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Facts
The revenue appealed against the CIT(A)'s order, which allowed the assessee's appeal. The AO had treated the assessee as an 'assessee-in-default' under Section 201(1) for failing to deduct TDS under Section 194H on payments of 'turnover rebate' and 'special incentive' to its dealers/distributors/stockists. The assessee contended that these payments were not commission as the transactions were on a principal-to-principal basis.
Held
The Tribunal held that the payments made as turnover rebate and special incentive were in the nature of a discount and not commission. The relationship between the assessee and its distributors/stockists was on a principal-to-principal basis, and they were not acting as agents of the assessee. Therefore, Section 194H of the Income Tax Act was not applicable.
Key Issues
Whether the 'turnover rebate' and 'special incentive' paid to dealers/distributors/stockists constituted 'commission' attracting TDS under Section 194H of the Income Tax Act, 1961.
Sections Cited
201(1), 194H, 133B(2), XVIIB
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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Justice (Retd.) C V Bhadang, Hon’ble & Shri B R Baskaran, Hon’ble
Per Justice (Retd.) C V Bhadang :
By this appeal, the revenue is challenging the order dated 20.06.2023 passed by the CIT(A) - NFAC, Delhi. By the impugned order the NFAC has allowed the appeal filed by the respondent assessee thereby nullifying aside the order dated 28.03.2019 passed by the DCIT(TDS)-2(3), (AO) Mumbai. The appeal relates to assessment year 2012-13. The Assessing Officer vide his order had found the assessee to be an ‘assessee-in-default’ under Section 201(1) of the Income Tax Act, 1961 (‘Act’ for short) for failure to deduct tax at source (TDS) under Section 194H of the said Act.
The brief facts are that the assessee is a company engaged in manufacturing automobile bearings. A spot verification under Section 133B(2) of the said Act, was conducted in the case of the assessee on 30.10.2018 for the purpose of verification of compliance to provisions of Chapter XVIIB of the said Act. According to the
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Assessing Officer during the course of verification it was disclosed that the assessee had paid ‘turnover rebate’ and ‘special incentive’, to its dealers/distributors/stockists without deducting TDS as per the provisions of Section 194H of the said Act. Consequently, a show cause notice dated 24.12.2018 and 27.02.2019 was issued to the assessee to which the assessee filed reply dated 02.01.2019 and 07.03.2019.
On behalf of the assessee, it was contended that the assessee manufactures automotive bearings and caters to the domestic as well as export market. In the domestic market, sales are made to Original Equipment Manufacturers (OEMs) as well as the company is also operating in the replacement market where sales are made to various distributors/stockists who, according to the assessee, are its customers. There is a scheme in place which is notified in advance under which incentives are given to such dealers/distributors/stockists on the basis of the value of purchase made by them. In short, it was contended that the dealers/distributors to whom such turnover rebate and special incentive are given are not the agents of the assessee and the sale is essentially on principal-to-principal basis. It was thus contended that the payment to the dealers/distributors cannot partake of the nature of a ‘commission’, within the meaning of Section 194H of the said Act and, thus, there is no liability to deduct tax at source.
On behalf of the assessee, reliance was placed on the sample copy of the scheme documents in respect of some of the dealers and the decision of Bombay High Court in CIT vs Intervet India Pvt. Ltd., 364 ITR 238 (Bom.), inter alia, amongst others.
The Assessing Officer refused to accept the contention mainly on the ground that the payment in the nature of ‘turnover rebate and special incentive’ would come within the ambit of Section 194H of the said Act. The Assessing Officer found that the decisions relied upon are distinguishable on facts.
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The CIT(A) after noticing the provisions of Section 194H of the said Act and extensively relying upon the decision of the Kolkata Bench of this Tribunal in the case of EPCOS India (P) Ltd. vs. ITO (169 ITD 541) found that any such cash discount/rebate/incentive given by the assessee to its customers for purchasing goods in bulk quantity was in the nature of discount in transaction of sale and, therefore, Section 194H of the said Act had no application to the said transaction. Reliance was also placed on the decision of Hon’ble Supreme Court in CIT vs. Ahmedabad Stamp Vendors Association (348 ITR 378). In that view of the matter, the appeal came to be allowed.
