2015 (11) TMI 63 - AT - Income Tax

Disallowance U/s 40(a)(ia) - packing material expenses in the form of job charges paid without deduction of tax u/s-194C - Held that - A work does not include where supply of a product according to requirements or specification of a customer by using materials purchased from a person other than the customers. Hence, the provision of Sec. 194C does not attract to the present case. The case cited by the Ld. DR is not applicable as it was decided in the context of the provisions of Bombay Sales Tax Act 1959 and it has no nexus with the provisions of section 194C of the Act and consequently there was no application of provisions of section 40(a)(ia) of the Act. Hence, this ground of Revenue s appeal is dismissed.- Decided in favour of assessee. Disallowance of sales promotion & selling expenses - assessee failed to produce any details such as address, PAN etc., of the payee - genuineness of the expenses not proved - violation of section 40(a)(ia) viz a viz section 194C - CIT(A) deleted the addition - Held that - It has been noted that the Ld. AO recorded the transaction not genuine in the absence of the complete address of the distributors. But the AO did not issue even a single notice to any of the party out of the list provided at the time of assessment under section 133(6) of the Act. So it was not appropriate on the part of the AO to conclude the parties not genuine. Besides the AO has also not appreciated the volume of the business viz a viz the PAN India dealer network. With regard to the violation of the provisions of section 194H read with section 40(a)(ia), the AO held such transaction as of principal and agent. From the aforesaid submission of the assessee, it is clear that the transaction was of a purchase and sale. There was no monetary transaction between the parties for the target incentive. Only the credit notes were provided only to the distributors who have achieved the target which they can redeem at the time of subsequent purchases. So we are of the opinion that the transaction is out of the purview of the TDS provision. At the end, we find no infirmity in the order of the CIT(A) - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for packing material expenses.
2. Deletion of disallowance of sales promotion and selling expenses due to failure to produce details of payees.
3. Applicability of Section 194C and Section 194H for the transactions in question.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(ia) for Packing Material Expenses:
The Revenue challenged the deletion of disallowance amounting to Rs. 4,04,12,991/- towards packing material expenses without deduction of tax under Section 194C of the Income Tax Act, 1961. The Assessing Officer (AO) had classified the transaction as a work contract, citing Circular No. 715 and relevant case laws, and disallowed the expenses for non-compliance with Section 194C. The assessee argued that the expenses were for a contract of sale, not job work, and provided supporting judgments from various courts. The CIT(A) ruled in favor of the assessee, determining that the transaction was a sale contract, not a work contract, as the materials were not supplied by the assessee. The Tribunal upheld the CIT(A)'s decision, referencing multiple judicial pronouncements that distinguished between contracts of sale and work contracts, thus excluding the transaction from the purview of Section 194C.

2. Deletion of Disallowance of Sales Promotion and Selling Expenses:
The Revenue also contested the deletion of disallowance of sales promotion expenses amounting to Rs. 88,85,919/- and selling expenses of Rs. 4,19,23,214/-. The AO disallowed these expenses on two grounds: lack of genuineness and violation of Section 40(a)(ia) read with Section 194C. The assessee failed to provide sufficient details to substantiate the expenses, leading the AO to question their genuineness. Additionally, the AO considered the relationship between the assessee and its distributors as that of principal and agent, invoking Section 194H. The CIT(A) found the transactions genuine and ruled that the relationship was principal-to-principal, not principal-agent, thus not attracting the provisions of Section 194H. The Tribunal concurred with the CIT(A), noting that the AO did not issue notices to verify the parties and that the transactions were indeed sales, not commission payments, thereby not requiring TDS deduction.

3. Applicability of Section 194C and Section 194H:
The Tribunal examined whether the transactions fell under the scope of Section 194C or Section 194H. For the packing material expenses, the Tribunal concluded that the transaction was a sale, not a work contract, as the materials were not supplied by the assessee. For the sales promotion and selling expenses, the Tribunal determined that the relationship was principal-to-principal, not principal-agent, and the incentives were provided through credit notes redeemable against future purchases, not monetary transactions, thus excluding them from the purview of Section 194H.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowances. The Tribunal found no infirmity in the CIT(A)'s order, confirming that the transactions were genuine and did not attract the provisions of Sections 194C and 194H, thereby not requiring TDS deductions. The appeal was pronounced dismissed in the open court on 28/09/2015.