Shri Virendra Kumar Jain Vs ITO (ITAT Jaipur)

We note that the business model of the mobile operators through distributor/dealers/retailers is such that the income of all the down stream inter-mediatory is only the discount/commission allowed by the Cellular operators. There is no dispute that the mobile operators are making the payment of such commission/discount to the distributors/dealers/retailers directly. However, for accounting purposes the payments are reflected through inter-mediatory. Thus when the actual transaction of payment is made directly by the mobile operators to the retailers, then the assessee being a dealer has carried out only the accounting entries for completeness of the account. It is also not in dispute that these payments are determined by the mobile operators and the assessee is having no discretion or role in the quantum of the alleged discount/commission to be paid to the retailers. Hence having considered the undisputed fact and business model where the payments are directly made by the company to the retailers and the assessee is only showing the entries in the books of accounts for receipts as well as payments without actual receipt and payment of the said amount, then the AO cannot made addition by looking one side of the transaction and overlooking the other side of no actual receipt by the assessee. Accordingly, we find that the addition made by the AO is not justified, hence the same is deleted.

FULL TEXT OF THE ITAT JUDGMENT

This appeal by the assessee is directed against the order dated 27^th November, 2017 of ld. CIT (A)-3, Jaipur for the assessment year 2010-11. The assessee has raised the following grounds :-

“ 1. That under the facts and circumstances of the case the learned CIT (A) has erred in confirming the action of the learned Assessing Officer in making disallowance of Rs. 16,41,989/- u/s 40(a)(ia) of the Income Tax Act, 1961.

2. That under the facts and circumstances of the case the learned CIT (A) has erred in confirming the addition of Rs. 1,56,787/- on account of alleged bogus expenses on account of commission paid by the assessee to retailers.
3. The assessee craves your indulgence to add, amend or alter all or any grounds of appeal before or at the time of hearing.”

Ground No. 1 is regarding disallowance made under section 40(a)(ia) in respect of the commission/discount given to the retailers.

2. The assessee is an Individual and engaged in the business of trading in mobile and accessories including SIM card, pre-paid card etc. During the course of assessment proceedings, the AO noted that the assessee has shown the payment of commission of Rs. 16,41,989/- under section 40(a)(ia) of the Act without deduction of TDS. Accordingly, the AO disallowed the said amount by invoking the provisions of section 40(a)(ia). The assessee challenged the action of the AO before the ld. CIT (A) and submitted that the alleged payment was not made by the assessee but it was directly paid by the mobile operator to the retailers on the basis of sale figures supplied by the assessee out of purchase consideration of SIM card. However, the ld. CIT (A) did not accept the contention of the assessee and confirmed the disallowance made by the AO.
3. Before us, the ld. A/R of the assessee has reiterated his contention that the alleged payment of commission was not paid by the assessee to the retailers but it was directly paid by the mobile operator whose SIM card and pre-paid coupons were sold by the assessee. Therefore, the assessee was not under obligation to deduct TDS on such amount. He has further contended that since the assessee is a dealer, only for accounting purposes the assessee has made contra entries in respect of the said amount being receipts as well as payments whereas there is no actual payment by the assessee but it was paid by the company M/s. Vodafone Digilink Pvt. Ltd. who has accepted the said payment. The assessee filed the confirmation from the company M/s. Vodafone Digilink Pvt. Ltd. that the control of payment of the alleged amount was not in the hands of the assessee but it was directly paid by the said company. The assessee’s role is only inter-mediatory and passing the service from one hand to the other hand. He has relied upon the decision of the Coordinate Bench of this Tribunal in the case of M/s. Chocopack Enterprises vs. ITO in ITA No. 821/JP/2016 dated 13.10.2017.

3.1. On the other hand, the ld. D/R has relied upon the orders authorities below and submitted that the ld. CIT (A) has relied upon various decisions of Hon’ble High Courts including the decision of Hon’ble Kerala High Court in case of Vodafone Essar Cellular Ltd. vs. ACIT as well as decision of Hon’ble Calcutta High Court in case of Hutchiso Telecom East Ltd. vs. CIT, 232 Taxman 665 (Cal.). He has further contended that the decision of Coordinate Bench of this Tribunal in case of M/s. Chocopack Enterprises vs. ITO (supra) is only in respect of sale of SIM card whereas the assessee is also selling pre-paid coupons.