Feeling aggrieved, the Revenue is in appeal.
We have heard Shri Ashok Kumar Ambastha, learned DR for the appellant and Shri Dharmesh Shah & Ms. Mitali Parekh learned counsels for respondent. Perused record.
It is submitted by the learned DR that the decision in EPCOS India (P) Ltd. (supra), is distinguishable on facts inasmuch as in that case there was an out and out sale of the products by the assessee to the dealers at listed price ruling at the time of delivery after deducting the normal trade discount on such listed price which was notified to the dealer from time to time. It is submitted that the present case of the assessee making payment in the nature of turnover rebate and special incentive, which are shown as expenses in the books of accounts, would partake of the nature of commission, thus attracting the provisions of Section 194H of the said Act. Reliance on behalf of the appellant is placed on the order of this Tribunal, dated 03.07.2015, in Skol Breweries Ltd. vs ACIT (ITA No. 7123/Mum/2012 for A.Y. 2008- 09). It is submitted that in similar factual situation it has been held that the incentive or benefit or compensation, the benefit of the nature of discount/rebate given for attaining sale target will have to be reckoned as commission.
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The learned counsel for the respondent has taken us through the sample scheme letters dated 30.05.2011, 31.10.2011 and 24.01.2012 as well as the copy of the agreements for appointment of authorized stockists executed with Diesel Auto Parts Co. Pvt. Ltd and some other stockists. It is submitted that the nature of the transaction has to be ascertained from the terms agreed between the parties as a whole. It is submitted that if the nature of the scheme and the terms of the agreement are seen as a whole, there is an out and out sale of the product by the assessee to the dealers/stockists. It is thus submitted that the stockists do not render any services as such to the assessee and, thus, the turnover rebate and special incentive cannot be considered as a commission. On behalf of the respondent, reliance is placed on the decision of Hon’ble Supreme Court in the case of Bharti Cellular Ltd. vs ACIT [462 ITR 247 (SC)] as also the decision of Hon’ble Bombay High Court in the case of Intervet India Pvt. Ltd. (supra).
We have considered the rival circumstances and the submissions made. The liability to deduct tax at source would arise in the present case only if there is payment of any commission or brokerage within the meaning of Section 194H of the said Act. We have gone through the scheme document as well as the copy of the agreements and we find the transactions between the assessee and the entities to whom such rebate or special incentive was paid is on principal-to-principal basis. It is trite that the nature of the transaction has to be ascertained on the basis of the intention of the parties which has to be gathered on the basis of the recitals of the scheme as well as the agreements read as a whole. It can be seen from the agreement that the assessee had appointed M/s. Diesel Auto Parts Co. and other similar entities as its authorized stockists for the market. There are elaborate provisions made in Article 4 for mode of placement of order and delivery of the products as well as the price and the payment terms (Article 5), which clearly indicate that these entities to whom the rebate or special incentives was offered cannot be said to be agents acting on behalf of the assessee. We find that the facts obtaining in the case of Intervet India Pvt. Ltd. (supra) before Bombay High Court were similar in nature in which the High court has held as under :-
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“The relationship between the assessee and the distributor stockists was that of principal to principal and in fact the distributors were the customers of the assessee to whom the sales were effected either directly or through the consignment agent. As the distributor/stockists were the persons to whom the product was sold, no services were offered by the assessee and what was offered by the distributor was a discount under the product distribution scheme or product campaign scheme to buy the assessee's product. The distributors/stockists were not acting on behalf of the assessee and that most of the credit was by way of goods on meeting of sales target, and hence, it could not be said to be a commission payment within the meaning of explanation (i) to section 194H of the Income-tax Act, 1961. The application of Explanation (i) to section 194H being applicable to all categories of sales expenditure cannot be accepted. Such reading of Explanation (i) to section 194H would amount to reading the said provision in abstract. The application of the provision is required to be considered to the relevant facts of every case. In the facts of the present case that as regards sales promotional expenditure in question, the provisions of Explanation (i) to section 194H of the Act are rightly held to be not applicable as the benefit which is availed of the dealers/stockists of the assessee is appropriately held to be not a payment of any commission in the concurrent findings as recorded by the Commissioner (Appeals) and the Tribunal.”
