The Income Tax Appellate Tribunal (ITAT) held that Vodafone Idea Ltd. is not required to collect TDS on the discounts given to its pre-paid distributors when distributing prepaid services.
The TDS officer contends that the Appellant’s relationship with the pre-paid distributors is not one of “Principal to Principal” and that the discount granted to them is in the nature of a commission, subject to tax withholding at source as provided for in section 194H of the Act.
The appellant argued that the discount it granted was not income for its distributors and that any money that did exist exclusively came from the distributors’ continuing distribution of the pre-paid services.
The assessee was not required to withhold tax at source in accordance with Section 194H of the Income Tax Act of 1961, according to the Vikas Awasthy (Judicial Member) and M. Balaganesh (Accountant Member) bench, because the relationship between the assessee company and the distributors was only one of principal to principal and not one of principal to agent.
The bench also referred to a legal maxim ” Lex Non Cogut Ad Impossiblia,” which means “A person cannot be forced by law to do something he is not capable of doing.”
Vodafone Idea claimed that it appoints distributors who buy prepaid SIM cards and recharge vouchers in bulk from the assessee at a reduced price, which they then resell to sub-dealers or retailers.
The assessee claimed that there was no control being exerted by the assessee company over the distributors and that they were free to sell the prepaid SIM cards and recharge vouchers to any retailer at any price they chose, subject to the maximum retail price.
The appellant argued that the provisions of section 194H of the Act do not apply since there is not a flow of money from the appellant to the distributor of pre-paid services but rather from the distributor to the appellant.
The assessee could not be considered an assessee-in-default under section 201 of the Income Tax Act because it failed to require the assessee to withhold taxes on the amount of discounts it offered on prepaid services under section 194H of the IT Act.
The ITAT concluded that the assessee’s relationship with the distributors was only one of principal to principal, not principal to agent, and that the assessee was not required to withhold tax at source in accordance with Section 194H of the Income Tax Act. The ITAT annulled the AO’s ruling disallowing certain expenses under Section 40(a) (ja).