Per Jugal Kishore, Accountant Member. - Both the above appeals filed by the revenue are against the consolidated order of Ld. CIT(A)-XL, Kolkata dated 16-5-2005 for assessment years 2003-04 and 2004-05. Since vide both the appeals the revenue has disputed the order of Ld. CIT(A) in treating the levy of tax under section 201(1) and interest under section 201(1A) read with section 194H and there is a common consolidated order of Ld. CIT(A), both the above appeals were heard together and are now being disposed of vide this common consolidated order for the sake of convenience.
2. Brief facts are that the assessee is engaged in the business of providing cellular mobile telephone services in Kolkata under the brand name "AIRTEL". The assessee provides such premi- ses through its distributors by selling to them Starter Pack and Rechargeable Coupons which is commonly known as "SIMCARD" and pre-paid Card (as there is no dispute regarding post-paid Card Mobile holders). These "SIMCARDS" and rechargeable coupons were purchased by the distributors/franchisees appointed by the assessee at a fixed rate below the market price on such SIMCARD and the same was further sold to the retailers by whom it was ultimately sold to the customers. The Assessing Officer while perusing the TDS return filed by the assessee observed that the assessee had paid commission on starter packs and recharge coupons to 16 parties, herein called "Franchisees" and though the assessee had deducted TDS on commission and deposited the same during period from April, 2002 to July, 2002, such deduction of tax at source was discontinued by the assessee treating the payment to such franchisees not as commission but as discount which was outside the ambit of TDS under section [194H.]
3. Observing the above discontinuance of deduction of tax at source the Assessing Officer issued show cause to the assessee and after considering the details filed by the assessee along with sample copy of the agreement entered with such franchisees observed that these franchisees and the assessee (i.e. M/s. Bharti Cellular Limited) maintained a principal-agent relationship and therefore, any commission made to such franchisee was liable for deduction of tax at source under section 194H. The Assessing Officer also observed that from the perusal of various process of selling these SIM and pre-paid cards to perspective customers, it was evident that these franchisees were only collecting information for passing on the same to the assessee and therefore, these franchisees were only agents of the assessee for which they were getting fixed percentage on such sale from the assessee.
4. The Assessing Officer thereafter observed that the assessee-company had paid commission of Rs. 3,08,00,435 in between 2-8-2003 to 31-3-2003 on sale of starter packs and rechargeable coupons to 16 franchisees where such commission in the financial year 2003-04 was Rs. 5,66,76,134. The Assessing Officer has, therefore, treated the assessee a defaulter for not deducting TDS and has accordingly computed the quantum of short deduction under section 201(1) and interest chargeable thereon under section 201(1A) at Rs. 20,09,151 in the financial year 2002-03 and Rs. 32,60,471 in financial year 2003-04.
5. The assessee being aggrieved with such order of the Assessing Officer went in first appeal before the Ld. CIT(A) wherein it was submitted that the discount given to distributors were not in the nature of commission and that there was no principal-agent relationship between the assessee and its distributor as they were independent business entities. The assessee claimed before the Ld. CIT(A) that it had neither made any payments nor credited any amount to the distributors, hence the discount allowed on sale cannot be brought within the ambit of section 194H. The assessee relied on the judgment of Gujarat High Court in the case of Ahmedabad Stamp Vendors Association v. Union of India [2002] 176 CTR 1931 wherein it was held that discount allowed to licensing Stamp Vendors do not fall within the explanation "commission" as defined under section 194H.
6. The Ld. CIT(A) after considering the above submissions of the assessee has held that since these franchisees are making payment to the assessee-company after reducing discount by the assessee-company for the SIMCARDS and since both the assessee and the franchisees have independent business entity, it would be incorrect to hold that the discount allowed by the assessee to the franchisees on the sale made by it as a commission. The Ld. CIT(A) on the basis of above observation and also following the decision of Gujarat High Court in the case of Ahmedabad Stamp Vendors Association (supra) has vacated the order of Assessing Officer and has held that the discount allowed to the franchisees are outside the purview of section 194H.
