HC (KOL) : TDS, Sale by franchise, discount liable for TDS.

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Whether when property in SIM cards even after transfer to franchisee remains with telecom Co and franchisee has no free choice to sell them at own price, discount offered is liable to TDS as commission - YES: HC

THE issue before the High Court is - Whether when the property in the SIM Cards even after transfer to the franchisee remains with the assessee and the franchisee has no free choice to sell them at its own price, the relationship between the assessee and the franchisee is principal to agent and the assessee is liable to deduct tax on discount offered. And the High Court says YES.

Facts of the case

Assessee is engaged in the business of providing cellular mobile telephone services through its distributors by selling to them `SIM Card' and pre-paid card at a rate below the market price on such Simcard and the same are sold by the distributors/franchise to the retailers by whom the same are ultimately sold to the customers. AO observed that assessee had paid commission on SIM card to some Franchisees and deducted TDS on commission and deposited the same from April 2002 to July 2002, later on assessee discontinued such TDS treating such payment not as commission but discount which was outside the ambit of TDS u/s 194H – these franchisees and the assessee maintained principal and agent relationship as per their agreement and any payment made to such franchisee was liable for TDS under Section 194H - further observed that these franchisees were only collecting information for the assessee and therefore, these franchisees were only agents of the assessee for which they were getting fixed percentage of commission in the name of discount in such sale from the assessee – thus, AO treated the assessee a defaulter for not deducting TDS and had accordingly computed the quantum of such undeducted Tax u/s 201(1) and interest chargeable thereon u/s 201(1A) - CIT(A) allowed the appeal of the assessee stating that there was no principal and agent relationship between the assessee and its distributors, and their business activities and entities were independent – ITAT reversed the decision of the CIT(A) and restored the decision of the AO.

After hearing both the parties, the High Court held that,

++ on reading of the relevant and salient clauses of the agreement between assessee and the franchise the following features are found (i) Property in the SIM card, pre paid coupons even after transfer and delivery to franchisee remains with the assessee, (ii) the franchisee really act as a facilitator and/or instrumentality of providing services by the assessee to the ultimate subscriber, (iii) the franchisee has no free choice to sell it and everything is being regulated and guided by the assessee, (iv) the rate at which the franchisee will sell to retailers and that at which is realized by the assessee to the franchisee, is also regulated and fixed by the appellant-assessee. From these it emerges though nomenclature has been used franchisee the agreement is essentially that of the principal and agent;

++ explanation (1) of section 194H provides inclusive definition of commission or brokerage and the same may be received or receivable indirectly also by person acting on behalf of another person or service rendered. In usual business transaction commission is paid by the principal to agent after services is rendered. But by aforesaid explanation commission which is receivable in future is within its sweep. In the present case after selling all the Simcards and Prepaid Coupons to the retailers the franchisee is to make payment of sale proceeds to the assessee after deducting a discount per Simcard. Thus this receipt of discount is in real sense commission paid to the franchisees. Hence all the trappings of liability as agent, of the franchisee towards assessee subsists;

++ there has been indirect payment by the assessee to the franchisee of the commission and the same is attractable u/s 194H. The decision of the Tribunal is affirmed. AO is further directed to examine whether all the franchisees whose TDS has not been deducted by the assessee has already been assessed entire tax payable is recovered in regular basis or not. If it is not by this time then this action will be taken, and if it is already realised and recovered then the principal amount of taxes to the extent of deductable at source shall not be recovered from this assessee however, interest payable under the law has to be levied.
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