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Facts
The revenue appealed against the order of the CIT(A) which deleted TDS demands against the assessee. The AO had alleged that the assessee was liable to deduct tax at source under Section 194H for commission payments to franchisees/LFS and under Section 194-I for discounts treated as rent. The assessee contended the transactions were principal-to-principal.
Held
The Tribunal held that the arrangement between the assessee and its channel partners was on a principal-to-principal basis, not principal-to-agent, and therefore Section 194H was not applicable. The Tribunal also found that the discounts did not amount to rent under Section 194-I.
Key Issues
Whether the transactions between the assessee and its channel partners were on a principal-to-principal basis, attracting TDS under Section 194H, and whether discounts offered to LFS constituted rent under Section 194-I.
Sections Cited
194H, 194-I, 201(1), 201(1A)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
This bunch of appeals of the revenue were filed against the order of theLearned Commissioner of Income-tax (Appeal) Addl / JCIT (A)-1, Hyderabad [for brevity, ‘Ld.CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2016-17,2017-18 & 2018-19,date of & 5165/Mum/2024 House of Anita Dongre Pvt Ltd order08/08/2024, for all assessment years.The appeals are emanated from the order of the Ld.ACIT (OSD), TDS Circle 1(2), Mumbai (in short, the “Ld. AO”) for A.Y.2016-17, date of order 15/02/2021, orders passed by Ld. DCIT (OSD), TDS Circle 1(2), (in short the “Ld. AO”) for A.Ys. 2017-18 & 2018-19, orders passed under section 29/12/2023 and all the orders passed under section 201(1) / 201(1A) of the Act.
ITA 5210/Mum/2024
3. The revenue has taken the following grounds:-
“1) "Whether on the facts and in the circumstances of the case and law, the Ld. Addl./Jt. CIT(A) has erred in holding that the transaction between the assessee company and channel partners was on principal to principal basis and therefore transaction would not come under ambit of 194H, without appreciating the fact that Ownership of the goods lies with the assessee company (brand owner) till the time of sale of the goods by channel partner to end customer since the business risk of goods supplied to channel partners lies with assessee company till the time goods are sold to the end customer." 2) "Whether on the facts and circumstances of the case and in law, the Ld. Addl./Jt. CIT(A) has erred in holding that the transaction between the assessee company and channel partners was on principal to principal basis and therefore transaction would not come under ambit of 194H, without appreciating the fact that sale as a contract involving transfer of the possession and the ownership (title) of a good in exchange for money or value. However, in the instant case, ownership is not transferred, the channel partner is not needed to deploy capital for receipt of goods and money is also not received unless the end sale is made." 3) "Whether on the facts and circumstances of the case and in law, the Ld. Addl./Jt. CIT(A) has erred in holding that the transaction between the assessee company and channel partners was on principal to principal basis and therefore transaction would not come under ambit of 194H, without appreciating the fact & 5165/Mum/2024 House of Anita Dongre Pvt Ltd that the channel partners are provided margins by the assessee company, the manner in which Goods are sold and the price at which they are sold are in the domain and discretion of the assessee company and this would not be the case had it been "Principal to Principal" sale scenario." 4) "Whether on the facts and circumstances of the case and in law, the Ld. Addl./Jt. CIT(A) has erred in holding that the transaction between the assessee company and channel partners was on principal to principal basis and therefore transaction would not come under ambit of 194H, without appreciating the fact that as per CBDT Circular No. 619 dated 04-12-1991 the retention of commission by an agent amounts to constructive payment on which TDS is required to be deducted by the principal." 5) "Whether on the facts and circumstances of the case and in law, the Ld. Addl./Jt. CIT(A) has erred in holding the contention of the appellant that it has recognized revenue in its books in line with the accounting standard -9 and therefore transaction would not come under ambit of 194H, without appreciating the fact that Hon'ble Supreme Court's decision in the case of B. Boda & Co. Pvt. Ltd. vs. Central Board of Direct Taxes (223 ITR 271], affirms the principle that the method of settlement of accounts is of no consequence in determining the true nature of a transaction. 6. "Whether on the facts and circumstances of the case and in law, the Ld. Addl./Jt. CIT(A) has erred in holding that that LFS players are not in business of letting out space and relationship between them is of principal to principal nature and therefore transaction would not come under ambit of 1941, without appreciating the fact that there is a clear element of acquiring/gaining possession by the taxpayer over a specifically demarcated area in the premises; possession of that specific area is with deductor and it enjoys unrestricted and uninhibited possession as well as right to use of the area; the employees of the deductor use the space exclusively for their own business; and Interior decoration as well as presentation, layout and configuration etc. of the demarcated area is in the exclusive control of the deductor, therefore, present arrangement falls squarely within the definition of 'RENT' which has been accorded a wider meaning than the connotation of 'rent' as commonly understood." 7) "Whether on the facts and circumstances of the case and law, the Ld. Addl./Jt. CIT(A) has erred in holding that the case law i.e. Bharti Cellular Ltd. vs ACIT [(20240 462 ITR 247 (SC)] cited by Ld. Addl/JCIT(A)is squarely applicable in this case without appreciating the fact that the instant case is different from the cited case law as there are certain restrictions in with respect to freedom of fixing retail sale price of the branded goods, in other words, there is no severance of control by the assessee company till the goods are sold to the retail customer, regulation of design and pattern of constructions, presence of employees, which & 5165/Mum/2024 House of Anita Dongre Pvt Ltd were not a case in the case of Bharti Cellular Ltd. vs ACIT [(20240 462 ITR 247 (SC)]."
