In a major relief to the leading mobile phone service providers, the Karnataka High Court has ruled that they are not liable to deduct tax at source on the discount given to the 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 M/s Bharati Airtel Ltd; Vodafone South Ltd and Tata Teleservices Ltd questioning the demand made by the Income-Tax Department for payment of TDS and orders of the appellate authority and the tribunal upholding such demands.

The Department had claimed 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 companies were directed to pay TDS along with penalty for not having deducted tax at source from 2005-06 on wards.

The Department had claimed that the service providers were selling pre-paid cards with retail price of ₹100 at ₹80 to the distributors and hence ₹20 was commission.

Court’s verdict

However, on analysing the agreements between the service providers and the distributors/channel partners, the Court observed that “it is clear 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/channel partners 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 categorized as commission...,” the Court said.

‘Right to service’

The Court also held that “what is sold by the service provider to the distributors is the right to service. The income accrues to the distributors only when they sell these products and not when they purchase this ‘right to service’ from the service producers.”

“The service providers are not concerned with quantum and time of accrual of income to the distributors by reselling the prepaid cards to the sub-distributors/retailers. As at the time of sale of prepaid cards by the assessee to the distributors, income has not accrued or arisen to the distributors, there is no primary liability to tax on the distributor.” (The Hindu Business)