7. The revenue is aggrieved with such order of the Ld. CIT(A) and has now come in appeal by taking following grounds of appeal in both the years:—
"(i)That the Ld. CIT(A) accepted additional evidence filed by the assessee during the course of hearing. No opportunity under rule 46A of the Income-tax Rules was given to the Assessing Officer before passing the order under section 251.
(ii)That the Ld. CIT(A) erred in allowing full relief to the deductor considering the benefit allowed to the agents as discount allowed to them. The persons who sales the starter packs and rechargeable coupons needs to get them appointed by the cellular company through a series of formalities imposed upon them. Sometimes they are not allowed to sell such coupons of rival cellular companies. Moreover the intermediate selling organizations are given the authority to verify the credentials of the end consumers. In the instant case, Bharti Cellular Limited has done so in the case of its sellers.
(iii)That it is a proven situation that there remained principal-agent relationship between the cellular company and the organizations selling starter packs etc. on which they enjoy financial benefits.
(iv)That the benefit allowed to the agents in the name of discount may be treated as commission.
(v)That a ‘commission’ is the recompense or reward of an agent, factor, broker or bailee, when the same is calculated as a percentage on the amount of his transaction or on the profit to the principal - Sunderland v. Day 145 N.E. 2d. 39, 41 12111, 2d. 50.
(vi)That ‘commission’ is compensation paid to another for services rendered in the handling of another’s business or property and based proportionally upon the amount or value thereof - Rubinstein v. Rubinsterin 109 N.Y.S. 2d 725, 734.
(vii)That ‘commission’ is a word without technical meaning but when used to express compensation for services rendered, it usually denotes a percentage on the amount of moneys paid or received - Purify v. Godfray.
(viii)That the order of Ld. CIT(A) deserves to be vacated and that of the Assessing Officer restored.
(ix)That the appellant craves to alter, amend, add or modify the all or any of the grounds of appeal taken."
8. In appeal before us the Ld. Departmental Representative for the revenue has relied heavily on the reasoning given by the Assessing Officer while treating the assessee as a defaulter for not deducting TDS. The Ld. Departmental Representative has submitted that since tax was being deducted for the earlier year and even for a part of financial year 2002-03, and the assessee suddenly stopped deducting tax at source from payment of such commission paid to franchisees, claiming that such payment was discount in nature which does not come under the ambit of section 194H. The Ld. Departmental Representative has pleaded that the case laws relied by the Ld. CIT(A) in the case of Ahmedabad Stamp Vendors Association (supra) and the decision of Delhi Tribunal relied by the assessee in its paper book in the case of National Panasonic India (P.) Ltd. v. Dy. CIT [2005] 94 TTJ 9011 is not identical to the fact of the present case. It has, therefore, been contended by the Ld. Departmental Representa-tive that since the assessee has itself considered such payment as commission in nature in earlier years and from the perusal of the agreement between the assessee and the franchisees/ distributors, it is evident that such agreement was meant for of principal and agent relation, the action of assessee, not deducting tax at source just on the basis of different opinion and changing the nomenclature of such commission cannot be held justified. The Ld. Departmental Representative has, therefore, submitted that the order of the Assessing Officer should be restored.