Let us take a look at the relevant material facts and the developments leading to this litigation before us. The assessee is engaged in the business of manufacturing and selling branded garments. The sale of goods is carried out through various channels, including Franchisee-Owned and Operated Stores (FOFO), Large Format Stores (LFS), and Company-Owned Franchisee-Operated (COFO) outlets. A survey action was conducted U/s 133A of the Act by the department and found some discrepancies in mode of transactions related TDS application. During the course of assessment proceedings, the Ld. AO alleged that the assessee was liable to deduct tax at source (TDS) under:
Section 194H of the Act, on account of purported commission payments to franchisees/LFS, and Section 194-I of the Act, treating the discounts offered to LFS as rent for occupation of a demarcated space within the LFS premises.
The Ld. AO contended that the transaction between the assessee and the franchisees/LFS was in the nature of a principal-agent relationship, and that the assessee had effective possession and control over specified areas in LFS stores where its goods were displayed and sold. The assessee disputed these findings, arguing that the arrangements were purely on a principal-to-principal basis, supported by tax invoices, GST compliance, and contractual terms. It was also submitted that the assessee did not make any commission payments nor had any control or possession over the LFS premises. Employees deputed to the LFS stores were only present to assist in promoting sales and had no exclusive rights over & 5165/Mum/2024 House of Anita Dongre Pvt Ltd the display space. Finally, the assessment was completed and the liability of the assessee was worked out amount to Rs. 17,68,31,100/- which includes outstanding TDS amount to Rs. 10,34,10,000/- and the late payment amount to Rs. 7,34,21,100/-. Being aggrieved the assessee filed an appeal before the Ld. CIT(A). The CIT(A) accepted the assessee’s contention and deleted the TDS demands. Aggrieved, the revenue filed the present appeal before the Tribunal.
5. The Ld.DR vehemently argued and submitted a written submission dated 23/01/2025. The relevant paragraphs are reproduced below:-
“The assessee company is involved in manufacturing and retailing of branded apparel, selling its products through multiple channels. A survey action u/s.133A of the Income Tax Act 1961 (in short "the Act") was conducted by department on 28.08.2019 revealed some discrepancies related to tax deduction at source. The company primarily sells goods through channel partners on a "Sale or Return (in short "SOR") basis"; meaning unsold goods are returned to the company. The modus operandi followed by the assessee company found during the course of survey proceedings are as follows:
1. 1. Franchise-Owned-Franchise-Operated (FOFO) Stores: The franchise owns or leases the store and sells branded goods provided by the assessee-company on an SOR basis. Unsold items are returned by the franchise to the assessee-company. It is the absolute right of the assessee-company to decide sale prices and discounts to the franchises.
2. Large-Format Stores (LFS): The assessee-company supplies products to stores like Pantaloons, Central and Lifestyle on an SOR basis. The assessee-company also provides brand promoters who are paid by the assessee-company itself. The assessee-company reserves absolute rights to determine sale prices and discounts.
3. E-Commerce Sales (Third party): The assessee-company sells products via e-commerce platforms like Flipkart and Myntra on an SOR basis. Here also assessee-company reserves absolute rights to determine sale prices and discounts.
4. Company-Owned-Franchisee-Operated (COFO) Stores: Theassessee-company arranges the store space, while the franchise operates the business. The assessee-company supplies & 5165/Mum/2024 House of Anita Dongre Pvt Ltd goods on an SOR basis and unsold items are returned. Sale prices and discounts are set by the assessee-company itself. Further, order u/s 201(1)/201(1A) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was passed on 15.02.2021 treating the assessee as 'assessee in default for not deducting TDS on discount paid by the assessee-company by treating the relationship between assessee& its franchise /channel partners as principal and agent. Aggrieved by this order, the assessee filed appeal before the First Appellate Authority (FAA). The main grounds of the appeal considered by FAA to decide the appeals are as under:
1.
On the issue of whether the relationships between the appellant and its channel partners is that of principal and agent? 2. On the issue of whether appellant's SOR method of sales is legally right and when sales did takes place? On First Ground: The FAA held that the franchisees /channel partners bearresponsibility for the goods once delivered including handling defective products, theft, and losses. This supports the view that the relationship between the appellant and its franchises is principal-to-principal, not principal-to-agent.
