2023 (8) TMI 456 - HC - Income Tax

TDS u/s 194H - non-deduction of taxes on payments made to distributors towards price protection and special price clearance discounts - relationship between the assessee and the distributor is that of Principal to Principal OR Principal to Agent - HELD THAT - CIT (A), in our opinion, has rightly recorded that distributors are required to place the purchase order as per clause 2.1 of the agreement and assessee reserves right to accept or reject any order. The inventory risk after acquiring the product is that of the distributor. Payment from the distributor to assessee has no link with the further sales made by the distributor. The commission or brokerage is described in explanation to Section 194H of the Income Tax Act, 1961 In view of the factual findings recorded by the CIT(A) that payment from the distributor to the assessee has no link with the further sale made by the distributor and same having been confirmed by the ITAT which is the last fact finding authority based on the decision of this Court in Bharti Airtel Ltd. Vs. DCIT 2014 (12) TMI 642 - KARNATAKA HIGH COURT we find no merit in these appeals. Decided against revenue.

Summary

Issues involved:
The judgment involves the interpretation of provisions of section 194H of the Income Tax Act, 1961 regarding payments made to distributors and the nature of the relationship between the assessee and the distributors.

First Issue - Section 194H applicability:
The first issue raised in the judgment pertains to whether the provisions of section 194H are attracted in the case of the assessee with regard to payments towards supply of manpower and non-deduction of taxes on payments made to distributors towards price protection and special price clearance discounts. The Assessing Officer held that the assessee was liable to deduct tax on such activities as it attracted section 194H of the Act. However, the CIT(A) reversed this finding, which was confirmed by the ITAT. The Tribunal found that the payment made by the assessee to distributors did not fall under the purview of commission as defined in section 194H, as the distributors were liable for making the full invoice value payment and the subsequent sales made by the distributors were at their own risk.

Second Issue - Nature of relationship between assessee and distributor:
The second issue raised in the judgment concerns the relationship between the assessee and the distributor. The CIT(A) cancelled the order passed under section 201(1) and 201(1A) of the Act, holding that the relationship between the assessee and the distributor is that of Principal to Principal and not that of Principal to Agent. The assessee, a manufacturer of computers and peripherals, supplied its products to distributors who sold them to dealers. The distributors were required to place purchase orders as per the agreement, and the assessee reserved the right to accept or reject any order. The distributors bore the inventory risk after acquiring the product, and the payment from the distributor to the assessee had no link with further sales made by the distributor.

Conclusion:
Based on the factual findings that the payment from the distributor to the assessee had no link with the further sales made by the distributor, and considering the decision in Bharti Airtel Ltd. Vs. DCIT (2014) 52 taxman.com 31 KAR, the High Court dismissed the appeals. The first question did not arise for consideration, and the second question was answered in favor of the assessee and against the Revenue.