9. In his rival submission the Ld. Counsel of the assessee has relied heavily on the order of Ld. CIT(A) and has submitted that the assessee is having two types of cards i.e. "Post-paid Cards" and "Pre-paid Cards" and in the case of pre-paid card the distributor/franchisee has to pay the price of the recharge coupons, less discount provided to them and this is not a case where the franchisee collects the recharge coupons from the assessee, sells them to the customers and then deposit the sale proceeds to the assessee after deducting discount. It has further been submitted by the Ld. Counsel that in this process the assessee compensate the franchisees for procuring new connections and selling recharging coupons with necessary discount and the franchisees, in turn, allow some portion of discount to the retailers who are working under them. It has, therefore, been submitted by the Ld. Counsel that the entire process of such sale of new connections and rechargeable coupons are in the nature of purchase and sale between the two independent entities wherein the purchaser pays lesser amount than the listed price and thereby avails the discount which in no way come under the purview of section 194H and therefore, the Ld. CIT(A) was justified in vacating the order of the Assessing Officer. He has also relied on the following judgments in support of his contention:—
(i) Ahmedabad Stamp Vendors Association’s case (supra)
(ii) National Panasonic India (P.) Ltd.’s case (supra)
(iii) Bhopal Sugar Industries Ltd. v. Sales Tax Officer [1977] 40 STC 42 (SC).
10. We have given our careful consideration to the rival submissions made before us and have perused the orders of the tax authorities. We have also considered the paper books filed by the assessee and the case laws relied by both the parties. The Assessing Officer in this case has considered the difference between the listed price of coupons and the sell price by the assessee to its franchisees as "commission" payment by the assessee along with the commission on new connections for which the assessee is liable to deduct tax at source under section 194H of the Act. The assessee, however, has claimed that since the franchisees were making payment after deducting the discount offered to them, the same will be discount in nature which is outside the purview of section 194H. The assessee has further contended that since the liability of the franchisees to pay the price to the assessee is not dependent upon or contingent to the sale of recharge coupon and the both the assessee and the franchisees are having independent entities. There cannot be any relation of principal and agent between these two parties and therefore, no question arises of treating such payments as "commission" in nature.
11. We have also considered the fact that it is an undisputed fact that the assessee has itself deducted tax at source on such payment in earlier years and even for a part of the financial year 2002-03 which is before us and the assessee from August, 2002 onwards has treated such payment as discount in nature. Since the assessee has claimed that it was offering discount to its franchisee and the Assessing Officer is of the opinion that such payment to franchisee is in the nature of commission, we are of the view that the nature of payment can well be examined with help of agreement between the assessee and the franchisee.
12. We find from the perusal of the agreement between the assessee and the franchisees, that the franchisees were working for the assessee in a capacity of agents. While forming such opinion we get support from the following paras of agreement entered by the assessee with one of the franchisee Shri Ashoke Kumar Singh which is also available at page 22 onwards in the paper book. Some of the relevant paras of agreement reads as under:—
"4.1The FRANCHISEE shall maintain a suitable establishment for the conduct of its business and the performance of its obligations under this Agreement. The FRANCHISEE shall use its best efforts to actively provide effective ways to market and promote the Pre-paid Services and shall always act in the interest of both BML and the subscribers to the Services of BML.
4.8The FRANCHISEE shall use its best efforts and endeavours to market and promote the Pre-paid Services to meet the growing demands of the subscribers. At no point of time shall any right, title or interest pass to the FRANCHISEE in respect of the Pre-paid Cards for the Pre-paid Services given to the subscribers for connection to the service and all right, title ownership and property rights in the such cards shall at all times vest with BML.
4.9The FRANCHISEE shall seek prior written approval from BML for its promotional literature campaign (including promotional material which bears the Trademarks, logos and trade names of BML) for the Pre-paid Services. BML will not share the expenditure incurred by the FRANCHISEE for such advertising and publicity of the services unless agreed to earlier in writing. Any share of the expenditure stated above and the ratio for the same shall be decided by BML from time to time at its sole discretion.
4.14The FRANCHISEE shall, be responsible for collection of all necessary agreement/contract forms and other related forms, and for obtaining the signature of the customers on these forms. The FRANCHISEE shall forward all such forms, duly completed in all respects and signed by customers, to BML for its verification and records.
5.1From time to time, BML will review with the FRAN-CHISEE minimum subscription targets for the Pre-paid Services, taking into account the market development and market potential and other relevant factors. The achievements of these prescribed targets by the FRANCHISEE is a material obligation of the FRANCHISEE under this Agreement.
