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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Commissioner of Income Tax (Appeals) dated 22.02.2016 and pertains to the assessment year 2011-12. 2. The grounds of appeal
read as under: 1.0: On facts and in law and in the circumstances of the case, Hon'ble CIT (A) erred in confirming the disallowance in respect of discounts and incentives of Rs.11,373,719 made by the AO by invoking provisions of section 40(a)(ia) the Income Tax Act, 1961. 1.1: Hon'ble CIT (A) failed to appreciate that payments made by the appellant to various customers on account of 'Rate difference, discounts and Incentives' were 2. M/s. Jai Balaji Textile Mills in the nature of discount and not 'commission' within the meaning of Section 194H of the Income Tax Act, 1961. 1.2: Hon'ble CIT (A) failed to appreciate that the appellant has made payments of 'Rate difference, discounts & incentives' directly to its customers with whom it has principal to principal relationship. 1.3: Hon'ble C1T(A) while dealing with the issue erred in observing certain incorrect observations in the order so passed by him u/s 250(6) of the Income Tax Act, 1961. 2.0: Hon'ble CIT(A) erred in rejecting the Assessee's ground No.2 before him by taking a view that an assessment order passed in respect of an assessee on whom the AO had no territorial jurisdiction is only a technical mistake curable under section 292B of the Income Tax Act, 1961. 2.1: Hon'ble CIT(A) failed to appreciate that any assessment order passed without holding proper jurisdiction would be bad in law and invalid ab-initio. . Apropos issue on merits in ground no. 1:
Brief facts of the case are as under:
The Assessing Officer during assessment proceedings found debited following payments under subgroup "Sales":
SI No. ITEMS AMOUNT IN RUPEES 1 Rate Difference to Customers 61,17,321/- 2 Incentive Account 39,11,270/- 3 Special Rebate 13,45,128/- 4 Discount against Export Sales 29,083/- TOTAL 1,14,02,802/- The Assessing Officer asked assessee why these payments should not be treated as Commission/Brokerage and be disallowed u/s.40(a)(ia) of the Act as no TDS u/s 194H has been deducted. The Assessing Officer noted that assessee has submitted that debit under the head "Rate Difference to customers" are basically trade discounts allowed by the assessee to its customers as per agreed terms. But the Assessing Officer opined that the above "trade discounts" having Incentive Character as "Rate difference" has not been 3 M/s. Jai Balaji Textile Mills reflected in the invoice. Assessee has also submitted that any compensation received for late payment by the customers is also credited under this subhead. Assessing Officer opined that if it was in the character of Trade Discount, the compensation on delayed payment would not have been netted against this head and it would have been shown separately. Further, Incentive is additional discount given to the customers in terms of their performance in achieving annual targets set by the assessee. Assessee himself accepted that these payments under the subhead "Incentive Account" is in nature of Incentives in terms of customer's performance. Next, as and when the assessee is loaded with heavy inventory, it comes out with the scheme of lifting out by the customer's desired quantity in a specified period. Customers achieving that desired level become eligible for specular rebate.
