2014 (4) TMI 353 - HC - Income Tax

Deletion of disallowance u/s 40(a)(ia) r.w section 194H of the Act Explanation to section 194H not properly interpreted The Assessee had undertaken sales promotional scheme viz. Product discount scheme and Product campaign under which the Assessee had offered an incentive on case to case basis to its stockists /dealers/agents - Held that - The relationship between the Assessee and the distributor / stockists was that of principal to principal and in fact the distributors were the customers of the assessee to whom the sales were effected either directly or through the consignment agent - the distributor / stockists were the persons to whom the product was sold, no services were offered by the assessee and what was offered by the distributor was a discount under the product distribution scheme or product campaign scheme to buy the assessee's product. The distributors / stockists were not acting on behalf of the assessee and that most of the credit was by way of goods on meeting of sales target - it could not be said to be a commission payment within the meaning of explanation (i) to Section 194H of the Income Tax Act, 1961 - the application of the provision is required to be considered to the relevant facts of every case - as regards sales promotional expenditure, the provisions of Explanation (i) below Section 194H of the Act are rightly held to be not applicable as the benefit which is availed of by the dealers / stockists of the Assessee is appropriately held to be not a payment of any commission thus, no substantial question of law arises for consideration Decided against Revenue.

Summary

Issues:
1. Whether the sales promotion expenditure incurred by the assessee amounts to payment of commission under Section 194H of the Income Tax Act, 1961?
2. Whether the disallowance of sales promotion expenditure by the Assessing Officer was justified?
3. Whether the Tribunal erred in not following the explanations attached to Section 194H of the Income Tax Act, 1961 defining the term "Commission"?

Analysis:

Issue 1: The main issue in this case was whether the sales promotion expenditure incurred by the assessee amounted to payment of commission under Section 194H of the Income Tax Act, 1961. The Revenue contended that the expenditure should be considered as commission payment as the distributors/stockists were paid based on the quantum of sales made by them. However, both the Commissioner of Income Tax (Appeals) and the Tribunal held that the distributors were not acting on behalf of the assessee and the expenditure was for promotion of sales, not commission. The Tribunal dismissed the Revenue's appeal, confirming that the sales promotion expenditure was not in the nature of commission.

Issue 2: Another crucial issue was the disallowance of sales promotion expenditure by the Assessing Officer. The Assessing Officer disallowed an amount of Rs. 70,67,089 for non-deduction of TDS on the payment made to distributors/stockists. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee, stating that the expenditure was for promotion of sales and not commission. The Tribunal upheld this decision, leading to the dismissal of the Revenue's appeal under Section 260A of the Income Tax Act.

Issue 3: The third issue revolved around whether the Tribunal erred in not following the explanations attached to Section 194H of the Income Tax Act, 1961 defining the term "Commission." The Tribunal, after considering the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals), concluded that the sales promotion expenditure did not fall under the definition of commission as per the explanations provided in the Act. The Tribunal's decision was based on the fact that the distributors/stockists were not acting on behalf of the assessee and were customers to whom sales were made directly or through consignment agents.

In conclusion, the High Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, ruling that the sales promotion expenditure incurred by the assessee was not considered as commission payment under Section 194H of the Income Tax Act. The Court found no substantial question of law in the appeal and dismissed it accordingly.