6.3BML reserves the right to inspect and audit at any time the related quality standards observed by the FRANCHISEE and his employees and the FRANCHISEE will ensure that both he and his employees fully co-operate with such inspection and audit, BML will communicate the result of such inspection and audit to the FRANCHISEE, who shall take remedial measures if so advised by BML.
7.Operating Procedures
The FRANCHISEE in its business operations shall ensure implementation the Operating Procedures specified by BML from time to time and observe such other operating criteria as may be contained in any memorandum or directive issued by BML to FRANCHISEE generally or specifically to the FRANCHISEE. Operating procedures for the purpose of this Clause shall include the operating procedure to be implemented by the FRANCHISEE as specified by BML to the FRANCHISEE in the form of manuals, bulletins, circulars or letters issued, amended and/or updated by BML from time to time.
The FRANCHISEE shall ensure the availability to subscribers of the Pre-paid Services, a level of service standards strictly in accordance with BML’s standards and specifications. The FRANCHISEE acknowledges that the providing of satisfactory services in terms here above is a material obligation under this Agreement."
13. From the perusal of above clauses of agreement between the assessee and the franchisees, it is evident that these franchisees are commission agents acting on fixed margins and fixed responsibilities, as evident from Para 4.8 of the agreement which is again reproduced for the sake of clarity:—
"4.8 The FRANCHISEE shall use its best efforts and endeavours to market and promote the Pre-paid Services to meet the growing demands of the subscribers. At no point of time shall any right, title or interest pass to the FRANCHISEE in respect of the Pre-paid Cards for the Pre-paid Services given to the subscribers for connection to the service and all right, title ownership and property rights in the such cards shall at all times vest with BML."
14. On a plain reading of above para, it is apparent that the rights with the Pre-paid Cards at all times vests with the assessee company before it is finally sold to the customer. The above agreement between the assessee and the franchisees also suggest that they have a relation of principal and agent because in principal to principal relationship the franchisees/distributors enjoy full independence and once the goods are sold there cannot be any restrictions by the principal and the franchisees enjoy all freedom to sell such goods as per its own convenience. We have also considered the fact that in the present case also the franchisee has to comply with all the formalities to be fixed by the assessee before selling the new connections or the Pre-paid Cards to the customers. Apart from the fact that it has also to charge from the customers at the rate prescribed by the assessee from time to time and service by assessee on such Cards is subject to variation from time to time.
15. We have also considered the fact that the modus operandi of sale of such card is also decided by the assessee apart from the fact that the assessee has got full right to inspect such goods while inspection knowledge as mentioned in Para 6.3 of the agreement along with other characteristic of the premises of the franchisee.
16. It is, therefore, evident that the assessee cannot do anything apart from the power and right delegated to it which follows the law of maxim that delegarta members postaslas non potest delegari which means that an agent cannot delegate his power or duties to another without the expressed authority of the principal. In this case also the assessee can use only those powers which has been delegated to it by the assessee, which is confined to promoting and marketing of Pre-paid Cards sold by the assessee through franchisee and though the franchisee is making payment on behalf of such Pre-paid Cards supplied by the assessee after deducting commission, at the same time all rights, title, ownership and property rights in such cards shall at all time vests with the assessee as mentioned in Para 4.8 of the agreement.
17. We have also considered the fact that the franchisee while selling such cards is bound to ensure implementation of the operating procedures specified by the assessee from time to time and has to observe such other operating criteria as may be contained in any memorandum or directive issued by the assessee to franchisee generally or specifically.
18. Apart from above fact, we have also taken into consideration the fact that the franchisee price and payment for services is being decided from time to time by the assessee itself which clearly suggests that these are commission in nature and not discount as contemplated by the assessee and is also evident from clause No. 8.1 of the agreement between the assessee and the franchisee which is being reproduced hereinunder for the sake of clarity:—
"8.1The FRANCHISEE’s price and payment for services will be specified by BML from time to time. The rates are subject to variation during the term of this agreement at the sole discretion of BML and shall be intimated to the distributor from time to time."
