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August 2, 2020

Can discount given on supply of SIM cards by a telecom company to its franchise be treated as commission

Can discount given on supply of SIM cards and pre-paid cards by a telecom company to its franchise be treated as commission

“Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered, or for any services in the course of buying or selling of goods, or in relation to any transaction relating to any asset, valuable article or thing, other than securities.

Fact of the case: (Bharti Cellular Ltd. v. ACIT)

In the above case the issue under consideration before the High court is that whether discount given on supply of SIM cards and pre-paid cards by a telecom company to its franchisee be treated as commission to attract the TDS provisions under section 194H.

Calcutta High Court Observations:

On this issue, the Calcutta High Court observed the Supreme Court ruling in Bhopal Sugar Mills’ case (1977) 40 STC 42, wherein it was held that the true relationship between the parties has to be gathered from the nature of the contract, its terms and conditions. The terminology used by the parties is not decisive of the said relationship.

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The High Court, on perusal of the agreement between the assessee-telecom company and the franchisees, observed that –

1. The  property  in  the  start-up  pack  and  pre-paid  coupons,  even  after  transfer  and delivery to the franchisee, remained with the assessee-telecom company;

2. The franchisee really acted as a facilitator and/or instrument of providing services by the assessee-telecom company to the ultimate subscriber;

3. The franchisee had no free choice to sell the pre-paid coupons and sim cards and everything including the selling price was regulated by the assessee-telecom company;

4. The rate at which the franchisee sells to the retailers is also regulated and fixed by the assessee-telecom company.

In the real sense, the franchisee acted on behalf of the assessee-telecom company for selling start-up pack, prepaid recharge coupons to the customer. Therefore, the relationship between the assessee and the franchisee is essentially that of principal and agent, though the nomenclature used is “franchisee”. The franchisees were, thus, agents of the assessee, getting a fixed percentage of commission, in the form of discount.

Calcutta High Court Decision:

Considering the above, the High Court held that there is an indirect payment of commission, in the form of discount, by the assessee-telecom company to the franchisee. Therefore, the assessee is liable to deduct tax at source on such commission as per the provisions of section 194H.

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