2016 (4) TMI 1128 - AT - Income Tax

TDS u/s 194H - non deduction of tds - payment of incentive to the dealers for the purpose of promotion in selling its goods beyond a targeted quantum - Held that - In the present case the ld. CIT(A) examined the copies of agreements of dealers and he found that dealers are the receipts of the amount given by the assessee as incentive. The dealers are buying the goods from the assessee on their own risk. The assessee paid the incentive to the dealers for the purpose of promotion in selling its goods beyond a targeted quantum. Therefore we see no relation of principal and agent as agitated by the ld. DR. If that be the case the applicability of section 194H and invocation of section 40(a)(ia) of the Act for violation of section 194H is bad under law. Thus it is clear that the liability to deduct TDS under section 194H of the Act arises only when a person acts on behalf of another. The incentives received by the distributors/dealers is neither contractual transaction nor payment commission or brokerage under the relation of principal and agent and which are a strict requirement of section 194H of the Act to deduct the TDS. Therefore we hold that the payments paid to the distributors/ dealers by way of incentives would not come under the purview of section 194H and invocation thereon under section 40(a)(ia) is bad and hence no interference is required with the order of the CIT(A) therefore it is confirmed. - Decided against revenue.

Summary

Issues Involved:
1. Allowability of provision for warranty expenses.
2. Applicability of Section 194H and disallowance under Section 40(a)(ia) for commission payments to distributors/dealers.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Warranty Expenses:
The Revenue challenged the CIT(A)'s decision to allow a provision for warranty expenses amounting to ?3,62,820. The Assessing Officer (AO) had disallowed this provision, treating it as a mere provision and not an actual expense. The CIT(A) observed that any excess provision could be taxed in subsequent years. The assessee argued that the provision was made based on past experience to meet future obligations arising from past sales, in line with the Supreme Court's decision in the case of Retork Controls India (P) Ltd. vs. CIT. The Tribunal, following the Supreme Court's precedent, upheld the CIT(A)'s order, stating that the provision for warranty expenses was made systematically and scientifically based on historical data and was therefore allowable as a business expenditure under Section 37 of the Income Tax Act.

2. Applicability of Section 194H and Disallowance under Section 40(a)(ia) for Commission Payments:
The Revenue also contested the CIT(A)'s decision to allow ?1,20,88,591 as commission payments to distributors/dealers without deducting tax at source under Section 194H, which the AO had disallowed under Section 40(a)(ia). The CIT(A) found that these payments were turnover discounts and not commission, thus not attracting Section 194H. The Tribunal examined the nature of the relationship between the assessee and the distributors/dealers, concluding that it was a principal-to-principal relationship and not a principal-agent relationship. This was supported by agreements and the fact that the distributors bore the risk of purchasing goods from the assessee. The Tribunal referenced similar cases from the Delhi High Court (CIT vs. Jai Drinks (P) Ltd.) and the Bombay High Court (CIT vs. Intervet India Pvt. Ltd.), which held that such payments were not commissions and thus not subject to TDS under Section 194H. Consequently, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal on this ground.

Conclusion:
The appeal filed by the Revenue and the Cross Objection filed by the assessee were both dismissed. The Tribunal confirmed the CIT(A)'s decisions on both issues, allowing the provision for warranty expenses and ruling that the payments to distributors/dealers were not commissions subject to TDS under Section 194H.