I-T – Sec 194H – Vodafone pushes pre-paid & post-paid SIM Cards through distributors – deducts TDS on commission paid on post-paid but treats pre-paid as sale of good and offers margins on MRP – Once it is held that SIM cards are only to facilitate rendering of service, it cannot be treated as sale – assessee liable to TDS on margins: ITAT
For the global telecom giant Vodafone, Indian income tax is evidently turning out to be a real Waterloo! Its all meticulous tax planning does not seem to working in its favour. Netizens are well aware of Rs 10,000 Crore capital gains tax liability raised by the Revenue on its share-transfer deal. Here comes another blow where the Tribunal has held that the Vodafone Essar Cellular Ltd is liable to TDS u/s 194H on the margins offered to distributors for pushing pre-paid SIM Cards to ultimate consumers. The assessee has been deducting tax at source in the case of commission paid on distribution of post-paid SIM Cards but it had entered into a different kind of agreement with its distributors for distributing pre-paid SIM Cards whereby it has been providing the SIM to distributors at a discount from the MRP and has not been deducting TDS by treating the same as a sale of goods.
However, what has turned the table against the assessee is the Kerala VAT case decided by the Kerala HC before this case came up for hearing before the Tribunal. The HC has held against the VAT authorities by holding the distribution of SIM cards as rendering of service and not a sale of goods. Once it is judicially established that the distribution of SIM cards is not a sale but merely a facilitation for rendering telephony service by the assessee-company, it indeed became many shades easier for the Tribunal to hold that the distributors indeed do not own anything of their 
own by pushing SIM cards to customers in the market as the ultimate owners of the SIM cards are the consumers and not the distributors. Besides, it is the consumer who goes for activation of the SIM card through the secret number provided in the SIM and not the distributor, and the service-company always remains in the picture in the entire transaction of distributing SIM cards. Since service cannot be sold, there is a continuous relationship between the distributors and the service-providing company, and such a relationship is atypical of principal and agent relationship.
Facts of the case
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The assessee-company is engaged in the business of providing cellular mobile telephone services to its customers in Kerala through a network of distributors. Enquiries were carried out by the revenue authorities so as to ascertain whether the assessee-company is making proper deductions of tax at source while paying commissions to its distributors in Kerala Circle. The assessee-company is functioning in Kerala by its Kerala Circle Office at Shanmugham Road, Kochi. The Authorized Officer called for details. The assessee filed the details and they were perused by conducting hearings.
- Initially the service network of the assessee-company in Kerala was owned by M/s. BPL Mobile Cellular Ltd. Later on the network was taken over by M/s. Hutchison Essar Cellular Ltd. At present, the assessee, M/s. VECL, provides the network.
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All the above three companies had entered into agreements with distributors for the purpose of distributing pre-paid SIM Cards and other service products to the consumers at large. In fact, the assessee-company is providing the services of post-paid mobile connection as well as pre-paid mobile connection through its distributors. Needless to explain that in a post-paid mobile connection, the consumer is billed after a specific period like one month and the charges for that period is collected after rendering mobile services. The consumer first enjoys the service provided by the assessee and thereafter makes the payment to the assessee-company against the bills issued to them.
- In respect of the post-paid cellular services, the assessee-company is deducting tax at source while making the payment of commission to its distributors. Therefore, there is no dispute between the assessee-company and the revenue in the matter of deducting tax at source in respect of post-paid cellular mobile services. But the assessee-company is not deducting any tax in respect of monetary transactions arising out of providing pre-paid cellular services to the consumers. The pre-paid cellular services are provided by the assessee-company by distributing pre-paid cards, service tickets, Refill, Refill slip, SIM cards, etc. to the consumers through its distribution network. The assessee has entered into separate agreements with its distributors for providing pre-paid cellular services. Generally, the devices used for providing the Pre-paid cellular services are known as SIM Cards/Electronic Recharge.
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The TDS Officer takes the view that the assessee-company is bound to deduct tax at source under section 194H while making the commission payments to its distributors along with the delivery of SIM Cards and other products for rendering pre-paid mobile services to the consumers. On an examination of the trial balance for the financial year 2007-08, TDS Officer found that the assessee has debited its accounts with “Pre-paid dealer commission”. The assessee explained to the TDS Officer that the assessee- company is not paying any commission or brokerage to its distributors but the remuneration to the distributors are paid by way of discount given on pre-paid cards at the time of delivery of the cards. The assessee-company explained that the distributors are supposed to sell the SIM cards for any price not exceeding the Maximum Retail Price (MRP) mentioned on the SIM cards. The assessee further explained that assessee provides to the distributors SIM Cards and service tickets at a price known as “Distributor price” which is less than the MRP, at a specified rate. Distributor price means, price of the SIM Cards and service tickets offered by the assessee-company to its distributors from time to time. As already stated the MRP is mentioned on the service tickets and SIM Cards. The distributors cannot go beyond that MRP. The profit of the distributors is the difference between the price for the service tickets and SIM Cards sold by the distributors and the price realized by the assessee-company. The assessee-company explained that the assessee-company delivers service tickets and SIM Cards to its distributors on payment of distributor price and thereafter there is no need of any price adjustment between the assessee-company and distributors. Therefore, the assessee-company explained that once the service tickets and SIM Cards are delivered to the distributors, the assessee-company is neither making any payment to the distributors by way of commission nor crediting the accounts of the distributors for any commission. The assessee-company contended that the consideration given by the assessee-company to its distributors is only the discount for which section 194H does not apply. The assessee-company explained that it is for the above reasons that it is not deducting tax at source in respect of its pre-paid/SIM Cards business even though the assessee-company is deducting tax at source in the case of its post-paid cellular business. But the CIT(A) agrees with the AO.