3. On Second Ground :The FAA held that ownership of the goods transfers to the channel partner only when sold to the end customer, as they have the right to return unsold goods. The appellant complies with the Sale of Goods Act, 1930, and is not responsible for TDS deduction u/s 194H or/and u/s 1941 of the Act. Based on the above, the FAA held that the appellant is not liable to deduct TDS u/s 194H or/and u/s 194I of the Act and consequently is not liable to pay any interest u/s 201(1A) of the Act. The decisions of the FAA are not acceptable due to the following reasons: a. The majority of sale by assessee-company is made through the above mentioned frameworks. All the participants are supplied goods on SOR basis. In lieu of effecting sale of branded goods manufactured by the assessee-company, the channel partners are provided margins by the assessee-company, e.g. in case of margin of 20%, goods, whose retail sale price is Rs 100/- plus GST, are invoiced at Rs 80/- plus GST by the assessee- company. Once goods are sold to end customers, the channel partner collects money from end customer, retains its margin and gives the balance amount to the assessee- company. b. On the basis of facts gathered during survey proceedings, it was found that supply of goods to franchisee/E-commerce/LFS player under SOR basis is not sale transaction. This supply is also not on Principal to Principal basis. Though the company claims that supply to franchisee/E-commerce/LFS player is a sale transaction as invoice is raised and GST is & 5165/Mum/2024 House of Anita Dongre Pvt Ltd paid to the government, in substance the supply is not a sale transaction. In reality, the franchisees/E-commerce/LFS players are being provided margin for acting like an agent for providing various services which culminates on the sale of goods of assessee company. Hence, prima facie, it is evident that the payment made to the channel partners, quantified as percentage of retail sale price, ought to have been subjected to TDS u/s. 194H of the Act. This view is further strengthened due to the following points:- 1. Sale through Owned Franchisee Operated (FOFO) Stores: Under this business model, the Company provides franchisees to different parties. The company sells goods to such franchisee on SOR. Under this method, the company sells the goods to different franchisee with commercial understanding that the parties would pay the consideration after the goods are sold by them. Company provides the goods to such franchise at MRP less discount as negotiated. The price on which goods are to be sold to the end- customers by these franchisees/channel partners is decided by the assessee-company and there is no right to sale the goods other than the price as decided by the assessee-company. It is pertinent to mention here that the franchise makes final payments to assessee-company only after the end sale has taken place to end-customers and retaining their discount portion. This discount is nothing but commission, which is paid by the assessee-company to its franchisees/channel partner for rendering their services.
2. Sale through Large Format Stores (LFS's): 2.1 Under sale through Large Format Sales (LFS) the company enters into an agreement with Multi Brand Retail Stores like Pantaloons, Lifestyle, Shoppers Stop etc. for sale of goods of the company by such Multi Brand Retail Chain. 2.2 Goods are sent to these stores and sale is affected through the floor of LFS's, the assessee- company transfers goods to the LFS's at MRP minus certain pre-agreed percentage, whereas the sale from the LFS's takes place at MRP. The Margin is the benefit to the LFS. Here also assessee- company decides the price on which goods to be sold to the end-customers and there is no right of LFS to modify sale price, as decided by the assessee-company. Crux of assessee's submission regarding non-applicability of section 194H of the Act on margins retained by various channel partners is that relationship between assessee company and & 5165/Mum/2024 House of Anita Dongre Pvt Ltd channel partners is of principal to principal nature. It is gathered from the survey u/s 131 of the Act, that there is a "Principal to Agent" relationship between assessee-company and its various channel partners. This is established by the following observations: i) Assessee- Company receives the payment from the channel partners only when goods are sold to end customer by the channel partners. The channel partner is not needed to deploy capital for receipt of goods. ii) If goods are not sold, channel partners return the unsold goods to the assessee company at the price at which goods were received by them. iii) Ownership of the goods lies with the assessee-company under (Brand Owner) till the time of sale of the goods by channel partner to end customer since the business risks of goods supplied to channel partners lies with assessee-company till the time goods are sold to the end customer. iv) Risks of obsolescence of the goods lies with the assessee (Brand Owner) v) At the end of every month, assessee-company determines the quantum of unsold goods lying at the premises of channel partners and makes sale reversal entries in its books of accounts irrespective of the fact whether the unsold goods are physically returned to it or not. It proves overall control of the assessee-company till the sale to end-customers. vi) End sale price of the goods supplied to the channel partners for sale to end customers is decided by the assessee-company. This means that sale price of goods is always controlled by the assessee-company alone. vii) Construction/design of franchisee's store are controlled by the company (as per clause 3.1 and 3.2 on page 3 of agreement between House of Anita Dongre Limited and Aavaran Apparels)(copy enclosed) viii) Sale agents deployed at LFS are provided by the assessee company. ix) Marketing of the company's products at franchisee's store is controlled by the assessee company. 2.3 In this regard, the dictionary meaning of SOR arrangement has also been seen and is found to be of relevance. It is seen that: i. As per Collin's dictionary, "SOR is an arrangement by which a retailer pays only for goods sold, returning those that are unsold to the wholesaler or manufacturer".
