I. Section 194H r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including festival discount and bonus points to customers cannot be considered as commission and therefore not liable for deduction of tax II. Section 36(1)(iii) – Assessee had filed necessary evidence to prove availability of owned funds to cover investment made in capital WIP. Thus, interest paid on borrowed funds was to be allowed u/s 36(1)(iii)

7. [2020] 119 taxmann.com 424 (Mum.)(Trib.) Tata Sky Ltd. vs. ACIT, Circle 7(3) A.Ys.: 2009-10 and 2010-11 Date of order: 10^th September,
2020

I. Section 194H
r/w/s 201(1) – Discount on sale of set-top boxes and recharge coupons including
festival discount and bonus points to customers cannot be considered as
commission and therefore not liable for deduction of tax

II. Section 36(1)(iii) – Assessee had filed
necessary evidence to prove availability of owned funds to cover investment
made in capital WIP. Thus, interest paid on borrowed funds was to be allowed
u/s 36(1)(iii)

FACTS

I.   The assessee was engaged in the business of
providing Direct to Home (DTH) services. The set-top box (STB) installed at the
premises of the subscribers receives television signals through the
broadcasters which are uplinked to the satellite. The main source of income for
the assessee was from the sale of STB’s and sale of recharge coupons to
subscribers. The assessee claimed deduction of discounts offered on sale of
STB’s and recharge coupons. The A.O. contended that the very nature of discount
given by the assessee to distributors is in the nature of commission and
disallowed the expenditure as no tax deduction was made by the assessee. The
CIT(A) upheld the decision of the A.O.

Aggrieved, the
assessee preferred an appeal with the Tribunal.

II.   The assessee had certain capital WIP and the
A.O. had observed that no interest expenditure was allocated against it. The
assessee had incurred huge interest expenditure on various loans and the A.O.
disallowed proportionate interest expenditure u/s 36(1)(iii). The CIT(A)
confirmed the disallowance. The assessee preferred an appeal with the Tribunal..

HELD

I. The transactions
between the assessee and its distributors were on principal-to-principal basis
and all the risk, loss and damages are transferred to the distributor on
delivery. Further, the distributors were free to sell the STB’s at any price below
the maximum retail price. The assessee had filed the sample copy of invoices
for sale of STB’s and other recharge coupons to prove that it was a sale and
not services to be covered u/s 194H. Therefore, the assessee was not required
to deduct TDS on discount allowed on the sale of STB’s and hardware, recharge
coupon vouchers and disallowance of bonus or credit provided to subscribers,
including sales promotion expenses. The A.O. was directed to delete the
addition made on account of the disallowances.

II.   Based on the facts in the case, it was clear
that the assessee had not borrowed specific loan for acquiring capital assets.
The A.O. had disallowed proportionate interest paid on other loans including
loans borrowed for working capital purpose on the ground that the assessee had
used interest-bearing funds for acquisition of capital asset. The A.O. did not
bring on record any evidence to prove that borrowed funds were used for
acquisition of capital work in progress. The assessee filed evidence to the
effect that capital work in progress had been acquired out of the share capital
raised which was sufficient to cover investment in the capital work in
progress. Therefore, the A.O. erred in disallowing proportionate interest
expenses u/s 36(1)(iii).