed and Others%s. Director of State Lotteries and others – 249 ITR 186 (Ker.) that the assessee company had no occasion to deduct tax at source as the assessee company was not making any payment to the distributors or crediting the account of the distributors for any services rendered to it. But that occasion was removed by the assessee itself by conscious wordings of the terms of the agreement. The assessee company can collect the net sale proceeds along with TDS element from the distributors while distributing the pre-paid products to the distributors. The distributors shall file their returns before the concerned authorities and depending upon the working results, they can adjust the TDS collected by the assessee company against their tax liability or the refund due. The fact that the distributors may some time deliver the products for a price less than the MRP is not at all an impediment in deducting the tax at source. The distributors may deliver the products at a lesser price, but even then for the purpose of section 194H, as in the above example, the margin available to the distributor is Rs.20/-, which is to be treated as commission, and the assessee has to consider that amount for the purpose of quantifying the element of TDS. The assessee company has to collect the net price along with the above stated TDS element. Therefore, the argument that there was no occasion as in the case of M.S.Hameed and Others vs. Director of State Lotteries and others – 249 ITR 186 (Ker.) has no relevance here. The situation considered by the Hon’ble High Court was different. In that case one party is State Government. Without executing an authority in conformity with the statutory and administrative Rules, no-body can become an Agent of the Government. Further, the Court has considered the subject transaction as that of purchase and sale of goods. But, in the present case, there is no failure of any procedural provisions as apprehended by the assessee company.

61. We have considered the issue raised in these appeals in the light of the judgments of the Hon’ble High Court of Kerala in the case of Kerala State Stamp Vendors Association vs. Office of the Accountant General and others – 282 ITR 07; M.S.Hameed and Others vs. Director of State Lotteries and others – 249 ITR 186; Gujarat High Court in the case of Ahmedabad Stamp Vendors Association vs. Union of India -257 ITR 202 and the Hon’ble Bench of Income-tax Appellate Tribunal, Delhi, in the case of Idea Cellular Ltd. vs. Dy.CIT -121 TTJ 352 and that of the Hon’ble Bench of Income-tax Appellate Tribunal, Hyderabad in the case of M/s. Idea Cellular Ltd.

62. We have also considered all other judgments relied on by the assessee company in support of various propositions relied on,while explaining the features of relationship of principal to principal, principal to agent and meaning to be assigned to the words brokerage, commission, discount, etc.

63. The findings arrived at in all these judgments, though delivered on analogous situation, cannot be implanted in the present case because of the judgment of the Hon’ble High Court of Kerala in the case of M/s. BPL Mobile Cellular Ltd. vs. State of Kerala in Writ Petition No. 29202 of 2005 dated 13-02-2009 which has been pronounced in assessee’s own case in matters relating to Kerala Value Added Tax.

64. Therefore, in the facts and circumstances of the case, we hold that the margin earned by the distributors on supply of SIM Cards and other service products are in the nature of commission and therefore, the assessee is liable to deduct tax at source U/S.194H. As the assessee has not complied with the provisions as stated above, the assessee Is liable to be visited with the consequences provided u/s.201(1) and 201(1A) of the I.T.Act. The assessee company fails in its appeals filed before us.