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd ii. As per Macmillan dictionary, SOR is an arrangement in which a shop can return to the wholesaler any goods that is not able to sale. iii. As per www.accounting explanation.com: "Under SOR, goods passed to a customer on the understanding that a sale will not occur until they are paid for. As a result, these goods continue to belong to the seller. The effect of an arrangement of this type is that there is not really a liability to pay the seller until the goods have been sold on to a customer or the buyer. If there is no liability, the buyer cannot recognise the existence of the goods held on "sale or return" basis, when the buyer's financial statements are being prepared at the end of the accounting period. As a result, if goods on "sale or return" are held by the buyer at the stock taking date, they should not be included in the buyer’s stock valuation nor in the figure of purchases. iv. www.business.dictionary.com defines sale as a contract involving transfer of the possession and the ownership (title) of a good in exchange for money or value. However, in the instant case, ownership is not transferred, and money is also not received unless the end sale is made. 2.4 The matter has also been examined with respect to the agreement dtd.29.02.2016 (copy enclosed) between House of Anita Dongre Limited (HOADL) andAavaran Apparels (The franchisee). The relevant clauses are reproduced below for ready references which throw light in establishing relationship between assessee-company and its channel partner. 3.1. The franchisee agrees to get necessary fit-outs carried out in the franchisee store through any person or agency as may be designated by the HOADL. 3.2 The Franchisee store must be constructed and equipped in all respects in accordance the standards and specifications furnished and/or approved by the HOADL. 4.8 The franchisee shall sell the Franchised items only at the stated maximum retail price on the Franchised items price tag and shall not offer any discounts, freebies promotions without prior written consent of the HOADL. 4.10 Staff to be appointed as a franchise store must be approved by the HOADL. 5.8 HOADL will provide Performance discounts @3% linked to the Franchise Store Performance. The HOADL will also conduct audits every quarter and on the basis of that the performance incentive will be given. 6.2 The franchise acknowledges that from time to time HOADL may deem it necessary for its franchisees to conduct sales, give away and other promotional on advertising programs & 5165/Mum/2024 House of Anita Dongre Pvt Ltd as an integral part of the operation of Franchise Store. Upon HOADL's request the Franchisee shall, participate in such sales, give-away and promotions. 7.9 The Franchisee shall undertake that it will not use any social network website for marketing of franchised store without prior approval for the same from the HOADL 7.11 The franchisee shall fully co-operate with and assist the HOADL and/or its agents in inspection of the franchisee's and business and its operations. From the above, it is quite clear that whichever way the matter is examined, the arrangement is commission as defined u/s 194H of the Act. The channel partners act merely as agents, working on fixed percentage and have clearly defined responsibilities. It is of crucial significance to note that the assessee-company enjoys unrestricted freedom of fixing of retail sale price of the branded goods. In other words, there is no severance of control by the assessee- company till the goods are sold to the retail customer. Thus, the contention of the assessee that the arrangement was Principal to Principal in nature is untenable. Had that been so, once goods were sold then there could not be restriction/conditions on channel partners after such sales. However, assessee-company exercises all the control on channel partners as per the statement of Mr. Arun Ganapathy [Chief Financial Officer and as evident from agreement between M/s House of Anita Dongre Limited (HOADL) and Aavaran Apparels (The franchisee), a Proprietorship Firm) (copy enclosed). ASSESSEE'S RELIANCE ON GST PAYMENT BY CHANNEL PARTNER Assessee-company's contention on payment of GST on secondary sale by its channel partner is misplaced. In all sale transactions, GST is always borne by end customer only. In the modus operandi which has been adopted by assessee-company, the channel partners are provided margins by the assessee-company. In a case wherein margin provided to channel partner is 20%, end sale price of goods is 100/- plus GST at 12%, payment of GST to government account will be in the following manner: First goods will be invoiced to channel partner by the assessee-company. GST amount will be deposited in the government account by the assessee-company. Further, when goods are sold to end customers at Rs. 100/plus GST at 12%, channel partner will deposit GST to government account after claiming input credit of GST already deposited by the assessee- company into govt. Account, Thus, govt. will get total GST of Rs 12/- and this amount of Rs 12/- is borne by end customer only. However, if margins provided to channel partners are treated as commission income, payment of GST to Govt. Account will be in the following manner:
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd Government will get total GST of Rs 12/- as end sale price of goods is Rs 100/-. Further, as channel partner is getting commission (in lieu of providing some services) from assessee company, the commission receipt will also be subjected to GST @18%. Hence total GST receipt in the hands of the govt's account will be higher when compared to total receipt that is being received under modus operandi being adopted by the assessee-company presently. It has been a settled position that retention of commission by an agent amounts to constructive payment on which TDS is required to be deducted by the principal. In this regard, reference is made to CBDT Circular No. 619dated 04.12.1991 (copy enclosed) which, inter-alia, stipulated the following: "A question may raise whether there would be deduction of tax at source under section 194H where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time". Thus, from the aforesaid discussion, it is clear that theassessee company was obliged to deduct tax on such payments which it has failed to do. Thus, there was an undeniable default within the meaning of section 201(1) of the Act on part of the assessee. Accordingly, assessee was held to be an assessee in default within the meaning of section 201(1) of the Act for non deduction of TDS on constructive payment made to its channel partners u/s 194H of the Act. On the issue of whether the space allotted to appellant by the channel partners tantamount "rented premise" requiring deduction of TDS u/s 194I of the Act: FAA has relied on decision of Hon'ble Karnataka High Court in the case of Mis Acer India Pvt. Ltd. Vs CIT(TDS), Bengaluru, it was held that the relationship is principal-to-principal, not requiring TDS deductions u/s 1941 of the Act for space provided to the appellant by channel partners. Based on the above, the FAA held that the appellant is not liable to deduct TDS u/s 194I of the Act, and consequently is not liable to pay any interest u/s 201(1A) of the Act. The decision of the FAA on this issue is not acceptable due to the following reasons: 1. Assessee's contention is that LFS players are not in business of letting out space and relationship between them is of principal-to-principal nature. From the analysis of the & 5165/Mum/2024 House of Anita Dongre Pvt Ltd agreement entered into by the taxpayer, the following four dimensions are undisputedly apparent: a) There is a clear element of acquiring/gaining possession by the taxpayer over a specifically demarcated area in the premises; b) Possession of that specific area is with deductor and it enjoys unrestricted and uninhibited possession as well as right to use of the area; c) The employees of the deductor use the space exclusively for their own business; and d) Interior decoration as well as presentation, layout and configuration etc. of the demarcated area is in the exclusive control of the deductor.
