MAHINDRA AUTOMOBILE DISTRIBUTOR P. LTD,MUMBAI vs. DCIT CIR 2(2), MUMBAI

आयकर अपीऱीय अधिकरण, म ुंबई न्यायपीठ ‘बी’, म ुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI, JM आमकय अऩीर सं./ITA No.5185/Mum/2013 (नििाारण वषा / Assessment Year : 2008-09) Mahindra Automobile Vs. JCIT (OSD), Circle-2(2), Distributor Private Limited, Mumbai Mumbai (Earlier Known as Mahindra Renault Private Limited), Automotive Sector, Mahindra Towers, First Floor, Akruli Road, Kandivali, Mumbai-400001 स्थामी रेखा सं./ जीआइआय सं./ PAN/GIR No. : AAECM 2999 P (अऩीराथी /Appellant) (प्रत्मथी / Respondent) .. ननधाारयती की ओर से /Assessee by : Shri Bhavin Shah & Ms. Mansi Chitroda याजस्व की ओर से /Revenue by : Shri N.P.Singh सुनवाई की तायीख / Date of Hearing : 03/12/2015 घोषणा की तायीख/Date of Pronouncement 19/02/2016 आदेश / O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)- Mumbai, dated 14-3-2013, for the assessment year 2008-09, in the matter of order passed u/s.143(3) of the I.T.Act. 2. First grievance of the assessee relates to disallowance of provision for product warranty. 3. At the outset, ld. AR placed on record order of the Tribunal in assessee’s own case for the assessment year 2008-09, dated 29-11-2013, wherein similar issue was restored back to the file of AO.

2 ITA No.5185/13 4. We had gone through the order of the Tribunal, wherein the Tribunal restored the matter back to the file of AO after having the following observation:- “22. It has been admitted by both the parties that this issue has been set aside to the file of the Assessing Officer to decide the issue afresh in view of the principles laid down by the Hon'ble Supreme Court in Rotrok Control India Pvt. Ltd. 314 ITR 62 (SC). 23. After hearing both the parties and in view of the decision of the Hon'ble Supreme Court in Rotrok Control s India Pvt. Ltd. (supra), we set aside the impugned order passed by the Assessing Officer and restore the issue back to his file and direct him to deal and decide as per the direction given by the Tribunal in assessee‟s own case in the assessment years 2006– 07 and 2007–08. Thus, ground no.5, raised by the assessee is treated as allowed for statistical purposes.” As the facts and circumstances during the year are same, respectfully following the order of the Tribunal in assessee’s own case, matter is restored back to the file of AO for deciding in the light of principle of law laid down by the Hon’ble Supreme Court in the case of Rotrok Control India Pvt. Ltd., 314 ITR 62(SC). 5. Next grievance of the assessee relates to disallowance of expenditure by way of payments to dealers against service coupons by invoking provisions of Section 40(a)(ia) of the Act, rejecting the contention of the assessee that there was no obligation to deduct tax at source. The AO disallowed the amount by observing that same is in the nature of payment to contractor for work assigned by the assessee company to the dealer and, therefore, the same is covered u/s.40(a)(ia). The CIT(A) confirmed the action of AO by following its decision for the assessment year 2007-08. 6. We found that the Tribunal in assessee’s own case for the assessment year 2007-08 vide order dated 8-6-2012, in ITA No.7999/Mum/2011 has decided the issue, wherein the Tribunal held as under :- “4. Ground number 14 is about disallowance of Dealer Incentive and Service Coupons. AO disallowed dealer incentive amounting to Rs. 87.57 crores and service coupon of Rs. 35.49 Crores under section 40 (a)(ia) r.w.s. 194 H and 194C of the act respectively. From page number 49 to 55 of the assessment order the issue in question has been dealt by the AO. During the course of assessment proceedings AO found that TDS