The Assessing Officer was not convinced. He referred to the Explanation to section 194H and held that the definition was inclusive definition. He referred to the decision of the ITAT, Mumbai in the case of SKOL Breweries Ltd. vs. ACIT [2013] 29 taxmann.com 111 (Mum). The Assessing Officer further noted that the issue is regarding the amount of incentive/so called discount given by the assessee by way of credit note which was not adjusted or mentioned in the invoice. He also found that this amount of benefit by way of credit note was not reduced from the sale turnover for the purpose of sales tax return. Hence, he held that the amounts claimed as discount does not fit into the definition of the term discount. Accordingly, the assessee disallowed the amount of Rs.1,13,73,719/- u/s. 40(a)(ia) of the Act as under:
4 M/s. Jai Balaji Textile Mills SI No. ITEMS AMOUNT IN RUPEES 1 Rate Difference to Customers 61,17,321/- 2 Incentive Account 39,11,270/- 3 Special Rebate 13,45,128/- TOTAL 1,13,73,719/- 5. Before the ld. Commissioner of Income Tax (Appeals), the assessee’s submissions were as under:
Appellant during appellate proceedings has submitted that he is a wholesaler. In order to promote its sales, the appellant is granting rebates and quantity discounts and sales incentives to its customers and all such expenditures are recorded under the heading "Rate difference and discounts" in its audited accounts. These costs are reflecting in the Profit & Loss account by debiting under the heading Gross Sales. As these payments are directly made to its own customers, these were not liable for TDS u/s 194H of the Act. The AO in the assessment order so passed u/s 143(3) has disallowed the expenditure of Rs.1,13,73,719/- u/s 40{a)(ia) of the Act by taking a view that these expenditures were 'Commission' and therefore liable for TDS u/s 194H of the Act. While doing so, AO has relied upon the ITAT decision in the matter of SKOL Breweries Ltd Vs. ACIT [2013] 29 taxmann.com 111. AR further submitted that the appellant has debited total sum of Rs.1,14,02,802/- in its books under the heading 'Rate difference and Discount'. Following is the breakup of total sum of Rs.1,14,02,802/- debited under the heading of 'Rate difference and Discounts:- Rate difference & discounts:- Amount in Rupees Rate difference allowed to 6,117,321 Customers Incentive Account (Performance) 3,911,270 Special Rebate (Quantity discount) 1,345,128 Discount against Export Sales 29,083 TOTAL 11,402,802 7.2. Rate difference allowed to Customers Rs.61,17,321/-: This is discount allowed by the appellant to its customer at the time of payment at the rate agreed with the customer. This also includes short payment received from the customers owing to their claims in respect of quality or rates charged. Incentive Account Rs.39,11,270/-: This is additional discount allowed by the appellant to its customer at the end of a financial year. These incentives discounts are payable only to those customers who have achieved the sales target set for the year. Special Rebate Rs.13,45,128/-: As and when the appellant is loaded with heavy inventories, the customers are encouraged to lift specified quantity in a specified period and avail the special rebate. The AO has disallowed these expenditures of Rs.1,13,73,719/- 5 M/s. Jai Balaji Textile Mills by treating the same to be 'Commission' payment liable for TDS within the meaning of section 194H of the Income Tax Act. As the appellant has not deducted TDS in respect of these 3 expenditures, the AO by invoking the provisions of section 40{a)(ia) of the Act has disallowed the entire expenditure. It is also submitted that AO has made the disallowance by recording following incorrect observations and finding in the assessment order:(i) In para 4.1 AO has observed that he has asked the appellant to produce the agreements with customers, if any, or the scheme of incentives/ Rebates in respect of these payments but, the appellant could not produce any such agreement or scheme. These observations are incorrect as the AO never required the appellant to produce any such documents, (ii) in para 4.8 of the assessment order AO has observed that the 'appellant has not reduced the amount of discount from the Turnover for the purpose of Maharashtra VAT and has not produced any of evidence in support of such reduction'. These observations are incorrect. Infact, the Appellant is engaged in selling of fabrics which is exempt from VAT. It is evident from its audited balance sheet that the appellant has accounted for the amount of 'Rate difference and Discounts' by reducing the same from sales. It is submitted that the payments grouped under the heading 'Rate difference and Discounts' are primarily in the nature of 'Discounts and rebates' directly allowed by the appellant to its Customers where it has 'Principal to Principal relationship'. The appellant is also making payment of Commission to its agents and brokers through whom the goods are supplied to the customers after deducting TDS as required by the law. Further, it is submitted that any payment between two principals i.e. seller and buyer is undoubtedly not "Commission" for the buyer. AR of appellant argued that the definition of commission u/s 194H of the Act provides that "'Commission or brokerage' includes that any payment received by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities'. It is submitted that customers to whom discount or rebate is allowed by the appellant are independent entities acting on their own behalf and not on behalf of the appellant and also not rendering any agency services to the appellant. It is to be appreciated that the 'Brokers or agents' are the persons who are acting on behalf of the assessee and are paid brokerage or commission after deduction of tax u/s 194H of the Act and any discount or rebate to a customer who is an independent buyer and not acting as an agent cannot be treated as 'Commission' within the meaning of Section 194H of the Act and therefore the action of the AO was not legally tenable. Customer's ledger confirmation showing the relevant transactions and entries in respect of the discounts allowed was produced. But no such ledger confirmation from customers was produced or placed in appeal file.lt was also argued that most of the assessments have been made u/s 143(3)of the Act in past wherein the nature of the said expenditure has been accepted as discount. This was for the first time that the AO has deemed the Discount as 'Commission'. It was 6 M/s. Jai Balaji Textile Mills furthermore submitted that the issue is no more res-integra and the Hon'ble High Court of Bombay in the matter of Commissioner of Income Tax v. Intervet India (P) Ltd [2014] 49 taxmann.com14 (Order dated 01/04/2014) has held that a distributor or customer where their relationship with seller is principal to principal, could not be said to be acting on behalf of the seller and therefore any discount, rebate or incentive allowed to them by the seller for promoting sales or meeting sales target could not be said to be 'Commission' payment within the meaning of Explanation (i) to Section 194H of the Income Tax Act . It was put forth that the Income Tax department has accepted this decision and so far has not filed any appeal against the said judgment from Hon'ble Bombay High Court and therefore this judgment has a binding force, Further, the findings of the ITAT in the matter of SKOL Breweries Ltd Vs. CIT in their order dated 18/01/2013 have impliedly been overruled and have no force.