2. The present arrangement falls squarely within the definition of "RENT" which has been accorded a wider meaning than the connotation of 'rent' as commonly understood. For the purpose of present discussion, the relevant definition of 'RENT' as per Explanation to Section 194I of the Income-tax Act, 1961 is reproduced below :- "RENT Section 194-I Any persons, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, which is earlier deduct income-tax thereon at the rate of........ Explanation For the purposes of this section, - [(i) rent mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any, 3. land; or 4. building (including factory building); or and appurtenant to a building (including factory building); or ………………………..” In view of the above discussion, the decision of FAA is not acceptable and it is prayed that order of Assessing Officer for the A/Yr. 2016-17 to 2018-19 may kindly be upheld.”
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd 6. The Ld. DR further mentioned that the entire agreement with the franchise of the assessee is fully controlled by the assessee itself and the relation between the franchise holder and the assessee is not a principal to principal, but a principal to agent. Considering the agreement, the Ld.DR submitted a summary which is reproduced below:-
The Ld.AR vehemently argued and filed the paper books which are kept in record. The relevant part of submission of the Ld. AR is reproduced as below:-
“SYNOPSIS OF FACTS AND ARGUMENTS ON BEHALF OF THE RESPONDENT: 1. The Respondent-assessee is a Company registered under the Companies Act and is, inter alia, engaged in the business of manufacturing and retailing of branded apparels. During the relevant year, the Respondent-assessee was engaged in retailing of brands such as AND, Globaldesi, Grassroot and Anita Dongre. The Respondent-assessee sells its branded products through various channels, viz.: (i) Sale through franchisee owned and operated stores: In this mode, the franchisee operates from a store which is either owned or taken on lease by the franchisee. (ii) Sale through Large Format Stores (LFS): The Respondent-assessee provides its products to LFS like Pantloon, Lifestyle, Shoppers' Stop etc. (iii) Sale through Company owned franchisee operated stores: In this mode, the franchisee operates from a store which is arranged by the Respondent-assessee. (iv) Sale to e-commerce: The Company provides its products to e-commerce players like Flipcart, Myntra etc.
The sale by the Respondent-assessee through all the aforesaid channels (also referred to as 'channel partners') are made on sales or return basis, i.e. goods are, in the first instance, sold to franchisee/LFS with the franchisee / LFS retaining the rights to return the goods as per the terms of the agreement. At the time of sale of goods by the Respondent-assessee to the franchisee / LFS, an invoice is raised on an amount mutually decided which is less than the Maximum Retail Price (MRP) and Goods and Services Tax (GST) is charged by the Respondent-assessee on the said sales. The franchisee / LFS would in turn sell the goods to the end customer in its own name. The franchisee / LFS would pay the sale consideration to the Respondent-assessee and would in turn collect the sale price from the customer. In the books of accounts of the Respondent-assessee, goods are treated as sold when invoices for the goods are raised, and & 5165/Mum/2024 House of Anita Dongre Pvt Ltd goods are transferred to the franchisee/LFS. When goods are returned by the franchisee / LFS, a separate entry is passed for sales return.
Income of the Respondent-assessee is offered to tax on the basis of the said sales, as recorded in the books of accounts of the Respondent-assessee. In so far as the income tax assessment is concerned, the income has been accepted by the Assessing Officer by treating the said transaction with franchisee / LFS as sales and income therefrom, which has been offered to tax by the Respondent-assessee, has been so assessed to tax.
4. It is the Respondent-assessee's case that transaction between the assessee and the franchisee / LFS is on principal-to-principal basis.
