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Income Tax Appellate Tribunal, BENCH ‘B’ KOLKATA
Before: Hon’ble Shri P.M.Jagtap AM & Shri N.V.Vasudevan JM ]
ITA No.852 & 853/Kol/13
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘B’ KOLKATA [Before Hon’ble Shri P.M.Jagtap AM & Shri N.V.Vasudevan JM ] ITA Nos.852 & 853/Kol/2013 Assessment Years : 2003-04 & 2004-05
ITO (TDS) Ward-58(3) M/S.Metro Diary Limited, 21, Gopal Mukherjee Road, Kolkata. -versus- Kolkata-700 002. TAN CALMO2193C
For the Assessee : None For the Respondent : Shri M.K.Biswas, JCIT Sr.DR.
Date of Hearing : 20.10.2015 Date of Pronouncement : 20.10.2015
ORDER PER N.V.VASUDEVAN, JM:
These are appeals by the Revenue against two orders both dated 3.1.2013 of CIT(A)-I, Kolkata, passed u/s.201(1) & 201(1A) of the Income Tax Act, 1961(Act) pertaining to AY 2003-04 & 2004-05.
Notice sent to the Assessee has been returned un-served with the ‘LEFT”. Since the issue arising for consideration in this appeal have been considered and decided in several cases of manufacturers of dairy products by higher judicial forums under identical facts and circumstances, we proceed to decide these appeals, after considering the arguments of the learned DR.
The issue involved in both these appeals are identical and arise out of same facts and circumstances. We deem it appropriate to pass a common consolidated order.
The Assessee is a company engaged in the business of production and sale of milk, ice- cream and other Dairy products. The Assessee sells its milk and other products to the public through franchises who have different retail outlets(booths). The Assessee enters into agreement with Franchisee setting out the terms and conditions under which they were to act 1
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as franchisees of Assessee’s products. The Assessee fixes the maximum retail price(MRP) for each of the products sold through the franchisee. The Assessee collects price of the product from the franchisees which is less than the MRP. The difference between the MRP and the price that the franchisees pay to the Assessee according to the Assessee was nothing but discount or margin allowed by it to the franchisee so that they may ear profit from their business of sale of dairy products of the Assessee to the public. According to the revenue such difference is nothing but in the nature of “Commission” and therefore the Assessee was bound to deduct tax at source u/s.194H of the Act on the difference between the MRP and the price which the franchisee pay to the Assessee. Sec.194-H of the Act reads thus:
"Section 194H: COMMISSION, BROKERAGE, ETC.
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of October, 1991 but before the 1st day of June, 1992, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.
(2) The provisions of sub-section (1) shall not apply –
(a) To such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue, by notification in the Official Gazette , specify in this behalf;
(b) Where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees.
Explanation : For the purposes of this section, -
(i) "Commission or brokerage" includes any payment received or receivable, directly or indirectly, 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;
(ii) "Professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA; 2
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(iii) Where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly."
It is clear from the aforesaid provision that taxes have to be deducted at source by a person responsible for paying any income by way of commission or brokerage. The expression "commission" or "brokerage" has been defined in the explanation, which includes any payment received or receivable directly or indirectly 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 and selling of goods or in relation to any transaction relating to following:
(i) For services rendered (not being professional);
(ii) For any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing
Sec. 201(1) of the Act provides that where a person is obliged to deduct tax at source in accordance with the aforesaid provisions fails to deduct tax at source or after deducting tax at source fails to pay it to the Government then such person will be deemed to be an Assessee in default and is liable to pay the tax not so deducted or not paid. Further Sec.201(1A) provides that such person shall also be liable to pay interest on the tax not so deducted or paid from the date on which such tax ought to have been paid to the Government till such time such taxes are paid to the Government.
According to the AO, the following terms of the Agreement between the Assessee and the franchisee clearly showed that the Franchisee was acting as Agent of the Assessee and therefore the payment by the Assessee to the Franchisee partakes the character of “Commission”:
a) Clause 6.1 which provides that the Franchisee shall pay a deposit of Rs.10,000 to MDL (Assessee) for due performance and observances of the various terms and conditions of the Agreement by the Franchisee;
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b) Clause 6.2 of the Agreement whereby the franchisee agreed to pay an advance “Crate” deposit calculated at Rs.100/- per crate for the milk crates to be provided by the Assessee to the franchisee. c) Clause 9.1 of the agreement whereby the Assessee had the right to mix margin payable to the franchisee for conducting the sale of milk other products as prescribed from time to time. d) Clause 10.1 whereby the officials of the Assessee had a right to enter the selling premises for implementation and observance of various provisions of the agreement and to collect sample of the milk supplied by the Assessee and to check the various records in connection with the agreement. e) Clause 10.2 whereby the Assessee reserved a right to change the selling price of milk to the consumers from time to time and the same will not have any connection with the margin allowable to the franchisee. f) Clause 22 whereby the franchisee was obliged to display signboard and price list as specified by the Essential commodities Act or the Assessee. g) Claus 24 of the agreement which provides that the franchisee shall not under any circumstances whatsoever sell any other type of milk other than the milk supplied to them by the Assessee either directly or through any other party from the said selling premises and that such sale shall be only against cash payment on first cum first served basis.