Thus the issue goes to the Tribunal which observes that,
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the pricing freedom is not so crucial in examining the exact nature of the business relation between the assessee-company and its distributors. The pricing factor is also a matter of mutual consent between the parties. Even in the case of an agency, there can be a clause by which an agent is authorized to sell the goods for a price less than the MRP. Even in a case of principal-to-principal, there may be a clause that the distributor cannot sell a product for a price less than the MRP unless a consent is given by the manufacturer. The matter of pricing in both the cases, i.e., principal-to-principal and principal to agents can be a matter of mutual consent between the parties and even a matter of negotiation after the execution of the agreement.
- the Kerala HC had an occasion to consider the very same issue in a Writ Petition filed by the assessee-company in its earlier name M/s. BPL Mobile Cellular Ltd. The predecessor of the assessee-company was carrying on the same business in the State of Kerala. M/s. BPL Mobile Cellular Ltd. was distributing SIM Cards including recharge coupons to different distributors to make them available to the ultimate consumers in the State of Kerala . A Writ Petition was filed by M/s. BPL Mobile Cellular Ltd. questioning the legal validity of the demand raised by the State of Kerala against the company under Kerala Value Added Tax Act (KVAT Act). And the Court has held that M/s. BPL Mobile Cellular Ltd. was not liable for KVAT as the transaction was only that of service. The Court has held that SIM Cards as well as recharge coupons delivered by M/s. BPL Mobile Cellular Ltd. is not exigible to KVAT/Sales-tax as the transaction between the service provider and the distributors is only that of a service and not sale and purchase of any goods or merchandise.
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In the light of the HC decision, it is not possible to hold that the SIM Cards and recharge coupons delivered by the assessee-company to its consumers and made available by them to the ultimate considers in the State of Kerala are goods.
- It is obvious that a service can only be rendered and cannot be sold. The owner of the SIM Cards and recharge coupons is the assessee-company. This is because the assessee-company is operating under the right of a licence agreement entered into with the Government of India. The SIM Card is in the nature of a key to the consumer to have access to the telephone network established and operated by the assessee-company on its own behalf. Since the SIM Card is only a device to have access to the mobile phone network, there is no question of passing of any ownership or title of the goods from the assessee-company to the distributor or from the distributor to the ultimate consumer.
- The distributors are acting only as a link in the chain of service providers. The assessee-company is providing the mobile phone service. It is the ultimate owner of the service system. In between providing of that service, it is necessary for the company to appoint distributors to make available the pre-paid products to the public as well as to look after the documentation and other statutory matters regarding the mobile phone connection.
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So, what is the essence of service provided by the distributors? The essence of service rendered by the distributors is not the sale of any product or goods. The distributors are providing facilities and services to the general public for the availability of devices like SIM Cards to have access to the mobile phone network of the assessee-company. Therefore, it is beyond doubt that all the distributors are always acting for and on behalf of the assessee-company.
- the SIM Cards stocked by the distributors are still the property of the service provider. The permissive right to use SIM Cards to get access to the phone network of the assessee-company is given only to the ultimate consumer who activates the connection by using the secrete number provided in the SIM Card. It is only for the ultimate consumer or the assessee-company who has the authority to un-cover the secret number and bring the card into activation. This unique situation negates the argument of the assessee-company that once delivery of the SIM Card is taken, it is the absolute property of the distributors.
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53. De facto, there is no case of any purchase and sale in the matter of pre-paid SIM Cards/recharge coupons. All these technical products are only distributed through distributors and retailers. Any contractual or legal obligation in respect of providing of a pre-paid mobile telephone service is in fact, between the assessee-company and the ultimate consumer.
- It is beyond any dispute that the essence of service rendered to the pre-paid and post-paid consumers are one and the same. There is no difference. The only difference is technical. The difference exists only in billing system and revenue collection, etc. In both the cases, assessee-company is providing the service. Distributors are helping to reach such services to the ultimate consumers. In both the systems, there is documentation. In both the systems, the distributors render similar types of services to the assessee-company. Of course accounting the revenue collection and related matters are different. The essence of post-paid and pre-paid services rendered by the assessee-company is the same and the relationship between the assessee and the customers is also the same. Therefore, if post-paid scheme is subject to section 194H, it is quite unlikely that pre-paid system would be outside the purview of section 194H.
Under both the schemes, the character of the relationship between the assessee-company and the distributors is the same. Therefore, the Tribunal finds it difficult to accept the profound contention of the assessee-company against the application of section 194H. It further held that the margin earned by the distributors on supply of SIM Cards and other service products are in the nature of commission and therefore, the assessee is liable to deduct tax at source under section 194H.