However, the TDS Officer has passed an order dated 15.02.2021 under section 201(1)/201(1A) of the Income-tax Act, 1961 ('the Act' for short) treating the Respondent- assessee as an assessee in default for non-deduction of tax at source under section 194H of the Act by treating the franchisee/LFS as the agent of the assessee and the amount of discount as being in the nature of commission paid by the Respondent-assessee to franchisee/LFS. The TDS Officer has, by referring to the statements of employee of the Appellant recorded during the course of survey on the Respondent-assessee as well as certain terms of the distribution agreement with franchisee/LFS, held that a. ownership of goods lies with the assessee till the time of sale of the goods by the channel partner to the end customer since the business risk of goods supplied to channel partner lies with the assessee by relying on answer to Question No.12 in the statement of Mr. Arun Ganapathy (CFO of the assessee); b. assessee receives payment from channel partner only when goods are sold to end customer by channel partner and the channel partner is not needed to deploy capital for receipt of goods; & 5165/Mum/2024 House of Anita Dongre Pvt Ltd c. end sale price of the goods supplied by the assessee to the channel partner is decided by the assessee. This means that the sale price of the goods is always controlled by the assessee; d. Construction/design of franchisee store is controlled by the assessee; e. sales agents deployed by the assessee to LFS are provided by the assessee; f. referring to certain terms of the agreement, Respondent No. 1 alleged that the arrangement between the assessee and the franchisee/LFS is an arrangement of commission, as defined under section 194H of the Act and the TDS Officer concluded that the channel partners acted merely as agents of the assessee;
g. the TDS Officer held that by treating the transaction as sale of goods, the GST liability is artificially reduced by the assessee, h. The TDS Officer further held that retention of commission by the agent amounts to constructive payment to the channel partners, on which TDS was required to be deducted by the principal, i.e. the assessee. i. Without prejudice, the TDS Officer also held that in so far as the sales through LFS is concerned, discount would amount to rent under section 1941 of the Act as the employees of the assessee have possession over a demarcated area in the premises of LFS and, therefore, the discount by LFS would be in the nature of rent.
The Commissioner of Income-tax (Appeals), vide order dated 8th August, 2024, allowed the appeal filed by the Respondent-assessee, by, inter alia, holding as under:
(i) The relationship between the Respondent-assessee and its channel partner is on principal to principal. In paragraph 7.3.1.9, the Commissioner of Income-tax (Appeals) has referred to the relevant clauses of the agreement with various channel partners to come to the aforesaid conclusion. The Commissioner of Income-tax (Appeals) concluded that once the goods are delivered to the franchisee/LFS, the goods were the responsibility of the franchisee/LFS and, therefore, the agreement between the (ii) The Commissioner of Income-tax (Appeals) further held that merely because the agreement has clause for return of goods does not deter from the fact that originally when the goods are supplied by the assessee to the channel partners, there is a sale of goods.
(iii) The Commissioner of Income-tax (Appeals) notes that the Respondent-assessee fixes and pays the GST liability when the goods are transferred to the channel partners. Thus, the agreement entered into between the Respondent-assessee and the channel partners amounts to sale of goods.
(iv) The Commissioner of Income-tax (Appeals) further held that LFS has not let out any space to the Respondent-assessee merely by allowing the employees of the Respondent- assessee to be present on the floor of the LFS. There is no rental agreement between the Respondent-assessee and the franchisee/LFS for alleging applicability of section 194IA of the Act. The Respondent-assessee has relied on the decision of the Hon'ble Apex Court in the case of Bharti Cellular Ltd. vs. ACIT, 462 ITR 247 to hold that the provisions of section 194H are not applicable.”
We have heard the rival submissions and perused the material available on record. The modus operandi adopted by the assessee in relation to sale of goods pertains to sales effected through (i) Franchisee Owned and Operated Stores (FOFO), (ii) Large Format Stores (LFS), (iii) Company Owned Franchisee Operated Stores (COFO), and (iv) e-commerce platforms.
The revenue has challenged the impugned appellate order primarily on two grounds:
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd (i) Whether the nature of the transactions is not that of a principal-to-principal basis, but rather a principal-to-agent relationship, thereby attracting the applicability of TDS under Section 194H read with Section 201 of the Act, on alleged commission payments; and (ii) Whether the arrangement involving use of designated areas in LFS for promotion of sales constitutes a lease/rental arrangement, thereby attracting TDS under Section 194-I of the Act.
The Ld. AR submitted that Section 194H of the Act has no applicability in the present facts, as the assessee is not a person responsible for making any payment to the franchisees or LFS. It was contended that Section 194H mandates that any person responsible for paying to a resident any income by way of commission or brokerage shall deduct tax at source at the time of credit or payment, whichever is earlier.The Ld. AR argued that in the present case, the assessee raises invoices for sale of goods to franchisees/LFS and receives consideration against such sales. Since the assessee does not pay any amount to the franchisees/LFS, the provisions of Section 194H do not get attracted.
