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2009 (2) TMI 246 - AT - Income TaxTDS u/s 194H - Penalty levied u/s 271C - failure to deduct the tax at source on discount allowed by the assessee - assessee supplied Pre-paid SIM Card and recharge vouchers to pre-paid distributors at a discounted price - Contract of agency - relationship between principal and agent - Before the ld CIT(A) it was contended by the assessee that there was no principal and agent relationship between the assessee and the distributor and the discount allowed to such distributors was not commission paid attracting deduction of tax at source u/s. 194H. According to the assessee, it is not the product sold which determines the relationship between the supplier and the distributor but the terms of contract between the two. CIT(A) held that there was no principal agent relationship between the assessee and the distributors nor there was any payment at all by the principal to the distributor either directly or constructively i.e., in an implied manner - further held that since there was no payment at all either in monetary terms or in terms of goods and/or services, the provisions of s. 194H are not attracted - further held that simply because the agreement shows the difference between the market price and the price at which the distributor buys the cards as commission or the treatment given in accounts, it would not partake the character of commission for the purpose of taxation - CIT(A) while observing that viewed from any angle, it cannot be said that the assessee was a defaulter, attracting the provisions of s. 201(1) and the provisions of s. 201 (1A). HELD THAT - The Hon'ble Supreme Court in the case of Bhopal Sugar Industries Ltd. vs. STO 1977 (4) TMI 151 - SUPREME COURT explained the contract of agency to mean;- A contract of agency, however, differs essentially from contract of sale in as much as an agent after taking delivery of the property of the principal does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. In Gordon Woodroffe Co. vs. Sheikh M.A. Majid Co. 1966 (3) TMI 79 - SUPREME COURT it has been observed that it is well established that even an agent can become a purchaser when an agent pays the price to the principal on his own responsibility. Applying the ratio of the decisions in the light of provisions of s. 194H, and keeping in view that the decisions relied on by the ld DR in Asstt. CIT vs. Bharti Cellular Ltd. 2006 (4) TMI 50 - ITAT, KOLKATA and in the case of Hindustan Coca Cola Beverages (P) Ltd. vs. ITO 2005 (7) TMI 306 - ITAT JAIPUR , have been distinguished by the Tribunal in Foster's India (P) Ltd 2008 (4) TMI 397 - ITAT PUNE-A ., on the ground that the normative effect of the judgments of Hon'ble Supreme Court is far greater than that of the judgments of the Co-ordinate Benches, we are of the view that for application of the provisions of s. 194H there should be in existence the relationship of principal and agent in order to bring the discount in the ambit of commission or brokerage. The expression 'commission or brokerage' as contained in cl. (i) of Explanation to s. 194H, it is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods, hence discount allowed on transactions resulting in outright purchases cannot be treated as brokerage or commission. In our view, the transactions between the assessee and the distributors are on principal to principal basis and not on principal and agent basis and hence, it cannot be said that the assessee was defaulter attracting the provisions of s. 201(1) and s. 201 (1A) and accordingly the order passed by CIT(A) does not call for any interference. The grounds taken by the Revenue are therefore rejected.
Issues Involved:
1. Relationship between the assessee and the distributors: Principal to principal or Principal to agent. 2. Applicability of Section 194H of the IT Act, 1961 regarding TDS on commission. 3. Nature of discount allowed to distributors: Whether it constitutes commission. 4. Accounting practices and their relevance to the determination of the nature of transactions. 5. Legal precedents and their applicability to the case. Detailed Analysis: 1. Relationship between the Assessee and the Distributors: Principal to Principal or Principal to Agent The primary issue was whether the relationship between the assessee and its distributors was that of a principal to principal or principal to agent. The assessee argued that the relationship was principal to principal, as the distributors paid for the prepaid cards upfront, bore the risk of unsold inventory, and were free to deal with competitors' products. The AO, however, concluded that the relationship was principal to agent, citing clauses in the agreement that indicated control by the assessee over the distributors, such as the requirement for distributors to provide customer service, maintain records, and the ability to withdraw commission if a subscriber deactivates within six months. 2. Applicability of Section 194H of the IT Act, 1961 Regarding TDS on Commission Section 194H mandates TDS on any income by way of commission or brokerage. The AO argued that the discount allowed to distributors constituted commission, thus attracting TDS under Section 194H. The assessee contended that no commission was paid, only discounts were allowed, and since there was no principal-agent relationship, Section 194H was not applicable. 3. Nature of Discount Allowed to Distributors: Whether it Constitutes Commission The AO treated the discount allowed to distributors as commission, relying on the terms of the agreement which referred to the margin as "commission" and the accounting treatment of the discount. The assessee argued that the discount was not commission but a reduction in the sale price, and the distributors were not agents but independent entities purchasing the cards outright. 4. Accounting Practices and Their Relevance to the Determination of the Nature of Transactions The AO considered the accounting practices, where the gross amount was credited and the discount was debited as commission, to conclude that the discount was effectively a commission. The assessee argued that the accounting treatment should not determine the nature of the transaction, and the true nature should be inferred from the contractual terms and the actual conduct of the parties. 5. Legal Precedents and Their Applicability to the Case The assessee relied on several legal precedents, including the decision of the Hon'ble Gujarat High Court in Ahmedabad Stamp Vendors Association vs. Union of India, and the Hon'ble Supreme Court in Gordon Woodroffe & Co. vs. Sheikh M.A. Majid & Co., to argue that the relationship was principal to principal and not principal to agent. The AO referred to the decision in Asstt. CIT vs. Bharti Cellular Ltd., where it was held that the assessee was liable to deduct TDS on commission payments to franchisees. Judgment: The CIT(A) concluded that there was no principal-agent relationship between the assessee and the distributors, and there was no payment of commission by the assessee to the distributors. The CIT(A) held that the discount allowed was not commission and thus, Section 194H was not applicable. The CIT(A) relied on the nature of the contractual relationship and the actual conduct of the parties, rather than the accounting treatment or the terminology used in the agreement. The Tribunal upheld the CIT(A)'s decision, agreeing that the relationship was principal to principal, and the discount allowed did not constitute commission. The Tribunal distinguished the decisions in Asstt. CIT vs. Bharti Cellular Ltd. and Hindustan Coca Cola Beverages (P) Ltd., and relied on the decision in Idea Cellular Ltd. vs. Dy. CIT, where it was held that the discount allowed by the assessee to prepaid market associates did not fall under the definition of commission or brokerage. The Tribunal emphasized that the element of agency is essential for the application of Section 194H, which was not present in this case. Conclusion: The Tribunal dismissed the Revenue's appeal, holding that the provisions of Section 194H were not attracted as there was no principal-agent relationship and the discount allowed to distributors did not constitute commission. The assessee was not liable to deduct TDS under Section 194H, and the order of the CIT(A) was upheld.
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