It was submitted by the learned DR that the terms in Article 5 would indicate that the assessee has residual power to dictate the terms as to how the stockist should deal with the products which would indicate that it was a contract of agency. We are not inclined to accept the same. This is because terms of any such agreement or a scheme have to be read as a whole in order to gather the real nature of the transaction in consonance with the intention of the parties.
The issue about the obligation to deduct tax at source under Section 194H of the said Act fell for the consideration of the Hon’ble Supreme Court in Bharti Cellular Ltd. (supra). Hon’ble Supreme Court after taking a survey of several decisions holding the field has culled out the principles which are germane while deciding whether there is a relationship of principal and agent between the parties. This is relevant in the present case also, inasmuch as, according to the learned DR there was a relationship of principal and agent between the assessee and the
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distributor/stockist. The principles are set out by the Hon’ble Supreme Court in para 8 of the judgment as under : “8. Agency is therefore a triangular relationship between the principal, agent and the third party. In order to understand this relationship, one has to examine the inter se relationship between the principal and the third party and the agent and the third party. When we examine whether a legal relationship of a principal and agent exists, the following factors/aspects should be taken into consideration: (a) The essential characteristic of an agent is the legal power vested with the agent to alter his principal's legal relationship with a third party and the principal's co-relative liability to have his relations
(b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship. (c) The task entrusted by the principal to the agent should result in a fiduciary relationship. The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so.8 (d) As the business done by the agent is on the principal's account, the agent is liable to render accounts thereof to the principal. An agent is entitled to remuneration from the principal for the work he performs for the principal.”
Further, in para 39, Hon’ble Supreme Court has analysed the legal position of the distributors as under :
“39. Coming back to the legal position of a distributor, it is to be generally regarded as different form that of an agent. The distributor buys goods on his account and sells them in his territory. The profit made is the margin of difference between the purchase price and the sale price. The reason is, that the distributor in such cases is an independent contractor. Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party. The distributor has rights of distribution and is akin to a franchisee. Franchise agreements are normally considered as sui generis, though they have been in existence for some time. Franchise agreements provide a mechanism whereby goods and services may be distributed. In franchise agreements, the supplier or the manufacture, i.e. a franchisor, appoints an independent enterprise
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as a franchisee through whom the franchisor supplies certain goods or services. There is a close relationship between a franchisor and a franchisee because a franchisee's operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement. Franchise agreements are extremely detailed and complex. They may relate to distribution franchises, service franchises and production franchises. Notwithstanding the strict restrictions placed on the franchisees - which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with certain requirements, and even sell according to specified prices - the relationship may in a given case be that of an independent contractor. Facts of each case and the authority given by 'principal' to the franchisees matter and are determinative.”
Applying the aforesaid principles to the facts as obtaining in the present case, we find that there is neither any relationship of principal and agent or the distributors/stockists acting as franchisee for and on behalf of the assessee. Thus, the learned CIT(A) has rightly concluded that there was no liability to deduct tax at source. We thus find that the impugned order does not suffer from any infirmity so as to require interference. The appeal is without any merit and is accordingly dismissed. Order pronounced in the open court on 26th July, 2024.
Sd/- Sd/- [B R Baskaran] [Justice (Retd.) C V Bhadang] ACCOUNTANT MEMBER PRESIDENT Mumbai, Dated : 26th July, 2024. SA
Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The PCIT, Mumbai. 4. The CIT 5. The DR, ‘B’ Bench, ITAT, Mumbai BY ORDER
//True Copy// (Assistant Registrar) Income Tax Appellate Tribunal, Mumbai