By TIOL News Service

HYDERABAD, OCT 11, 2017: THE issue before the Bench is - Whether distributor of cellular company can only be termed as 'agent', and hence, merely by providing services of connection or talk-time to subscribers would not characterize relationship as 'principal to principal'. And the verdict is YES.

Facts of the case

The Assessee-company, was engaged in providing two types of cellular mobile telephone services i.e., post-paid and pre-paid to its customers in Andhra Pradesh. The Assessee filed its return for the relevant AY and had not deducted tax at source upon receiving advance amount from distributors for its pre-paid services. For post-paid services, the Assessee appointed number of distributors to manage the distribution business, hence, a commission was paid for the services and on the said commission, tax was deducted at source u/s 194H. On the other hand, for the pre-paid services, the Assessee offered services through State-wide distributors to identify and distribute pre-paid products to customers. In this segment, distributors were paying in advance to the Assessee and consumers in turn pay in advance to distributors. The Assessee believed that there was principal to principal relationship between the Assessee-company and its various distributors and hence, section 194H was not applicable.

During the assessment proceeding, the AO noticed that a survey action was conducted on Assessee, where Assessee-company was made clear of its liability much before the begining of the financial year relevant to the AY 2010-11 and also about the applicability of TDS provisions. A demand u/s 201(1) and 201(1A) was raised by the AO for the AYs 2007-08 to 2009-2010, which were confirmed by CIT(A), the Tribunal, Hyderabad Bench and Andhra Pradesh High Court. Instead of furnishing a reasonable cause for non-compliance to TDS provisions, the Assessee merely submitted that there was no case for levy of penalty. The said action of Assessee appeared that it was under bonafide belief that pre-paid distributor was not subject to TDS u/s 194H and hence was not required to deduct any tax on discount offered to the distributors. It was then contended by the Assessee that the transfer of "talk time" to pre-paid distributors does not result into income in the hands of distributors and hence, there was no reason for Assessee to withhold taxes. Further, the Assessee also contended that non-deduction of tax does not emanate from any malafide intention on the part of the Assessee to evade tax or to circumvent the law and hence, does not fit to levy penalty u/s 271C. However, all the Assessee's explanation was not accepted as a reasonable cause u/s 273B. An alternative contention was also placed by the Assessee, where it argued that no penalty should be levied when taxes were paid by the payee. However, the Assessee was not sure as to whether the distributors had paid taxes, therefore, the claim was not accepted by the AO. The AO completed the assessment by imposing penalty u/s 271C for the failure to deduct tax at source, for the AYs 2010-2011 to 2014-2015.

Aggrieved Assessee preferred an appeal before the CIT(A) for the AYs 2010-2011 to 2014-2015. For the AY 2010-2011, the CIT(A)-II, Hyderabad was the incharge of the appeals arising out of the order passed by the TDS Officer and accordingly a direction was made to the AO to verify and take action accordingly with a rider that if the income was already admitted by payee there was no need to treat Assessee as defaulter u/s 201(1). However, for the AY 2011-2012 onwards, the CIT(A)-8, Hyderabad had the jurisdiction and accordingly the appeals were disposed of wherein it followed the decision of the Andhra Pradesh High Court in Assessee's own case and also stated that the Counsel for the Assessee took a hyper technical view which was contrary to the various High Court's decisions and hence, dismissed the grounds. Subsequently, the CIT(A) rejected the Assessee's contention and confirmed the action of the TDS Officer.

the Tribunal held that,

++ while giving a finding in the case on hand we have also carefully gone through the distributorship agreements. We are unable to accept the contention of the Assessee that the distributor has complete right and control over the matter of providing "talk-time" to ultimate subscribers; distributor can of course insist upon Assessee while making a request to provide "talk-time" through e-module etc., but the final decision has to be taken by Assessee, only upon verification of consumer details which in turn has to be provided by distributor. Assessee can terminate the contract at any time by giving 30 days time without assigning any reason and distributor has to return all equipment and furniture supplied by the VESL upon termination of such contract. Other conditions such as maintaining the confidentiality and limitation of assigning rights or obligations to third party by distributor would also indicate that distributor is merely acting as an agent i.e., as a connecting link between Assessee and ultimate subscriber;

++ we therefore prefer to follow the decision of jurisdictional High Court by holding that though distributor commits Assessee to subscribers and exercise his authority to ensure arranging connection to subscriber, it will not alter the situation since the overall context in which such power is given to distributor has to be looked into in the circumstances of the case and the role of distributor can only be said to be a middleman between service provider on one hand (Assessee herein) and ultimate consumer on the other hand. In otherwords, the distributor can only be termed as an agent of Assessee in which event providing service to ultimate consumer through the medium of distributor cannot be said to be a sale of service by Assessee to the distributor;

++ the observations made therein by the jurisdictional High Court are only in the context of considering balance of convenience while granting stay and such observations need not be considered as a decision doubting the correctness of the judgment delivered by earlier Bench of High Court. In fact, even in the aforecited judgment, it was admitted that the earlier Bench affirmed the order of the Tribunal by following judgments of Delhi High Court, Kerala High Court and Calcutta High Court and because a similar issue is pending before the Supreme Court, apart from the fact that there is a favourable decision of Karnataka High Court, Andhra Pradesh High Court thought fit to grant conditional stay. Therefore, observations made by Andhra Pradesh High Court in W.P. Nos. 2456 and others cannot be termed as an order doubting the correctness of earlier judgment of the same High Court;

++ the ITAT Hyderabad Bench is bound to follow the order passed jurisdictional High Court on merits rather than interpreting / reconsidering the issue based upon certain observations made by a later Bench while granting partial stay. We already noticed that earlier decisions of Delhi High Court and Kerala High Court are on the premise that distributor is merely a link between Assessee and ultimate consumer / subscriber and distributor can at best enforce obligation on the part of Assessee to provide connection / talk-time to subscriber which itself would not change the characteristic of transaction from 'principal to agent' to 'principal to principal'. We therefore hold that the order passed by AO, as confirmed by the CIT(A), by holding that Assessee is a defaulter u/s 201(1) and consequently liable to pay interest u/s 201(1A), subject to certain conditions as prescribed by the Supreme Court (Hindustan Coca Cola Beverage P. Ltd), is in accordance with law.

(See 2017-TIOL-1404-ITAT-HYD)