ITA No.145 & 784 of 2009 Page 1 of 24 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.145 of 2009 with ITA No.784 of 2009 Reserved On: 11th December, 2009. % Date of Decision: 19th February, 2010. 1) ITA No.145 of 2009 Commissioner of Income Tax-XVII . . . Appellant through : Ms. Rashmi Chopra, Advocate. VERSUS Idea Cellular Ltd. . . .Respondent through: Mr. Farookh Irani with Mr. Satyen Sethi and Mr. Johnson Bara, Advocates. 2) ITA No.784 of 2009 Commissioner of Income Tax-XVII . . . Appellant through : Ms. Rashmi Chopra, Advocate. VERSUS Idea Cellular Ltd. . . .Respondent through: Mr. Farookh Irani with Mr. Satyen Sethi and Mr. Johnson Bara, Advocates. CORAM :- THE HON’BLE MR. JUSTICE A.K. SIKRI THE HON’BLE MR. JUSTICE SIDDHARTH MRIDUL 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. These appeals were admitted on the following question of law: “Whether on a true and correct appreciation of the relationship between the assessee and its distributors, the learned Income Tax Appellate Tribunal erred in holding that the payments paid by the assessee is not commission as envisaged under Section 194H of the Act?” ITA No.145 & 784 of 2009 Page 2 of 24 This question has arisen for determination for the Assessment Years 2003-04 and 2004-05. 2. A survey under Section 133 of the Income Tax Act (hereinafter referred to as „the Act‟) was conducted at the premises of the respondent-assessee (hereinafter referred to as „the assessee‟). It revealed that the assessee was not deducting tax at source. It was found that the assessee-company is engaged in the business of providing cellular telephone network through a card called Subscriber Identification Module (SIM). Prepaid or post paid connections are provided to the subscribers through distributors called „Prepaid Market Associates (PMAs)‟ appointed by the assessee. The assessee offers discount for prepaid calling services to its distributors. The assessing officer noted that as per the agreement the distributors were required to store the SIM Card and Recharge Coupons in such a way as to clearly indicate at all times that prepaid SIM Card/Recharge Coupons were owned by assessee. They were not allowed to remove, obscure or delete in marks placed on prepaid SIM Card/recharge coupons. The terms of agreement further provided that without written consent of ICL the distributors (PMAs) shall not directly or indirectly: (i) market, solicit, sell, offer and accept offers for telephony services that compete with ICL's telephony Services. (ii) induce or refer any actual or prospective subscriber of ICL's telephony services to subscribe to any Competitive Telephony Services. (iii) provide any Company or Customer information/data to any competitive entity. ITA No.145 & 784 of 2009 Page 3 of 24 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 company. PMAs further appointed the retailers after the written approval of the assessee. The maximum price of SIM Cards/recharge coupons was also decided by M/s IDEA CELLULAR LIMITED (ICL). It was also found that under the agreement, it is the responsibility of the PMAs to obtain all relevant informations concerning a subscriber and to forward the same to ICL. Unless that is done, no activation of SIM card can be done. Further ICL has the right to use of service marks, trademarks, trade names, copy rights, logos or any other copyright that might be created in future. PMA has to comply with all requirements of ICL in respect of invoicing and accounts, maintenance of brand image and provide monthly sales reports return and other information relating to business. ICL 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 company and reserved the right to terminate the agreement unilaterally. On the basis of these facts and the types of control exercised by ICL on its prepaid distributors, the Assessing Officer came to the conclusion that transaction with ICL and prepaid distributors were that of Principal and Agent at all times and prepaid distributors were selling a prepaid SIM Card/recharge coupon on behalf of the ICL. Consequently, amount of discount offered to prepaid distributor was in nature of commission and liable to tax deduction at source under Section 194H of the Income-tax Act. He accordingly treated the assessee as defaulter Under Section ITA No.145 & 784 of 2009 Page 4 of 24 201(1) and charged interest under Section 201(1 A) on amount of commission so paid by the assessee. 3. The assessee preferred appeals before the CIT (A), but was unsuccessful, as its appeals were dismissed. However, it has succeeded in further appeals preferred before the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟). The decisions of the CIT(A) as well as AO have been reversed and the issue is decided in favour of the assessee company. The Tribunal has opined that the relationship between the assessee and its distributors is that of „principal and principal‟ and not „principal and agent‟. Therefore, what was paid to the PMAs was not commission or brokerage and was not subject to deduction of tax at source under Section 194H of the Act. The Tribunal has arrived at the aforesaid findings in the following manner: “14. In order to ascertain whether the PMAs were acting as agents of the assessee or were outright