2008 (3) TMI 686 - HC - Income Tax

Payment of commission for export of wheat - Relationship between Principal and Agent or not - Liability to deduct tax at source u/s 194J? - default within the meaning of Section 201(1)/(1A) - HELD THAT - A perusal of clauses clarifies that during the financial year the relationship between M/s. PEC and assessed was that of Principal and Agent . It is clear from the Clause 6 that M/s. PEC had transferred its wheat export L/Cs in favor of the assessed for execution of the wheat export and M/s. PEC charged commission for the export. Therefore it can be said that M/s. PEC Ltd. transferred foreign buyers L/Cs in favor of the assessed against commission charges. As per Clause 4 of agreement the assessed agreed that the quantity of wheat delivered by FCI for the purpose of export against the export contract shall be exported in full to the foreign buyer and will not be sold in domestic market. All important works is being done by the assessed and M/s. PEC had transferred a simple contract of supplies to the assessed against the payment of commission and M/s. PEC was not rendering any kind of professional/technical services. Thus the provision of Section 194J of the Act is not applicable. It is clear that the amount paid by assessed to M/s. PEC was not towards fee for professional or technical service. Therefore the provisions of Section 194J of the Act are not applicable to the facts of the present case and the assessed is not liable to deduct tax at source on this amount under Section 201/201(A) of the Act. Therefore we do not find any infirmity in the impugned order passed by the Tribunal and thus in our opinion no substantial question of law arises for consideration. The appeal filed by the Revenue is hereby dismissed.

Summary

Issues:
Interpretation of Sections 194H and 194J of the Income Tax Act, 1961 regarding deduction of tax at source for commission payments.

Detailed Analysis:
The case involves an appeal by the Revenue against the Income Tax Appellate Tribunal's order allowing the assessed's appeal for the assessment year 2001-02. The assessed had shown commission expenses under "Salary Expenses," with payments made to different entities. The Assessing Officer concluded that the payments were for technical services, not commission, and thus, tax should have been deducted at source under Section 194J. The Commissioner of Income Tax (Appeal) upheld this decision, but the Tribunal reversed it, leading to the current appeal.

The Revenue argued that the agreement with one entity did not establish a principal-agent relationship and that the services were technical, not commission-based. On the other hand, the assessed claimed the payments were exempt from TDS as commission for supply contracts, not technical services. The Tribunal reproduced the relevant clauses of the agreement between the assessed and the entity in question.

Sections 194H and 194J of the Act were crucial in determining whether the payments constituted commission or fees for technical services. The agreement's terms indicated a principal-agent relationship and commission payments for wheat exports, not technical services. The Tribunal's analysis found that the services did not fall under the definition of technical services, as per Section 194J.

The Tribunal highlighted that the assessed assisted in wheat exports, managed the process, and did not receive professional or technical services from the entity. Therefore, the payments were not subject to TDS under Section 194J. The Court agreed with the Tribunal's interpretation, finding no legal issues to consider, and dismissed the Revenue's appeal.

In conclusion, the judgment clarified the distinction between commission payments and fees for technical services under Sections 194H and 194J of the Income Tax Act, ultimately ruling in favor of the assessed based on the nature of the services provided and the agreement's terms.