4. We have considered the rival submissions as well as the relevant material on record. The assessee has produced the confirmation from M/s. Vodafone Digilink Ltd. to show that the payment in question was directly paid by the said company to the retailers. The assessee has only carried out the necessary entries in his books of account for completion of record being the dealer and all the transactions are passing through the assessee. Once the payment in question was not made by the assessee and it was directly paid by the company and further the quantum and percentage of the said commission/discount was also in the full control of the company and not in the hands of the assessee, then merely because the assessee has passed the contra entry of the said amount would not bring the said transaction in the category of commission paid by the assessee so as to attract the provisions of section 194H. The Coordinate Bench of this Tribunal in the case of Chocopack Enterprises vs. ITO (supra) has considered an identical issue in para 9 as under :-

“9. I have considered the rival submissions as well as relevant material available on record. The assessee’s firm engaged in the business of distributorship of Idea recharge cards. The issue involved in case of theassessee is in respect of sale of recharge coupons and not the sale of sim cards. Therefore to the extent the issue of sale of sim cards by the service provider it is held by the Hon’ble Karnatka High Court in the case of Bharati Airtel Ltd. vs. CIT (supra) that the assessee is the service provider had no obligation to deduct TDS and accordingly when the service provider has is under no obligation to deduct tax, the distributor would also not under obligation to deduct TDS. However, the said decision is only on the issue of sale Sim cards and therefore, will not applicable in the case of the assessee. The Hon’ble Supreme Court in case of Bharat Sanchar Nigam Ltd. vs. Union of India 282 ITR 273 as also observed in paras 85 and 86 which are reproduced as under:-

“85. In that case Escotal was admittedly engaged in selling cellular telephone instruments, SIM cards and other accessories and was also paying Central sales tax and sales tax under the Kerala General Sales Tax Act, 1963, as applicable. The question was one of the valuation of these goods. The State sales tax authorities had sought to include the activation charges in the cost of the SIM card. It is contended by Escotal that the activation was part of the service on which service tax was being paid and could not be included within the purview of the sale. The Kerala High Court also dealt with the case of BPL, a service provider. According to BPL, it did not sell cellular telephones. As far as SIM cards were concerned, it was submitted that they had no sale value. A SIM card merely represented a means of the access and identified the subscribers. This was part of the service of a telephone connection. The court rejected this submission finding that the SIM card was “goods” within the definition of the word in the State sales tax act.

86. It is not possible for this court to opine finally on the issue. What a SIM card represents is ultimately a question of fact as has been correctly submitted by the States. In determining the issue, however the assessing authorities will have to keep in mind the following principles : If the SIM card is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the sales tax authorities to levy sales tax thereon. There is insufficient material on the basis of which we can reach a decision. However, we emphasise that if the sale of a SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. In our opinion the High Court ought not to have finally determined the issue. In any event, the High Court erred in including the cost of the service in the value of the SIM card by relying on the aspects doctrine. That doctrine merely deals with legislative competence. As has been succinctly stated in Federation of Hotel and Restaurant Association of India v. Union of India [1989] 3 SCC 634— “subjects which in one aspect and for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping ; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects”. No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction.”

Therefore, as the issue of sale of sim cards is concerned the Hon’ble Supreme Court has clearly held that the sale of sim cards merely incidental to the service being provided and only facilitates the identification of subscribers their credit and other details it would not be assessable to sale tax. As regards the sale of recharge coupons it is clearly a transaction of sale of goods as held by the Hon’ble Supreme Court that the telephone is nothing but a service. However, since the service is provided by the company which is the service provider and assessee is only a distributor and intermediatetory, therefore, the tax liability for paying the commission, if any, is attracted u/s 194H only against the person responsible for paying the commission. In case in hand the assessee is not paying any commission to the retailers but this commission or so called discount is allowed and paid by the service provider. The assessee is an intermediatetory and only recording this transaction in the books of account for the purpose of completeness. Hence, when the assessee is neither competent nor responsible nor actually paying any commission to the retailer on sale of recharge coupons to the retailers then the obligation for deduct tax u/s 194 H is attracted only against the service provider and not against the assessee who is only a distributor and receiving its share of the commission/ margins provided by the service provider. The determination of sale price of recharge coupons is in the sole domain of the service provider and the assessee is no role in determining the retail price at which the retailer is selling the recharge coupons to the customer or end user of the service. Therefore, in the facts and circumstances of the case when the assessee’s role is only an intermediatetory and passing the services from one hand to the other hand then merely because the assessee is showing an amount of commission/discount in the books of account for completeness of accounts and transactions will not impute any liability of deducting tax at source. The decisions relied upon by the ld. DR are also on the point where the service provider is allowing or paying the commission to the distributors or retailers and sale of sim cards as well as recharge coupons, therefore, even for the sake of arguments if it is accepted that the benefit allowed by the service provider to the distributors and retailers is commission it is service provider who is responsible for paying the said commission and therefore, the provisions of section 194H are not attracted against the distributor. Accordingly, when the assessee is not directly and indirectly in deciding the quantum of alleged commission/discount as well as determining the retail price at which the recharge coupons is sold to the customer then the provisions of section 194H cannot be applied on the assessee. Consequently disallowance made by the AO u/s 40 (a)(ia) is deleted.”