Before CIT(A), the Assessee submitted that key clauses of the agreement between the Assessee and franchisee would show that the arrangement for sale of dairy products of the Assessee to the public through franchisees was on the basis of principal to principal there being an outright sale of products by the Assessee to the franchisee and not in the capacity of commission agent. The Assessee pointed out that para 2 of the Franchisee Agreement provided that the Assessee will sell milk and the franchisee will purchase the same. This was very important as an agent would only take stock of goods of his principal and never purchase it. Para 8 and 9.2 of the Agreement provided that the franchisee has to make payment for the products and only than the goods would be supplied to the franchisee. The Assessee pointed out that para 13 and 14 of the agreement provided that title to the goods passes on the franchisee on delivery and risk also passes along with such passing of title. The
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franchisee was responsible for unsold or damaged stock. The license for running the business had to be obtained by the franchisee in its own name and cost. Storage of the products was the responsibility of the Assessee. The agreement also specifically provided that the arrangement should not be mistaken to consider the franchisee an agent, servant or employee of the Assessee.
The Assessee relied on the decision of the Hon’ble Delhi ITAT in the case of Mother Diary India Ltd. Vs. ITO 28 SOT 42(del) wherein on identical facts the Hon’ble ITAT held that the provisions of Sec.194H were not applicable. Similar decision rendered in the case of ITO Vs. Mother Dairy Food processing Ltd. 40 SOT 9 (Delhi) was also brought to the notice of the CIT(A).
The Assesse also highlighted as to how the various aspects pointed out by the AO in the order u/s.201(1) & (1A) of the Act were more for the purpose of control of the quality and goodwill of the product sold by the franchisee. The Assessee also highlighted that the decision rendered by the Hon’ble Calcutta High Court in the case of Bharti Cellular Ltd. Vs. ACIT ITA No.222 of 2006, were distinguishable in as much as the said decision was rendered in the context of terms of agreement between Bharati Cellular Ltd., and its franchisee whereby it was specifically provided that the property in goods will not pass on to the franchisee and unsold stock was the responsibility of Bharati Cellular Ltd.as follows:
The CIT(A) agreed with the contentions of the Assessee and held that the relationship between the Assessee and its franchisee was on a principal to principal basis and was not in the nature of relationship between principal and agent. The CIT(A) also relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Mother Diary India Ltd. (infra) rendered on identical facts and circumstances as the case of the Assessee. The CIT(A) therefore concluded that the payment by the Assessee to the franchisee was not in the nature of ‘commission’ within the meaning of Sec.194-H of the Act and therefore there was no obligation on the payment of the Assessee to deduct tax at source on such payment.
Aggrieved by the orders of the CIT(A), the revenue is in appeal before the Tribunal.
We have heard the submission of the learned DR who relied on the order of the AO. We have considered the order of the AO and that of the CIT(A) in the light of the various judicial 5
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pronouncements referred to therein in the light of the agreement between the Assessee and its franchisee.