Further, the ld. Commissioner of Income Tax (Appeals) was not convinced. He noted that the assessee had not produced the agreement with customers, or the scheme of incentives/ Rebates. Thereafter, the ld. Commissioner of Income Tax (Appeals) referred to several case laws. The ld. Commissioner of Income Tax (Appeals) also distinguished the decision of the Hon'ble Bombay High Court decision relied upon by the assessee in the case of Commissioner of Income Tax v. Intervet India (P) Ltd [2014] 49 taxmann.com14 (vide order dated 01/04/2014). He concluded as under:
In the case of the CIT vs.Intervet India (P) Ltd,(2014) 49 Taxmann.Com14 (Bombay) assessee used to circulate Produce Discount Scheme (PDS) in advance in the market on monthly basis. Discount is offered on the basis of value of the purchases by the distributors who are customers of the company. PDS is accounted for as a quantum of sales in book of Intervet India (P) Ltd. PDS is based on the sales quantum. It is common for all the distributors/stocklists and no agreement in this regard is entered into between Intervet India (P) Ltd and the Distributors/ Stockists. Product Campaign Discount is clearly specified for 3 to 6 months which is offered on quantum of sales during campaign period and Purchase Credit Notes are given to the distributors / stockists as a part of Product Campaign Scheme. Intervet India (P) Ltd passed on the incentives to the Distributors/ Stockists/ Dealers through the consignment agent by way of Sale Credit Notes.
7 M/s. Jai Balaji Textile Mills On the contrary, the appellant firm is in practice of selling goods to its customers at fixed price but discount is allowed at different rates depending on the price agreed with the customers, whereas in Intervet India (P) Ltd Product Discount is common for all the customers. Moreover, Incentives Character as '"Rate Differences & Discount" is not reflected in the invoices. 7.3.1. The claims of appellant on account of "Rate Differences & Discount" i.e. rate difference to customers/Income/ Rebate is given by way of Credit Note is not acceptable when amount paid by appellant is independent of the invoice price. Appellant has also not reduced the said amount from the Turnover for Mahaiashtra VAT. During appellate proceedings appellant has just stated that he is engaged in selling fabric which is exempt from VAT but no such evidence has been produced either before AO or during appellate proceedings. Appellant has also failed to establish principal to principal relationship with his customers by any documentary evidence before AO as well as in appeal. This fact becomes all the more clear when appellant submits that he is also making payment of commission to its agents and brokers through whom the goods are supplied to the customers after deducting TDS. These facts clearly establish that appellant has appointed agents and brokers through whom he is supplying goods to the customers and his claim of principal to principal relationship is devoid of truth in the absence of any supporting evidence submitted either before AO or in appeal. Appellant's submission that any compensation received for late payment by the customers is also credited under 'Rate Difference to Customers' also nullifies appellant claim that this amount is trade discount. 7.3.2. In view of these discussions it is clear that facts of the instant case are distinguished from the facts of the case of Intervet India (P) Ltd- The "Rate Differences & Discount" claimed as discount, Incentives and Special Rebate given by the appellant by way of credit note are not adjusted or mentioned in the Invoice. The same are also not reduced from the Sales for the purpose of VAT. Claim of the appellant of discount on the basis of Principal to Principal relation basis is not supported by any Agreement/Explicit Scheme / Invoices. It is also a fact that the discount is always given at the time of transaction of sale and purchase, whereas the commission is given only after the completion of the task or service or sales. In the instant case, assessee has not passed on rate difference to Customer/ Incentive/Rebate as discount on each transaction basis as the same is not reflected in the invoices. This is also evident from the Schedule "N" of Audit Report in "Notes in accounts" where it is mentioned at para 1(v) that rate difference allowed to Debtors is accounted for on the basis of settlement till the date of accounts finalization. 7.3.3. In view of above discussion, fact and circumstances, I hold that AO has rightly treated amount of Rs.1,13,73,719/- as Commission/Brokerage and 8 M/s. Jai Balaji Textile Mills disallowed u/s 40 (a) (ia) of the Act as no TDS u/s 194H of the Act has been deducted. Hence, I sustain the disallowance made by the A.C
Against the above order, the assessee is in appeal before us.
