2009 (7) TMI 836 - AT - Income Tax

Deduction of tax at source (TDS) under section 194H or 194J - Assessee has entered into business transactions with the company MMTC for export - The assessee has routed the transaction of export through MMTC only because the assessee was not allowed to effect the export on account of Government regulations - Agent can act on behalf of the principal only in respect of those transactions which the principal is entitled to carry on directly without the assistance/help of the agent, i.e. even in the absence of an agent, the principal should be entitled to carry on the said transaction the assessee herein is not entitled to export the iron ore with Fe content of 64 per cent and above - Held that it cannot be possible to say that the goods were exported by MMTC on behalf of the assessee on a principal to agent basis - The MMTC has exported the goods on its own and not on behalf of the assessee - By virtue of the Government regulations, both the companies had to reach an agreement with regard to the modalities of the incurring expenses and payment and in our opinion, the said modalities of payment are not the deciding factor to determine the nature of transaction - Issue in favour of the assessee - No TDS

Summary

Issues Involved:
1. Whether the payment made by the company to MMTC is liable for deduction of tax at source under section 194H or 194J of the Act.
2. Whether the levy of penalty under section 201 is justified given that MMTC has already paid the tax due on its income.

Issue-Wise Detailed Analysis:

1. Liability for Deduction of Tax at Source under Section 194H or 194J:
- Background: The assessee, M/s National Mineral Development Corporation (NMDC), and M/s MMTC are both Government of India undertakings. According to the EXIM policy, NMDC must export iron ore with Fe content of 65% and above through MMTC, the canalizing agency. The TDS officer, upon inspection, found that NMDC paid MMTC a 3% service charge on the FOB value of exported iron ore.
- TDS Officer's Findings: The TDS officer concluded that the payment of 3% was a commission, indicating a principal-agent relationship, thus liable for TDS under section 194H. Alternatively, the officer considered it as a fee for technical services under section 194J.
- Assessee's Argument: The assessee argued that the transaction was a sale on a principal-to-principal basis, not a principal-agent relationship. They cited the Supreme Court case of Bhopal Sugar Industries Ltd. v. STO, emphasizing that the substance of the transaction should be considered over its form. The assessee provided several points to support their claim:
- MMTC enters into contracts with foreign buyers, not NMDC.
- Title to the iron ore transfers to MMTC upon shipment.
- MMTC coordinates the movement of iron ore and bears the risks and responsibilities associated with the sale.
- MMTC issues Form 'H' under the CST Act and a Disclaimer certificate under the Income-tax Act, indicating a sale transaction.
- Tribunal's Analysis: The Tribunal found force in the assessee's arguments. They noted that:
- The title to the iron ore transfers to MMTC upon shipment.
- The record note of discussions was meant for operational and financial arrangements, not to establish a principal-agent relationship.
- MMTC exported the goods as the principal, not as an agent of NMDC.
- The government regulation preventing NMDC from exporting directly was a significant factor, indicating that MMTC acted on its own behalf.
- Conclusion: The Tribunal concluded that the transaction was a sale on a principal-to-principal basis, not a principal-agent relationship. Therefore, the payment was not liable for TDS under section 194H or 194J.

2. Levy of Penalty under Section 201:
- Background: The TDS officer levied a penalty equal to the amount of TDS to be deducted under section 201(1) and interest under section 201(1A), despite MMTC having paid the tax due on its income.
- Tribunal's Analysis: Since the Tribunal decided that the transaction was not a principal-agent relationship and not liable for TDS under section 194H or 194J, the issue of penalty under section 201 became infructuous.
- Conclusion: The Tribunal did not need to address the penalty issue due to their decision on the first issue.

Final Judgment:
The appeals filed by the assessee were allowed, setting aside the orders of the Ld. CIT(A) and the Assessing Officer. The Tribunal concluded that the transactions were sales on a principal-to-principal basis, not liable for TDS under section 194H or 194J, making the penalty issue moot.