purchasers of goods supplied by the assessee, it is necessary to discuss the distinction between the contract of sale or contract of agency. The essence of contract to sale is the transfer of title to the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of goods as a debtor for the price to be paid and not an agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of goods to a person, who is to sell them, not as his own property but as the property of the principal who continues to be the owner of goods and who is therefore liable to account for the proceeds. The true legal relationship between the assessee and the PMAs has to be inferred from the nature of contract, its terms and conditions and the nature of respective obligations undertaken by the parties. Clause 3 of the agreement specifically provides that the relationship created by the agreement is that of independent contracting parties and is not, and shall not deem to be any relationship inter-alia employer/employee; principal and agent. Clause 6(b) provides that full legal equitable title and interest in all and any of the prepaid simcard/recharge coupons delivered to PMAs shall remain in ICL and shall not pass to PMAs. However, in case the prepaid SIMCards/recharge coupons with PMAs become unusable, substandard or are destroyed due to natural calamities or occurrences or circumstances beyond the reasonable control of either party or due to negligence of PMA in storage, the assessee shall replace the prepaid simcards/recharge coupons subject to payment of processing fees for such replaced cards. On cursory look on this condition of agreement it appears that ownership on prepaid simcard/recharge coupons remains with ITA No.145 & 784 of 2009 Page 5 of 24 the assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of principal and agent, there was no need for recovery of processing fee for replacement of cards destroyed or become unusable. In case of a contract of agency the agents acts on behalf of the principle and no question arises for seeking the compensation from the agent in case of loss of property due to natural calamity or occurrence or circumstances beyond the reasonable control of the agent. The agent is required to protect the interest of his principal as a man of ordinary prudence. Another contention of Revenue that Clause 8 of the agreement debars the PMA to enter into agreement with other parties for similar telephony services and therefore he is not to act independently. In our view the restrictions prescribed in Clause 8 deals with the competitors of the assessee. Such terms and conditions are generally found in commercial agreements. Clause 9 provides for appointment of retailer by PMA. Further Clause 10 deals with the price at which PMA shall acquire the prepaid SIM cards/recharge vouchers. The retailers can sell the recharge vouchers to end user at any price not exceeding the maximum retail price. The assessee will receive the fixed amount including service charges. In case of a agent the price collected by him is remitted to the principal after deduction of his commission and expenses relating to sale of the goods. The assessee is not making any reimbursement of the expenditure incurred by the PMA and his retailers. This also suggests that the agreement between the assessee and PMA is that of seller and purchaser. Agreement also provides certain conditions relating to protection of intellectual property rights of the assessee. The other conditions stipulated in the agreement including termination clause do not throw any light so as to suggest that the agreement between the assessee and PMA is that of principal and agent. In the case of Gordon Goodroffe & Co. Madras Ltd. v. Shaik MA Mazid and Co. held that even an agent can become a purchaser when agent pays the price to principal on his own responsibility. In the case before the goods are sold to the PMA who in turn transfer goods to retailer to be sold to the end users. The retailers are appointed by the PMA though with the approval of the assessee but they are working under the instructions of PMAs. Termination of the retailers is co-terminus with the termination of the agreement with PMA. In our considered view the legal relationship between the assessee and PMA is that of seller and purchaser. We do not find any condition in the agreement from which it can be inferred that PMA stands in a fiduciary position in relation to the assessee. It is admitted by the revenue that the agreement in substance is the agreements entered into between the assessee and the PMA is in the nature of contract to sale and not contract of the agency. Therefore, the discount allowed by the assessee to PMA will not fall in the definition of commission of brokerage.” 4. Section 194H of the Act reads as under: “Section 194H: COMMISSION, BROKERAGE, ETC. ITA No.145 & 784 of 2009 Page 6 of 24 (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of October, 1991 but before the 1st day of June, 1992, 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 ten per cent. (2) The provisions of sub-section (1) shall not apply - (a) To such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue, by notification in the Official Gazette 1747e , specify in this behalf; (b) 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 by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees. 