3 ITA No.5185/13 had not been deducted on expenses on commission, debited under the head sales promotion and commission on sales/contracts. He asked the assessee to furnish details of all the expenses debited under the said headings. After considering the submissions of the appellant, the AO held as under: -dealers of the appellant were agents of the assessee company and they were not customers as claimed by the assessee, -dealers had been specially appointed for definite territory of making sales. Services had been rendered in the course of buying and selling of goods by the dealers so, the payments made to them was covered under section 194 H of the Act , -dealers were playing a dual role i.e. that of a buyer of the vehicles, and that of an agent of the appellant company, -the dealers were rendering certain services on the off of the assessee company to the final consumers. They were also agents of the assessee company to meet its target of high turnover to final consumers, -advertisements of the assessee company were also sent to the dealers -service coupons were covered by section 194 C. 4.1. Before us, AR submitted that no order had been passed under section 201 of the Act holding the assessee to be an assessee in default and that therefore, no disallowance could be made under section 40(a)(ia)of the Act, that no such this disallowance was made in the past, that dealer incentives were various types of discounts and rebates given by the assessee to the dealers who fulfilled certain conditions, that the transaction between the dealers and the assessee manufacturer were on principal to principal basis, that the sale of vehicles was subject to sales tax and excise duty, that the risks and rewards were all to the account of the dealers, that the leaders were owners of the vehicles, that there was no obligation to deduct tax at source under section 194 H of the Act, that section 194 C was not applicable, that the dealer did not render any service to the company, that the dealers did not carry on any work for the company, that value of service coupons was factored into the sale price and in the first instance was recovered from the dealers and in turn from the ultimate buyers. that dealers would be reimbursed a fixed sum on surrender of service coupons, that the said mechanism ensured that dealers undertook services of the vehicles for the customers and also that the customers take the vehicle for periodic services, that the AO had ignored payment of Rs. 8.22 Crores for the financial subvention charges on which TDS had already been deducted. Referring to the dealers agreement (page 124 of the paper-book) that was handed over to the AO during the course of assessment proceedings AR submitted that from the terms and conditions of the agreement one could easily see that the relationship between the assessee and its dealers was not of agency. He referred to various pages of the paper-book to support his case. He relied upon the judgments of Bhopal Sugar Industries Ltd.,[1977-(003)-0147- SC],Rowers Chemicals(Pvt.)Ltd.(4CTR111),Vijay Traders (1995 Scale(6),150, Moped India Ltd.[1986-(001)SCC-0125-SC],DCM Textiles[2006-(1950-ELT-0129-SC].On the other hand, DR submitted that the dealers incentives were covered under section 194 H of the Act, that prices were finalised by the appellant company, that company decided the duties of the dealers, that appellant compelled the dealers to maintain a

4 ITA No.5185/13 minimum stock, that after sales and service were provided by the dealer as per the directions of the appellant. He also referred to various pages of the paper book filed by the assessee. 4.2. We have heard the rival submission and perused the material produced before us. Two provisions, which would be relevant for determining the issue and to decide the real nature of transaction between the parties are section 4 of the Sale of Goods Act and section 182 of the Indian Contract Act. Section 4 of the Sale of Goods Act defines "sale". Therefore, this provision becomes material provision to determine as to whether the transaction between the assessee and the dealers is that of "sale" of motor vehicles as contended by the assessee. Section 182 of the Indian Contract Act, on the other hand, defines an agent, which definition becomes important to consider as to whether the relationship between the assessee and dealers is that of "principal and agent" as argued by the DR. A conjoint reading of the two provisions would be useful to decide the issue. Therefore, we take note of these provisions at this stage. Section 4 of the Sale of Goods Act, 1930 reads as under : "4. Sale and agreement to sell.-(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2)A contract of sale may be absolute or conditional. (3)Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4)An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. " Section 182 of the Indian Contract Act reads as under : "An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom the said act is done, or who is so represented, is called the principal. " Hon‟ble Delhi HC in CIT v. Singapore Airlines Ltd. (319ITR29) has analysed the aforesaid definition in the following manner (page 48) : "It is clear from the definition that an agency comes into existence where one person is vested with the authority or capacity to create a legal relationship between person referred to as a principal and an outside third party. Therefore, the basic and essential requisites of an agency ordinarily would be that :The agent makes the principal answerable to third persons whereby the principal can sue third parties directly and renders him-self, that is, the principal, liable to be sued directly by the third parties.” 4.3. Various courts have enumerated principals about sale and agency. A few of them are reproduced here

5 ITA No.5185/13 i)Following factors would not be relevant to determine as to whether an agency exists or not : -the fact that the distributor is subject to operational control by his principal ; -the fact that the distributor is subject to geographical controls by his principal -the fact that the distributor has to maintain detailed records and accounts -the fact that the distributor has to submit accounts to the principal. (ii)The person who purports to enter into a transaction on behalf of the principal would have the power to create, modify or terminate contractual relationship between his principal, that is, the person whom he represents, and the third parties. (iii)An agent, though bound by instructions given to him by the principal does not work under the direct control and supervision of the principal. The agent thus uses his own discretion to act on behalf of the principal subject to the limits to his authority prescribed by the principal. (iv)There is no necessity of a formal contract of agency, it can be implied which could arise from the act of parties or situations in which parties are put. 4.4. If the agreement entered in to between the assessee and the dealers (Pg.124-61)of the paper book) is analysed, it becomes clear that the dealers were not agents of the assessee. We would like to reproduce following terms and conditions of the said agreement- “3.The dealer has approached the company with a request to be appointed a dealer for the retail sales and distribution of the vehicles manufactured by the company, their spare parts and accessories……. Grant of Non Exclusive Rights The company grants to the dealer non-exclusive rights, during the term of this agreement, to purchase for retail sale and distribution within the territory described in Annexure 3 to this agreement, such of said products as described in as Annexure 1 and 1A here to and to provide sales and after sales services, workshop, operations and accessories and despair cards, warehouse and operation in the manner described in schedule 1,2,3 and 4 respectively, of Annexure 2 hereto, on the terms and conditions hereinafter contained. In Definitions clause net price has been defined as the price at which said products are sold to the dealer 4. Placing of orders, Prices – The dealer will send requisition to the company, in accordance with the distribution courses are established from time to time, at such intervals of time. As the company may designate for acceptance covering the dealer's requirements of said products and company shall sell the said products to the dealer in accordance with the orders accepted by the company.