The Hon’ble Delhi High Court in its judgment dated 19.12.2011 in the case of CIT Vs. Mother dairy India Ltd. ITA No.1925/2010 and ITA 313/d011 held in para-12 to para 15 of it’s judgment as follows:
12...........The principal question that falls for consideration is whether the agreements between the assessee and the concessionaires gave rise to a relationship of principal to principal or relationship of principal to agent. On a fair reading of all the clauses of the agreement as have been referred to in the orders of the Tribunal as well as those of the income tax authorities, we are unable to say that the view taken by the Tribunal is erroneous. It is a well-settled proposition that if the property in the goods is transferred and gets vested in the concessionaire at the time of the delivery then he is thereafter liable for the same and would be dealing with them in his own right as a principal and not as an agent of the Dairy. The clauses of the agreements show that there is an actual sale, and not mere delivery of the milk and the other products to the concessionaire. The concessionaire purchases the milk from the Dairy. The Dairy raises a bill on the concessionaire and the amount is paid for. The Dairy merely fixed the MRP at which the concessionaire can sell the milk. Under the agreement the concessionaire cannot return the milk under any circumstance, which is another clear indication that the relationship was that of principal to principal. Even if the milk gets spoiled for any reason after delivery is taken, that is to the account of the concessionaire and the Dairy is not responsible for the same. These clauses have all been noticed by the Tribunal. The fact that the booth and the equipment installed therein were owned by the Dairy is of no relevance in deciding the nature of relationship between the assessee and the concessionaire. Further, the fact that the Dairy can inspect the booths and check the records maintained by the concessionaire is also not decisive. As rightly pointed out by the tribunal the Dairy having given space, machinery and equipment to the concessionaire would naturally like to incorporate clauses in the agreement to ensure that its property is properly maintained by the concessionaire, particularly because milk and the other products are consumed in large quantities by the general public and any defect in the storage facilities which remains unattended can cause serious health hazards. These are only terms included in the agreement to ensure that the system operates safely and smoothly. From the mere existence of these clauses it cannot be said that the relationship between the assessee and the concessionaire is that of a principal and an agent. That question must be decided, as has been rightly decided by the Tribunal, on the basis of the fact as to when and at what point of time the property in the goods passed to the concessionaire. In the cases before us, the concessionaire becomes the owner of the milk and the products on taking delivery of the same from the Dairy. He thus purchased the milk and the products from the Dairy and sold them at the MRP. The difference between the MRP and the price which he pays to the Dairy is his income from business. It cannot be categorized as commission. The loss and gain is of the concessionaire. The Dairy may have fixed the MRP and the price at which they 6
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sell the products to the concessionaire but the products are sold and ownership vests and is transferred to the concessionaires. The sale is subject to conditions, and stipulations. This by itself does not show and establish principal and agent relationship. The supervision and control required in case of agency is missing.
It is irrelevant that the concessionaires were operating from the booths owned by the Dairy and were also using the equipment and furniture provided by the Dairy. That fact is not determinative of the relationship between the Dairy and the concessionaires with regard to the sale of the milk and other products. They were licencees of the premises and were permitted the use of the equipment and furniture for the purpose of selling the milk and other products. But so far as the milk and the other products are concerned, these items became their property the moment they took delivery of them. They were selling the milk and the other products in their own right as owners. These are two separate legal relationships. The income-tax authorities were not justified or correct in law in mixing up the two distinct relationships or telescoping one into the other to hold that because the concessionaires were selling the milk and other products from the booths owned by the Diary and were using the equipment and furniture in the course of the sale of the milk and other products, they were carrying on the business only as agents of the Diary.
We may refer to the judgment of this Court in the case of Delhi Milk Scheme vs CIT (Supra.) In that case the facts were different. Under the terms of agreement entered into between DMS and its concessionaires, the milk and other products did not become the property of the concessionaires on delivery. The unsold milk was taken back by the DMS from the concessionaires . The ownership of the milk and other products did not pass from DMS to the concessionaires inasmuch as there was no sale of the milk or milk products to them. Further the unsold milk was to be taken back by the DMS from the concessionaires. The agreement also provided that the daily cash collection of the concessionaires was to be handed over to DMS. On these facts, it was held by the Tribunal that the concessionaires only rendered a service to DMS for selling milk to the customers and, therefore, the relationship between DMS and the concessionaires was that of a principal and an agent. This attracted the provisions of Section 194H. This is apart from the fact, as noticed earlier, that the DMS redrafted the agreements and filed them before the CIT(A) and the Tribunal and such redrafted agreements were found to be different from the agreements found during the survey under Section 133A. This Court, on the above facts held that Section 194H was attracted. As already pointed out, the terms of the agreement entered into between the present assessees and their concessionaires are different in crucial aspects. Therefore, the judgment of this Court in the case of DMS(Supra) is not applicable to the present cases.
We are, therefore, of the view that no substantial question of law arises from the order of the Tribunal. The appeals of the revenue in ITA No.1925 and 313/2011 are accordingly dismissed with no order as to costs.
(emphasis supplied)
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It is clear from the judicial pronouncement of the Hon’ble Delhi High Court that passing of title in the goods is important and determinative of the question whether franchisee was acting as agent or acting on a principal to principal basis of the Assessee. It is an undisputed fact that as per the terms of the agreement between the Assessee and its franchisee property in goods was to pass on delivery and the risk of ownership (in the form of the franchisee not being to sell the product or damage to the product) was that of the franchisee. When that is the factual position in the case, we are of the view that the decision of the Hon’ble Delhi High Court was squarely applicable to the case of the Assessee. We therefore concur with the view of the CIT(A) and dismiss these appeals by the revenue.
In the result the appeals by the revenue are dismissed.
Order Pronounced in open court on 20.10.2015.
Sd/- Sd/- (P.M.Jagtap) (N.V.Vasudevan) Accountant Member Judicial Member Date: 20.10.2015. DKP/Ps. Copy of the order forwarded to: 1. M/S.Metro Diary Limited, 21, Gopal Mukherjee road, Kolkata-2. 2. ITO Ward 58(3), Kol-71 3. The CIT 4. The CIT(A) 5. DR. Kolkata Benches, Kolkata