8 We have heard both the counsel and perused the records. We find the sole basis for the treatment for the claim of discount and incentives given by the assessee to be commission payments is that the assessee has not produced the agreement with customers or the scheme of incentive/rebates. We find that the assessee in its submissions before the ld. Commissioner of Income Tax (Appeals) which he has also recorded in his appellate
order has duly contested that the Assessing Officer never required the assessee to produce such documents. Despite such submissions of the assessee, the ld. Commissioner of Income Tax (Appeals) himself never asks the assessee to produce these documents but proceeded to hold that in the absence of any such documents, adverse view was to be taken. Furthermore, the assessee’s detailed submissions as reproduced in the appellate
order noted by us also herein above have not been properly dealt by the ld. Commissioner of Income Tax (Appeals). We are also of the opinion that the ratio emanating out of the binding of the Hon'ble jurisdictional High Court decision should not be lightly distinguished without properly brining on record the distinguishing features.
In this view of the matter, in our considered opinion, this issue needs to be remitted to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh after giving the assessee proper opportunity of being heard. The Assessing Officer shall duly consider the observations hereinabove.
9 M/s. Jai Balaji Textile Mills Apropos ground no. 2
By way of this ground, the assessee has contested that the ld. Commissioner of Income Tax (Appeals) has erred in rejecting the assessee’s ground no. 2 before him. The said ground no. 2 before the ld. Commissioner of Income Tax (Appeals) read as under:
2.0 On facts and in law, the assessment order so passed is bad in law and invalid. The A.O. did not appreciate that he has no territorial jurisdiction over this case. The A.O. failed to appreciate and perform his legal duty of transferring the case records to proper justification.
The ld. Commissioner of Income Tax (Appeals) has dealt with the above order ground as under:
6. In Ground No 2 appellant has challenged territorial jurisdiction of the AO as principal place of business is located out of jurisdiction of AO. On perusal of assessment order, it appears that this issue was never contested before the AO and appellant has appeared through AR Sh.MukeshRungta, CA and assessment was accordingly completed. This defect is also covered u/s 292B of the Act. Section 292-B was introduced w.e.f. October 1, 1975 and states that no return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of the Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of the Act. Further, by Circular No. 179 dated 30th September, 1975, the scope of section 292-B was explained and it has been stated in the said circular that this provision has been made to provide against purely technical objections without substance coming in the way of the validity of assessment proceedings, etc. In view of these facts and circumstances and position of law, ground raised by the appellant is dismissed.
Against this order, the assessee is in appeal before us.
The ld. Counsel of the assessee has reiterated that the Assessing Officer in this case has not justified inasmuch as there was a change in address. However, all the 10 M/s. Jai Balaji Textile Mills necessary particulars in this case were not produced before us. During the course of hearing, it came to light that the assessee is claiming that there was a change of address pursuant to change of partnership. The change in the partnership deed and the date thereof was very crucial in this regard. Despite request, the assessee’s ld. Counsel of the assessee has not provided the same.
Furthermore, in view of the absence of proper details, we are of the considered opinion that the ld. Commissioner of Income Tax (Appeals) has passed a reasonable order on this issue and there is no infirmity on the same. Accordingly, we uphold the same.