6 ITA No.5185/13 All sales shall be ex plant price or ex storage point and the state where the plant is located on the date of delivery is affected at these two points in terms of the orders for the class II products... All sales from the plant shall be directed interstate sales to the dealers located outside the state.... Packing and other charges as well as octroi duty, Central sales tax and other taxes levied either by the Central or state government or local authority is all bodies shall be charged extra as and when applicable....... the point of sale for such interstate dispatches from the plant of the company shall be when such vehicles are delivered to the transporters. As the plant, as the property in the vehicles shall pass to the concerned dealer at that point 8.Method of consignment: b). Ex plant billing -In case of tax plan billing the company shall handover vehicles to transporters along with the invoice copy and other relevant documents of company's plan itself, and therefore the title in the vehicles shall be deemed to be transferred from the company to the dealer at the plant. (l) Comply with conditions of purchase will be bound by the company's conditions of sale in force. While purchasing the said products and selling the same to its own customers, and will abide by such other terms, as the company will impose, from time to time..... 19. Return of company property and disposal of stocks b) if upon expiry or termination of this agreement, the dealer shall offer for sale to the company all the Central Acts in possession of the dealer at a price equal to that paid by the dealer, together with cost of care is an insurance premium. However, the company shall be under no obligation to the purchase or any of the said products..... 27. Legal relationship : the relationship between the dealer and the company is on principal to principal bases and the dealer is not and shall not be the agent or employee of the company for any purpose and shall have no right or authority to sign or create any obligation of any kind, express or implied, 1B of of the company to widen the company in any way, to except any service or process upon the company or to receive and a notice for and on behalf of the company, of any nature whatsoever. We have also perused the page number 164 of the paper book and it is an invoice that contains details of price as well as VAT. At the bottom of the said page there is a declaration by the dealer about sale of the products and a comments that the transaction of sale covers value-added tax invoice and same had been affected.” 4.5. We are of the opinion that as sale took place between the assessee and the dealers, provisions of section 194 H would not be applicable in the case under consideration. Here, we would like to mention the facts and ratio of the case of Jai Drinks (336 ITR 383) decided by the Hon‟ble Delhi HC. In that case appeal was preferred against the order of the Income-tax Appellate Tribunal. The only question that arose before the Hon‟ble Court for consideration was as to whether as per the agreement

7 ITA No.5185/13 entered into between the assessee and the distributor and the payments made by the assessee to the distributor constitute commission as envisaged under section 194H, and whether the assessee was liable to deduct TDS. The entire dispute centred around the interpretation of the agreement entered into between the assessee and the distributor. The Commissioner of Income-tax (Appeals) had opined that, a sum allowed to a servant or agent who managed the affairs of others in recompense for his services could be termed compensation. He held that it was generally calculated at a certain percentage on the amount of transaction or on the profit to the principal. As a matter of fact, generally a person earning commission would be selling goods not on his own account but on behalf of another, commonly known as the principal. In order to attract the provision of section 194H, commission must have been received by a person who is acting on behalf of another. In other words, he must be acting as an agent to another person. The Commissioner of Income-tax (Appeals) had also noticed that the assessee as well as the distributor are showing their respective sale invoices and are assessed to sales tax, which was evidenced by the respective sales bills and sales tax orders. With these observations, and in the light of each and every clause of the agreement, the Commissioner of Income-tax (Appeals) held that the arrangement between the assessee and the distributor was that of principal-to-principal and not of principal-agent. The Income-tax Appellate Tribunal held that it was the case where two parties to a contract had taken a conscious decision to transact between each other on principal- to-principal basis and it would not be open to the Revenue to read into such contract and treat the same as being on principal-agent basis. Before the Hon‟ble High Court counsel appearing for the Revenue relied upon the case of CIT v. Idea Cellular Ltd. (325 ITR 148). It was held that the facts of CIT v. Idea Cellular Ltd. were „entirely distinguishable from the facts of the present case‟. It was further observed by the Hon‟ble court – “A perusal of the agreement shows that the assessee had permitted the distributor to sell its products in a specified area. The distributor was to exclusively deal in the products of the assessee in a specified territory. The products were to be purchased by the distributor from the assessee against 100 per cent. advance payment, though the decision rested with the assessee to give the products on credit to the distributor. The distributor was to maintain at all times the minimum stock and was to deal only in the products of the assessee. The distributor was to maintain its operational infra-structure including requisite staff under its employment with liability of PF contribution, ESI contribution, etc. as per the laws. It was specifically stated in clause 16 that the arrangements under this agreement are on principal-to-principal basis and nothing in this agreement shall be construed to confer the authority of an agent to bind the assessee. In clause 17 it was specifically mentioned that the distributor was to purchase the products of the assessee and was to be allowed discount per case on the printed MRP. In case of any breakage, leakage, etc., it was the distributor who was liable and not the assessee. Not only this, even all the approvals, consents, registrations, licences, etc. whatever may be required from Departments or authorities were to be obtained by the distributor. From all that has been noted above, it is evident that the distributor was to purchase products at pre-determined price from the assessee for selling the same within specified area. The products were to be purchased by the

