Discount provided to distributors on prepaid SIM cards: Liability to deduct tax at source under section 194H
- A survey under section 133A of the Act was conducted on 29.9.2011 in the premises of the Assessee and it was found that the Assessee had violated the provisions of tax deducted at source in non-deducting the same.
- The Assessing Officer issued show cause notice to the Assessee requiring to explain as to why tax was not liable to be withheld under section 194H of the Act on discount extended to the pre-paid distributors by the Assessee. The Assessing Officer was of the opinion that tax at source was to be deducted in respect of prepaid SIM cards and commission as it was paid for services rendered by the network of distributors.
- Therefore, according to the Assessing Officer the provisions of section 194H were applicable to the Assessee.
- In the present facts of the case, the Assessee was engaged in business of providing telecommunication services in various parts of India. The Assessee, under prepaid arrangement, had extended discount to prepaid cards to distributors.
- The arrangement between the Assessee and the prepaid distributors for distribution of right to prepaid service was on a ‘principal to principal’ basis. Under this arrangement, at each level of the distribution chain, the party distributing the right to prepaid service retained a margin for its efforts and risks assumed, while the telecom operator, being the service provider assumed the responsibility for provision of services to the subscriber. The distributors were free to distribute the right to prepaid service to the retailers/ eligible subscribers once they had acquired the same from the Assessee on payment of consideration.
- Hence, the discount extended to the prepaid distributors was in the nature of margin for this distribution of right to prepaid services and such discount did not qualify as commission within the meaning of section 194H of the Act.
- Therefore, the Assessee was not required to deduct tax under section 194H of the Act on the prepaid SIM Cards.