2011 (2) TMI 42 - AT - Income Tax

TDS - Trade Discount - According to the assessee, amount of discount offered to such customers are directly reduced from the bill amount and the said persons are also paying only the net amount - discounts offered by the company are in the nature of Trade Discount , in which case the question of deduction of tax at source u/s 194H does not arise - no liability for the assessee to deduct tax at source on such discount payments under section 194H of the Act - appeals of the revenue, dismissed

Summary

Issues Involved:
1. Whether the discounts paid by the assessee company to its distributors and retailers partake the character of "Commission" and consequently warrant deduction of tax at source under section 194H of the Income Tax Act.

Detailed Analysis:

Issue 1: Nature of Discounts and Applicability of Section 194H
- Facts and Background: The assessee, engaged in the manufacture and sale of soft drinks under the brand name "Pepsi," provides various discounts to retailers and distributors. The discounts are categorized into three types:
- Discount allowed to spot sale retailers.
- Monthly discount given to distributors.
- Promotional discount given to distributors upon achieving sales targets.

For the financial year 2005-06, the total discounts amounted to Rs. 4,81,72,933, and for 2006-07, it was Rs. 4,53,07,469.

- Assessee's Argument: The discounts are trade discounts and not commission payments, thus not warranting TDS under section 194H. The relationship between the assessee and its distributors is "Principal to Principal," not "Principal to Agent."

- Assessing Officer's View: The discounts are in the nature of "Commission Payments," necessitating TDS under section 194H. The officer relied on the decision of the Jaipur bench of ITAT in the case of M/s Hindustan Coca-cola Beverages (97 ITD 105).

- CIT(A)'s Decision: The CIT(A) held that the payments are trade discounts and the relationship between the assessee and the distributors is "Principal to Principal." Consequently, no TDS under section 194H is warranted.

- Revenue's Argument: The revenue argued that restrictive clauses in the agreement between the assessee and the distributors indicate a "Principal to Agent" relationship. The revenue relied on the decision in M/s Hindustan Coca-cola Beverages and other cases to support their stance.

- Assessee's Rebuttal: The assessee distinguished their case from M/s Hindustan Coca-cola Beverages, noting that in their case, discounts were not debited as commission expenses. They argued that the relationship with distributors is "Principal to Principal," supported by specific clauses in their agreement and the fact that the discounts are treated as exempted turnover in sales tax assessments.

Tribunal's Findings:
- Nature of Relationship: The Tribunal examined the agreement and concluded that the relationship between the assessee and its distributors is "Principal to Principal." The Tribunal noted that the title to property in the goods passes from the assessee to the distributors, a key indicator of a sale rather than an agency relationship.

- Judicial Precedents: The Tribunal referred to several judicial precedents, including the Supreme Court's decision in Bhopal Sugar Industries Ltd v. STO, which clarified that restrictions on pricing, area of operation, and other conditions do not necessarily convert a sale into an agency relationship.

- Specific Additions by AO: The Tribunal found that the Assessing Officer did not examine the discounts given to spot sales retailers and incorrectly categorized the discounts to distributors as commission. The Tribunal held that the discounts are trade discounts and do not attract TDS under section 194H.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the discounts provided by the assessee company are trade discounts and the relationship with distributors is "Principal to Principal." Therefore, no TDS under section 194H is warranted on these discount payments. Both appeals of the revenue were dismissed.