2006 (4) TMI 50 - AT - Income Tax

Deduction of tax at source - Revenue contended that assessee had paid commission to the franchisees and liable to deduct tax at source but as per assessee it is discount on sale - Held that revenue contention was correct and regarded assessee as defaulter

Summary

Issues Involved:
1. Treatment of payments to franchisees as commission or discount.
2. Principal-agent relationship between the assessee and franchisees.
3. Applicability of section 194H for TDS on commission payments.
4. Validity of additional evidence accepted by the Commissioner of Income-tax (Appeals).
5. Compliance with procedural rules under rule 46A of the Income-tax Rules.
6. Interpretation of relevant case laws cited by both parties.

Detailed Analysis:

1. Treatment of Payments to Franchisees as Commission or Discount:
The primary issue revolves around whether the payments made by the assessee to its franchisees should be treated as commission or discount. The Assessing Officer observed that the payments were in the nature of commission and thus subject to TDS under section 194H. The assessee argued that these payments were discounts, not commissions, and therefore outside the scope of section 194H. The Commissioner of Income-tax (Appeals) sided with the assessee, stating that the discount given to franchisees did not constitute commission.

2. Principal-Agent Relationship:
The Assessing Officer maintained that there was a principal-agent relationship between the assessee and its franchisees, making the payments liable for TDS as commission. This was based on the terms of the agreement, which indicated that the franchisees acted on behalf of the assessee and were involved in activities such as marketing and promoting the prepaid services. The Commissioner of Income-tax (Appeals) disagreed, suggesting that both parties were independent business entities, negating a principal-agent relationship.

3. Applicability of Section 194H:
The Tribunal examined whether the payments fell under the ambit of section 194H, which mandates TDS on commission payments. The Tribunal found that the franchisees were acting as agents of the assessee, based on the agreement clauses that indicated control and supervision by the assessee over the franchisees' activities. Therefore, the payments were indeed commissions and subject to TDS under section 194H.

4. Validity of Additional Evidence:
The Revenue contended that the Commissioner of Income-tax (Appeals) accepted additional evidence without giving the Assessing Officer an opportunity to examine it, violating rule 46A of the Income-tax Rules. The Tribunal did not directly address this procedural issue but focused on the substantive matter of whether the payments were commissions or discounts.

5. Compliance with Procedural Rules:
The Revenue argued that the Commissioner of Income-tax (Appeals) erred by not providing the Assessing Officer an opportunity to review additional evidence as required under rule 46A. This procedural lapse was one of the grounds for the Revenue's appeal.

6. Interpretation of Relevant Case Laws:
The assessee relied on several case laws, including Ahmedabad Stamp Vendors Association v. Union of India and National Panasonic India P. Ltd. v. Deputy CIT, to argue that the payments were discounts, not commissions. The Tribunal found these cases distinguishable, noting that the facts of the present case indicated a principal-agent relationship, unlike the cited cases. The Tribunal also referred to a similar case, Hindustan Coca Cola Beverages P. Ltd. v. ITO, where the relationship was deemed principal-agent, supporting the Revenue's stance.

Conclusion:
The Tribunal concluded that the payments made by the assessee to its franchisees were commissions, not discounts, and thus subject to TDS under section 194H. The Tribunal restored the order of the Assessing Officer, treating the assessee as a defaulter for not deducting TDS and computing the quantum of short deduction and interest thereon. The appeals filed by the Revenue for both assessment years were allowed.