2025 (4) TMI 789 - AT - Income Tax

TDS u/s 194C OR 194H - fixed expenses paid as incentive as well as commission paid under nomenclature of variable service charges on the bills raised by the CFAs - demand u/s 201(1) 201(1a) for short deduction of TDS - HELD THAT - No doubt the Assessee in the consignee and forwarding (CFA) agreement has used the world commission on sales on a monthly basis. CFA had very limited right just to carry out the work as per the direction of the Assessee and had no authority to bind the Assessee with the third party directly or indirectly and the Assessee was/is supposed to work as per the direction desire and welfare of the Assessee only. The role of the CFA is simplest of forwarding agent but not to make any contract with the third party qua goods delivered by the Assessee either in its own name and/or on behalf of the Assessee. Simply by using any term such as commission as used in the instant case ipso facto would not entail raising the demand and/or treating the Assessee in default. As the title of the provision of section 194C of the Act pertains to payments to contracts or carrying out any work which include carriage of goods or passengers by any mode of transport other than by railways as defined in the provisions of section 194C of the Act itself. Admittedly even otherwise no addition on account of disallowance u/s 40(a)(ia) of the Act has ever been made during the scrutiny proceedings u/s 143(3) of the Act for the A.Ys. 2013-14 to 2018-19 and vide intimation u/s 143(1) of the Act for the A.Y. 2019-20 which also strengthens the case of the Assessee. Thus we are of the considered view that the Assessee has rightly deducted the TDS u/s 194C of the Act hence the decision of the authorities below in treating the Assessee in default within the meaning of section 201(1) and 201(1a) of the Act and consequently making the demand is un-sustainable. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core issue in this case was whether the payments made by the Assessee to Consignee and Forwarding Agents (CFAs) should be classified as "commission" subject to tax deduction at source (TDS) under Section 194H of the Income Tax Act, 1961, at 5%, or as "contractual payments" subject to TDS under Section 194C at 2%. The determination of this issue involved examining the nature of the relationship between the Assessee and the CFAs, and whether it constituted a principal-agent relationship or a contractor relationship.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved Sections 194C and 194H of the Income Tax Act, 1961. Section 194C pertains to payments to contractors for carrying out any work, while Section 194H deals with payments by way of commission or brokerage. The distinction between these sections hinges on the nature of the relationship between the payer and payee, specifically whether it is a principal-agent relationship or a contractor relationship.

Court's Interpretation and Reasoning

The Tribunal analyzed the agreement between the Assessee and the CFAs, focusing on the nature of the services provided and the terms of payment. The Tribunal noted that the CFAs were engaged in storing, warehousing, and dispatching goods, which are activities typically covered under Section 194C as contractual services. The Tribunal also considered the degree of control the Assessee had over the CFAs and whether the CFAs had any authority to bind the Assessee in dealings with third parties.

Key Evidence and Findings

The Tribunal examined the CFA agreements, which described the CFAs as agents responsible for warehousing, storage, and dispatch of goods. The agreements specified fixed monthly payments and variable payments based on the quantity of goods handled. The Tribunal found that the CFAs had limited authority and acted primarily under the direction of the Assessee, without the ability to bind the Assessee in third-party transactions, which is a key characteristic of a contractor relationship.

Application of Law to Facts

The Tribunal applied the definitions and provisions of Sections 194C and 194H to the facts of the case. It concluded that the payments were for services that fell under the definition of "work" as per Section 194C, rather than "commission" as per Section 194H. The Tribunal emphasized that the use of the term "commission" in the agreement did not automatically classify the payments under Section 194H, especially given the nature of the services and the relationship between the parties.

Treatment of Competing Arguments

The Assessee argued that the payments were for contractual services and should be subject to TDS under Section 194C. The Revenue contended that the payments were commissions, as evidenced by the use of the term in the agreements and the nature of the payments. The Tribunal considered both arguments and found the Assessee's position more compelling, given the nature of the services and the lack of authority granted to the CFAs.

Conclusions

The Tribunal concluded that the payments made to the CFAs were for services that fell under Section 194C, and therefore, the Assessee had correctly deducted TDS at 2%. The Tribunal found that the Assessee was not in default for deducting TDS under Section 194C, and the demand raised by the Revenue was unsustainable.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal noted: "Simply by using any term such as 'commission' as used in the instant case, ipso facto, would not entail raising the demand and/or treating the Assessee in default."

Core Principles Established

The Tribunal established that the classification of payments for TDS purposes depends on the nature of the services and the relationship between the parties, rather than the terminology used in agreements. The degree of control and authority in the relationship is crucial in determining whether it is a principal-agent relationship or a contractor relationship.

Final Determinations on Each Issue

The Tribunal determined that the Assessee's payments to CFAs were for contractual services under Section 194C, not commission under Section 194H. Consequently, the Assessee was not liable for the higher TDS rate of 5% under Section 194H, and the demand raised by the Revenue was deleted.