It was further submitted that TDS under Section 194H is required only if either (i) income is credited to the account of the payee, or (ii) payment is made to the payee. In the present case, neither has any income been credited to the account of franchisees/LFS—as they are reflected as debtors in the books of the assessee—nor any payments made to them. On the contrary, the assessee only receives payments from the franchisees/LFS. Hence, the provisions of Section 194H are wholly inapplicable. a. CIT v. Piramal Health Care Ltd. [55 taxmann.com 534 (Bom)], held where assessee had received sale price from stockist but had not paid/credited any amount to stockist, question of invoking section 194J against assessee did not arise b. CIT v. Super Religare Laboratories Ltd. [133 taxmann.com 313 (Bom)], held Where assessee-company engaged in providing laboratory and testing services to customers through its own and through third party collection centres had allowed certain discount to its collection centres, since assessee did not perform any act of paying but was only receiving payments from these collection centres, there was no obligation on assessee to deduct tax at source under section 194H on discount so allowed c. PCIT v. Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [108 taxmann.com 541 (Guj)], held where in terms of tripartite agreement, assessee sold its goods at discounted price to dealers who, in turn, sold those goods to final consumers, collected sale consideration from them and handed it over to assessee, since it was a transaction on principal to principal basis and, there was no service rendered by dealers to assessee, discount offered to dealers could not be regarded as commission requiring deduction of tax at source under section 194H & 5165/Mum/2024 House of Anita Dongre Pvt Ltd wherein the Hon'ble High Courts held that where the assessee is not responsible for making any payment to the payee, the provisions of Section 194H are not attracted.
The Ld. AR further placed reliance on the principle of consistency, asserting its applicability on the following grounds:
(a) The business model of the assessee has remained unchanged for several years, during which the Revenue has not invoked the provisions of Section 194H. It is, therefore, not open to the Revenue to take a contrary stand in the current year.
(b) While computing the income of the assessee under the provisions of the Act, the Ld. AO has accepted the transactions with franchisees/LFS as sales, as recorded in the assessee's books and profit & loss account, and taxed the income arising from such sales. Therefore, another officer of the same Department cannot now contend that these transactions are in the nature of commission and not sales. Accordingly, it is submitted that a consistent approach must be adopted, recognizing that the amounts received from franchisees/LFS are not in the nature of commission.
The agreement entered into between the assessee and the franchisees/LFS establishes a principal-to-principal relationship. The franchisees/LFS are not agents of the assessee. Relevant terms of the agreement are annexed as Annexure ‘A’ to the Synopsis of Arguments.The transaction between the assessee and the franchisees/LFS is a sale on a principal-to-principal basis, supported by the following contentions:
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd (i) Upon transfer of goods to the franchisee/LFS, the assessee raises an invoice and charges GST. GST is leviable only on a sale of goods, not on the transfer of goods to an agent. Thus, issuance of invoice and payment of GST indicates a sale transaction.
(ii) Upon such sale, ownership in goods stands transferred from the assessee to the franchisee/LFS. Further, the franchisee/LFS effects subsequent sale to customers in its own name, not in the name of the assessee. When goods are sold by an agent, invoices are typically issued in the name of the principal, which is not the case here. Moreover, the GST authorities have not raised any objections to this arrangement, thereby accepting the transaction as a sale. Respectfully reliance is placed on CIT v. Khadim Shoes Pvt. Ltd. [61 taxmann.com 413 (Cal)] the relevant paragraph is reproduced as below:-
5. The case of the assessee has always been that the goods were purchased on the basis of samples which has not been disputed or could not be disputed by the revenue. The reasoning advanced by the CIT for the purpose of holding that the purchase worth Rs.7.90 crores amounted to awarding a specific job work to the vendors is neither supported by law nor is factually a correct finding. Goods can be sold either by sample or by description or manufactured as per requirement of the buyer. The assessee has purchased the goods and has admittedly paid sales tax, central excise duty and has in its turn availed the benefit of cenvat credit which is inconsistent with a job contract contemplated by section 194C of the Income Tax Act. Section 194C contemplates payment to a contractor for carrying out any work including supply of labour or carrying out any work. It was not the case of the revenue that the vendor of the assessee carried out any work of or for the assessee. The CIT could not dispute the fact that it was purchase of shoes from 10 manufacturers only which were labeled and marked with the logo 'khadim'." Section 194C contemplates a transaction between a principal and an agent. Whereas a transaction in the nature of sell and purchase is on principal to principal basis. The fact that goods for Rs.7.90 crores were purchased by the assessee has been accepted by the CIT (A). In spite thereof insistence upon bringing the case within Section 194C was an improper exercise of power.
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd 6. The learned Tribunal has set aside the order passed by the CIT (Appeals). They not only have taken a possible view but they have really done justice to the assessee. The appeal is, therefore, dismissed with costs assessed at Rs.10,000/-(Ten Thousand).” (iii) Once the goods are sold, responsibility for insuring the goods lies with the franchisee/LFS, which further substantiates the transfer of ownership.
(iv) The agreement also stipulates that transactions are on a "sale or return" basis, with explicit mention of the principal-to-principal nature of the relationship.
(v) The presence of certain restrictions on franchisees/LFS—such as MRP control, brand décor, marketing standards, and submission of accounts—does not alter the character of the transaction. Respectfully reliance is placed on Bharti Cellular Ltd. v. Assistant CIT [462 ITR 427 / 160 taxmann.com 12 (SC)], wherein the Apex Court, in the context of distribution of SIM cards and recharge vouchers, held that such restrictions do not change the nature of transaction from sale to agency.
