In a relief to mobile phone service providers, the High Court of Karnataka has ruled that they are not liable to deduct tax at source on the discount given to distributors while supplying them in bulk pre-paid cards and related starter kits and recharge vouchers.
A Division Bench comprising Justice N. Kumar and Justice B. Manohar delivered the verdict while allowing the pleas of Bharti Airtel, Vodafone South Ltd., and Tata Teleservices Ltd.
The companies had questioned the demand made by the Income-Tax Department for payment of tax and orders of the appellate authority and the tribunal upholding such demands.
The department had claimed that there was a “principal and agent” relationship between the service provider and the distributors/channel partners and, therefore, discount made to the latter was a commission, which was liable for deduction of tax at source under Section 194H of the I-T Act. The mobile phone service providers were directed to pay a few crore rupees as tax along with penalty for not having deducted tax at source.
The department had claimed that the service providers were selling pre-paid cards having maximum retail price of Rs. 100 at Rs. 80 to the distributors and hence Rs. 20 was commission.
However, on analysing the agreements between the service providers and the distributors, the court observed that “there is no relationship of principal and agent”. On the contrary, it was expressly stated in the agreements that the relationship was that of “principal to principal.”
“What is given by the assessees [mobile service providers] to their distributors/channel partners is a trade discount. It is not commission,” the court declared while pointing out that the distributors have to pay consideration for the products supplied to them and it was treated as “sale consideration”.
“The difference between the sale price to retailer and the price which the distributor pays to the service providers is his income from business. It cannot be categorised as commission [attracting tax]...,” the court said.
