2012 (5) TMI 488 - HC - Income Tax

Assessee in default Trade discount provided by newspaper publishers to advertising agencies under Rules and regulations of Indian Newspaper Society - Revenue contended that said discount are deemed commission and that the assessee ought to have deducted TDS u/s 194H and was liable as assessee-in-default u/s 201 demand of taxes and interest - Held that - Two conditions, which are required to be fulfilled before holding a person liable for deduction at source u/s 194H, are the payment is received by a person as agent of principal and secondly payment is for services rendered (not being professional services). In present case, it is clear that advertising agency has never been appointed as agent of the petitioner. The relationship between the assessee and the advertising agency in accordance with the INS Rules is that of a principal to principal because (a) the assessee has no control over the advertising agency, (b) the advertising agency is responsible for payment even if the advertiser has not paid the advertising agency, (c) the advertising agencies are rendering service to the advertisers/ customers & other terms. Therefore, trade discount provided cannot be termed as Commission. Deductor who fails to deduct income tax at source shall be deemed to be an assessee in default only when the assessee has also failed to pay such tax directly. Thus, it flows that there is no occasion to treat the deductor as an assessee in default unless the assessee has not paid the tax directly. Even in case of short deduction, tax cannot be realised from the deductor and he is at best liable for interest and penalty only; Assessing authority has not considered the relevant materials i.e. rules & Regulations of INS, Circular No. 715 dated 8-8-1995 issued by CBDT to determine nature of relationship and applicability of TDS provisions while passing the assessment order, rather placed reliance on the article published in a newspaper, which was an irrelevant material. Hence, said reliance on irrelevant material clearly vitiates the assessment order. Maintainability of writ petition - Since huge liability running in several crores have been fastened on the petitioner and multiplicity of proceedings will increase the assessee s sufferings even though s. 194H is clearly not applicable; therefore we are of the view that the petitioner has rightly invoked the jurisdiction of this Court under Article 226 and the petition cannot be thrown out on the ground of alternative remedy. Principle of natural Justice - It is the duty of the Department to make a correct assessment and not to make an excessive assessment merely on the ground of shortage of time, since it puts citizens to great harassment as exorbitant demands are raised and it breaches the principles of natural justice - Decided in favor of petitioner.

Issues Involved:
1. Invocation of writ jurisdiction under Article 226.
2. Jurisdictional facts for initiating proceedings under Sections 201 and 201(1A) of the Income Tax Act.
3. Relationship between petitioner and advertising agency (principal-agent relationship).
4. Nature of services rendered by advertising agencies.
5. Classification of trade discount as commission under Section 194H.
6. Applicability of judgments from Kerala High Court and Delhi High Court.
7. Liability of tax payment by deductor under Section 201.
8. Liability of tax payment by assessee under Section 191.
9. Conditions for deeming a deductor as an assessee in default.
10. Consideration of relevant and irrelevant materials by assessing authority.
11. Violation of principles of natural justice.
12. Reliefs to which the petitioner is entitled.

Issue-wise Detailed Analysis:

1. Invocation of writ jurisdiction under Article 226:
The court held that the petitioner can invoke writ jurisdiction under Article 226 to challenge the notices and assessment orders on the ground that there were no foundational facts to assume jurisdiction under Sections 201 and 201(1A). The court emphasized that the writ jurisdiction can be exercised when the authority acts without jurisdiction or there is a violation of principles of natural justice.

2. Jurisdictional facts for initiating proceedings under Sections 201 and 201(1A) of the Income Tax Act:
The court found that the jurisdictional facts required for initiating proceedings under Sections 201 and 201(1A) were not present. The court emphasized that the relationship between the petitioner and the advertising agencies was not that of principal and agent, and the advertising agencies did not render services to the petitioner.

3. Relationship between petitioner and advertising agency (principal-agent relationship):
The court concluded that the relationship between the petitioner and the advertising agencies was on a principal-to-principal basis and not that of principal and agent. The court relied on the rules of the Indian Newspapers Society (INS) and the agreements between the advertising agencies and the INS to determine that the advertising agencies were not agents of the petitioner.

4. Nature of services rendered by advertising agencies:
The court held that the advertising agencies rendered services to the advertisers (clients) and not to the petitioner. The court referred to the rules of the INS and the agreements between the advertising agencies and the INS to support this conclusion.

5. Classification of trade discount as commission under Section 194H:
The court found that the 15% trade discount allowed by the petitioner to the advertising agencies could not be classified as commission under Section 194H. The court relied on the judgment of the Delhi High Court in the case of Living Media India Ltd., which held that the trade discount allowed to advertising agencies was not commission and was not subject to tax deduction at source under Section 194H.

6. Applicability of judgments from Kerala High Court and Delhi High Court:
The court held that the judgment of the Delhi High Court in the case of Living Media India Ltd. was applicable to the present case and not the judgment of the Kerala High Court in the case of Prasar Bharati. The court noted that the facts of the Kerala High Court case were different as there was an explicit agreement between Doordarshan and the advertising agencies, which was not the case here.

7. Liability of tax payment by deductor under Section 201:
The court held that under Section 201, the liability of the deductor is limited to interest and penalty and not the payment of the tax which was not deducted at source. The court emphasized that the primary liability to pay tax is on the assessee whose income is to be taxed.

8. Liability of tax payment by assessee under Section 191:
The court reiterated that under Section 191, the liability to pay tax is on the assessee directly if the tax has not been deducted at source. The court emphasized that the deductor can be deemed to be an assessee in default only if the assessee has also failed to pay the tax directly.

9. Conditions for deeming a deductor as an assessee in default:
The court held that a deductor can be deemed to be an assessee in default under Section 201 only if it is found that the assessee has also failed to pay the tax directly. The court emphasized that this is a jurisdictional fact that must be established before deeming the deductor as an assessee in default.

10. Consideration of relevant and irrelevant materials by assessing authority:
The court found that the assessing authority had not considered relevant materials, such as the Circular issued by the Central Board of Direct Taxes (CBDT) dated 8.8.1995 and its clarification dated 12.9.1995. The court also found that the assessing authority had relied on irrelevant materials, such as an article published in the newspaper 'Business Standard'.

11. Violation of principles of natural justice:
The court held that there was a violation of principles of natural justice as the petitioner was not given adequate opportunity to present relevant materials. The court noted that the proceedings were rushed and concluded within ten days, denying the petitioner reasonable time to compile and submit the required details.

12. Reliefs to which the petitioner is entitled:
The court set aside the proceedings initiated vide notices dated 19.3.2012 and 21.3.2012 and the assessment orders dated 28.3.2012 and 29.3.2012. The court allowed the writ petition and directed that the parties shall bear their own costs.

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