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; (ii) "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) 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.” 5. It is clear from the aforesaid provision that taxes 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 goods or in relation to any transaction relating to following or any being securities: ITA No.145 & 784 of 2009 Page 7 of 24 (i) For services rendered (not being professional); (ii) For any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing 6. Counsel for both the parties agreed that element of agency is to be established in all the aforesaid circumstances. It was for this reason that the Tribunal had considered as to whether the transaction in question between the assessee and the PMAs amounted to contract of sale (thereby constituting relationship of „principal and principal‟) or it amounted to contract of agency (thereby resulting in „principal and agent‟). Both the parties concur that this was the essence of dispute. However, difference is in the perception inasmuch as according to the Revenue, the agreement constituted contract of agency and, therefore, payment made by the assessee to the PMAs was „commission‟ or „brokerage‟ attracting the provisions of Section 194H of the Act. 7. Learned counsel for the Revenue submitted that from the nature of services provided by the assessee to its ultimate consumers through the medium of these distributors called „Prepaid Marketing Associates (PMA)‟. It was clear that these distributors were only agent and link between the assessee and the ultimate consumers. She highlighted the nature of the transaction by pointing out that a subscriber uses the cellular telephone network through a card called Subscriber Identification Module (SIM Card). Prepaid or postpaid connections are provided to the subscriber. In this case, the prepaid services are termed as Idea Chitchat Prepaid. For rendering its services to the subscriber, the company appoints distributors called “PRE PAID MARKET ASSOCIATES (PMAs)”. ICL also appoints I-CAPs to promote its ITA No.145 & 784 of 2009 Page 8 of 24 chitchat prepaid services. The main duty of I-CAP is to obtain subscribers of SIM cards and activate them. In short, sometimes I-CAPs are directly appointed by the company and not through its PMAs. The assessee company offers discounts on prepaid calling services to its distributors. No breakup, however, has been given for the discounts offered on prepaid calling services to PMAs and I-CAPs. The break-up is, however, available for discounts offered on Starter Packs and Recharge Coupons. 8. Her submission was that the agreement brought out the following significant aspects showing „principal and agent‟ relationship: a) Full legal and equitable title and interest in prepaid SIM Card and recharge coupons delivered to the distributors at all time remains with the assessee. b) The distributors store the SIM Card and recharge coupons in such a way as to clearly indicate at all times that the prepaid SIM card/recharge coupons are owned by ICL and is not allowed to remove, obscure or delete any mark placed on prepaid SIM card/recharge coupons. c) The distributor is not free to sell the similar products offered by the competitors company without the written consent of the assessee. d) PMA is allowed to appoint the retailers only after the written approval from the assessee. e) The maximum price of SIM Card/recharge coupon is also decided by ICL. f) It is the responsibility of the PMA to obtain all relevant information concerning a subscriber and to forward the same to ITA No.145 & 784 of 2009 Page 9 of 24 ICL and unless that is done, no activation of SIM card can be done. g) The ICL has the right to use of service marks, trademarks, trade names, copyrights, logos (collectively the intellectual property) or any other copy right that ICL may create in future. h) The PMA has to comply with all requirements of ICL in respect of invoicing and accounts, maintenance of brand image and provide monthly sales reports return and other information relating to business. i) The representative of the ICL, under the agreement, has right to inspect the things material to the business, which is the subject matter of agreement. j) Minimum Performance Targets for the distributors are also set by the company and company reserves the right to terminate the agreement unilaterally. 9. Highlighting the aforesaid features of the agreement between the ICL and the PMAs, the learned counsel for the Revenue pleaded that the overall control always remained with the assessee. The ownership in the SIM cards were never transferred by the assessee to PMAs and, therefore, the transaction in question was not that of sale and purchase between the assessee and the PMAs and for this reason, no sales tax was even paid. According to her, it was always treated as „service‟. The PMAs were only appointed as distributors and were offered discount on the prepaid calling services/SIM cards. The discounts were, therefore, in the nature of „commission‟ or „brokerage‟ to the PMAs by the assessee. 