2005 (2) TMI 458 - AT - Income Tax

Deduction of tax at source - Payments made to C F agents - applicability of s. 194-I - camouflage transaction - agreement for services - Commission to its distributors and dealers in the form of incentives and discounts by using different names - relationship between the assessee and its distributors/dealers - Principal-to-Principal basis Or Principal and agent. HELD THAT - Merely because the C F agent stores the goods in the intervening period the character of the payment made by the manufacturer to the agent does not undergo any change so as to call it rent either under general law or for the purposes of s. 194-I of the Act. Further this being a contract for carrying out a work between the assessee and the agent the assessee has deducted tax at source under s. 194C of the Act. The fact that s. 194C will apply to the impugned payment is clarified by the Board in its Circular No. 715 dt.8th Aug. 1995. The Board has also clarified by its Circular No. 720 dt.30th Aug. 1995 that each section under Chapter XVII deals with a particular kind of payment to the exclusion of all other sections in the chapter. Therefore a payment is liable for tax deduction only under one section. Again obviously the total payment received by the agent will also include rent as a part of the total cost but that does not mean that the arrangement between the assessee and the agent is for the use of land or building. It is merely a component of total cost the break-up of which was given by the assessee to the authorities. But it does not attract the provisions of s. 194-I and hence the CIT(A) was not justified in holding it otherwise. In the final analysis we hold that s. 194-I does not apply at all to the payments made by the assessee to its C F agents. Commission to its distributors and dealers in the form of incentives and discounts by using different names - In the instant case it is not in dispute that the distributorship/dealership arrangement is on principal-to-principal basis and not on principal-agent basis. This is also evident from the sample agreements placed on record. Clause 5.1 of the dealership agreement clearly indicates that the dealer will be purchasing the goods from the assessee. Clause 7 of the agreement stipulates that the dealer shall pay for the products ordered and accepted by it against delivery. Clause 6.1 of the agreement stipulates that the dealer is free to sell the goods at any price subject to the condition that it shall not be sold at a price beyond the maximum price suggested by the assessee. In our considered view they are nothing more than incentives or motivators which may drive the dealer to achieve certain targets but certainly they cannot be called commission. They are various sales promotion schemes which keep on coming and going. They may be area specific class of customer-specific period-specific etc. They are never permanent and therefore incentives earned from such schemes cannot be said to have been earned in the course of buying and selling the goods. The fact that these schemes do not form part of the agreement itself suggests that they are not permanent and the profits of the dealer do not predominantly depend on these schemes. There may be a period during which no scheme may be in operation at all. But even in absence of a scheme the course of buying and selling goes on. The quantum of incentives earned by a dealer may be dependant on the quantum of certain sales but the normal buying and selling goes on irrespective of the schemes and hence these incentives cannot be termed as commission in the normal course of buying and selling the goods as envisaged in s. 194H of the Act. Accordingly we hold that the assessee had not made any commission payment to any person and hence there was no question of deducting any tax at source u/s 194H of the Act. In the result the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Applicability of Section 194-I of the Income Tax Act, 1961.
2. Applicability of Section 194H of the Income Tax Act, 1961.

Summary:

Issue 1: Applicability of Section 194-I of the Income Tax Act, 1961

The assessee, a subsidiary of Matsushita Electric Company, Japan, challenged the order of the CIT(A) regarding the applicability of Section 194-I. The AO analyzed the agreement between the assessee and Ankur Roadlines (P) Ltd., a C&F agent, and concluded that the dominant purpose was the use of premises for storage, thereby invoking Section 194-I for short deduction of tax. The CIT(A) scrutinized the agreements and segregated the rent portion, directing the AO to calculate tax on it. The Tribunal held that Section 194-I mandates tax deduction for rent, which is a payment for the use of land or building. However, in this case, the agreements were predominantly for C&F services, not for the use of land or building. Therefore, the Tribunal concluded that Section 194-I does not apply to the payments made by the assessee to its C&F agents.

Issue 2: Applicability of Section 194H of the Income Tax Act, 1961

The AO observed that the assessee offered huge commissions to its distributors and dealers in the form of incentives and discounts, treating the entire amount as commission under Section 194H. The CIT(A) held that except for trade discounts, other incentives were for services rendered in the course of buying or selling goods and thus treated them as commission. The Tribunal analyzed the definition of "commission" under Section 194H and concluded that the relationship between the assessee and its distributors/dealers was on a principal-to-principal basis, not principal-agent. The incentives were considered motivators or sales promotion schemes, not commissions earned in the course of buying and selling goods. Therefore, the Tribunal held that the assessee had not made any commission payments and was not liable to deduct tax under Section 194H.

Conclusion:

The appeal of the assessee was allowed, concluding that neither Section 194-I nor Section 194H applied to the payments made by the assessee.