The assessee has relied heavily on Paras 16.1 and 16.2 in support of its claim that both the assessee and the Franchisees are independent business entity and is solely principal to principal basis. The relevant paras reads as under:—
"16.1The FRANCHISEE understands that it is an independently owned business entity and this agreement does not make the FRANCHISEE, its employees, associates or agents as employees, agents or legal representatives of BML for any purpose whatsoever. The FRANCHISEE has no express or implied right or authority to assume or to undertake any obligation in respect of or on behalf of or in the name of BML or to bind BML in any manner. In case, the FRANCHISEE, its employees, associates or agents hold out as employees, agents, or legal representatives of BML, the FRANCHISEE shall forthwith upon demand make good any/all loss, cost, damages including consequential loss, suffered by BML on this account.
16.2It is understood that the relationship between the parties is solely on principal-to-principal basis. FRANCHISEE shall not acquire, by virtue of any provision of this agreement or otherwise, any right, power or capacity to act as an agent or commercial representative of BML for any purpose whatsoever. Nothing contained in the contract shall be deemed or construed as creating a joint venture relationship or legal partnership etc., between BML and the FRANCHISEE."
19. However, we are unable to accept the contention of the assessee only on the basis of the above two clauses just by changing the nomenclature of the payment made by the assessee to the Franchisee. As from the perusal of different clauses of agreement between the assessee and the Franchisee which have been reproduced above elsewhere as in this order, it is evident that the Franchisee in this case, are selling new connections and Pre-paid Cards on behalf of the assessee for which they are getting fixed commission as decided by the assessee and the entire ownership relating to such new Simcard and Pre-paid Cards always vest with the assessee as evident from different clauses such agreement which is also placed on record in the form of paper book.
20. The assessee in its written submission has also claimed that if such transactions are subject to commission then all the transactions of sale from manufacturer to a wholesaler and wholesaler to a retailer would be covered by section 194H. However, such contention of the assessee has to be adjudicated keeping in view the fact involved in this case and for drawing a conclusion that whether it is a sale on discount or sale with a component or commission involved, we have to see whether the assessee is having principal-to-principal relationship with its Franchisee or relationship of principal and agent. We find that in the case of principal-to-principal relationship within the restriction of maximum retail price, a principal enjoy full freedom of fixing sale price and also becomes owner of the goods purchased by it from another businessman. However, in this present case Franchisees/Distributors do not have any independence whatsoever to do so by reducing their margins.
21. Apart from above, in case of sale on discount, once the goods are sold there cannot be any restriction imposed by one principal on the other principal in regard to the manner and the area of sales of such goods sold. There can also not be any restriction on the manner in which the stock purchased by one principal has to be kept by it in case of purchase on discount. Whereas in the present case the assessee-company has got all right to regu-larly monitor operation of Franchisee/monitor or investigate the manner in which business operations are carried on by such franchisees which is not possible in case of sale on discount. In the present case before us the assessee has entered into an agreement with Distributors/Franchisees allowing later to sell the product within its specified geographical area and directing the Franchisees the manner in which such product will be sold in the market. We have also noticed the fact that this kind of agreement falls under the agency-Franchisee wherein a manufacturer i.e., Franchiser entered into an agreement with a Distributor to sell the product within its specified geographical area.
22. Even otherwise the provision as contained in relevant section 194H clearly holds the assessee responsible for deducting tax at source as such commission. Provision of section 194H is being reproduced hereunder for the facility of reference:—
"194H. Any person, not being an individual or a Hindu Undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent :
Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed two thousand five hundred rupees :
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section.
Explanation. - For the purposes of this section, -
(i)‘commission or brokerage’ 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 or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;
(ii)the expression ‘professional services’ means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA.
(iii)the expression ‘securities’ shall have the meaning assigned to it, in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(iv)where any income is credited to any account, whether called ‘Suspense Account’ or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly."