10. She further submitted that since the expression „commission‟ or „brokerage‟ was not given in statutory definition under the Act, one had ITA No.145 & 784 of 2009 Page 10 of 24 to take into account the expression as judicially defined. She referred to these definitions, which are even taken note of by the AO. She also argued that after the purchase of SIM card by the ultimate consumers, legal relationship between the said consumer/subscriber and the assessee, is created in the entire deal. She also heavily relied upon the decisions rendered by the Cochin Bench of the Tribunal in the case of Vodafone Essar Cellular Ltd. Vs. Assistant Commissioner of Income Tax [(2009) TIOL-630-ITAT-Cochin, decided on 30.04.2009] in addition to more judgments of other Benches of the Tribunal. 11. Mr. Farookh Irani, learned counsel who appeared on behalf of the assessee, countered the aforesaid submissions by making a passionate plea that the approach of the Tribunal is perfectly justified and it was permissible for the Tribunal not to take myopic view of the matter on the basis of trivial aspects of the agreement pointed out by the Revenue, which were not material to determine the controversy. His submission was that the following three conditions were to be fulfilled in order to attract the provisions of Section 194H of the Act: a) Expenses of principal-cum-agent-relationship, which was lacking in this case; b) Payment or credit by the assessee to its distributors, which attribute was again missing; and c) The amount, which the Revenue claims to be subject to TDS under Section 194H must be shown to the income of the recipient, which ingredient again was missing. 12. Dilating on the first ingredient, viz., there was no relationship of „principal and agent‟, the learned counsel submitted that the transaction ITA No.145 & 784 of 2009 Page 11 of 24 in question between the assessee and the PMAs was that of outright sale in view of the following characteristics: (i) The fact that payment for goods is made by a distributor to the principal upfront, prior to the realization by the distributor of the proceedings of the sale made by him has been recognized, in the following decisions, as a crucial factor in establishing that the transaction is one of a sale by the principal to the distributor: 1. Vijay Traders Vs. Bajaj Auto Ltd. [(1995) 6 SCC 566. 2. Commissioner of Central Excise Vs. DCM Textiles [(2006) 195 ELT 129 (SC)]. 3. Moped India Ltd. Vs. Asstt. Collector of Central Excise, Nellore and Ors. [(1986) 23 ELT 8 (SC)]. 4. Ahmedabad Stamp Vendors Association Vs. Union of India [257 ITR 202) (ii) The fact that there is a specification of the price at which goods are transferred between the principal and his distributor is indicative of the existence of principal and principal relationship. This has been laid down by the Supreme Court in the case of Gordon Woodroffe & Co. Ltd. Vs. Shaik Majid and Co. [AIR 1967 SC 181]. (iii) The fact that the distributor has freedom to sell at his own price without reference to the principal is indicative of the existence of principal and principal relationship. This has been laid down in ex parte White in Re Neville. 13. He further submitted that the following prerequisite/conditions necessary to establish relationship of „principal and agent‟ as per the required provisions of Indian Contract Act were not satisfied in the present case. The agent must be obliged to account to his principal for ITA No.145 & 784 of 2009 Page 12 of 24 the sale price of the goods, which he sells on behalf of his principal (Section 213 of the Indian Contract Act). The agent is obliged to pay to his principal the sale price of the goods, which he sells on behalf of his principal (Section 218 of the Indian Contract Act). 14. The learned counsel argued that on the contrary, following factors indicated that the relationship between the assessee and its distributors was one of the „principal and principal‟ in view of the following factors emerging on record: (i) The transaction between the respondent and its distributor is one of sale. (Clauses 10, 19 and 25(d) of the PMA Agreement) (ii) The distributor makes payment to the respondent upfront. (Clause 6(a) of the PMA Agreement. (iii) There is a specification of the price t which goods are transferred by the respondent to its distributors. (Clause 10 of the PMA Agreement) (iv) The distributor has freedom to sell at his own price. (Clause 10 of the PMA Agreement) (v) The distributor is not liable to account to the respondent for the price at which he effects the sale to the retailer/subscriber. (Clause 10 of the PMA Agreement) (vi) The distributor is not liable to pay to the respondent the price at which he effects the sale to the retailer/subscriber. (Clause 10 of PMA Agreement) Our attention was also drawn to Clause 3 of the PMA Agreement, which specifically negates the existence of a „principal and agent‟ relationship. This clause is of particular relevance especially considering the decision ITA No.145 & 784 of 2009 Page 13 of 24 of the Supreme Court in the case of Indian Oil corporation Vs. Consumer Protection Council [(1994) 1 SCC 397]. 15. His further submission was that the aspects highlighted by the learned counsel for the Revenue between the assessee and the PMAs were of no consequence inasmuch