Thus the Coordinate Bench has followed the decision of Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs. Union of India, 282 ITR 273 (SC). It is pertinent to note that the issue in case of Bharat Sanchar Nigam Ltd. vs. UOI (supra) as well as in the cases which are relied upon by the ld. CIT (A) was regarding the nature of the payment made by the operating companies whether it was commission or discount allowed by the Cellular/Mobile operators. Therefore, even otherwise the decisions on those cases are not directly applicable in the case of the assessee where the assessee is a distributor and an inter-mediatory between the Cellular/Mobile operator and the retailers. Following the decision of the Coordinate Bench of this Tribunal, we set aside the orders of the authorities below qua this issue and delete the disallowance made by the AO under section 40(a)(ia).

Ground No. 2 is regarding the addition of Rs. 1,56,787/- on account of bogus commission expenses.

5. The AO received the information/details from M/s. Vodafone Digilink Pvt. Ltd. and found that the said company has shown a payment of Rs. 95,846/- and Rs. 39,034/- respectively to the assessee whereas the same was not accounted for by the assessee in his books of accounts. Accordingly, the AO proposed to make the addition of the said amount. In response, the assessee has explained that the said payment was not received by the assessee but only book entry was made by the assessee. The assessee has referred the bank account and submitted that there is no such entry in the bank account of the assessee receiving the said amount. It was further explained that the said amount was directly paid by the company to the retailers though in the account of the company has shown the said payment through the assessee. The AO did not accept the said explanation of the assessee and made the addition. The assessee though challenged the action of the AO but could not succeed.
6. Before us, the ld. A/R of the assessee has reiterated his contention as raised before the authorities below and submitted that the assessee has never received the alleged payment of Rs. 95,846/- and Rs. 39,034/- and, therefore, there was no entry of such amount in the books of account. He has further contended that this payment was directly made by the company to the retailers. However, in their books, the said company has shown the said payment through the assessee. Further, the AO has also made an addition of Rs. 21,907/- which was found as commission paid to the retailers as a book entry on 4^thDecember, 2009. The ld. A/R has submitted that the assessee has not made any payment to the retailers but the company has directly paid the amount and the assessee has only carried out the entry as the assessee has neither received the said amount nor paid the same but the contra entry was made in the books being receipt and payment and, therefore, it is revenue neutral. Thus the ld. A/R has submitted that the addition made by the AO may be deleted.

6.1. On the other hand, the ld. D/R has relied upon the orders of the authorities below and submitted that once the entry in the books of Vodafone Digilink Pvt. Ltd. was found and irrespective of the payment to the assessee, the said income is assessable to tax in the hands of the assessee. As regards the commission payment, when the assessee is showing in the books the payment to the retailers without making the actual payment, then the said claim is not allowable.

7. We have considered the rival submissions as well as the relevant material on record. We note that the business model of the mobile operators through distributor/dealers/retailers is such that the income of all the down stream inter-mediatory is only the discount/commission allowed by the Cellular operators. There is no dispute that the mobile operators are making the payment of such commission/discount to the distributors/dealers/retailers directly. However, for accounting purposes the payments are reflected through inter-mediatory. Thus when the actual transaction of payment is made directly by the mobile operators to the retailers, then the assessee being a dealer has carried out only the accounting entries for completeness of the account. It is also not in dispute that these payments are determined by the mobile operators and the assessee is having no discretion or role in the quantum of the alleged discount/commission to be paid to the retailers. Hence having considered the undisputed fact and business model where the payments are directly made by the company to the retailers and the assessee is only showing the entries in the books of accounts for receipts as well as payments without actual receipt and payment of the said amount, then the AO cannot made addition by looking one side of the transaction and overlooking the other side of no actual receipt by the assessee. Accordingly, we find that the addition made by the AO is not justified, hence the same is deleted.

7. In the result, appeal of the assessee is allowed.

Order is pronounced in the open court on 24/05/2018.