Question And Answer
Subject: Is there a TDS obligation u/s 194-H of Income Tax Act when making payment to dealers for sim cards?
Category:  Income Tax
Asked by: Abdul Malik
Answered by:
Tags: ,
Date: September 15, 2018
Query asked by Abdul Malik

The assessee has made commission payment on which he has not deducted TDS u/s.194H. The reason is that the has more than 200 dealers/retailers at various places, who do not represent the assessee for rendering any services, and therefore, they are not entitled to any commission.

It was submitted that the sale transactions with the dealers/sub-dealers are direct and are made at arm’s length basis and the relationship is between principal to principal basis and there is no agency agreement between the assessee and the dealers/sub-dealers.

It is also explained that the property of goods, i.e., SIM cards including all risks and liabilities are transferred to the dealers/sub-dealers upon the delivery of goods by the assessee and any further dealing with the goods is on the risk and at the expense of concern dealers.

Accordingly, it was submitted that such transactions are not covered u/s.194H.

However, the AO is not prepared to accept the submissions of the assessee.

He has stated that in case where a distributor is transferring a goods to its dealers and sub-dealers, then the transaction is in the nature of principal to principal basis and discount by the former to the latter cannot be treated to be in the nature of commission.

However, he has held that in the case of the assessee the nature of transaction is different because the transaction involved recharge vouchers/prepaid vouchers/ SIM cards, etc. which products do not have any intrinsic value but are only in the nature of prepayment/commitment for payment for entitlement to avail the services which are being provided exclusively by the telecom entities.

The AO has taken the view that the franchisees can be considered as an intermediary between the service providers, the assessee and the ultimate consumer, and therefore, assessee becomes an agent of the telecom entity and there is a principal-agent relationship between telecom entity and the assessee.

He has held that the assessee becomes the principal and the dealer and sub-dealers becomes an agent.

Even if it is presumed that the transaction between the assessee and the dealers/subdealers contain the essential element of sale, to view such transaction without considering the commitment of the distributor and in turn, the service provider to provide the services for ultimate consumers to commit payment, either in advance or subsequent to the utilization of services, and therefore, in lieu of such entitlement, it would amount to ignoring the substance of transaction.

He has also taken the view that under the distributorship agreement entered by the assessee with various telecom entities, the obligation of distributor has been laid down in detail and the distributor has to exercise substantial control over its retailers.

Please give opinion whether there is a principal – agent relationship and whether assessee can be held to be an assessee-in-default for not deducting TDS u/s 194-H.

In CIT vs. Idea Cellular, reported in (2010) 325 ITR 148 and Vodafone Essar Cellular Ltd., reported in 141 TTJ 461 it was held by the Delhi High Court and the ITAT Chennai Bench that the relationship between the service providers, i.e., the telecom entities and the assessee-company is that of ‘principal-agent relationship’.

It was held that a cellular operator provides prepaid connection through recharge vouchers or prepaid SIM cards to the subscribers through distributors. A discount is offered by the cellular operators to its distributors who sell the SIM cards to the customers/ultimate consumers.

The Hon’ble Delhi High Court in Idea Cellular (supra) has interpreted the transaction between the cellular operator and the distributor and held that the nature of transaction does not amount to sale of goods because unsold SIM cards are returned to the cellular operator, who is required to make payment against them.
It was held that such a transaction cannot be treated as sale and therefore, the discount offered by the cellular entities/cellular operators to the distributors on the payments made for the SIM cards /recharge vouchers/ coupons which are eventually sold to the subscribers at the listed price is commission and hence it is subjected to TDS u/s.194H.
The Courts held that there is a principal-agent relationship between the cellular operator and dealers and the payments have to be treated to be commission.

However, it has not been held that a similar relationship exists between the wholesale dealer, dealers and sub-dealers.

It cannot be assumed that since there is a principal-agent relationship between the assessee and the telecom entity, there is a similar agency relationship between the assessee who is a wholesale dealer with dealers/sub-dealers.

A wholesale dealer gives incentives to his sub-dealers depending upon the advance and the promptness of the payment of the sale consideration received for selling the prepaid vouchers/SIM cards to the customers.

There is no agency agreement between the dealers and the sub-dealers.

The agency relationship between the dealer and the cellular operators cannot be inferred or presumed in the transaction between the dealer and his sub-dealers.

The reason being the SIM cards, vouchers belonged to the cellular operators/cellular entities and these cellular operators/telecom entities ensure that payment is received in respect of those prepaid vouchers and SIM cards which are sold to the subscribers and unsold SIM cards are returned back to them and even if such SIM cards are returned, then these cellular/telecom entities are required to be made payment against them and the SIM card stocked with the distributors are the property of service provider, i.e., the telecom/cellular entities.

The permissive right to use the SIM cards to get access to the phone network of the telecom companies is given only to the ultimate customers who have activated the connections.

Thus, in the case of the telecom company, it is the owner of the prepaid voucher/SIM card and not the wholesale dealer. It is the telecom companies who are providing the services to the distributors on prepaid package. If at all, there is an agency relationship on which TDS is required to be deducted on the commission paid to the dealers is qua the cellular operator and the wholesale dealer.

The same agency relationship cannot be inferred between the assessee being a wholesale dealer and sub-dealers.

In fact, in CIT vs. Idea Cellular, reported in (2010) 325 ITR 148, in the postpaid SIMs the telecom company was deducting TDS u/s.194H. There is no difference in the case of prepaid SIM card also and therefore, all the essential feature of agency relationship exists between the dealer and the telecom operator.

On the present facts, it cannot be held that a similar relationship exists between the assessee and his sub-dealers. Therefore, the nature of payment in the form of incentive to various sub-dealers cannot be equated with commission as stipulated u/s.194H.

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