8 ITA No.5185/13 distributor against 100 per cent. advance payment or may be some times on credit at the discretion of the assessee. Both the assessee and the distributor have been collecting and paying their sales tax separately. Both the parties have clearly understood and accepted the agreement between them. That being the arrangement between the assessee and the distributor, it could not be said that the relation between them was that of principal-agent. On the other hand it was clearly stipulated to be an agreement between them on principal-to principal basis. Both the Commissioner of Income-(Appeals) and also the Income-tax Appellate Tribunal rightly held that the payments being made by the assessee to the distributor were incentives and discounts and not commissions. We find no infirmity in the findings of the Commissioner of Income-tax (Appeals) and also the Income-tax Appellate Tribunal. Keeping in view the abovementioned facts and circumstances of the case, the present appeal has no merit and is hereby, dismissed.” 4.6. Considering the ratio of the case of Jai Drinks (supra) and the terms and conditions mentioned at paragraph 4.4we are of the opinion that provisions of 194 H are not applicable in this case. We are of the opinion that transaction between the assessee and the dealers were on principal to principal basis. In other words there are certain terma and conditions in the agreement that are clearly indicative of the fact that the transactions were between principal and principal and that even in the matter of sales that were effected by the dealer it did not act as an agent of the assessee company. In this behalf the first significant aspect which noteworthy is that pursuant to indents placed by the dealer the products were not merely supplied by the assessee company to the dealer, but were actually sold to the dealer at certain prices. In other words, what was charged by the appellant the dealer is the price and the transactions are not of the nature that there is supply of goods by the appellant to the dealer on the basis of any commission or otherwise or for any other similar consideration. Legal relationship between the dealers and the assessee clearly shows that dealers were not the agents. Even on termination assessee had an option to take back the goods. The agreement as a whole is about sale of vehicles and both the parties are paying sales tax. The dealer is taxed on the profits so made by it on its business. It is, therefore, clear that the transactions between the appellant and the dealer must be regarded as transactions between principal-and-principal and not as between principal and agent and that the dealer can never be regarded as effecting. 4.7. AO has categorically stated that plan of incentives was not filed before him. In the paper book we do not find any documents related with the incentive scheme. We are of the opinion that matter of incentives allowed by the assessee to its dealers needs to be restored to the file of the AO. He is directed to decide the issue afresh with regard to the provisions of section 194C of the Act. Assessee is directed to furnish the AO details like plan adopted by it, method of calculating the incentives, incentives actually allowed etc. to the AO.” As the facts and circumstances during the year under consideration are same, respectfully following the order Tribunal in assessee’s own case, we restore the matter back to the file of AO for deciding afresh in terms of direction given by the Tribunal in its order dated 8-6-2012.

9 ITA No.5185/13 7. In the result, appeal of assessee is allowed for statistical purposes. Order pronounced in the open court on this / /

(RAM LAL NEGI) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated / / प्र.कु.मभ/pkm, नन.स/ PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai. 3. आमकय आमुक्त / CIT 4. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 5. गार्ा पाईर / Guard file. 6. आदेशाि सार/ BY ORDER, सत्मावऩत प्रनत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीऱीय अधिकरण, भुंफई / ITAT, Mumbai

Date Initial 1. Draft dictated on 18-2-16 Sr.PS 2. Draft placed before author 18-2-16 Sr.PS (dictation pad enclosed) 3. Draft proposed & placed before JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the Sr.PS/ Sr.PS/PS PS 6. Kept for pronouncement on Sr.PS 7. File sent to the Bench Clerk Sr.PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.