From the perusal of Explanation (i) to section 194H, it is well apparent that the franchisee appointed by the assessee are only buying and selling Pre-paid and SIMCARDS on and behalf of the assessee. It is also worthwhile to note that service condition on such Pre-paid and SIM CARD purchased by the ultimate customers is always decided by the assessee and is subject to variation from time to time as per policy of the assessee-company and the franchisee has no role except to play a role of middleman between the assessee and the ultimate customers for which he gets commission.
23. It is, therefore, evident from the above discussion that price difference in this case is certainly carries nomenclature of the commission and not as discount as claimed by the assessee. Since apart from right of ownership of such Pre-paid Cards, the assessee company is strictly regulating as to the manner of business operation by the Franchisees while selling such cards from time to time vide investigation, checking by the auditors appointed by the company and inspection of record. The assessee only pays commission to the franchisee for the services rendered by them as evident from para 8.1 of this agreement, therefore, in our considered opinion such price difference is nothing but a payment of commission by the assessee to its Franchisees.
24. Coming to case laws relied by the assessee, we find that though the assessee has placed reliance on the judgment of Gujarat High Court in the case of Ahmedabad Stamp Vendors Association (supra) but the same is not identical to the facts involved in the present case as the restrictions involved in the Stamp Vendors are placed by the law of land and therefore are mandatory. Whereas in the present case restriction has been imposed by the assessee itself on the Franchisees before being sold ultimately to the retailers/customers and therefore, the above case is no help to the assessee.
25. Coming to the decision of Hon’ble Supreme Court in the case of Bhopal Sugar Industries Ltd. (supra), we find that this case is also of no help to the assessee as in that case also the substantial ownership has passed on to the Franchisee or purchaser whereas in the present case it is always lying with the assessee.
26. The decision of Delhi Bench in the case of National Panasonic India (P.) Ltd. (supra) is also not identical to the present case as in that case also the dealer after purchasing goods become entitle to sell it at any price subject to maximum limit imposed by the manufacturer whereas in the present case the Franchisee is not free to do so and the entire business operations in regard to sale of such new connections and Pre-paid Cards are being regulated/monitored by the assessee and therefore, this case also does not help the assessee.
27. We, therefore, find that the case laws relied by the assessee are distinguishable and are not identical facts involved in the present case. Whereas in a recent judgment Jaipur Tribunal in the case of Hindustan Coca Cola Beverages (P.) Ltd. v. ITO [2005] 98 TTJ (Jp.) 11 has held that when the assessee having sold goods to its distributors to operate in specified territories only and sale of goods at fixed margins is under the supervision and control of the assessee, the transaction between the assessee and the distributors were on principal and agent basis and not on principal-to-principal basis and, therefore, the assessee is liable to deduct tax at source under section 194H in respect of payment to Distributors.
28. We observe that the facts involved in the present case are identical to the facts of the case disposed of by the Jaipur Tribunal in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra) as in this case also the assessee has sold Pre-paid Cards to its distributors to operate in specified territories only and sale of goods by franchisee gives them fixed margins decided by the assessee and the business operation of such franchisee is always under the supervision of the assessee and therefore such transactions are on principal and agent basis for which the assessee was liable to tax at source under section 194H.
29. We, therefore, considering the facts and circumstances of the case and in the light of above discussion, are of the opinion that the assessee was liable for deduction of tax at source under section 194H on commission payment to its Franchisees and therefore, the Assessing Officer was justified in treating the assessee as a defaulter and then compute TDS and interest thereon under section 201(1) and 201(1A) and the Ld. CIT(A) was not justified in vacating such order of the Assessing Officer. We, therefore, set-aside the order of the Ld. CIT(A) in this regard and restore the order of the Assessing Officer and accordingly accept the grounds raised by the revenue for both the years.
30. In the result, appeals filed by the revenue for both the years are allowed.
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