DCIT(TDS)OSD-1(2), MUMBAI, CUMBALLA HILL vs. HOUSE OF ANITA DONGRE PVT LTD, BANDRA WEST

PER BENCH:

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 order08/08/2024, for all assessment years.The appeals are emanated from the order of the Ld.ACIT (O ), 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 (O ), 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.
2. All the appeals have same nature of facts and have a common issue. All the appeals are taken together, heard together and disposed of together. So,ITA
No.5210/Mum/2024 is taken as lead case.
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 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.
[(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 were not a case in the case of Bharti Cellular Ltd. vs ACIT [(20240 462 ITR 247
(SC)]."
4. 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 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. 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 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 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.

(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 Respondent-assessee and the franchisee/LFS was that of principal-to-principal relationship.

(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.”
8. 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:
(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.
9. In support of this contention, respectfully reliance is placed upon the decisions in:
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 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.
10. 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.
11. 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:
(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.
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.
(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.
12. 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.
13. 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 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.
14. 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 194-I of the Act.
15. 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.
16. 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.
17. 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 ITA No. 5210/Mum/2024 for the AY2016-17 shall apply mutatis mutandis in the appeal bearing ITA No. 5211 &
5165/Mum/2024 for AY 2017-18 &2018-19 and followed accordingly.
18. In the result, appeals of the revenue bearing ITA No. 5210, 5211 &
5165/mum/2024 are dismissed.
Order pronounced in the open court on 11th day of April 2025. (MISS PADMAVATHY S.)
JUDICIAL MEMBER
Mumbai,दिन ांक/Dated: 11/04/2025
Pavanan
Copy of the Order forwarded to:

BY ORDER,
////

(Asstt.