(vi) The Ld. DR respectfully relied on the decision in Singapore Airlines Ltd. v. CIT [144 taxmann.com 221 (SC)]which is distinguishable. In that case, travel agents received standard and supplemental commission from the airlines and operated as agents under an admitted principal-agent relationship. The Hon’ble Supreme Court held that TDS under Section 194H was applicable to both standard and supplemental commission in light of specific contractual clauses (e.g., Clause 7.2 of the Passenger Sales Agency Agreement), wherein agents held all collected monies in trust for the airline. No such clause exists in the assessee’s agreements with the franchisees/LFS. Hence, the facts in Singapore Airlines are materially different and inapplicable to the present case.
& 5165/Mum/2024 House of Anita Dongre Pvt Ltd (vii) It is further submitted that in the case of the assessee, no amount received by the franchisees/LFS is held in trust or on behalf of the assessee. There is no clause in the agreement similar to Clause 7.2 of the Passenger Sales Agency Agreement considered in Singapore Airlines Ltd. (supra). Accordingly, the said decision does not apply to the present facts.
During the course of hearing, the Ld. DR placed reliance upon the judgment in Delhi Milk Scheme v. CIT [2008] 173 Taxman 54 (Delhi), wherein the assessee had appointed agents for distribution of milk and unsold stock was returned at the same price. In that context, the Hon’ble High Court held that the relationship between the parties was of principal and agent, thereby justifying the invocation of Section 194H of the Act.However, the facts of the present case are clearly distinguishable, as the assessee herein has not appointed the LFS/franchisees as agents, and no commission has been paid. Therefore, the case relied upon by the revenue is not applicable to the facts under consideration.
Respectfully reliance was also placed by the Ld. DR on the decision of the Hon’ble Supreme Court in Gordon Woodroffe & Co. v. M.A. Majid & Co., Civil Appeal No. 164 of 1964, decided on 22.03.1966 [MANU/SC/0065/1966], which dealt with the issue of whether a transaction constituted a contract of sale or agency. However, the facts in that case are factually different and do not aid the revenue’s contention in the present appeal.
On the applicability of Section 194-I of the Act, the assessee contended that the discount allowed to LFS cannot be considered as rent. The allegation of the Ld. AO that the assessee acquires possession or control over a specified demarcated area within the premises of the LFS stores, and that its employees & 5165/Mum/2024 House of Anita Dongre Pvt Ltd use the space exclusively for its business purposes, is factually incorrect and unsustainable.As per the agreement between the assessee and the LFS entities, the assessee merely sells goods to the LFS, who in turn display and sell the goods to end customers. For the purpose of facilitating sales, the assessee may, at times, depute its employees to be present on the store floor to assist customers. However, the employees do not possess or control the premises. The LFS retains full possession and operational control.The fact that a brand-dedicated area is used for display of goods does not lead to the inference that the assessee has possession or control over that space. The employees of the assessee are neither entitled to exclusive use of such space nor do they have independent access or rights thereto. Further, no fixed or identifiable area is earmarked in the agreement, and the LFS has complete discretion regarding whether to display the goods or not. Therefore, the invocation of Section 194-I of the Act is without merit.
In support of the above submissions, reliance has been placed by the assessee on the decision of the Hon’ble Bombay High Court in CIT v. Maharashtra State Electricity Distribution Co. Ltd. [2015] 375 ITR 23 (Bom), wherein it was held that mere use of transmission lines by electricity companies does not amount to payment of rent under Section 194-I. The Hon’ble Court held at para 57 that for a payment to qualify as rent, possession is a necessary element.
Respectfully reliance was also placed on the decision of the ITAT, Mumbai Bench, in Chhattisgarh State Electricity Board v. ITO [2012] 18 taxmann.com 150 (Mum), where a similar view was taken. Accordingly, it is submitted that
On perusal of the agreements and invoices placed on record (Paper Book - Index II, pages 1 to 66), it is evident that the assessee raised invoices in the name of the LFS/franchisees, and the LFS/franchisees in turn raised invoices to the end customers. The brand name was merely used to sustain the market position. The transactions are clearly on a principal-to-principal basis, and the discounted pricing mechanism adopted by the assessee cannot be considered as payment of commission.No evidence has been placed by the revenue to establish that the assessee has paid any commission to the LFS/franchisees. Further, the transactions have been accepted by both the Assessing Officer and the GST Authorities as sales on a principal-to-principal basis.The only objections raised pertain to alleged applicability of TDS under Sections 194H and 194-I, which, in our considered view and as elaborated hereinabove, are not sustainable.
In light of the above, and respectfully following the binding precedents of the Hon’ble Supreme Court, Hon’ble Bombay High Court, and Hon’ble Calcutta High Court, we find no infirmity in the impugned order passed by the Ld. CIT(A). We therefore see no reason to interfere with the same.
In the result, the appeal filed by the revenue is dismissed.
The bench has noticed that the issues raised by the assessee in the above appeal is equally similar on set of facts and grounds. Therefore, it is not imperative to repeat the facts and various grounds raised by the assessee. Hence, the bench feels that the decision taken by us in for the & 5165/Mum/2024 House of Anita Dongre Pvt Ltd AY2016-17 shall apply mutatis mutandis in the appeal bearing & 5165/Mum/2024 for AY 2017-18 &2018-19 and followed accordingly.